x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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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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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
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Atlanta,
Georgia
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30303
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(Address
of principal executive offices)
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(Zip
Code)
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Title
of Each Class
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Name
of Exchange on Which Registered
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Common
Stock, $0.001 par value
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The
NASDAQ Stock Market LLC
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(NASDAQ
Global Market)
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Large
accelerated filer o
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Accelerated
filer 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)
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Internap
operated
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Operated
under third party agreements
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Atlanta
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Atlanta
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Oakland
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Amsterdam
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Boston
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Boston
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Orange
County/
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Hong
Kong
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Houston
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Chicago
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San
Diego
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London
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New
York
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Dallas
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Philadelphia
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Mumbai
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Seattle
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Denver
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Phoenix
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Osaka
(1)
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Los
Angeles
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San
Francisco
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Singapore
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Miami
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San
Jose
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Sydney
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New
York
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Washington
DC
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Tokyo
(1)
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Toronto
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(1)
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Through
our joint venture in Internap Japan Co., Ltd. with NTT-ME Corporation and
Nippon Telegraph and Telephone
Corporation.
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●
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NSPs
that provide connectivity services, including AT&T Inc.; Sprint Nextel
Corporation; Verizon Communications Inc.; Level 3 Communications, Inc.;
Global Crossing Limited and Verio, an NTT Communications
Company;
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●
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regional
Bell operating companies that offer Internet access and managed
services;
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global,
national and regional ISPs such as Orange Business Services, BT Infonet,
and Savvis, Inc.;
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●
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providers
of specific applications or solutions, such as content delivery, security
or storage such as Akamai Technologies, Inc.; Limelight Networks, Inc.; CD
Networks Co., Ltd.; Mirror Image Internet, Inc.; Symantec Corporation;
Network Appliance, Inc. and Virtela Communications,
Inc.;
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●
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software-based,
Internet infrastructure companies focused on IP route control and wide
area network optimization products such as Riverbed Technology, Inc.; F5
Networks, Inc. and Radware Ltd.; and
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●
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colocation
and data center providers, including Equinix, Inc.; Switch & Data
Facilities Company, Inc.; Terremark Worldwide, Inc.; Navisite, Inc.; 365
Main Inc.; Quality Technology Services; Savvis, Inc. and Neon
Communications Group, Inc.
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●
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failure
to increase sales of our products and services;
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●
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pricing
pressures;
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●
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significant
increases in bandwidth and data center costs or other operating
expenses;
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●
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failure
of our services or software to operate as expected;
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●
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loss
of customers or inability to attract new customers or loss of existing
customers at a rate greater than our increase in new
customers;
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●
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inability
of a customer to pay our fees on a timely basis or at all or failure to
continue to purchase our services in accordance with their contractual
commitments; or
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●
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network
failures and any breach or unauthorized access to our
network.
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Our
customers’ renewal rates may decline or fluctuate as a result of a number
of factors, including:
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●
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their
satisfaction or dissatisfaction with our services;
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the
prices of our services and those of our competitors;
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discontinuation
by our customers of their Internet or web-based content distribution
businesses;
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mergers
and acquisitions affecting our customer base; and
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●
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reduction
in our customers’ spending levels.
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managing
the length of the development cycle for new products and product
enhancements, which historically has been longer than
expected;
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adapting
to emerging and evolving industry standards and to technological
developments by our competitors and customers;
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extending
the operation of our products and services to new platforms and operating
systems;
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entering
into new or unproven markets where we have limited
experience;
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managing
new product and service strategies and integrating those with our existing
products and services;
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incorporating
acquired products and technologies;
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trade
compliance issues affecting our ability to ship new products to
international markets;
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developing
or expanding efficient sales channels; and
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obtaining
required technology licenses and technical access from operating system
software vendors on reasonable terms to enable the development and
deployment of interoperable
products.
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human
error;
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physical
or electronic security breaches;
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fire,
earthquake, hurricane, flood, tornado and other natural
disasters;
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●
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improper
building maintenance by the landlords of the buildings in which our data
centers are located;
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water
damage;
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extreme
temperatures;
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fiber
cuts;
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power
loss or equipment failure;
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sabotage
and vandalism; and
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failures
experienced by underlying service providers upon which our business
relies.
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competition
and the introduction of new services by our
competitors;
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continued
pricing pressures resulting from competitors’ strategies or excess
bandwidth supply;
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fluctuations
in the demand and sales cycle for our services;
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fluctuations
in the market for qualified sales and other personnel;
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changes
in the prices for Internet connectivity we pay to NSPs;
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the
cost and availability of adequate public utilities, including
power;
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●
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our
ability to obtain local loop connections to our network access points at
favorable prices;
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●
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integration
of people, operations, products and technologies of acquired
businesses;
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●
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general
economic conditions; and
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●
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any
impairments or restructurings charges that we may incur in the
future.
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the
ability to identify and consummate complementary
acquisitions;
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●
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the
possibility that we may not be able to integrate the operations,
personnel, technologies, products and services of the acquired companies
in a timely and efficient manner or achieve the level of quality in such
businesses to which our customers are accustomed;
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●
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diversion
of management’s attention from other ongoing business
concerns;
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insufficient
revenue to offset significant unforeseen costs, including transaction
costs, and increased expenses associated with the
acquisitions;
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●
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challenges
in completing projects associated with in-process research and development
being conducted by the acquired businesses;
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●
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risks
associated with entering markets in which we have little or no prior
experience or where competitors have a stronger market
presence;
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●
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deferral
of purchasing decisions by current and potential customers as they
evaluate the likelihood of success of our acquisitions;
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●
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incurring
or assuming contingent liabilities and amortization expense for acquired
intangible assets;
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●
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incurring
acquisition liabilities as a result of integrating acquired
businesses;
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●
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difficulties
in successfully integrating the management teams and employees of both
companies; and
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●
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loss
of key employees of the acquired
companies.
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●
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challenges
in establishing and maintaining relationships with foreign customers as
well as foreign NSPs and local vendors, including data center and local
network operators;
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●
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challenges
in staffing and managing network operations centers and network access
points across disparate geographic areas;
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●
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potential
loss of proprietary information due to misappropriation or laws that may
be less protective of our intellectual property rights than the laws in
the United States;
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●
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challenges
in reducing operating expense or other costs required by local laws, and
longer accounts receivable payment cycles and difficulties in collecting
accounts receivable;
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●
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exposure
to fluctuations in foreign currency exchange rates;
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●
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costs
of customizing network access points for foreign countries and
customers;
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●
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requirements
of foreign laws and other governmental controls, including trade and labor
restrictions and related laws that reduce the flexibility of our business
operations;
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●
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protectionist
laws and practices favoring local competition;
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deteriorating
economic conditions in foreign markets;
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political
and economic instability; and
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compliance
with governmental regulations.
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implementing
customer orders for services;
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delivering
these services; and
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timely
billing for these services.
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actual
or anticipated variations in our quarterly and annual results of
operations;
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●
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changes
in market valuations of companies in the Internet connectivity and
services
industry;
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changes
in expectations of future financial performance or changes in estimates of
securities analysts;
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●
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fluctuations
in stock market prices and volumes;
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●
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future
issuances of common stock or other securities;
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the
addition or departure of key personnel; and
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●
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announcements
by us or our competitors of acquisitions, investments or strategic
alliances.
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Top
Markets
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Number of
our Facilities
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Approximate
Gross Square
Footage
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|||||
New
York Metro area
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2
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152,848
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Boston area
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2
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116,699
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|||||
Atlanta
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1
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120,298
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|||||
Houston
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1
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36,649
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|||||
Seattle
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3
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70,535
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Los
Angeles
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1
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15,320
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|||||
Top
Markets Total
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10
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512,349
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Year
Ended December 31, 2008:
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High
|
Low
|
||||||
Fourth
Quarter
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$ | 3.72 | $ | 2.00 | ||||
Third
Quarter
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5.08 | 2.65 | ||||||
Second
Quarter
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5.90 | 4.20 | ||||||
First
Quarter
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9.02 | 3.63 |
Year
Ended December 31, 2007
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High
|
Low
|
||||||
Fourth
Quarter
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$ | 17.18 | $ | 8.14 | ||||
Third
Quarter
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16.15 | 13.04 | ||||||
Second
Quarter
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19.33 | 12.95 | ||||||
First
Quarter
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20.98 | 15.60 |
Equity
Compensation Plan Information
|
||||||||||
Plan
category
|
Number
of securities
to
be issued upon
exercise
of
outstanding
options,
warrants
and rights
(a)
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Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
(b)
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Number
of securities
remaining
available
for
future issuance
under
equity
compensation
plans
(excluding
securities
reflected
in
column (a))
(c)
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|||||||
Equity
compensation plans approved by security holders
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2,781
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(1)
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$
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11.91
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6,988
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(2)
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||||
Equity
compensation plans not approved by security holders
|
—
|
—
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—
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|||||||
Total
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2,781
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$
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11.91
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6,988
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(1)
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Excludes
purchase rights accruing under the 2004 Employee Stock Purchase Plan, or
the Purchase Plan. Under the Purchase Plan, each eligible employee may
purchase up to $12,500 worth of our common stock at each semi-annual
purchase date (the last business day of June and December each year),
but not more than $25,000 worth of such stock (determined on the basis of
the fair market value per share on the date(s) such rights are granted)
per calendar year that the purchase right remains outstanding. The
purchase price payable per share is equal to 95% of the closing selling
price per share of our common stock on the purchase
date.
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(2)
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Includes
229,000 shares available for issuance under the Purchase
Plan.
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12/31/03
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12/31/04
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12/31/05
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12/31/06
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12/31/07
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12/31/08
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|||||||||||||||||||
Internap
Network Services Corporation
|
$
|
100.00 |
$
|
37.96 |
$
|
17.55 |
$
|
81.10 |
$
|
34.00 |
$
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10.20 | ||||||||||||
Hemscott
Group Index
|
100.00 | 126.04 | 109.07 | 103.53 | 110.68 | 71.06 | ||||||||||||||||||
NASDAQ
Market Index
|
100.00 | 108.41 | 110.79 | 122.16 | 134.29 | 79.25 |
Period
|
(a) Total Number of Shares (or Units) Purchased* |
(b) Average Price Paid per Share (or Unit) |
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
||||||||||||
October
1 to 31, 2008
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2,382 |
$
|
2.60 | — | — | |||||||||||
November
1 to 30, 2008
|
811 | 2.71 | — | — | ||||||||||||
December
1 to 31, 2008
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8,921 | 2.54 | — | — | ||||||||||||
Total
|
12,114 |
$
|
2.57 | — | — |
Year
Ended December 31,
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||||||||||||||||||||
2008(1)
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2007(2)
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2006(3)
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2005
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2004
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||||||||||||||||
Consolidated
Statement of Operations Data:
|
||||||||||||||||||||
Revenues
|
$ | 253,989 | $ | 234,090 | $ | 181,375 | $ | 153,717 | $ | 144,546 | ||||||||||
Operating
costs and expenses:
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||||||||||||||||||||
Direct
costs of network, sales and services, exclusive of depreciation and
amortization, shown below
|
135,877 | 118,394 | 97,338 | 81,958 | 76,990 | |||||||||||||||
Direct
costs of amortization of acquired technologies
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6,649 | 4,165 | 516 | 577 | 579 | |||||||||||||||
Direct
costs of customer support
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16,217 | 16,547 | 11,566 | 10,670 | 10,180 | |||||||||||||||
Product
development
|
8,477 | 6,564 | 4,475 | 4,864 | 6,412 | |||||||||||||||
Sales
and marketing
|
30,888 | 31,533 | 27,173 | 25,864 | 23,411 | |||||||||||||||
General
and administrative
|
30,675 | 30,251 | 21,556 | 18,665 | 22,357 | |||||||||||||||
Provision
for doubtful accounts
|
5,083 | 2,261 | 548 | 1,431 | 2,415 | |||||||||||||||
Depreciation
and amortization
|
23,865 | 22,242 | 15,856 | 14,737 | 15,461 | |||||||||||||||
Goodwill
impairment
|
99,700 | — | — | — | — | |||||||||||||||
Restructuring
and other impairments
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1,741 | 11,349 | 323 | 44 | 3,644 | |||||||||||||||
Acquired
in-process research and development
|
— | 450 | — | — | — | |||||||||||||||
Gain
on disposals of property and equipment
|
(16 | ) | (5 | ) | (113 | ) | (19 | ) | (3 | ) | ||||||||||
Other
|
— | 50 | — | 60 | — | |||||||||||||||
Total
operating costs and expenses
|
359,156 | 243,801 | 179,238 | 158,851 | 161,446 | |||||||||||||||
(Loss)
income from operations
|
(105,167 | ) | (9,711 | ) | 2,137 | (5,134 | ) | (16,900 | ) | |||||||||||
Non-operating
(income) expense
|
(245 | ) | (937 | ) | (1,551 | ) | (87 | ) | 772 | |||||||||||
(Loss)
income before income taxes and equity in earnings of equity-method
investment
|
(104,922 | ) | (8,774 | ) | 3,688 | (5,047 | ) | (17,672 | ) | |||||||||||
Provision
(benefit) for income taxes
|
174 | (3,080 | ) | 145 | — | — | ||||||||||||||
Equity
in earnings of equity-method investment, net of taxes
|
(283 | ) | (139 | ) | (114 | ) | (83 | ) | 390 | |||||||||||
Net
(loss) income
|
$ | (104,813 | ) | $ | (5,555 | ) | $ | 3,657 | $ | (4,964 | ) | $ | (18,062 | ) | ||||||
Net
(loss) income per share:
|
||||||||||||||||||||
Basic
|
$ | (2.13 | ) | $ | (0.12 | ) | $ | 0.11 | $ | (0.15 | ) | $ | (0.63 | ) | ||||||
Diluted
|
$ | (2.13 | ) | $ | (0.12 | ) | $ | 0.10 | $ | (0.15 | ) | $ | (0.63 | ) | ||||||
Weighted
average shares used in per share calculations:
|
||||||||||||||||||||
Basic
|
49,238 | 46,942 | 34,748 | 33,939 | 28,732 | |||||||||||||||
Diluted
|
49,238 | 46,942 | 35,739 | 33,939 | 28,732 |
December
31,
|
||||||||||||||||||||
2008(1)
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2007(2)
|
2006
|
2005
|
2004
|
||||||||||||||||
Consolidated
Balance Sheet Data:
|
||||||||||||||||||||
Cash,
cash equivalents and short-term investments in marketable
securities
|
$ | 54,069 | $ | 71,599 | $ | 58,882 | $ | 40,494 | $ | 45,985 | ||||||||||
Non-current
marketable securities
|
6,378 | — | — | — | 4,656 | |||||||||||||||
Total
assets
|
330,083 | 427,010 | 173,702 | 155,369 | 168,149 | |||||||||||||||
Note
payable and capital lease obligations, less current
portion
|
23,244 | 17,806 | 3,364 | 7,903 | 12,837 | |||||||||||||||
Total
stockholders’ equity
|
248,195 | 346,633 | 126,525 | 109,728 | 113,738 |
Year
Ended December 31,
|
||||||||||||||||||||
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
Other
Financial Data:
|
||||||||||||||||||||
Purchases
of property and equipment
|
$ | 51,154 | $ | 30,271 | $ | 13,382 | $ | 10,161 | $ | 13,066 | ||||||||||
Net
cash flows provided by (used in) operating activities
|
37,951 | 27,526 | 29,387 | 5,493 | (1,150 | ) | ||||||||||||||
Net
cash flows used in investing activities
|
(41,690 | ) | (36,393 | ) | (10,399 | ) | (9,428 | ) | (29,659 | ) | ||||||||||
Net
cash flows (used in) provided by financing activities
|
(821 | ) | 15,240 | 1,957 | (5,454 | ) | 45,747 |
__________________ | ||
(1)
|
As
a result of our annual goodwill impairment test on August 1, 2008, we
recorded a $99.7 million impairment charge to adjust goodwill in our CDN
services segment to an implied fair value of $54.7
million.
|
|
(2)
|
On
February 20, 2007, we completed our acquisition of VitalStream, whereby
VitalStream became our wholly-owned subsidiary. Prior to this acquisition,
we did not offer proprietary CDN services, but instead, we were a reseller
of third party CDN services. Under the purchase method of accounting, we
allocated the total estimated purchase price to VitalStream’s net tangible
and intangible assets based on their estimated fair values as of February
20, 2007. We recorded the excess purchase price over the value of the net
tangible and identifiable intangible assets as goodwill. Also, as a result
of the acquisition, we issued approximately 12.2 million shares of our
common stock.
|
|
(3)
|
Effective
January 1, 2006, we adopted Statement of Financial Accounting Standards,
or SFAS, No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123R) and related interpretations, using the
modified prospective transition method and therefore have not restated
prior periods’ results. Prior to the adoption of SFAS No. 123R on January
1, 2006, we accounted for stock-based compensation plans under the
recognition and measurement provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations. We also
provided disclosures in accordance with SFAS No. 123, Accounting
for Stock-Based Compensation, as amended by SFAS No. 148, Accounting
for Stock-Based Compensation—Transition and Disclosure —an Amendment of
FASB Statement No. 123. Accordingly, we did not recognize expense
for options to purchase our common stock that we granted with an exercise
price equal to fair market value at the grant date and we did not
recognize expense in connection with purchases under employee stock
purchase plans for any periods prior to January 1,
2006.
|
●
|
Although
we experienced pricing pressure for our IP services, our revenue increased
year-to-year due to an increase in demand for our services. We
historically have priced our IP services at a premium compared to the
services offered by conventional Internet connectivity service providers.
Due to competitive forces, however, we have been required to lower pricing
of our IP services, although this decrease in pricing has been offset by
an increase in demand for our IP services. Our IP traffic has increased as
a result of our 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. We expect that we
will continue to experience pricing pressure as well as gains in IP
traffic for the reasons noted.
|
|
●
|
Data
center services continue to be a source of revenue growth for our
business, and we expect this trend to continue. We have expanded
the sites that we operate and may add additional space in the future as
part of our data center growth initiative. 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. We experienced a net
increase in customers in this segment as we structured our data center
business to accommodate larger, global
customers.
|
|
●
|
Although
we experienced a net decrease in customers in our CDN segment, our revenue
in that segment has increased. Revenues increased in our CDN
segment, despite a net decrease in the number of our CDN customers, due to
increased usage of our applications. Although this revenue growth has not
met our initial expectations, we believe the growth will continue. In this
regard, we have upgraded and expanded related infrastructure, including in
Europe and Asia. We also have extended our 100% uptime SLA to customers
purchasing or renewing CDN services. As discussed in note 8 to the
accompanying financial statements and below, we recorded asset impairment
charges of $102.3 million on our CDN services goodwill and other
intangible
assets.
|
In
our existing markets, we realize incremental margins as new customers are
added. Additional volume in an existing market allows improved utilization
of existing facilities and an improved ability to cost-effectively predict
and acquire additional network capacity. Conversely, decreases in the
number of customers in an established market lead to decreased facility
utilization and increase the possibility that direct network resources are
not cost-efficiently employed. Although we are encouraged by our revenue
growth among a smaller customer base, we will continue to strive to add
additional customers to achieve these cost savings.
|
||
●
|
We
have experienced impairments in our goodwill and other intangible assets
and additional adjustments to our restructuring reserve, summarized as
follows:
|
|
|
● Goodwill. We are required to assess
goodwill for impairment under generally accepted accounting principles in
the United States, or GAAP, on at least an annual basis. Our annual
assessment date is August 1 of each year, following our annual strategic
planning cycle, which includes an update of our long-term financial
outlook.
|
|
As
a result of our August 1, 2008 assessment, we concluded that the current
carrying value of our goodwill in the CDN services segment was impaired.
We recorded the CDN services goodwill following our February 2007
acquisition of VitalStream. We recorded a $99.7 million goodwill
impairment charge to adjust goodwill in our CDN services segment to an
implied fair value of $54.7 million. The goodwill impairment charge was
primarily due to declines in our CDN services revenues and operating
results as compared to our projections and unfavorable changes in market
factors used to estimate fair values.
|
||
The
impairment also caused us to reverse a deferred tax liability and create
an income tax benefit of $0.6 million associated with the CDN services
goodwill.
|
||
We
also assessed the likelihood of triggering events and concluded that none
had occurred that would cause us to re-assess goodwill for impairment
subsequent to August 1, 2008.
|
||
● Other
Intangible Assets. In conjunction with our August 1, 2008 review of
our long-term financial outlook, we also performed an analysis of the
potential impairment, and re-assessed the remaining asset lives, of other
identifiable intangible assets acquired in the VitalStream acquisition.
This analysis and re-assessment resulted in: (1) an impairment charge of
$1.9 million in developed advertising technology due to a strategic change
in market focus, (2) an impairment charge of $0.8 million in trade names
as a result of discontinuing use of the VitalStream trade name and (3) a
change our estimates that resulted in acceleration of amortization
expense of our customer relationships intangible asset over a shorter
estimated useful life (four remaining years instead of the original
estimated nine years) due to customer churn resulting in higher than
expected attrition as of our acquisition date.
|
||
These
non-cash charges to earnings and change in estimated useful life had no
impact on our cash balance as of December 31, 2008 and did not result in a
violation of any covenants in our debt instruments.
|
||
We
discuss these impairments in note 8 to the accompanying consolidated
financial statements and the section below captioned “—Results of
Operations—Other Operating Expenses—Goodwill Impairment” and
“—Restructuring and Other Impairments.”
|
||
● Restructuring.
In conjunction with the preparation of our financial statements as of and
for the year ended December 31, 2008 and in light of the recent and
significant deterioration in the real estate market, we completed an
analysis of our remaining accrued restructuring liability for leased
facilities. After reviewing the analysis and specifically, the underlying
assumptions related to anticipated sublease recoveries, we concluded that
certain of the facilities remaining in the restructuring accrual were
taking longer than expected to sublease or were otherwise not generating
the expected levels of sublease income. The analyses were based on
discounted cash flows using the same credit-adjusted risk-free rate that
we used to measure the initial restructuring liability for leases that
were part of the 2007 restructuring plan and undiscounted cash flows for
leases that were part of the 2001 restructuring plan. The cumulative
effect of these changes was $1.1 million which we recorded as additional
restructuring expense and an increase to the liability. We discuss this
charge in note 9 and report it in “Restructuring and other impairments” in
the accompanying consolidated statement of operations, along with a $0.8
million impairment of the VitalStream tradename and a reduction of the
accrued liability of $0.1 million for employee separations since we paid
all such amounts. We estimated net related expenditures for the 2007
restructuring plan to be $12.2 million, of which we paid $4.2 million
through December 31, 2008, and the balance continuing through December
2016, the last date of the longest lease term. We expect to pay these
expenditures out of operating cash flows. We estimate cost savings
from the restructuring to be approximately $0.8 million per year through
2016, primarily for
rent.
|
●
|
We
amended our Credit Agreement. On September 30, 2008, we amended our
credit agreement with Bank of America, N.A. The amendment consolidated a
two-tiered debt facility into a single revolving loan. Under the amended
credit facility, we converted the previously-existing $20.0 million term
loan balance and outstanding letters of credit with Bank of America into a
$35.0 million revolving loan facility. The amendment extended the
principal settlement terms from quarterly payments, scheduled to begin in
the third quarter of 2008, to a single principal repayment due in 2011. As
of December 31, 2008, we had $10.8 million of borrowing capacity on the
revolving credit facility. We discuss this amended credit agreement in
note 11 to the accompanying consolidated financial statements and the
section below captioned “—Liquidity and Capital
Resources.”
|
|
●
|
We
have increased our provision for doubtful accounts after taking into
consideration current economic conditions. We are continuing 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 businesses
we serve, resulting in a decline in demand for our products and services.
In addition, deteriorating economic conditions may make it more difficult
for these businesses to meet their obligations to us, which could result
in delayed collection of accounts receivable and an increase in our
provision for doubtful accounts. For the year ended December 31, 2008, we
increased our provision for doubtful accounts by $2.8 million, compared to
the year ended December 31, 2007, in part after taking into consideration
current economic
conditions.
|
●
|
Income
Approach. To determine fair value, we discounted the expected cash
flows of the CDN services reporting unit. Expected cash flows were
calculated using a compounded annual revenue growth rate of approximately
20%, forecasting existing cost structures and considering capital
reinvestment requirements. We used a discount rate of 20%, representing
the estimated weighted average cost of capital, which reflects the overall
level of inherent risk involved in our CDN services operations and the
rate of return an outside investor would expect to earn. To estimate cash
flows beyond the final year of our model, we used a terminal value and
incorporated the present value of the resulting terminal value into our
estimate of fair value.
|
●
|
Market-Based
Approach. To corroborate the results of the income approach
described above, we estimated the fair value of our CDN services reporting
unit using several market-based approaches, including the enterprise value
that we derive based on our stock price. We also used the guideline
company method, which focuses on comparing our risk profile and growth
prospects, to select reasonably similar/guideline publicly traded
companies. Using the guideline company method, we selected revenue and
EBITDA multiples below the median for our comparable
companies.
|
●
|
determining
fair value in a dislocated market depends on facts and circumstances, and
may require the use of significant judgment about whether individual
market transactions are forced liquidations or distressed sales and
therefore poor indicators of fair value;
|
|
●
|
when
relevant observable market data is not available, the use of assumptions
about future cash flows and discount rates may be appropriate in
determining fair value; and
|
|
●
|
the
value of broker quotes in determining fair value depends on facts and
circumstances, particularly when an active market does not
exist.
|
●
|
costs
for connecting to and accessing NSPs and competitive local exchange
providers;
|
|
●
|
facility
and occupancy costs for hosting and operating our and our customers’
network equipment;
|
|
●
|
costs
of FCP solutions sold;
|
|
●
|
costs
incurred for providing additional third party services to our customers;
and
|
|
●
|
royalties
and costs of license fees for operating systems
software.
|
Year
Ended December 31,
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
Revenues:
|
||||||||||||
IP
services
|
48.5 | % | 52.2 | % | 61.9 | % | ||||||
Data
center services
|
43.2 | 35.7 | 31.2 | |||||||||
CDN
services
|
8.3 | 7.6 | — | |||||||||
Other
|
— | 4.5 | 6.9 | |||||||||
Total
revenues
|
100.0 | 100.0 | 100.0 | |||||||||
Operating
costs and expenses:
|
||||||||||||
Direct
costs of network, sales and services, exclusive of depreciation and
amortization, shown below:
|
||||||||||||
IP
services
|
18.0 | 18.8 | 22.4 | |||||||||
Data
center services
|
32.3 | 25.4 | 25.6 | |||||||||
CDN
services
|
3.2 | 2.8 | — | |||||||||
Other
|
— | 3.6 | 5.6 | |||||||||
Direct
costs of amortization of acquired technologies
|
2.6 | 1.8 | 0.3 | |||||||||
Direct
costs of customer support
|
6.4 | 7.1 | 6.4 | |||||||||
Product
development
|
3.3 | 2.8 | 2.5 | |||||||||
Sales
and marketing
|
12.2 | 13.4 | 15.0 | |||||||||
General
and administrative
|
12.1 | 12.9 | 11.9 | |||||||||
Provision
for doubtful accounts
|
2.0 | 1.0 | 0.3 | |||||||||
Depreciation
and amortization
|
9.3 | 9.5 | 8.7 | |||||||||
Goodwill
impairment
|
39.3 | — | — | |||||||||
Restructuring
and other impairments
|
0.7 | 4.9 | 0.2 | |||||||||
Other
operating costs and expenses
|
— | 0.2 | (0.1 | ) | ||||||||
Total
operating costs and expenses
|
141.4 | 104.2 | 98.8 | |||||||||
(Loss)
income from operations
|
(41.4 | )% | (4.2 | )% | 1.2 | % |
Year
Ended December 31,
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
IP
services
|
$ | 123,268 | $ | 122,205 | $ | 112,250 | ||||||
Data
center services
|
109,679 | 83,632 | 56,548 | |||||||||
CDN
services
|
21,042 | 17,806 | — | |||||||||
Other
|
— | 10,447 | 12,577 | |||||||||
$ | 253,989 | $ | 234,090 | $ | 181,375 |
Year
ended December 31,
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
Direct
costs of customer support
|
$ | 1,369 | $ | 1,892 | $ | 1,102 | ||||||
Product
development
|
688 | 856 | 628 | |||||||||
Sales
and marketing
|
1,782 | 2,135 | 2,145 | |||||||||
General
and administrative
|
3,660 | 3,798 | 2,067 | |||||||||
Total
stock-based compensation expense included in net income
|
$ | 7,499 | $ | 8,681 | $ | 5,942 |
●
|
an
impairment charge of $1.9 million in developed advertising technology due
to a strategic change in market focus,
|
|
●
|
an
impairment charge of $0.8 million in trade names as a result of
discontinuing use of the VitalStream trade name, and
|
|
●
|
a
change in our estimates that resulted in acceleration of amortization
expense of our customer relationships intangible asset over a shorter
estimated useful life (four remaining years instead of the original
estimated nine years) due to customer churn resulting in higher than
expected attrition as of the acquisition
date.
|
●
|
converted
the outstanding Term Loan balance of $20.0 million as of September 30,
2008 into a loan under the Revolving Credit Facility;
|
|
●
|
terminated
the Term Loan under the Credit Agreement;
|
|
●
|
increased
the total Revolving Credit Commitment (as defined in the Amended Credit
Agreement) from $5.0 million to $35.0 million;
|
|
●
|
increased
the Letter of Credit Sublimit (as defined in the Amended Credit Agreement)
from $5.0 million to $7.0 million;
|
|
●
|
provided
us and Bank of America with an option to enter into a lease financing
agreement not to exceed $10.0 million; and
|
|
●
|
modified
certain covenants and
definitions.
|
Payments Due by
Period
|
||||||||||||||||||||
Total
|
Less
than 1
year |
1-
3 Years |
3-5 Years |
More than
5 |
||||||||||||||||
Revolving
line of credit(1)
|
$ | 21,623 | $ | 600 | $ | 21,023 | $ | — | $ | — | ||||||||||
Capital
lease obligations
|
9,441 | 822 | 1,130 | 1,150 | 6,339 | |||||||||||||||
Operating
lease commitments
|
216,125 | 25,624 | 51,898 | 51,721 | 86,882 | |||||||||||||||
Service
commitments
|
27,085 | 20,866 | 6,219 | — | — | |||||||||||||||
$ | 274,274 | $ | 47,912 | $ | 80,270 | $ | 52,871 | $ | 93,221 |
____________________ | |
(1)
|
As
noted in the section captioned “—Credit
Agreement,” the interest rate on the Revolving Credit Facility is based on
our bank’s prime rate less a 0.25% margin. As of December 31, 2008, the
interest rate was 3.0% and the projected interest included in the debt
payments above incorporates this rate. We subsequently paid $19.8 million
on the Revolving Credit Facility in January 2009 which would significantly
lower the projected interest included above. We plan to borrow on the
Revolving Credit Facility from time-to-time particularly if we consider it
economically favorable to do
so.
|
●
|
The
exercise price per share of each replacement option granted in the
exchange offer was $14.46, the average of the closing prices of our common
stock as reported by the American Stock Exchange and the NASDAQ Global
Market, as applicable, for the 15 consecutive trading days ending
immediately prior to the grant date of the replacement
options;
|
|
●
|
For
all eligible options with an exercise price per share greater than or
equal to $20.00, the exchange ratio was one-for-two;
and
|
|
●
|
Each
new option had a three-year vesting period, vesting in equal monthly
installments over three years, so long as the grantee continued to be a
full-time employee and a 10-year
term.
|
●
|
A single,
common logging system, or portal, for customers to record all disputes,
disconnects and requests for credits,
|
|
●
|
A weekly
review of a customer request log with appropriate designated management
and approval pursuant to the schedule of authorization,
and
|
|
●
|
A review
by the appropriate designated finance management personnel of the
accounting estimates developed from the relevant, sufficient, and reliable
data collected above.
|
(a)
|
Documents
filed as a part of the report:
|
(1)
|
Consolidated
Financial Statements.
|
Page
|
|||
Report
of Independent Registered Public Accounting Firm
|
F-2
|
||
Consolidated
Statements of Operations
|
F-3
|
||
Consolidated
Balance Sheets
|
F-4
|
||
Consolidated
Statement of Stockholders’ Equity and Comprehensive Loss
|
F-5
|
||
Consolidated
Statements of Cash Flows
|
F-6
|
||
Notes
to Consolidated Financial Statements
|
F-8
|
(2)
|
Financial
Statement Schedule.
|
Page
|
||
Schedule
II - Valuation and Qualifying Accounts for the Three Years Ended December
31, 2008
|
S-1
|
(3)
|
Index
to Exhibits.
|
Exhibit
|
||
Number
|
Description
|
|
2.1
|
Agreement
and Plan of Merger dated October 12, 2006, by and among the Company, Ivy
Acquisition Corp. and VitalStream Holdings, Inc. (incorporated herein by
reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K,
filed on October 12, 2006).
|
|
3.1
|
Certificate
of Incorporation of the Company, as amended (incorporated by reference
herein to Exhibit 4.1 to the Company’s Registration Statement on Form S-3,
filed on September 8, 2003, File No. 333-108573).
|
|
3.2
|
Certificate
of Amendment of Certificate of Incorporation of the Company (incorporated
by reference herein to Exhibit 3.1 to the Company’s Current Report on Form
8-K filed on July 11, 2006).
|
|
3.3
|
Certificate
of Amendment of Certificate of Incorporation of the Company dated June 19,
2008 (incorporated by reference herein to Exhibit 3.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, filed
on August 11, 2008).
|
|
3.4
|
Amended
and Restated Bylaws of the Company (incorporated by reference herein to
Exhibit 4.2 to the Company’s Registration Statement on Form S-3, filed
September 8, 2003, File No. 333-108573).
|
|
3.5
|
Certificate
of Designation of Rights, Preferences and Privileges of Series B Preferred
Stock (incorporated by reference herein to Exhibit 3.4 to the Company’s
Current Report on Form 8-K filed on April 13, 2007).
|
|
4.1
|
Rights
Agreement, dated as of April 11, 2007, between the Company and American
Stock Transfer & Trust Company, as Rights Agreement (incorporated by
reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K,
filed on April 13, 2007).
|
|
10.1
|
Amended
and Restated Internap Network Services Corporation 1998 Stock Option/Stock
Issuance Plan.* +
|
|
10.2
|
Internap
Network Services Corporation 1999 Non-Employee Directors’ Stock Option
Plan.* +
|
|
10.3
|
First
Amendment to the Internap Network Services Corporation 1999 Non-Employee
Directors’ Stock Option Plan.* +
|
|
10.4
|
Internap
Network Services Corporation 1999 Employee Stock Purchase Plan
(incorporated herein by reference to Exhibit 10.4 to the Company’s
Registration Statement on Form S-1, File No. 333-84035 dated July 29,
1999).+
|
|
10.5
|
Amended
and Restated Internap Network Services Corporation 1999 Stock Incentive
Plan for Non-Officers.*
+
|
10.6
|
Amended
Internap Network Services Corporation 1999 Equity Incentive Plan
(incorporated herein by reference to Exhibit 10.7 to the Company’s
Registration Statement on Form S-1, File No. 333-95503 dated January 27,
2000).+
|
|
10.7
|
Form
of 1999 Equity Incentive Plan Stock Option Agreement (incorporated herein
by reference to Exhibit 10.8 to the Company’s Registration Statement on
Form S-1, File No. 333-84035 dated July 29, 1999).+
|
|
10.8
|
Internap
Network Services Corporation 2000 Non-Officer Equity Incentive Plan
(incorporated herein by reference to Exhibit 99.1 to the Company’s
Registration Statement on Form S-8, File No. 333-37400 dated May 19,
2000).+
|
|
10.9
|
Internap
Network Services Corporation 2002 Stock Compensation Plan.*
+
|
|
10.10
|
Form
of Nonstatutory Stock Option Agreement under the Internap Network Services
Corporation 2002 Stock Compensation Plan.* +
|
|
10.11
|
Form
of Employee Confidentiality, Nonraiding and Noncompetition Agreement used
between Company and its Executive Officers (incorporated herein by
reference to Exhibit 10.11 to the Company’s Registration Statement on Form
S-1, File No. 333-84035 dated July 29, 1999).+
|
|
10.12
|
Amended
and Restated 2005 Incentive Stock Plan, dated March 15, 2006 (incorporated
by reference to Appendix B to the Company’s Definitive Proxy Statement
filed May 8, 2008).+
|
|
10.13
|
Employment
Agreement dated as of July 10, 2007 between the Company and James DeBlasio
(incorporated herein by reference to Exhibit 99.1 to the Company’s Current
Report on Form 8-K, filed on July 11, 2007).+
|
|
10.14
|
First
Amendment to Employment Agreement between James P. DeBlasio and the
Company dated November 14, 2007 (incorporated herein by reference to
Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed on
November 19, 2007).+
|
|
10.15
|
Amended
and Restated 2004 Internap Network Services Corporation Employee Stock
Purchase Plan, dated January 11, 2006 (incorporated by reference to
Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006, filed on May 10, 2006).+
|
|
10.16
|
Form
of Stock Grant Certificate under the Amended and Restated Internap Network
Services Corporation 2005 Incentive Stock Plan (incorporated by reference
to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2006, filed on August 8, 2006).+
|
|
10.17
|
Form
of Stock Option Grant Certificate under the Amended and Restated Internap
Network Services Corporation 2005 Incentive Stock Plan (incorporated by
reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2006, filed on August 8,
2006).+
|
|
10.18
|
VitalStream
Holdings, Inc. 2001 Stock Incentive Plan (Third Amended and Restated)
(incorporated by reference to Exhibit 4.4 to the Company’s Registration
Statement on Form S-8, File No. 333-141245 , filed on March 13,
2007).+
|
|
10.19
|
General
Release Agreement dated as of April 9, 2008 between the Company and
Vincent Molinaro (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K, filed on April 18,
2008).+
|
|
10.20
|
2007
Executive Bonus Award Incentive Plan (incorporated by reference to Exhibit
10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2007, filed on May 10, 2007).+
|
|
10.21
|
Amendment
to the 2007 Executive Bonus Award Incentive Plan (incorporated herein by
reference to Exhibit 99.6 to the Company’s Current Report on Form
8-K, filed on November 19, 2007).+
|
|
10.22
|
2008
Executive Bonus Award Incentive Plan (incorporated herein by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed March 24,
2008).+
|
|
10.23
|
2008
Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.2
to the Company’s Current Report on Form 8-K, filed March 24,
2008).+
|
|
10.24
|
Credit
Agreement dated as of September 14, 2007 by and among the Company, as the
Borrower, Bank of America, N.A., as Administrative Agent, Swing Line
Lender and L/C Issuer, and the other Lenders party thereto (incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
filed on September 19,
2007).
|
10.25
|
Pledge
and Security Agreement dated as of September 14, 2007 among the Company,
and certain of its Subsidiaries party thereto from time to time, as
Grantors, and Bank of America, N.A., as Administrative Agent (incorporated
by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K,
filed on September 19, 2007).
|
|
10.26
|
Intellectual
Property Security Agreement dated as of September 14, 2007 among the
Company, and certain of its Subsidiaries party thereto from time to time,
as Grantors, and Bank of America, N.A., as Administrative Agent
(incorporated by reference to Exhibit 10.3 to the Company’s Current Report
on Form 8-K, filed on September 19, 2007).
|
|
10.27
|
Amendment
No. 1 to Credit Agreement entered into as of May 14, 2008 by and among
Bank of America, N.A. as Administrative Agent, Swing Line Lender, L/C
Issuer and sole Lender, the Company and the Subsidiaries of the Company
party thereto as Guarantors (incorporated herein by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K, filed May 16,
2008).
|
|
10.28
|
Amendment
No. 2 dated September 30, 2008 to Credit Agreement, dated as of September
14, 2007, by and among the Company, as the Borrower, Bank of America,
N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the
other Lenders party thereto (incorporated herein by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K, filed October 6,
2008).
|
|
10.29
|
Joinder
Agreement to the Employment Security Plan executed by Richard Dobb
(incorporated herein by reference to Exhibit 99.3 to the Company’s Current
Report on Form 8-K, filed on November 19, 2007).+
|
|
10.30
|
Joinder
Agreement to the Employment Security Plan executed by Phil Kaplan
(incorporated herein by reference to Exhibit 99.4 to the Company’s Current
Report on Form 8-K, filed on November 19, 2007).+
|
|
10.31
|
Joinder
Agreement to the Employment Security Plan executed by Vince Molinaro
(incorporated herein by reference to Exhibit 99.5 to the Company’s Current
Report on Form 8-K, filed on November 19, 2007).+
|
|
10.32
|
Joinder
Agreement to the Employment Security Plan executed by George E. Kilguss
(incorporated herein by reference to Exhibit 99.1 to the Company’s Current
Report on Form 8-K, filed on March 28, 2008).+
|
|
10.33
|
Joinder
Agreement to the Employment Security Plan executed by Tim Sullivan.
+
|
|
10.34
|
Offer
Letter between the Company and Eric Cooney, dated January 16, 2009
(incorporated herein by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K, filed on February 2, 2009).+
|
|
10.35
|
Joinder
Agreement to the Employment Security Plan executed by Eric Cooney
(incorporated herein by reference to Exhibit 10.2 to the Company’s Current
Report on Form 8-K, filed on February 2, 2009).+
|
|
10.36
|
Agreement
between the Company and James P. DeBlasio, dated January 29, 2009
(incorporated herein by reference to Exhibit 10.3 to the Company’s Current
Report on Form 8-K, filed on February 2, 2009). +
|
|
21.1
|
List
of Subsidiaries (incorporated herein by reference to Exhibit 21.1 to the
Company’s Form 10-K, filed on March 31, 2008).
|
|
23.1*
|
Consent
of PricewaterhouseCoopers LLP, Independent Registered Public Accounting
Firm.
|
|
31.1*
|
Rule
13a-14(a)/15d-14(a) Certification, executed James P. DeBlasio, President,
Chief Executive Officer and Director the Company.
|
|
31.2*
|
Rule
13a-14(a)/15d-14(a) Certification, executed by George Kilguss, III, 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 George Kilguss, III, 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 15(c) of this
Report.
|
INTERNAP
NETWORK SERVICES CORPORATION
|
|||
Date:
March 12, 2009
|
|||
By:
|
/s/
George E. Kilguss, III
|
||
George
E. Kilguss, III
|
|||
Vice
President and Chief Financial Officer
|
|||
(Principal
Accounting Officer)
|
Signature
|
Title
|
Date
|
||
/s/
James P. DeBlasio
|
||||
James
P. DeBlasio
|
President,
Chief Executive Officer and Director (Principal Executive
Officer)
|
March
12, 2009
|
||
/s/
George E. Kilguss, III
|
||||
George
E. Kilguss, III
|
Vice
President and Chief Financial Officer (Principal Accounting
Officer)
|
March
12, 2009
|
||
/s/ Eugene Eidenberg | ||||
Eugene
Eidenberg
|
Non-Executive
Chairman and Director
|
March
12, 2009
|
||
/s/ Charles B. Coe | ||||
Charles
B. Coe
|
Director
|
March 12,
2009
|
||
/s/ William J. Harding | ||||
William
J. Harding
|
Director
|
March
12, 2009
|
||
/s/ Patricia L. Higgins | ||||
Patricia
L. Higgins
|
Director
|
March
12, 2009
|
||
/s/ Kevin L. Ober | ||||
Kevin
L. Ober
|
Director
|
March
12, 2009
|
||
/s/ Gary Pfeiffer | ||||
Gary
Pfeiffer
|
Director
|
March
12, 2009
|
||
/s/ Daniel C. Stanzione | ||||
Daniel
C. Stanzione
|
Director
|
March
12,
2009
|
Internap
Network Services Corporation
|
||
Index
to Consolidated Financial Statements
|
||
Page
|
||
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated
Statements of Operations
|
F-3
|
|
Consolidated
Balance Sheets
|
F-4
|
|
Consolidated
Statement of Stockholders’ Equity and Comprehensive (Loss)
Income
|
F-5
|
|
Consolidated
Statements of Cash Flows
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
|
Financial
Statement Schedule
|
S-1
|
/s/
PricewaterhouseCoopers LLP
|
Atlanta,
Georgia
|
March
12, 2009
|
INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
(In
thousands, except per share
amounts)
|
Year
Ended December 31,
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
Revenues:
|
||||||||||||
Internet
protocol (IP) services
|
$ | 123,268 | $ | 122,205 | $ | 112,250 | ||||||
Data
center services
|
109,679 | 83,632 | 56,548 | |||||||||
Content
delivery network (CDN) services
|
21,042 | 17,806 | — | |||||||||
Other
|
— | 10,447 | 12,577 | |||||||||
Total
revenues
|
253,989 | 234,090 | 181,375 | |||||||||
Operating
costs and expenses:
|
||||||||||||
Direct
costs of network, sales and services, exclusive of depreciation and
amortization, shown below:
|
||||||||||||
IP
services
|
45,782 | 43,925 | 40,723 | |||||||||
Data
center services
|
82,009 | 59,439 | 46,474 | |||||||||
CDN
services
|
8,086 | 6,594 | — | |||||||||
Other
|
— | 8,436 | 10,141 | |||||||||
Direct
costs of amortization of acquired technologies
|
6,649 | 4,165 | 516 | |||||||||
Direct
costs of customer support
|
16,217 | 16,547 | 11,566 | |||||||||
Product
development
|
8,477 | 6,564 | 4,475 | |||||||||
Sales
and marketing
|
30,888 | 31,533 | 27,173 | |||||||||
General
and administrative
|
30,675 | 30,251 | 21,556 | |||||||||
Provision
for doubtful accounts
|
5,083 | 2,261 | 548 | |||||||||
Depreciation
and amortization
|
23,865 | 22,242 | 15,856 | |||||||||
Goodwill
impairment
|
99,700 | — | — | |||||||||
Restructuring
and other impairments
|
1,741 | 11,349 | 323 | |||||||||
Acquired
in-process research and development
|
— | 450 | — | |||||||||
Gain
on disposals of property and equipment
|
(16 | ) | (5 | ) | (113 | ) | ||||||
Other
|
— | 50 | — | |||||||||
Total
operating costs and expenses
|
359,156 | 243,801 | 179,238 | |||||||||
(Loss)
income from operations
|
(105,167 | ) | (9,711 | ) | 2,137 | |||||||
Non-operating
(income) expense:
|
||||||||||||
Interest
income
|
(1,884 | ) | (3,228 | ) | (2,305 | ) | ||||||
Interest
expense
|
1,251 | 1,150 | 883 | |||||||||
Write-off
of investment
|
— | 1,178 | — | |||||||||
Other,
net
|
388 | (37 | ) | (129 | ) | |||||||
Total
non-operating (income) expense
|
(245 | ) | (937 | ) | (1,551 | ) | ||||||
(Loss)
income before income taxes and equity in earnings of equity-method
investment
|
(104,922 | ) | (8,774 | ) | 3,688 | |||||||
Provision
(benefit) for income taxes
|
174 | (3,080 | ) | 145 | ||||||||
Equity
in earnings of equity-method investment, net of taxes
|
(283 | ) | (139 | ) | (114 | ) | ||||||
Net
(loss) income
|
$ | (104,813 | ) | $ | (5,555 | ) | $ | 3,657 | ||||
Net
(loss) income per share:
|
||||||||||||
Basic
|
$ | (2.13 | ) | $ | (0.12 | ) | $ | 0.11 | ||||
Diluted
|
$ | (2.13 | ) | $ | (0.12 | ) | $ | 0.10 | ||||
Weighted
average shares used in per share calculations:
|
||||||||||||
Basic
|
49,238 | 46,942 | 34,748 | |||||||||
Diluted
|
49,238 | 46,942 | 35,739 |
INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
|
CONSOLIDATED
BALANCE SHEETS
|
(In
thousands, except per share
amounts)
|
December
31,
|
||||||||
2008
|
2007
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 46,870 | $ | 52,030 | ||||
Short-term
investments in marketable securities
|
7,199 | 19,569 | ||||||
Accounts
receivable, net of allowance for doubtful accounts of $2,777 and $2,351,
respectively
|
28,634 | 36,429 | ||||||
Inventory
|
381 | 304 | ||||||
Prepaid
expenses and other assets
|
10,866 | 8,464 | ||||||
Deferred
tax asset, current portion
|
1 | 479 | ||||||
Total
current assets
|
93,951 | 117,275 | ||||||
Property
and equipment, net
|
97,350 | 65,491 | ||||||
Investments
and other related assets, $7,027 and $0, respectively measured at fair
value
|
8,650 | 1,138 | ||||||
Intangible
assets, net
|
33,942 | 43,008 | ||||||
Goodwill
|
90,977 | 190,677 | ||||||
Restricted
cash
|
— | 4,120 | ||||||
Deposits
and other assets
|
2,763 | 2,287 | ||||||
Deferred
tax asset, non-current
|
2,450 | 3,014 | ||||||
Total
assets
|
$ | 330,083 | $ | 427,010 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Note
payable, current portion
|
$ | — | $ | 2,413 | ||||
Accounts
payable
|
19,642 | 19,624 | ||||||
Accrued
liabilities
|
8,756 | 10,159 | ||||||
Deferred
revenues, current portion
|
3,710 | 4,807 | ||||||
Capital
lease obligations, current portion
|
274 | 805 | ||||||
Restructuring
liability, current portion
|
2,800 | 2,396 | ||||||
Other
current liabilities
|
116 | 108 | ||||||
Total
current liabilities
|
35,298 | 40,312 | ||||||
Note
payable, less current portion
|
20,000 | 17,354 | ||||||
Deferred
revenues, less current portion
|
2,248 | 2,275 | ||||||
Capital
lease obligations, less current portion
|
3,244 | 452 | ||||||
Restructuring
liability, less current portion
|
6,222 | 7,697 | ||||||
Deferred
rent
|
14,114 | 11,011 | ||||||
Deferred
tax liability
|
— | 398 | ||||||
Other
long-term liabilities
|
762 | 878 | ||||||
Total
liabilities
|
81,888 | 80,377 | ||||||
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; 50,224 and 49,759
shares outstanding at December 31, 2008 and 2007,
respectively
|
50 | 50 | ||||||
Additional
paid-in capital
|
1,216,267 | 1,208,191 | ||||||
Treasury
stock, at cost, 83 shares at December 31, 2008
|
(370 | ) | — | |||||
Accumulated
deficit
|
(966,823 | ) | (862,010 | ) | ||||
Accumulated
items of other comprehensive income
|
(929 | ) | 402 | |||||
Total
stockholders’ equity
|
248,195 | 346,633 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 330,083 | $ | 427,010 |
Common Stock | |||||||||||||||||||||||||
Shares | Par Value | Additional Paid-In Capital | Treasury Stock | Deferred Stock Compensation | Accumulated Deficit |
Accumulated
Items
of Comprehensive Income (Loss) |
Total Stockholders’ Equity | ||||||||||||||||||
Balance,
December 31, 2005
|
|
34,168
|
$
|
34
|
$
|
970,221
|
$
|
—
|
$
|
(420
|
)
|
$
|
(860,112
|
)
|
$
|
5
|
$
|
109,728
|
|||||||
Net
income
|
—
|
—
|
—
|
—
|
—
|
3,657
|
—
|
3,657
|
|||||||||||||||||
Change
in unrealized gains and losses on investments, net of
taxes
|
—
|
—
|
—
|
—
|
—
|
—
|
80
|
80
|
|||||||||||||||||
Foreign
currency translation adjustment
|
—
|
—
|
—
|
—
|
—
|
—
|
235
|
235
|
|||||||||||||||||
Total
comprehensive income
|
3,972
|
||||||||||||||||||||||||
Reclassification
of deferred stock compensation resulting from implementation of SFAS No.
123R
|
—
|
—
|
(420
|
)
|
—
|
420
|
—
|
—
|
—
|
||||||||||||||||
Stock
compensation plans activity and stock-based compensation
expense
|
1,154
|
2
|
9,015
|
—
|
—
|
—
|
—
|
9,017
|
|||||||||||||||||
Exercise
of warrants
|
551
|
—
|
3,808
|
—
|
—
|
—
|
—
|
3,808
|
|||||||||||||||||
Balance,
December 31, 2006
|
35,873
|
36
|
982,624
|
—
|
—
|
(856,455
|
)
|
320
|
126,525
|
||||||||||||||||
Net
loss
|
—
|
—
|
—
|
—
|
—
|
(5,555
|
)
|
—
|
(5,555
|
)
|
|||||||||||||||
Change
in unrealized gains and losses on investments, net of
taxes
|
—
|
—
|
—
|
—
|
—
|
—
|
(25
|
)
|
(25
|
)
|
|||||||||||||||
Foreign
currency translation adjustment
|
—
|
—
|
—
|
—
|
—
|
—
|
107
|
107
|
|||||||||||||||||
Total
comprehensive loss
|
(5,473
|
)
|
|||||||||||||||||||||||
Stock
issued in connection with VitalStream acquisition
|
12,206
|
12
|
208,281
|
—
|
—
|
—
|
—
|
208,293
|
|||||||||||||||||
Stock
compensation plans activity and stock-based compensation
expense
|
1,680
|
2
|
17,286
|
—
|
—
|
—
|
—
|
17,288
|
|||||||||||||||||
Balance,
December 31, 2007
|
49,759
|
50
|
1,208,191
|
—
|
—
|
(862,010
|
)
|
402
|
346,633
|
||||||||||||||||
Net
loss
|
—
|
—
|
—
|
—
|
—
|
(104,813
|
)
|
—
|
(104,813
|
)
|
|||||||||||||||
Change
in unrealized gains and losses on investments, net of
taxes
|
—
|
—
|
—
|
—
|
—
|
—
|
(29
|
)
|
(29
|
)
|
|||||||||||||||
Foreign
currency translation adjustment
|
—
|
—
|
—
|
—
|
—
|
—
|
(1,302
|
)
|
(1,302
|
)
|
|||||||||||||||
Total
comprehensive loss
|
|
|
(106,144
|
) | |||||||||||||||||||||
Stock
compensation plans activity and stock-based compensation
expense
|
465
|
—
|
8,076
|
(370
|
)
|
—
|
—
|
—
|
7,706
|
||||||||||||||||
Balance,
December 31, 2008
|
50,224
|
$
|
50
|
$
|
1,216,267
|
$
|
(370
|
)
|
$
|
—
|
$
|
(966,823
|
)
|
$
|
(929
|
)
|
$
|
248,195
|
Year Ended December
31,
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
(loss) income
|
$ | (104,813 | ) | $ | (5,555 | ) | $ | 3,657 | ||||
Adjustments
to reconcile net (loss) income to net cash provided by operating
activities:
|
||||||||||||
Depreciation
and amortization
|
28,663 | 26,407 | 16,372 | |||||||||
Gain
on disposal of property and equipment, net
|
(16 | ) | (5 | ) | (113 | ) | ||||||
Goodwill
and other intangible asset impairments
|
102,336 | 2,454 | 319 | |||||||||
Acquired
in-process research and development
|
— | 450 | — | |||||||||
Stock-based
compensation expense
|
7,499 | 8,681 | 5,942 | |||||||||
Write-off
of investment
|
— | 1,178 | — | |||||||||
Equity
in earnings from equity-method investment
|
(283 | ) | (139 | ) | (114 | ) | ||||||
Provision
for doubtful accounts
|
5,083 | 2,261 | 548 | |||||||||
Non-cash
changes in deferred rent
|
3,102 | (421 | ) | 2,247 | ||||||||
Deferred
income taxes
|
644 | (3,095 | ) | — | ||||||||
Other,
net
|
(477 | ) | (150 | ) | — | |||||||
Changes
in operating assets and liabilities, excluding effects of
acquisition:
|
||||||||||||
Accounts
receivable
|
2,424 | (15,825 | ) | (1,702 | ) | |||||||
Inventory,
prepaid expenses, deposits and other assets
|
(2,919 | ) | (2,182 | ) | (1,778 | ) | ||||||
Accounts
payable
|
18 | 7,920 | 3,010 | |||||||||
Accrued
and other liabilities
|
(1,404 | ) | (2,466 | ) | 1,422 | |||||||
Deferred
revenue
|
(836 | ) | 2,704 | 1,070 | ||||||||
Accrued
restructuring liability
|
(1,070 | ) | 5,309 | (1,493 | ) | |||||||
Net
cash flows provided by operating activities
|
37,951 | 27,526 | 29,387 | |||||||||
Cash
flows from investing activities:
|
||||||||||||
Purchases
of investments in marketable securities
|
(21,422 | ) | (38,508 | ) | (17,427 | ) | ||||||
Maturities
and sales of investments in marketable securities
|
26,591 | 32,395 | 20,277 | |||||||||
Purchases
of property and equipment
|
(51,154 | ) | (30,271 | ) | (13,382 | ) | ||||||
Proceeds
from disposal of property and equipment
|
175 | 5 | 133 | |||||||||
Cash
received from acquisition, net of costs incurred for the
transaction
|
— | 3,203 | — | |||||||||
Change
in restricted cash, excluding effects of acquisition
|
4,120 | (3,217 | ) | — | ||||||||
Net
cash flows used in investing activities
|
(41,690 | ) | (36,393 | ) | (10,399 | ) |
Year
Ended December 31,
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
Cash
flows from financing activities:
|
||||||||||||
Proceeds
from notes payable, net of discount
|
20,000 | 19,742 | — | |||||||||
Principal
payments on notes payable
|
(20,000 | ) | (11,318 | ) | (4,375 | ) | ||||||
Payments
on capital lease obligations
|
(807 | ) | (1,617 | ) | (538 | ) | ||||||
Debt
issuance costs
|
(14 | ) | (65 | ) | — | |||||||
Stock-based compensation
plans
|
108 | 8,582 | 3,031 | |||||||||
Proceeds
from exercise of warrants
|
— | — | 3,808 | |||||||||
Other,
net
|
(108 | ) | (84 | ) | 31 | |||||||
Net
cash flows (used in) provided by financing activities
|
(821 | ) | 15,240 | 1,957 | ||||||||
Effect
of exchange rates on cash and cash equivalents
|
(600 | ) | 66 | 212 | ||||||||
Net
(decrease) increase in cash and cash equivalents
|
(5,160 | ) | 6,439 | 21,157 | ||||||||
Cash
and cash equivalents at beginning of period
|
52,030 | 45,591 | 24,434 | |||||||||
Cash
and cash equivalents at end of period
|
$ | 46,870 | $ | 52,030 | $ | 45,591 | ||||||
Supplemental
disclosure of cash flow information:
|
||||||||||||
Common
stock issued and stock options assumed in VitalStream
acquisition
|
$ | — | $ | 208,293 | $ | — | ||||||
Cash
paid for interest, net of amounts capitalized
|
1,403 | 1,152 | 793 | |||||||||
Cash
paid for income taxes
|
361 | 103 | 149 | |||||||||
Non-cash
acquisition of property and equipment
|
3,069 | 148 | 162 | |||||||||
Capitalized
stock-based compensation
|
97 | 25 | 44 |
1.
|
DESCRIPTION
OF THE COMPANY AND NATURE OF
OPERATIONS
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
●
|
An
impairment charge of $1.9 million in developed advertising technology due
to a strategic change in market focus,
|
|
●
|
An
impairment charge of $0.8 million in trade names as a result of
discontinuing use of the VitalStream trade name,
and
|
|
●
|
a
change in our estimates that resulted in acceleration of amortization
expense of our customer relationships intangible asset over a shorter
estimated useful life (four remaining years instead of the original
estimated useful life of nine years) due to customer churn resulting in
higher than expected attrition as of the acquisition
date.
|
Year
Ended December 31,
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
Net
(loss) income
|
$ | (104,813 | ) | $ | (5,555 | ) | $ | 3,657 | ||||
Weighted
average shares outstanding, basic
|
49,238 | 46,942 | 34,748 | |||||||||
Effect
of dilutive securities:
|
||||||||||||
Stock
compensation plans
|
— | — | 984 | |||||||||
Warrants
|
— | — | 7 | |||||||||
Weighted
average shares outstanding, diluted
|
49,238 | 46,942 | 35,739 | |||||||||
Net
(loss) income per share:
|
||||||||||||
Basic
|
$ | (2.13 | ) | $ | (0.12 | ) | $ | 0.11 | ||||
Diluted
|
$ | (2.13 | ) | $ | (0.12 | ) | $ | 0.10 | ||||
Anti-dilutive
securities not included in diluted net (loss) income per share
calculation:
|
||||||||||||
Stock
compensation plans
|
3,651 | 3,860 | 1,408 | |||||||||
Warrants
to purchase common stock
|
— | 34 | — | |||||||||
3,651 | 3,894 | 1,408 |
IP
Services
|
Data
Center
Services
|
CDN
Services
|
Other
|
Total
|
||||||||||||||||
Year
ended December 31, 2007:
|
||||||||||||||||||||
Revenues:
|
||||||||||||||||||||
Previously
reported
|
$ | 119,848 | $ | 83,058 | $ | 17,718 | $ | 13,466 | $ | 234,090 | ||||||||||
Reclassification
of termination fees and professional and reseller products and
services
|
2,357 | 574 | 88 | (3,019 | ) | — | ||||||||||||||
Revised
|
$ | 122,205 | $ | 83,632 | $ | 17,806 | $ | 10,447 | $ | 234,090 | ||||||||||
Direct
costs of network, sales and services, exclusive of depreciation and
amortization:
|
||||||||||||||||||||
Previously
reported
|
$ | 43,681 | $ | 59,439 | $ | 6,584 | $ | 8,690 | $ | 118,394 | ||||||||||
Reclassification
of professional and reseller products and services
|
244 | — | 10 | (254 | ) | — | ||||||||||||||
Revised
|
$ | 43,925 | $ | 59,439 | $ | 6,594 | $ | 8,436 | $ | 118,394 | ||||||||||
Year
ended December 31, 2006:
|
||||||||||||||||||||
Revenues:
|
||||||||||||||||||||
Previously
reported
|
$ | 109,748 | $ | 56,152 | $ | — | $ | 15,475 | $ | 181,375 | ||||||||||
Reclassification
of termination fees and professional and reseller products and
services
|
2,502 | 396 | — | (2,898 | ) | — | ||||||||||||||
Revised
|
$ | 112,250 | $ | 56,548 | $ | — | $ | 12,577 | $ | 181,375 | ||||||||||
Direct
costs of network, sales and services, exclusive of depreciation and
amortization:
|
||||||||||||||||||||
Previously
reported
|
$ | 39,744 | $ | 46,474 | $ | — | $ | 11,120 | $ | 97,338 | ||||||||||
Reclassification
of professional and reseller products and services
|
979 | — | — | (979 | ) | — | ||||||||||||||
Revised
|
$ | 40,723 | $ | 46,474 | $ | — | $ | 10,141 | $ | 97,338 |
●
|
determining
fair value in a dislocated market depends on facts and circumstances, and
may require the use of significant judgment about whether individual
market transactions are forced liquidations or distressed sales and
therefore poor indicators of fair value;
|
|
●
|
when
relevant observable market data is not available, the use of assumptions
about future cash flows and discount rates may be appropriate in
determining fair value; and
|
|
●
|
the
value of broker quotes in determining fair value depends on facts and
circumstances, particularly when an active market does not
exist.
|
3.
|
BUSINESS
COMBINATION
|
Value
of Internap stock issued
|
$
|
197,272
|
||
Fair
value of stock options assumed
|
11,021
|
|||
Direct
transaction costs
|
5,729
|
|||
Total purchase
price
|
$
|
214,022
|
Amount
|
Estimated
Useful
Life
|
||||||
Net
tangible assets
|
$
|
12,286
|
—
|
||||
Identifiable
intangible assets:
|
|||||||
Developed
technologies
|
36,000
|
8
years
|
|||||
Customer
relationships
|
9,000
|
9
years
|
|||||
Trade
name and other
|
1,500
|
3-6
years
|
|||||
Acquired
in-process research and development
|
450
|
—
|
|||||
Goodwill
(1)
|
154,786
|
—
|
|||||
Total
estimated purchase price
|
$
|
214,022
|
(1)
|
Subsequent
to the finalization of the purchase price allocation, we recorded a net
increase of $0.1 million to goodwill as a result of adjustments to
certain pre-acquisition assets and liabilities and decrease of $0.4
million as a result of the utilization of a portion of VitalStream’s net
operating loss carryforwards.
|
Year
Ended December 31,
|
||||||||
2007
|
2006
|
|||||||
Pro
forma revenues
|
$ | 236,418 | $ | 205,052 | ||||
Pro
forma net loss
|
(14,269 | ) | (16,153 | ) | ||||
Pro
forma net loss per share, basic and diluted
|
(0.25 | ) | (0.34 | ) |
4.
|
OPERATING
SEGMENTS
|
Year
Ended December 31, 2008
|
||||||||||||||||||||
IP
Services
|
Data
Center
Services
|
CDN
Services
|
Other
|
Total
|
||||||||||||||||
Revenues
|
$ | 123,268 | $ | 109,679 | $ | 21,042 | $ | — | $ | 253,989 | ||||||||||
Direct
costs of network, sales and services, exclusive of depreciation and
amortization
|
45,782 | 82,009 | 8,086 | — | 135,877 | |||||||||||||||
Segment
profit
|
$ | 77,486 | $ | 27,670 | $ | 12,956 | $ | 118,112 | ||||||||||||
Other
operating expenses
|
223,279 | |||||||||||||||||||
Loss
from operations
|
(105,167 | ) | ||||||||||||||||||
Non-operating
income
|
245 | |||||||||||||||||||
Loss
before income taxes and equity in earnings of equity-method
investment
|
$ | (104,922 | ) |
Year
Ended December 31, 2007
|
||||||||||||||||||||
IP
Services
|
Data
Center
Services
|
CDN
Services
|
Other
|
Total
|
||||||||||||||||
Revenues
|
$ | 122,205 | $ | 83,632 | $ | 17,806 | $ | 10,447 | $ | 234,090 | ||||||||||
Direct
costs of network, sales and services, exclusive of depreciation and
amortization
|
43,925 | 59,439 | 6,594 | 8,436 | 118,394 | |||||||||||||||
Segment
profit
|
$ | 78,280 | $ | 24,193 | $ | 11,212 | $ | 2,011 | 115,696 | |||||||||||
Other
operating expenses
|
125,407 | |||||||||||||||||||
Loss
from operations
|
(9,711 | ) | ||||||||||||||||||
Non-operating
income
|
937 | |||||||||||||||||||
Loss
before income taxes and equity in earnings of equity-method
investment
|
$ | (8,774 | ) |
Year
Ended December 31, 2006
|
||||||||||||||||||||
IP
Services
|
Data
Center
Services
|
CDN
Services
|
Other
|
Total
|
||||||||||||||||
Revenues
|
$ | 112,250 | $ | 56,548 | $ | — | $ | 12,577 | $ | 181,375 | ||||||||||
Direct
costs of network, sales and services, exclusive of depreciation and
amortization
|
40,723 | 46,474 | — | 10,141 | 97,338 | |||||||||||||||
Segment
profit
|
$ | 71,527 | $ | 10,074 | $ | — | $ | 2,436 | 84,037 | |||||||||||
Other
operating expenses
|
81,900 | |||||||||||||||||||
Income
from operations
|
2,137 | |||||||||||||||||||
Non-operating
income
|
1,551 | |||||||||||||||||||
Income
before income taxes and equity in earnings of equity-method
investment
|
$ | 3,688 |
IP
Services
|
Data
Center
Services
|
CDN
Services
|
Other
|
Total
|
||||||||||||||||
December
31, 2008:
|
||||||||||||||||||||
Goodwill
|
$ | 36,314 | $ | — | $ | 54,663 | $ | — | $ | 90,977 | ||||||||||
Total
assets
|
151,839 | 69,317 | 108,927 | — | 330,083 | |||||||||||||||
December
31, 2007:
|
||||||||||||||||||||
Goodwill
|
$ | 36,314 | $ | — | $ | 154,363 | $ | — | $ | 190,677 | ||||||||||
Total
assets
|
148,697 | 64,498 | 211,469 | 2,346 | 427,010 |
5.
|
INVESTMENTS
|
December
31, 2008
|
||||||||||||
Cost
Basis
|
|
Unrealized
Gain
(Loss)
|
Carrying
Value
|
|||||||||
Corporate
debt securities
|
$ | 5,706 | $ | (7 | ) | $ | 5,699 | |||||
U.S.
Treasury bills
|
1,500 | — | 1,500 | |||||||||
Total
short-term investments in marketable securities
|
$ | 7,206 | $ | (7 | ) | $ | 7,199 |
December
31, 2007
|
||||||||||||
Cost
Basis
|
Unrealized
Gain
(Loss)
|
Carrying
Value
|
||||||||||
Corporate
debt securities
|
$ | 7,607 | $ | 3 | $ | 7,610 | ||||||
Auction
rate securities
|
7,150 | — | 7,150 | |||||||||
Commercial
paper
|
4,787 | 2 | 4,789 | |||||||||
Other
|
24 | (4 | ) | 20 | ||||||||
Total
short-term investments in marketable securities
|
$ | 19,568 | $ | 1 | $ | 19,569 |
Year
Ended December 31,
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
Investment
Balance, January 1,
|
$ | 1,138 | $ | 958 | $ | 823 | ||||||
Proportional
share of net income
|
283 | 139 | 114 | |||||||||
Unrealized
foreign currency translation gain, net
|
201 | 41 | 21 | |||||||||
Investment
Balance, December 31,
|
$ | 1,622 | $ | 1,138 | $ | 958 |
6.
|
FAIR
VALUE MEASUREMENTS
|
●
|
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.
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
Money
market funds and other
|
$ | 21,877 | $ | — | $ | — | $ | 21,877 | ||||||||
Corporate
debt securities
|
— | 5,699 | — | 5,699 | ||||||||||||
U.S.
Treasury bills
|
— | 1,500 | — | 1,500 | ||||||||||||
Auction
rate securities
|
— | — | 6,378 | 6,378 | ||||||||||||
ARS
Rights
|
— | — | 649 | 649 | ||||||||||||
Total
|
$ | 21,877 | $ | 7,199 | $ | 7,027 | $ | 36,103 |
Auction
Rate
Securities
|
ARS
Rights
|
|||||||
Balance,
December 31, 2007
|
$ | 7,150 | $ | — | ||||
Net
realized loss included in earnings
|
(772 | ) | — | |||||
Issuance
of ARS Rights
|
— | 649 | ||||||
Balance,
December 31, 2008
|
$ | 6,378 | $ | 649 | ||||
7.
|
PROPERTY
AND EQUIPMENT
|
December
31,
|
||||||||
2008
|
2007
|
|||||||
Network
equipment
|
$ | 96,958 | $ | 86,496 | ||||
Network
equipment under capital lease
|
1,596 | 1,596 | ||||||
Furniture,
equipment and software
|
33,853 | 31,726 | ||||||
Leasehold
improvements
|
147,835 | 111,216 | ||||||
Buildings
under capital lease
|
3,003 | — | ||||||
Property
and equipment, gross
|
283,245 | 231,034 | ||||||
Less:
Accumulated depreciation and amortization ($1,721 and $1,596 related to
capital leases at December 31, 2008 and 2007,
respectively)
|
(185,895 | ) | (165,543 | ) | ||||
$ | 97,350 | $ | 65,491 |
Year
ended December 31,
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
Direct
costs of network, sales and services
|
$ | 20,650 | $ | 18,313 | $ | 13,250 | ||||||
Other
depreciation and amortization
|
3,215 | 3,929 | 2,606 | |||||||||
Subtotal
|
23,865 | 22,242 | 15,856 | |||||||||
Amortization
of acquired technologies(1)
|
6,649 | 4,165 | 516 | |||||||||
Total
depreciation and amortization
|
$ | 30,514 | $ | 26,407 | $ | 16,372 |
8.
|
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
Data
|
||||||||||||||||
IP
|
Center
|
CDN
|
||||||||||||||
Services
|
Services
|
Services
|
Total
|
|||||||||||||
Balance,
January 1, 2007
|
$ | 36,314 | $ | — | $ | — | $ | 36,314 | ||||||||
Goodwill
acquired
|
— | — | 154,653 | 154,653 | ||||||||||||
Adjustments
to pre-acquisition assets and liabilities
|
— | — | 133 | 133 | ||||||||||||
Utilization
of a portion of net operating losses
|
— | — | (423 | ) | (423 | ) | ||||||||||
Balance,
December 31, 2007
|
36,314 | — | 154,363 | 190,677 | ||||||||||||
Balance,
January 1, 2008
|
36,314 | — | 154,363 | 190,677 | ||||||||||||
Impairment
|
— | — | (99,700 | ) | (99,700 | ) | ||||||||||
Balance,
December 31, 2008
|
$ | 36,314 | $ | — | $ | 54,663 | $ | 90,977 |
●
|
Income Approach: To
determine fair value, we discounted the expected cash flows of the CDN
services reporting unit. We calculated expected cash flows using a
compounded annual revenue growth rate of approximately 20%, forecasting
existing cost structures and considering capital reinvestment
requirements. We used a discount rate of 20%, representing the
estimated weighted average cost of capital, which reflects the overall
level of inherent risk involved in our CDN services operations and the
rate of return an outside investor would expect to earn. To estimate cash
flows beyond the final year of our model, we used a terminal value and
incorporated the present value of the resulting terminal value into our
estimate of fair value.
|
|
●
|
Market-Based Approach:
To corroborate the results of the income approach described above, we
estimated the fair value of our CDN services reporting unit using several
market-based approaches, including the enterprise value that we derive
based on our stock price. We also used the guideline company method, which
focuses on comparing our risk profile and growth prospects, to select
reasonably similar/guideline publicly traded companies. Using the
guideline company method, we selected revenue and EBITDA multiples below
the median for our comparable
companies.
|
●
|
an
impairment charge of $1.9 million in developed advertising technology due
to a strategic change in market focus,
|
|
●
|
an
impairment charge of $0.8 million in trade names as a result of
discontinuing use of the VitalStream trade name,
and
|
●
|
a
change in our estimates that resulted in an acceleration of amortization
expense of our customer relationships intangible asset over a shorter
estimated useful life (four remaining years instead of an original
estimated nine years) due to customer churn resulting in higher than
expected attrition as of the acquisition
date.
|
December
31, 2008
|
December
31, 2007
|
||||||||||||
Gross
|
Gross
|
||||||||||||
Carrying
|
Accumulated
|
Carrying
|
Accumulated
|
||||||||||
Amount
|
Amortization
|
Amount
|
Amortization
|
||||||||||
Technology
based
|
$
|
40,061
|
$
|
(13,317
|
)
|
$
|
41,911
|
$
|
(8,518
|
)
|
|||
Contract
based
|
24,232
|
(17,034
|
)
|
25,018
|
(15,403
|
)
|
|||||||
$
|
64,293
|
$
|
(30,351
|
)
|
$
|
66,929
|
$
|
(23,921
|
)
|
2009
|
$
|
6,696
|
|||
2010
|
6,509
|
||||
2011
|
6,181
|
||||
2012
|
5,356
|
||||
2013
|
4,246
|
||||
Thereafter
|
4,954
|
||||
$
|
33,942
|
9.
|
RESTRUCTURING
AND OTHER IMPAIRMENTS
|
December
31,
|
Restructuring
|
December
31,
|
December
31,
|
|||||||||||||||||||||||||||||||||
2006
|
and
|
Non-Cash
|
Non-Cash
|
2007
|
Non-Cash
|
2008
|
||||||||||||||||||||||||||||||
Restructuring
|
Impairment
|
Cash
|
Write-
|
Plan
|
Restructuring
|
Cash
|
Plan
|
Restructuring
|
||||||||||||||||||||||||||||
Liability
|
Charges
|
Payments
|
Downs
|
Adjustments
|
Liability
|
Payments
|
Adjustments
|
Liability
|
||||||||||||||||||||||||||||
Activity
for 2007 restructuring charge:
|
||||||||||||||||||||||||||||||||||||
Real
estate obligations
|
$ | — | $ | 7,755 | $ | (2,248 | ) | $ | — | $ | 805 | $ | 6,312 | $ | (1,120 | ) | $ | 1,084 | $ | 6.276 | ||||||||||||||||
Employee
separations
|
— | 1,140 | (615 | ) | — | (119 | ) | 406 | (260 | ) | (146 | ) | — | |||||||||||||||||||||||
Total
restructuring costs
|
— | 8,895 | (2,863 | ) | — | 686 | 6,718 | (1,380 | ) | 938 | 6,276 | |||||||||||||||||||||||||
Activity
for 2007 impairment charge:
|
||||||||||||||||||||||||||||||||||||
Leasehold
improvements
|
— | 897 | — | (897 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
Other
|
— | 471 | — | (471 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
Total
asset impairments
|
— | 1,368 | — | (1,368 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
Activity
for 2001 restructuring charge:
|
||||||||||||||||||||||||||||||||||||
Real
estate obligations
|
4,784 | — | (1,199 | ) | — | (211 | ) | 3,374 | (647 | ) | 19 | 2,746 | ||||||||||||||||||||||||
Total
|
$ | 4,784 | $ | 10,263 | $ | (4,062 | ) | $ | (1,368 | ) | $ | 475 | $ | 10,092 | $ | (2,027 | ) | $ | 957 | $ | 9,022 |
10.
|
ACCRUED
LIABILITIES
|
December
31,
|
|||||||
2008
|
2007
|
||||||
Compensation
and benefits payable
|
$
|
2,918
|
$
|
5,390
|
|||
Telecommunications,
sales, use and other taxes
|
1,902
|
2,317
|
|||||
Other
|
3,936
|
2,452
|
|||||
$
|
8,756
|
$
|
10,159
|
11.
|
REVOLVING
CREDIT FACILITY AND NOTE PAYABLE
|
●
|
converted
the Term Loan balance of $20.0 million as of September 30, 2008 into a
loan under the Revolving Credit Facility under the Credit
Agreement;
|
|
●
|
terminated
the Term Loan under the Credit Agreement;
|
|
●
|
increased
the total Revolving Credit Commitment (as defined in the Amended Credit
Agreement) from $5.0 million to $35.0 million;
|
|
●
|
increased
the Letter of Credit Sublimit (as defined in the Amended Credit Agreement)
from $5.0 million to $7.0 million;
|
|
●
|
provided
us and Bank of America with an option to enter into a lease financing
agreement not to exceed $10.0 million; and
|
|
●
|
modified
certain covenants and definitions.
|
12.
|
CAPITAL
LEASES
|
2009
|
$
|
822
|
||
2010
|
564
|
|||
2011
|
566
|
|||
2012
|
569
|
|||
2013
|
581
|
|||
Thereafter
|
6,339
|
|||
Remaining
capital lease payments
|
9,441
|
|||
Less:
amounts representing imputed interest
|
(5,923
|
)
|
||
Present
value of minimum lease payments
|
3,518
|
|||
Less:
current portion
|
(274
|
)
|
||
$
|
3,244
|
13.
|
INCOME
TAXES
|
Year Ended December 31,
|
|||||||||||
2008
|
2007
|
2006
|
|||||||||
Current:
|
|||||||||||
Federal
|
$
|
254
|
$
|
15
|
$
|
145
|
|||||
State
|
181
|
—
|
—
|
||||||||
Foreign
(including change in unrecognized tax benefits)
|
(668
|
)
|
921
|
—
|
|||||||
Total
current provision
|
(233
|
)
|
936
|
145
|
|||||||
Deferred:
|
|||||||||||
Federal
|
(398
|
)
|
356
|
—
|
|||||||
State
|
(16
|
)
|
42
|
—
|
|||||||
Foreign
|
821
|
(4,414
|
)
|
—
|
|||||||
Total
deferred benefit
|
407
|
(4,016
|
)
|
—
|
|||||||
Net
income tax provision (benefit)
|
$
|
174
|
$
|
(3,080
|
)
|
$
|
145
|
Year
Ending December 31,
|
||||||||||
2008
|
2007
|
2006
|
||||||||
Federal
income tax (benefit) expense at statutory rates
|
(34
|
)%
|
(34
|
)%
|
34
|
%
|
||||
Goodwill
impairment
|
29
|
—
|
—
|
|||||||
Foreign
and state income tax (benefit) expense
|
—
|
(4
|
)
|
4
|
||||||
Stock-based
compensation expense
|
1
|
6
|
8
|
|||||||
Tax
reserves
|
—
|
11
|
—
|
|||||||
Other
|
—
|
—
|
1
|
|||||||
Change
in valuation allowance
|
4
|
(14
|
)
|
(43
|
)
|
|||||
Effective
tax rate
|
—
|
%
|
(35
|
)%
|
4
|
%
|
December
31,
|
||||||||
2008
|
2007
|
|||||||
Current
deferred income tax assets:
|
||||||||
Provision
for doubtful accounts
|
$ | 1,378 | $ | 593 | ||||
Accrued
compensation
|
205 | 233 | ||||||
Other
accrued expenses
|
213 | 196 | ||||||
Deferred
revenue
|
1,298 | 1,648 | ||||||
Restructuring
costs
|
973 | 910 | ||||||
Foreign
net operating loss carryforwards – current portion
|
— | 479 | ||||||
Other
|
63 | 77 | ||||||
Current
deferred income tax assets
|
4,130 | 4,136 | ||||||
Less:
valuation allowance
|
(4,129 | ) | (3,625 | ) | ||||
1 | 511 | |||||||
Non-current
deferred income tax assets:
|
||||||||
Property
and equipment
|
23,719 | 21,488 | ||||||
Goodwill
|
3,897 | — | ||||||
Intangible
assets
|
2,574 | — | ||||||
Deferred
revenue, less current portion
|
767 | 717 | ||||||
Restructuring
costs, less current portion
|
2,455 | 2,925 | ||||||
Deferred
rent
|
5,689 | 4,184 | ||||||
Stock
compensation
|
3,378 | 2,620 | ||||||
U.
S. net operating loss carryforwards
|
71,616 | 81,766 | ||||||
Foreign
net operating loss carryforwards, less current portion
|
5,481 | 13,717 | ||||||
Capital
loss carryforwards
|
2,271 | 2,271 | ||||||
Tax
credit carryforwards
|
690 | 180 | ||||||
Other
|
539 | 502 | ||||||
Non-current
deferred income tax assets
|
123,076 | 130,370 | ||||||
Less:
valuation allowance
|
(120,626 | ) | (124,936 | ) | ||||
2,450 | 5,434 | |||||||
Non-current
deferred income tax liabilities:
|
||||||||
Purchased
intangibles
|
— | (1,531 | ) | |||||
FIN
48 liability related to net operating loss carryforwards
|
— | (921 | ) | |||||
Goodwill
|
— | (398 | ) | |||||
Non-current
deferred income tax assets (liabilities), net
|
2,450 | 2,584 | ||||||
Net
deferred tax assets
|
$ | 2,451 | $ | 3,095 |
Year Ended December 31,
|
|||||||||||
2008
|
2007
|
2006
|
|||||||||
Balance,
January 1,
|
$
|
128,561
|
$
|
117,747
|
$
|
130,316
|
|||||
Decrease
(increase) in deferred tax assets
|
(3,806 |
)
|
15,228 |
(12,569
|
)
|
||||||
Recognition
of deferred tax assets
|
—
|
|
(4,414
|
)
|
—
|
||||||
Balance, December
31,
|
$
|
124,775
|
$
|
128,561
|
|
$
|
117,747
|
Year
Ending December 31,
|
||||||||
2008
|
2007
|
|||||||
Unrecognized
tax benefits balance at January 1,
|
$ | 921 | $ | — | ||||
Additions
for tax positions of prior years
|
— | — | ||||||
Reductions
for tax positions of prior years settlements
|
— | — | ||||||
Additions
for tax positions of current year
|
— | 921 | ||||||
Foreign
exchange (loss)
|
(253 | ) | — | |||||
Lapse
of statute of limitations
|
(668 | ) | — | |||||
Unrecognized
tax benefits balance at December 31,
|
$ | — | $ | 921 |
14.
|
EMPLOYEE
RETIREMENT PLAN
|
15.
|
COMMITMENTS,
CONTINGENCIES, CONCENTRATIONS OF RISK AND LITIGATION, INCLUDING SUBSEQUENT
EVENT
|
2009
|
$
|
24,808
|
|||
2010
|
25,789
|
||||
2011
|
26,109
|
||||
2012
|
26,875
|
||||
2013
|
24,846
|
||||
Thereafter
|
86,882
|
||||
$
|
215,309
|
2009
|
$
|
7,163
|
|||
2010
|
4,941
|
||||
2011
|
1,278
|
||||
$
|
13,382
|
16.
|
PREFERRED
STOCK AND STOCKHOLDERS’ EQUITY
|
17.
|
STOCK-BASED
COMPENSATION PLANS
|
Year ended December 31, | ||||||||||||
2008
|
2007
|
2006
|
||||||||||
Direct
costs of customer support
|
$ | 1,369 | $ | 1,892 | $ | 1,102 | ||||||
Product
development
|
688 | 856 | 628 | |||||||||
Sales
and marketing
|
1,782 | 2,135 | 2,145 | |||||||||
General
and administrative
|
3,660 | 3,798 | 2,067 | |||||||||
Total
stock-based compensation expense included in net income
|
$ | 7,499 | $ | 8,681 | $ | 5,942 |
●
|
The
exercise price per share of each replacement option granted in the
exchange offer was $14.46, the average of the closing prices of the common
stock as reported by the American Stock Exchange and the NASDAQ Global
Market, as applicable, for the 15 consecutive trading days ending
immediately prior to the grant date of the replacement
options;
|
|
●
|
For
all eligible options with an exercise price per share greater than or
equal to $20.00, the exchange ratio was one-for-two;
and
|
|
●
|
Each
new option has a 10-year term and a three-year vesting period, vesting in
equal monthly installments over three years, so long as the grantee
continues to be a full-time
employee.
|
Shares
|
Weighted
Average
Exercise
Price
|
||||||||
Balance,
January 1, 2008
|
3,173 | $ | 13.29 | ||||||
Granted
|
660 | 6.90 | |||||||
Exercised
|
(78 | ) | 4.08 | ||||||
Forfeitures
and post-vesting cancellations
|
(974 | ) | 13.62 | ||||||
Balance,
December 31, 2008
|
2,781 | $ | 11.91 | ||||||
Exercisable,
December 31, 2008
|
1,738 | $ | 13.37 |
Fully
Vested
and
Exercisable
|
Expected
to
Vest
|
||||||||
Total
shares
|
1,738 | 2,616 | |||||||
Weighted-average
exercise price
|
$ | 13.37 | $ | 12.07 | |||||
Aggregate
intrinsic value
|
$ | 2,925 | $ | 2,925 | |||||
Weighted-average
remaining contractual term, in years
|
5.8 | 6.6 |
Shares
|
Weighted-Average
Grant
Date Fair
Value
|
||||||||
Non-vested
balance, January 1, 2008
|
679 | $ | 13.19 | ||||||
Granted
|
724 | 4.07 | |||||||
Vested
|
(256 | ) | 10.84 | ||||||
Forfeited
|
(302 | ) | 9.22 | ||||||
Non-vested
balance, December 31, 2008
|
845 | $ | 7.76 |
December
31, 2008
|
|||||||||||
Stock
Options
|
Restricted
Stock
|
Total
|
|||||||||
Unrecognized
compensation
|
$
|
8,367
|
$
|
8,253
|
$
|
16,620
|
|||||
Weighted-average
remaining recognition period (in years)
|
2.5
|
2.6
|
2.6
|
18.
|
RELATED
PARTY TRANSACTIONS
|
19.
|
UNAUDITED
QUARTERLY RESULTS
|
Quarter
Ended
|
||||||||||||||||
2008
|
March
31
|
June
30
|
September
30
|
December
31
|
||||||||||||
Revenues
|
$ | 62,053 | $ | 62,325 | $ | 65,399 | $ | 64,212 | ||||||||
Direct
costs of network, sales and services, exclusive of depreciation and
amortization
|
31,363 | 33,484 | 35,404 | 35,626 | ||||||||||||
Direct
costs of amortization of acquired technologies
|
1,229 | 1,229 | 3,049 | 1,142 | ||||||||||||
Direct
costs of customer support
|
4,365 | 4,203 | 3,950 | 3,699 | ||||||||||||
Impairments
and restructuring
|
— | — | 100,415 | 1,026 | ||||||||||||
Net
income (loss)
|
739 | (3,237 | ) | (101,405 | ) | (910 | ) | |||||||||
Basic
net income (loss) per share
|
0.02 | (0.07 | ) | (2.06 | ) | (0.02 | ) | |||||||||
Diluted
net income (loss) per share
|
0.01 | (0.07 | ) | (2.06 | ) | (0.02 | ) |
Quarter
Ended
|
||||||||||||||||
2007
|
March
31
|
June
30
|
September
30
|
December
31
|
||||||||||||
Revenues
|
$ | 53,534 | $ | 58,494 | $ | 60,426 | $ | 61,636 | ||||||||
Direct
costs of network, sales and services, exclusive of depreciation and
amortization
|
28, 629 | 29,617 | 29,272 | 30,876 | ||||||||||||
Direct
costs of amortization of acquired technologies
|
654 | 1,054 | 1,228 | 1,229 | ||||||||||||
Direct
costs of customer support
|
3,388 | 4,330 | 4,495 | 4,334 | ||||||||||||
Impairments
and restructuring
|
11,349 | — | — | — | ||||||||||||
Acquired
in-process research and development
|
450 | — | — | — | ||||||||||||
Write-off
of investment
|
— | 1,178 | — | — | ||||||||||||
Net
(loss) income
|
(10,695 | ) | (1,683 | ) | 1,383 | 5,440 | ||||||||||
Basic
and diluted net (loss) income per share
|
(0.26 | ) | (0.03 | ) | 0.03 | 0.11 | ||||||||||
Balance
at
Beginning
of
Fiscal
Period
|
Charges
to
Costs
and
Expense
|
Charges
to
Other
Accounts
|
Deductions
|
Balance
at
End
of
Fiscal
Period
|
||||||||||||
Year
ended December 31, 2006:
|
||||||||||||||||
Allowance
for doubtful accounts
|
$
|
963
|
$
|
548
|
$
|
—
|
$
|
(1,130
|
)(1)
|
$
|
381
|
|||||
Year
ended December 31, 2007:
|
||||||||||||||||
Allowance
for doubtful accounts
|
381
|
2,261
|
928
|
(2)
|
(1,219
|
)(1)
|
2,351
|
|||||||||
Year
ended December 31, 2008:
|
||||||||||||||||
Allowance
for doubtful accounts
|
2,351
|
5,322
|
—
|
(4,896
|
)(1)
|
2,777
|
__________________ | ||
(1)
|
Deductions
in the allowance for doubtful accounts represent write-offs of
uncollectible accounts net of recoveries.
|
|
(2)
|
Purchase
price adjustment associated with our acquisition of VitalStream Holdings,
Inc.
|