ANNUAL REPORT
2002
THE INTERNET PERFORMANCE COMPANY
BUSINESS DESCRIPTION
Internap delivers mission-critical, Internet-based solutions to business customers throughout the U.S., Europe and Japan.
The Company’s network-of-network’s architecture, patented and patent-pending route management technology, industry-
leading Service Level Agreement, and world-class customer service provide our customers with confidence to migrate
revenue generating applications to the Internet.
R E V E N U E I N C R E A S E 1 3 %
D I R E C T M A R G I N U P 1 2 0 %
E B I T D A P O S I T I V E
$1.957
$12.520 $69.613 $117.404 $132.487
20% 26% 32% 41%
44%
$(13.9) $(9.8)
$(6.1) $(1.2)
$1.5
‘98
‘99
‘00
‘01
‘02
Q40 1 Q1
Q2
Q3 Q402
Q40 1 Q1
Q2
Q3 Q402
Figures In $ millions
Expressed as a percentage
EBITDA is defined as earnings before interest,
taxes, depreciation and amortization.
Internap guarantees the highest quality of service levels in the industry – enabling the growth of
mission-critical, Internet-based applications. Private networks, dedicated facilities, and large operations
organizations are rapidly being replaced with cost-efficient Internet Protocol solutions. Internap leads
this evolution with carrier-class, Internet-based service for the Financial Services; Entertainment/Media;
Travel; Internet Commerce; Government, Education, Healthcare; Legal; and Technology verticals.
These industries trust the performance of their applications to Internap.
Selected Internap customers include:
Financial Services
Entertainment/Media
Airlines
Retailers
Technology
Charles Schwab
Fox
United
JCPenney.com
Ameritrade
The New York Times
American
CompUSA
Microsoft
Gateway
Morgan Stanley
The Walt Disney Co.
Delta
Walmart.com
Sun Microsystems
Equifax
Union Bank
of California
Ticketmaster
Recreational
Equipment Inc. (REI )
Apple
Internap provides industry leading quality-of-service to these customers and many more. In addition
to IP Connectivity, Internap offers a portfolio of performance-based products – Colocation, Managed
Security and Storage, VPNs, and Content Distribution Networks. Internap’s unique business model
is built on:
Multiple Internet pathways providing customers with redundant IP connectivity that assures
customers their Internet service will always be available.
Proprietary, intelligent, performance-based routing that provides superior performance by getting
data to its destination in the fastest, safest, most efficient way.
A 100 percent, proactive, Internet-wide Service Level Agreement.
Dedicated customer service and support 24 hours a day, 7 days a week, 365 days a year.
WITH INTERNAP, YOU GET PERFORMANCE. GUARANTEED.
I N T E R N A P 2 0 0 2 A R
1
CLIENT PROFILE NO. 1
WHEN YOU SELL MORE THAN 38 MILLION TICKETS A YEAR ONLINE
LIKE TICKETMASTER, YOU MAKE SURE THE LINE MOVES QUICKLY.
The world’s largest ticket retailer, Ticketmaster, knows how to keep its online consumers
happy. So ticketmaster.com relies on Internap’s highly robust, reliable and scalable
Internet connectivity. Because when the curtain goes up, nothing’s more important to
Ticketmaster than making sure its customers get a great seat to see their favorite band,
sporting event or theatrical performance.
BEHIND THE PERFORMANCE
Eric Suddith
Director, Service Delivery
Jackie Barnette
Corporate Counsel
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I N T E R N A P 2 0 0 2 A R
CLIENT PROFILE NO. 2
UNION BANK OF CALIFORNIA
WITH ITS ‘BANK@HOME’ ONLINE BANKING SERVICE,
UNION BANK OF CALIFORNIA MAKES A LOT OF CENTS.
With 265 branches in California, Washington and Oregon, Union Bank of California
knows all about how to manage its money wisely. So when it came to picking an Internet
Service Provider for its online banking services, the state’s third largest commercial bank
wasn’t about to take any chances. For UBOC, the choice of Internap for redundant,
robust and scalable Internet connectivity was like money in the bank.
BEHIND THE PERFORMANCE
In Ho Lee
Regional Technical Manager
I N T E R N A P 2 0 0 2 A R
3
CLIENT PROFILE NO. 3
REI HAS ALWAYS BEEN AT HOME IN THE GREAT OUTDOORS,
BUT THEY WANT CONNECTIVITY THAT NEVER GOES OUT.
Recreational Equipment Inc. (REI) members know they’ll find the highest quality gear
and clothing for their outdoor adventures at REI.com and REI-OUTLET.com. And when
it comes to tracking down the most robust and reliable Internet connectivity, REI isn’t
about to be lost in the woods – so they use Internap. No one else takes the “adventure”
out of networking like Internap.
BEHIND THE PERFORMANCE
(starting at top right)
Amy Cielinski
Sales Program Manager
Mike Orell
Product Marketing Manager
Lucien Ntab
Sales Analyst
4
I N T E R N A P 2 0 0 2 A R
CLIENT PROFILE NO. 4
GATEWAY.COM LETS THOUSANDS OF PEOPLE BUILD THEIR OWN
COMPUTERS ONLINE, SO EVERYTHING HAS TO CLICK RIGHT ALONG.
Selling $4 billion a year in custom-built desktop PCs, laptops and network servers is no
small task. But thanks to a commitment to quality, performance and innovation, Gateway
keeps its assembly lines “moooving.” And the company found that same dedication to
superior quality when it asked Internap to provide IP services for the company and its
Gateway.com website.
BEHIND THE PERFORMANCE
(left to right)
Tyler West
Product Marketing Manager
Smitha Perumal
HQ Operations Support
Lucy Seastres
Network Capacity Planner
I N T E R N A P 2 0 0 2 A R
5
O U R VA L U E P R O P O S I T I O N
THE INTERNET PERFORMANCE COMPANY
OFFERS MULTIPLE PATHWAYS INSTEAD OF ONE.
The foundation of Internap’s IP service model is our network architecture. Internap’s Private Network Access
Points (PNAPs) are interconnected with the diverse network paths of the major Network Service Providers
(NSPs). Since each Service Point is independent, Internap is able to leverage the local and national strengths
of all its providers and partners.
THE INTERNET PERFORMANCE COMPANY
DELIVERS INTELLIGENT PERFORMANCE-BASED ROUTING.
Internap’s technology leverages a robust and redundant network architecture to introduce a higher level of
certainty and reliability into the Internet Protocol services platform. BGP, the protocol traditional Network
Service Providers (NSPs) employ to direct routing decisions, does not enable NSPs to deliver the network
quality customer applications demand.
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I N T E R N A P 2 0 0 2 A R
The architecture of each PNAP is fully redundant, giving our customers the confidence that there is no single
point of failure in our network. Our PNAPs are located in facilities providing redundant power, environmental
systems, security, and carrier presence required to support mission-critical applications.
Internap’s highly redundant and resilient network architecture, managed through an intelligent routing tech-
nology platform, allows Internap to uniquely route manage Internet-based traffic and deliver a truly carrier-
class service.
Internap’s ASsimilator technology identifies and leverages the unique strengths of each Network Service
Provider and avoids performance affecting weaknesses. The result is carrier-class Internet service to support
mission-critical needs. ASsimilator constantly monitors network performance (e.g., latency and packet loss)
across all major Internet pathways. This performance data, evaluated in conjunction with network costs,
available bandwidth, and global BGP routing tables, enables ASsimilator to select the highest performing
Internet segments.
NSPs relying on BGP and traditional peering alone are only able to deliver sub-optimal guarantees across
their own network. Internap’s ASsimilator platform ensures an enterprise receives carrier-class performance
across the entire Internet to support its business-critical needs.
I N T E R N A P 2 0 0 2 A R
7
O U R VA L U E P R O P O S I T I O N
THE INTERNET PERFORMANCE COMPANY
PROVIDES A 100% GUARANTEE –
ALL THE INTE RNET, ALL THE TIME.
Internap’s unique network architecture, intelligent routing technology, and world-class customer service
enable Internap to deliver an industry-leading Service Level Agreement (SLA) to our customers.
Internap’s SLA guarantees a broad range of service quality commitments and metrics including network
availability, packet loss, latency and Domain Name Service (DNS), colocation environmental conditions, and
THE INTERNET PERFORMANCE COMPANY
PROTECTS YOUR BUSINESS
WITH 24-SEVEN-365 CUSTOMER SERVICE.
Internap’s business model allows our customers to outsource the challenges of managing the Internet to our
team. Internap’s expansive geographic footprint, the multiple and diverse network backbone architecture,
and advanced route management technology are the platform. The next layer is Internap’s Network
Operations Centers (NOCs).
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I N T E R N A P 2 0 0 2 A R
data center security. Internap’s SLA leads the industry with guarantees of 100 percent network availability;
packet loss of less than 0.3 percent; and latency of less than 45 milliseconds. Traditional NSPs’ guarantees
apply only to traffic that stays on their network. Once traffic exits the NSPs’ network, their SLA no longer
applies. Internap’s SLA not only delivers stronger guarantees on the NSPs’ network than they themselves
deliver, Internap’s SLA covers 100 percent of our customers’ traffic across the entire Internet.
Distinguishing our commitment to quality and customer service even further, Internap’s SLA is proactive. This
dictates that we constantly monitor ourselves. If Internap fails to meet one of its service commitments, the
customer will see credits applied automatically during the next billing cycle.
Internap’s SLA defines our commitment to service quality and ensures an enterprise has the certainty they
demand in Internap’s carrier-class service to place mission-critical applications on the Internet.
Internap’s parallel NOCs, located in Atlanta and Seattle, monitor performance of all Internet routes, over-
see and route hundreds of millions of transactions per day, and provide world-class customer service for our
customers. These advanced facilities are staffed with certified network engineers who proactively resolve
quality assurance issues associated with the Internet and the customers’ local access. Internap’s 1-Tier
approach ensures that customers have direct interaction with our engineers to resolve their issues. Our
engineers pride themselves on being proactive and notifying clients of critical information, such as
upstream provider maintenance windows and network troubles… in real time.
Internap NOC personnel are empowered to diagnose, troubleshoot and remedy any problems – and they
are ready to help customers 24 hours a day, seven days a week, 365 days a year.
I N T E R N A P 2 0 0 2 A R
9
LETTER TO OUR SHAREHOLDERS
GREGORY A. PETERS
President & Chief Executive Officer
Dear Internap Shareholder:
Despite a challenging economic environment worldwide, Internap today is poised for growth with a strong
business model precisely positioned at the center of Internet commerce. As I write this letter to you, the
Company’s restructuring is nearly complete, a new management team is in place, Internap customers are
growing, our financial strength is improved, and our long-term prospects are strong.
During 2002, Internap improved on all major financial metrics, while many competitors struggled with declining
revenues, shrinking margins and even bankruptcies. Internap achieved these milestones without compromising
customer growth, service or technology advancements. This remarkable accomplishment is a credit to the dedi-
cation of the Internap team.
Our team embraced many challenges during the year. Operationally, our consolidation included closing a devel-
opment location in Utah, transferring Amsterdam operations to London, eliminating P-NAP redundancy in many
U.S. cities, reducing headcount by over 50 percent, and transitioning headquarters operations from Seattle to
Atlanta. These initiatives were implemented during one of the most difficult management periods our industry
has ever faced. Our team accepted these challenges and surpassed expectations while growing revenues and
increasing profitability.
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I N T E R N A P 2 0 0 2 A R
Revenues for 2002 grew by 13 percent to a record $132.5 million. The Company reduced its EBITDA loss by a
substantial 84 percent to $15.6 million, compared to an EBITDA loss of $97.9 million in 2001. The year’s net
loss, computed in accordance with generally accepted accounting principles, also decreased by 84 percent to
$75.4 million.
What is most important to note is that in the third quarter of 2002, Internap reported that it had turned
EBITDA positive ahead of schedule. Moreover, in the fourth quarter, the Company posted a positive EBITDA
of $1.5 million – compared to an EBITDA loss of $13.9 million in the same quarter of the previous year.
In 2002, Internap raised its total customer base to 1,273, a 31 percent growth year over year. In the fourth quar-
ter alone, Internap installed 118 new customers, including: Con Edison; Screen Actors Guild; government of
Orange County, California; Penn State Hershey Medical Center; Toyota Motor Sales, USA; Amgen; and Nextel
Communications. Additional customers added during the year include: American Airlines; Compaq; McKinsey
& Company; Morningstar, Inc.; Charles Schwab; DHL; Southwest Airlines; Callaway Golf; Sharp Electronics;
Ameritrade; eBay; The Franklin Mint; and Continental Airlines.
Our sales and marketing efforts are focused on key vertical markets where mission-critical applications are
Internet based. These verticals include: travel, financial services, Internet commerce, media and entertainment,
manufacturing, legal, and government and education. We have captured many top accounts in each segment,
for example, Internap currently serves five of the nation’s eight largest airlines.
Advancements in technology remain a priority at Internap. During 2002, the Company continued to enhance
network performance and announced a Service Level Agreement (SLA) that surpasses all in our industry.
Internap is the only service provider that guarantees its services Internet-wide, and at service levels that intro-
duce “carrier-class” performance across the Internet. These service level guarantees are the reason that tradi-
tional brick-and-mortar companies have confidence to run revenue-producing applications over the Internet.
Internap is leading the industry, and the Internet, in this key measurement of service performance.
In recognition of strong performance in 2002, Cisco Capital and Silicon Valley Bank modified existing financial
facilities to a structure that enables our strategic growth initiatives; and action was taken by the Board to pro-
tect our NASDAQ listing. We appreciate this ongoing support from our strategic partners.
INTERNAP’S KEY PERFORMANCE METRICS
FINANCIAL DATA:
(In thousands)
Revenues
Direct Cost of Network
EBITDA (1)
SUPPLEMENTAL
FINANCIAL DATA:
Direct Margin (2)
Total Customers
Day Sales Outstanding
Operating Cash Flow Positive Metro Markets
12-MONTH PERIOD ENDED
DECEMBER 31,
2 0 0 1
2 0 0 2
% CHANGE
$117,404
$132,487
98,915
83,207
(97,866)
(15,669)
20%
44%
974
45
4
1,273
38
12
13%
(16%)
84%
120%
31%
16%
200%
(1) EBITDA is defined as net loss before interest, investment income (loss), lease termination expenses, loss on sales and retirement of property and
equipment, income taxes, depreciation, amortization, amortization of deferred stock compensation, and restructuring costs and credits. Excludes
a one-time benefit of $2.1 million recorded during 2002.
(2) Direct margin is defined as revenues less direct cost of network divided by revenue.
I N T E R N A P 2 0 0 2 A R
11
Highlights of the Company’s financial and operational performance in 2002 include:
FINANCIAL
• Achieved 26th sequential quarter of customer growth, increasing customer base 31 percent to 1,273
• Reduced cost of network by 22 percent
• Reduced cash use by 78 percent
• Restructured key lease and credit facilities, eliminating over $100 million in excess real estate obligations
• Achieved 120 percent improvement in Direct Margin to a record 44 percent, and became operating cash
flow positive in 12 metro markets
OPERATIONAL
• Launched 15 new product/service offerings
• Expanded service reach to 15 additional domestic markets and 14 additional countries
• Relocated corporate headquarters from Seattle to Atlanta
• Established parallel Network Operations Centers in Seattle and Atlanta
• Created the industry’s first 100 percent Internet-wide network availability Service Level Agreement
These achievements were accomplished during one of the most difficult economic periods we have faced in
many years – and now place Internap in an excellent position to once again grow market share and revenues
at a time when many competitors in the industry are faltering.
Internap’s turnaround is a result of significant work behind the scenes. I’d like to thank our employees, manage-
ment team and, especially, our customers, who have continued to recognize the inherent value of Internap, and
have remained loyal and committed even during an especially trying time. As we move the Company forward,
it is important that we pay tribute to each of these key constituencies for their unique contribution.
In particular, I’d like to express my gratitude to the Board of Directors, former Chief Financial Officer John
Scanlon, and my predecessor, Chairman Eugene Eidenberg, who guided the Company as CEO from August
2001 until April 2002. I would also like to thank the many former employees who were unable to make the
transition to our new corporate headquarters. Your contributions have given Internap the ability to reach its
milestones and grow as a profitable business.
2003 will be a year in which we will continue to take market share from competitors; continue to expand our oper-
ational footprint, our service offerings and customer base; and participate in the strategic growth of the Internet,
as a leader in the Internet services industry. We look forward to expanding our operational margins, improving our
ability to lead our customers’ transition to Internet-based services, and growing the value of our Company.
To all our shareholders, customers, employees and business partners, thank you for your investment in
Internap, your trust and your continued support.
Sincerely,
Gregory A. Peters
President and Chief Executive Officer
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I N T E R N A P 2 0 0 2 A R
FROM THE CHAIRMAN
Dear Fellow Shareholders:
In 2002, Internap turned the corner in its two-year effort to
reduce its cost structure without compromising revenue and
market share growth. The program that began in 2001 culmi-
nated in the decision this year to relocate the Company’s head-
quarters from Seattle to Atlanta while building the outstanding
management team that now leads Internap. This successful
transition was nothing less than a re-start of your company.
All this was accomplished during a period of unprecedented
challenge for American corporate governance in general and
the telecommunications industry in particular. Revelations of
shocking irregularities in accounting with resulting declara-
tions of bankruptcy, as well as the continuing weakness of
global equity markets, cost shareholders billions of dollars
and cast a cloud on the integrity of the leadership of
American business.
While Internap has been a public company for less than four
years, the Company’s governance practices and its system of
internal financial controls are fully compliant with the recently
adopted Sarbanes-Oxley legislation. I want you to know that
your board and management will continually seek to achieve
the highest standards of conduct in every aspect of
Internap’s business.
One unfortunate result of the excesses and malfeasance
of several large companies has been criticism of the use of
equity as an important element in compensation programs
to motivate and reward employees. During this period,
which saw Internap’s equity value drop significantly, your
board has relied on stock options as an important element in
the compensation program that helped us retain and recruit
the world-class team that leads the Company. Indeed, we
are recommending a significant increase in the Company’s
option pool in order to enable us to continue to retain and
attract the talent necessary to achieve the fair return on
investment that our shareholders deserve.
With quality leadership, companies can plan and operate for
long-term growth while also rewarding good results with
equity value for both employees and shareholders. In sum,
your board believes that broad employee stock ownership
of young and emerging companies is a good thing.
Internap’s value proposition and business model have
emerged stronger than ever from the prolonged tumult of
our industry. Now, as a more focused and efficient business,
your company stands on the threshold of significant new
opportunities. On behalf of the entire board, I thank you
for your continued support of the Company.
Eugene Eidenberg
Chairman
I N T E R N A P 2 0 0 2 F I N A N C I A L R E V I E W
14 Selected Financial Data
36 Consolidated Statements of Cash Flows
15 Management’s Discussion and Analysis
37 Notes to Consolidated Financial Statements
33 Consolidated Balance Sheets
67 Report of Independent Accountants
34 Consolidated Statements of Operations
68 Shareholder Information
35 Consolidated Statements of Stockholders’ Equity
69 Executive Management Team & Board of Directors
I N T E R N A P 2 0 0 2 A R
13
INTERNAP 2002 SELECTED FINANCIAL DATA
The following selected financial data are qualified by reference to, and should be read in conjunction with, our financial state-
ments and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
appearing elsewhere in this annual report. The statement of operations data presented below for the years ended December 31,
2000, 2001 and 2002, and the selected balance sheet data as of December 31, 2001 and 2002 are derived from our audited
financial statements included elsewhere in this annual report. The statement of operations data presented below for the years
ended December 31, 1998 and 1999, and the selected balance sheet data as of December 31, 1998, 1999 and 2000 are
derived from our audited financial statements that are not included in this annual report.
Year Ended December 31,
(in thousands, except per share data)
Revenues
Costs and expenses:
1998
1999
2000
2001
2002
$ 1,957
$ 12,520
$ 69,613
$ 117,404
$132,487
Direct cost of network
Customer support
Product development
Sales and marketing
General and administrative
Depreciation and amortization
Amortization of goodwill and other intangible assets
Amortization of deferred stock compensation
Lease termination expense
Restructuring cost (benefit)
Impairment of goodwill and other intangible assets
In-process research and development
Loss on sales and retirements of property and equipment
1,990
666
754
2,822
1,734
736
–
205
–
–
–
–
–
17,848
5,796
3,876
17,519
7,335
4,808
–
7,569
–
–
–
–
–
62,465
20,320
11,924
35,390
32,962
20,522
54,334
10,651
–
–
–
18,000
–
98,915
21,480
12,233
38,151
44,491
48,550
38,116
4,217
–
64,096
195,986
–
2,714
83,207
12,913
7,447
21,641
20,848
49,600
5,626
260
804
(3,781)
–
–
2,829
Total operating costs and expenses
Loss from operations
8,907
(6,950)
64,751
(52,231)
266,568
(196,955)
568,949
(451,545)
201,394
(68,907)
Other income (expense):
Interest income (expense), net
Loss on investments
Total other income (expense)
(23)
–
(23)
2,314
–
2,314
11,498
–
(1,272)
(26,345)
11,498
(27,617)
(2,194)
(1,244)
(3,438)
Net loss
$(6,973)
$ (49,917) $(185,457) $(479,162)
$ (72,345)
Basic and diluted net loss per share
$ (1.04)
$
(1.31) $
(1.30) $
(3.19)
$
(0.47)
Weighted average shares used in computing basic
and diluted net loss per share(1)
6,673
37,994
142,451
150,328
155,545
As of December 31,
(in thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term investments
Total assets
Notes payable and capital lease obligations,
less current portion
Series A convertible preferred stock
Total stockholders’ equity (deficit)
1998
1999
2000
2001
2002
$ 275
7,487
$205,352
245,546
$ 153,965
650,110
$ 82,306
284,977
$ 25,219
172,969
2,342
–
(436)
14,378
–
210,500
27,646
–
531,953
16,448
86,314
66,169
27,913
79,790
1,835
(1)See Note 2 of notes to financial statements for a description of the computation of basic and diluted net loss per share and the number of shares
used to compute basic and diluted net loss per share.
14
I N T E R N A P 2 0 0 2 A R
INTERNAP 2002 MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Internap is a leading provider of IP-based connectivity solutions to businesses seeking to maximize the
performance of mission-critical Internet-based applications. Customers connected to one of our 34 service
points have their data intelligently routed to and from destinations on the Internet using our overlay net-
work, which analyzes the traffic situation on the many networks that comprise the Internet and delivers
mission-critical information and communications faster and more reliably. Use of our overlay network
results in lower instances of data loss and greater quality of service than services offered by conventional
Internet connectivity providers. Our customers are primarily businesses that desire high-performance
Internet connectivity services in order to run mission-critical Internet-based applications. Due to our high
quality of service, we generally price our services at a premium to providers of conventional Internet con-
nectivity services. We expect to remain a premium provider of high-quality Internet connectivity services
and anticipate continuing our pricing policy in the future. We believe customers will continue to demand
the highest quality of service, as their Internet connectivity needs grow and become even more complex
and, as such, will continue to pay a premium for high-quality service.
The following discussion should be read in conjunction with the consolidated financial statements pro-
vided under Part II, Item 8 of this Annual Report on Form 10-K. Certain statements contained herein may
constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements involve a number of risks, uncertainties and other factors that could cause actual
results to differ materially, as discussed more fully herein.
The forward-looking information set forth in this Annual Report on Form 10-K is as of January 31, 2003,
and Internap undertakes no duty to update this information. Should events occur subsequent to January 31,
2003, that make it necessary to update the forward-looking information contained in this Form 10-K, the
updated forward-looking information will be filed with the SEC in a Quarterly Report on Form 10-Q or as
a press release included as an exhibit to a Form 8-K, each of which will be available via the SEC’s Edgar
database, available at www.sec.gov. More information about potential factors that could affect our busi-
ness and financial results is included in the section entitled “Risk Factors” in our Form 10-K.
Critical Accounting Policies and Estimates
Our discussion and analysis of the Company’s financial condition and results of operations are based upon
the consolidated financial statements of Internap Network Services Corporation, which have been pre-
pared in accordance with accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of con-
tingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to
revenue recognition, doubtful accounts, investments, intangible assets, long-lived assets, income taxes,
restructuring costs, long-term service contracts, contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that are believed to be reasonable under the cir-
cumstances, the results of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results may differ materially from
these estimates under different assumptions or conditions.
I N T E R N A P 2 0 0 2 A R
15
INTERNAP 2002 MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management believes the following critical accounting policies affect the judgments and estimates used
in the preparation of Internap’s consolidated financial statements.
Customer credit risk. We review the creditworthiness of our customers routinely. If we determine that collec-
tion of service revenues is uncertain, we do not recognize revenue until cash has been collected. Additionally,
we maintain allowances for doubtful accounts resulting from the inability of our customers to make required
payments on accounts receivable. If the financial condition of our customers were to deteriorate, additional
allowances may be required.
Internap has a substantial number of its service points located in facilities of third parties. In many of
those arrangements, we do not have property rights similar to those customarily possessed by a lessee
or sublessee, but instead have lesser rights of occupancy. In certain situations, the financial condition
of those parties providing occupancy to us could have an adverse impact on the continued occupancy
arrangement or the level of service delivered to us under such arrangement.
Restructuring and Impairment Costs
2001 RESTRUCTURING CHARGE. During fiscal year 2001, due to the decline and uncertainty of the telecom-
munications market, we announced two separate restructurings of our business. Under the restructuring
programs, management decided to exit certain non-strategic real estate lease and license arrangements,
consolidate and exit redundant network connections and streamline the operating cost structure. As part
of the 2001 restructuring activity, 313 employees were involuntarily terminated. Employee separations
occurred in all departments. The majority of the costs related to the termination of employees in 2001
were paid during 2001. The total charges include restructuring costs of $71.6 million. During fiscal year
2001, we incurred cash restructuring expenditures totaling $19.9 million and non-cash restructuring
expenditures of $4.7 million. We reduced the original 2001 restructuring charge cost estimate by $7.7 mil-
lion primarily as a result of favorable lease obligation settlements, leaving a balance of $39.3 million as of
December 31, 2001. During the first and third quarters of 2002, we further reduced our 2001 restructuring
charge liability by $5.0 million and $7.2 million, respectively. The first reduction was primarily due to set-
tlements to terminate and restructure certain collocation lease obligations on terms more favorable than
our original restructuring estimates. The second reduction was primarily due to the decision to relocate
our corporate headquarters to the previously restructured Atlanta, Georgia, facility. Pursuant to the original
restructuring plans, we did not anticipate using the Atlanta facility in the future. However, due to changes in
management, corporate direction, and other factors, which could not be foreseen at the time of the origi-
nal restructuring plans, the Atlanta facility was selected as the location for the new corporate headquarters.
2002 RESTRUCTURING AND ASSET IMPAIRMENT CHARGE. With the continuing decline and uncertainty of
the telecommunications market during 2002, we took additional restructuring actions to align our busi-
ness with market opportunities. As a result, we recorded a business restructuring charge and asset
impairments of $7.6 million in the three months ended September 30, 2002. The charges were primarily
comprised of real estate obligations related to a decision to relocate the corporate headquarters from
Seattle, Washington, to an existing leased facility in Atlanta, Georgia, net asset write-downs related to the
departure from the Seattle office and costs associated with further personnel reductions. The restructuring
and asset impairment charge of $7.6 million during 2002 was offset by a $7.2 million adjustment, described
above, resulting from the decision to utilize the Atlanta facility as our corporate headquarters. The pre-
viously unused space in the Atlanta location had been accrued as part of the restructuring liability
established during fiscal year 2001.
16
I N T E R N A P 2 0 0 2 A R
INTERNAP 2002 MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Included in the $7.6 million 2002 restructuring charge are $1.1 million of personnel costs related to a
reduction in force of approximately 145 employees. This represents employee severance payments made
during 2002. We expect that there will be additional restructuring costs in the future as additional pay-
ments are made to employees who are subject to deferred compensation arrangements payable at the
completion of interim employment agreements. We expect these costs to total less than $1.0 million.
Additionally, we continue to evaluate the restructuring reserve as plans are being executed, which could
result in additional charges or adjustments.
Real estate obligations. Both the 2001 and 2002 restructuring plans require us to abandon certain leased
properties not currently in use or that will not be utilized by us in the future. Also included in real estate
obligations is the abandonment of certain collocation license obligations. Accordingly, we recorded real
estate related restructuring costs of $40.8 million, net of non-cash plan adjustments, which are estimates
of losses in excess of estimated sublease revenues or termination fees to be incurred on these real estate
obligations over the remaining lease terms expiring through 2015. These costs were determined based
upon our estimate of anticipated sublease rates and time to sublease the facilities. If rental rates decrease
in these markets or if it takes longer than expected to sublease these properties, the actual loss could
exceed this estimate.
Network infrastructure obligations. The changes to our network infrastructure require that we decom-
mission certain network ports we do not currently use and will not use in the future pursuant to the
restructuring plan. These costs have been accrued as components of the restructuring charge because
they represent amounts to be incurred under contractual obligations in existence at the time the restruc-
turing plan was initiated. These contractual obligations will continue in the future with no economic
benefit, or they contain penalties that will be incurred if the obligations are cancelled.
Asset impairments. On June 20, 2000, we completed the acquisition of CO Space, which was accounted
for under the purchase method of accounting. The purchase price was allocated to net tangible assets
and identifiable intangible assets and goodwill.
On February 28, 2001, management and the Board of Directors approved a restructuring plan that
included ceasing development of the executed but undeveloped leases and the termination of core collo-
cation development personnel. Consequently, financial projections for the business were lowered and,
pursuant to the guidance provided by Financial Accounting Standards Board No. 121, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” (“SFAS 121”), manage-
ment completed a cash flow analysis of the collocation assets, including the assets acquired from CO Space.
The cash flow analysis showed that the estimated cash flows were less than the carrying value of the collo-
cation assets. Accordingly, pursuant to SFAS 121, management estimated the fair value of the collocation
assets to be $79.5 million based upon a discounted future cash flow analysis. As estimated fair value of
the collocation assets was less than their recorded amounts, we recorded an impairment charge of
approximately $196.0 million.
I N T E R N A P 2 0 0 2 A R
17
INTERNAP 2002 MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table displays the activity and balances for restructuring and asset impairment activity for
2001 (in millions):
Charge
Cash
Reductions
Non-Cash
Write-downs
Non-cash
Plan
Adjustments
December 31,
2001
Reserve
$ (3.7)
$(7.0)
Restructuring costs
Real estate obligations
Employee separations
Network infrastructure obligations
Other
Total restructuring costs
Asset impairments
Goodwill
Assembled workforce
Trade name and trademarks
Completed real estate leases
Customer relationships
Total asset impairments
Total
$ 60.0(a)
3.3
6.3
2.0
71.6
176.1
1.5
2.2
14.8
1.4
196.0
$267.6
$(14.7)(a)
(3.2)
(1.9)
(0.1)
(19.9)
–
–
–
–
–
–
$(19.9)
–
(1.0)
–
(4.7)
(176.1)
(1.5)
(2.2)
(14.8)
(1.4)
(196.0)
$(200.7)
–
(0.7)
–
(7.7)
–
–
–
–
–
–
$34.6
0.1
2.7
1.9
39.3
–
–
–
–
–
–
$(7.7)
$39.3
(a)Includes the use of $6.0 million in restricted cash related to payment of a lease deposit on our corporate office space.
Of the $71.6 million recorded during 2001 as restructuring reserves, approximately $50.7 million related
to the direct cost of network, $1.1 million related to customer support, $0.3 million related to product
development, $1.5 million related to sales and marketing and $18.0 million related to general and
administrative costs.
The following table displays the activity and balances for restructuring and asset impairment activity for
2002 (in millions):
December 31,
2001
Restructuring
Liability
Restructuring
and
Impairment
Charge
Non-cash
and
Write-
downs
Non-Cash
Plan
Adjustments
December 31,
2002
Restructuring
Liability
Cash
Reductions
Restructuring costs activity for 2001
restructuring charge –
Network infrastructure obligations
Other
Restructuring costs activity
for 2002 restructuring charge –
Real estate obligations
Personnel
Other
Total restructuring cost
Net asset write-downs for 2002
restructuring charge
Total
$34.6
2.7
2.0
–
–
–
39.3
–
$39.3
$ –
–
–
2.2
1.1
0.2
3.5
4.1
$7.6
$(11.2)
(1.4)
(0.9)
(0.4)
(1.1)
(0.1)
$(1.6)
–
$(12.2)
–
–
–
–
–
–
–
–
–
(15.1)
(1.6)
(12.2)
–
$(15.1)
(4.3)
$(5.9)
–
$(12.2)
$ 9.6
1.3
1.1
1.8
–
0.1
13.9
(0.2)
$13.7
18
I N T E R N A P 2 0 0 2 A R
INTERNAP 2002 MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Of the $3.5 million recorded during 2002 as restructuring reserves, approximately $212,000 related to the
direct cost of network and $3.3 million related to general and administrative costs.
We expect to complete the majority of the restructuring activities related to the 2001 and 2002 restruc-
turing charges during 2003, although certain remaining restructured real estate and network obligations
represent long-term contractual obligations that extend beyond 2003.
Business Combinations
On July 31, 2000, we completed our acquisition of VPNX.com. The acquisition was recorded using the
purchase method of accounting under APB Opinion No. 16. The aggregate purchase price of the acquired
company, plus related charges, was approximately $87.4 million and was comprised of issuance of our
common stock, cash, acquisition costs and assumed options to purchase common stock. We issued approx-
imately 2.0 million shares of common stock and assumed options to purchase VPNX common stock that
were subsequently converted into options to purchase approximately 268,000 shares of our common
stock to effect the transaction. Results of operations of VPNX have been included in our financial results
from the closing date of the acquisition forward.
As a result of the VPNX acquisition, we recorded a total of $67.9 million of goodwill and other intangible
assets. Through December 31, 2001, the goodwill and other intangible assets were amortized to expense
over their useful lives, which are estimated to be three years, resulting in an expense of $9.4 million and
$22.7 million for the years ended December 31, 2000 and 2001 respectively. Internap has a substantial
number of its service points in facilities of third parties. In many of those arrangements, we do not have
property rights similar to those customarily possessed by a lessee or sublessee, but instead have lesser
rights of occupancy. In certain situations, the financial condition of those parties providing occupancy to
us could have an adverse impact on the continued occupancy arrangement or the level of service deliv-
ered to us under such arrangement. We also recorded an expense of $18.0 million related to acquired
in-process research and development costs for the year ended December 31, 2000. The amount allocated
to acquired in-process research and development is related to technology acquired from VPNX that was
expensed immediately subsequent to the closing of the acquisition since the technology had not com-
pleted the preliminary stages of development, had not commenced application development and did not
have alternative future uses. Furthermore the technologies associated with the acquired in-process research
and development did not have a proven market and are sufficiently complex so that the probability of
completion of a marketable service or product could not be determined. The fair value of the acquired
in-process research and development was determined using the income approach, which estimates the
expected cash flows from projects once commercially viable and discounts expected future cash flows to
present value. The percentage of completion for each project was determined based upon time and costs
incurred on the project in addition to the relative complexity. The percentages of completion varied by
individual project and ranged from 25% to 70%. The discount rate of 35% used in the present value cal-
culation was derived from an analysis of weighted average costs of capital, weighted average returns on
assets and venture capital rates of returns adjusted for the specific risks associated with the in-process
research and development expense. The development of the acquired technologies remains a significant
risk as the nature of the efforts to develop the acquired technologies into commercially viable services
consists primarily of planning, designing and testing activities necessary to determine that the products
can meet customer expectations.
I N T E R N A P 2 0 0 2 A R
19
INTERNAP 2002 MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Our revenues are generated primarily from the sale of Internet connectivity services at fixed rates or
usage-based pricing to our customers that desire a DS-3 or faster connection and other ancillary services,
such as collocation, content distribution, server management and installation services, virtual private net-
working services, managed security services, data backup, remote storage and restoration services and
video conferencing services. We also offer T-1 and fractional DS-3 connections at fixed rates. We recog-
nize revenues when persuasive evidence of an arrangement exists, the service has been provided, the
fees for the service rendered are fixed or determinable and collectibility is probable. Customers are billed
on the first day of each month either on a usage or a flat-rate basis. The usage based billing relates to the
month prior to the month in which the billing occurs, whereas certain flat rate billings relate to the month
in which the billing occurs. Deferred revenues consist of revenues for services to be delivered in the future
and consist primarily of advance billings, which are amortized over the respective service period and
billings for initial installation of customer network equipment, which are amortized over the estimated life
of the customer relationship.
Direct cost of network is comprised primarily of the costs for connecting to and accessing Internet backbone
providers and competitive local exchange providers, costs related to operating and maintaining service points
and data centers and costs incurred for providing additional third-party services to our customers. To the
extent a service point is located a distance from the respective Internet backbone providers, we may incur
additional local loop charges on a recurring basis.
Customer support costs consist primarily of employee compensation costs for employees engaged in con-
necting customers to our network, installing customer equipment into service point facilities, and servicing
customers through our network operation centers. In addition, facilities costs associated with the network
operations center are included in customer support costs.
Product development costs consist principally of compensation and other personnel costs, consultant
fees and prototype costs related to the design, development and testing of our proprietary technology,
enhancement of our network management software and development of internal systems. Costs associ-
ated with internal use software are capitalized when the software enters the application development
stage until implementation of the software has been completed. All other product development costs
are expensed as incurred.
Sales and marketing costs consist of compensation, commissions and other costs for personnel engaged
in marketing, sales and field service support functions, as well as advertising, tradeshows, direct response
programs, new service point launch events, management of our web site and other promotional costs.
General and administrative costs consist primarily of compensation and other expenses for executive, finance,
human resources and administrative personnel, professional fees and other general corporate costs.
Since inception, in connection with the grant of certain stock options to employees, we recorded deferred
stock compensation totaling $25.0 million, representing the difference between the fair value of our com-
mon stock on the date options were granted and the exercise price. In connection with our acquisition
of VPNX, we recorded deferred stock compensation totaling $5.1 million related to unvested options we
assumed. These amounts are included as a component of stockholders’ equity and are being amortized
over the vesting period of the individual grants, generally four years, using an accelerated method as
described in Financial Accounting Standards Board Interpretations No. 28. We recorded amortization of
deferred stock compensation in the amount of $10.7 million and $4.2 million and $0.2 million for the
years ended December 31, 2000, 2001 and 2002, respectively. At December 31, 2002, we had a total of
$396,000 remaining to be amortized over the corresponding vesting periods of the stock options.
20
I N T E R N A P 2 0 0 2 A R
INTERNAP 2002 MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The revenue and income potential of our business and market is unproven, and our limited operating his-
tory makes it difficult to evaluate its prospects. We have only been in existence since 1996, and our serv-
ices are only offered in limited regions. We have incurred net losses in each quarterly and annual period
since our inception, and as of December 31, 2002, our accumulated deficit was $796.4 million.
The following table sets forth, as a percentage of total revenues, selected statement of operations data
for the periods indicated:
Year Ended December 31,
Revenues
Costs and expenses:
Direct cost of network
Customer support
Product development
Sales and marketing
General and administrative
Depreciation and amortization
Amortization of goodwill and other intangible assets
Amortization of deferred stock compensation
Lease termination expense
Restructuring costs
Impairment of goodwill and other intangible assets
In-process research and development
Loss on sales and retirements of property and equipment
Total operating costs and expenses
Loss from operations
Other income (expense):
Interest income (expense), net
Loss on Investment
Total other income (expense)
Net loss
2000
100%
2001
100%
2002
100%
90%
29%
17%
51%
47%
30%
78%
15%
–
–
–
26%
–
383%
(283)%
17%
–
17%
84%
18%
10%
32%
38%
41%
33%
4%
–
55%
167%
–
2%
484%
(384)%
(1)%
(23)%
(24)%
(266)%
(408)%
63%
10%
6%
16%
16%
37%
4%
–
1%
(3%)
–
–
2%
152%
(52)%
(2)%
(1)%
(3)%
(55)%
Years Ended December 31, 2002 and 2001
Revenues. Revenues for the year ended December 31, 2002, increased by 13% to $132.5 million, up from
$117.4 million for the year ended December 31, 2001. The increase during 2002 was primarily driven by
increased connectivity service revenues, accounting for 75% of the increase, which reflects a full year of
operations at the 6 service points that were opened during 2001, and an increase in our overall customer
base from 974 to 1,273 customers, across our metropolitan market service points. Also included is contract
termination revenues of $1.3 million collected from customers that discontinued service during the year.
Of the remaining increase, 23% can be attributed primarily to content delivery network services and the
remaining 2% can be attributed to collocation data center services, including facilities charges, We expect
that revenues will continue to increase for the 2003 fiscal year as compared to the 2002 fiscal year and con-
nectivity revenues will remain our primary revenue source. We expect the composition of future revenue
increases will include an increasing percentage of revenue from non-connectivity products and services
than in the past.
I N T E R N A P 2 0 0 2 A R
21
INTERNAP 2002 MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Direct Cost of Network. Direct cost of network for the year ended December 31, 2002, decreased 16%
to $83.2 million from $98.9 million for the year ended December 31, 2001. The decrease of $15.7 million
in 2002 reflects reduced network cost and local access expenses (representing 107% of the decrease), res-
olution of disputes with network vendors (representing 9% of the decrease) and lower third-party colloca-
tion and service point facility costs (representing an additional 8% of the decrease). These decreases were
offset by a 10% increase in customer local access costs, a 6% increase in collocation costs in our facilities
and a 14% increase in costs associated with content delivery network services. Connectivity costs vary
dependent on customer demands and pricing variables and are expected to decrease during 2003, even
with modest revenue growth, due to the full year impact of pricing improvements negotiated during
2002. Collocation and other service point facility costs are generally fixed in nature, and we expect these
costs to remain stable during 2003. Content delivery network and other costs associated with reseller
arrangements are generally variable in nature and are expected to increase, although to a lesser extent as
revenue increases.
Customer Support. Customer support costs for the year ended December 31, 2002, decreased 40% to
$12.9 million from $21.5 million for the year ended December 31, 2001. The decrease of $8.6 million was
primarily driven by decreases in compensation (representing 65% of the decrease), facilities (representing
20% of the decrease), and decreases in communications, general office, travel and entertainment and
other costs (representing 15% of the decrease). Customer support costs are primarily related to employee
costs. We expect customer support costs to decrease during 2003 due to the full year effect of employee
terminations completed during 2002.
Product Development. Product development costs for the year ended December 31, 2002, decreased
39% to $7.4 million from $12.2 million for the year ended December 31, 2001. The decrease of $4.8 mil-
lion reflects reduced compensation expense (representing 51% of the decrease), facilities (representing
16% of the decrease), outside professional services (representing 25% of the decrease) and communica-
tions and other costs (representing 8% of the decrease). Product development costs are primarily related
to employee and professional service costs. We anticipate product development costs in 2003 to decrease
due to the full year effect of employee terminations completed during 2002.
Sales and Marketing. Sales and marketing costs for the year ended December 31, 2002, decreased 44%
to $21.6 million from $38.1 million for the year ended December 31, 2001. Approximately 35% of the
$16.5 million decrease can be attributed to a marketing and advertising campaign in 2001. Additionally,
34% of the decrease relates to compensation costs as a result of employee terminations completed dur-
ing 2002. Sales and marketing expenses in 2003 should remain consistent with 2002 expenses as a result
of more focused and efficient marketing and advertising efforts than those in prior periods.
General and Administrative. General and administrative costs for the year ended December 31, 2002,
decreased 54% to $20.8 million from $44.5 million for the year ended December 31, 2001. The decrease
of $23.7 million reflects lower facility costs (representing 28% of the decrease), lower compensation costs
(representing 25% of the decrease), decreases in taxes and bad debt expense (each representing 12% of
the decrease), reduced professional services (representing 8% of the decrease) lower training, communica-
tions, travel and entertainment and other office costs (representing 15% of the decrease). We anticipate
general and administrative costs will be lower in 2003 as compared to 2002 as a result of employee
terminations and other cost savings measures taken during 2002.
22
I N T E R N A P 2 0 0 2 A R
INTERNAP 2002 MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Depreciation and Amortization. Depreciation and amortization expense for the year ended December 31,
2002 increased 2% to $49.6 million as compared to $48.6 million for the year ended December 31, 2001.
The increase is attributable to a 6% increase in depreciation and amortization expense relating to network
and service point assets, including the deployment of six additional service points during 2001. We expect
network depreciation and amortization to decrease in 2003 as compared to 2002 as assets reach the end
of their depreciable lives. The increase in depreciation and amortization related to network assets was par-
tially offset by a 5% decrease in depreciation and amortization related to non-network assets. This decrease
was primarily due to retirements and write-downs of assets during 2001 and 2002. We expect deprecia-
tion related to these assets to decrease in 2003 as compared to 2002. Overall depreciation and amortiza-
tion is expected to be generally consistent with 2002 levels as network assets that become technologically
obsolete or reach the end of their estimated useful lives will be replaced with newer assets. Our current
plans do not require the deployment of significant additional capital assets during 2003.
Other Income (Expense). Other income (expense) consists of interest income, interest and financing
expense, investment losses and other non-operating expenses. Other income (expense) for the year
ended December 31, 2002, increased to $3.4 million from other expense of $27.6 million for the year
ended December 31, 2001. This increase was primarily due to losses incurred during 2001 on our invest-
ments in 360 Networks and Aventail of $14.5 million and $4.8 million, respectively, and the $6.0 million
provision we recorded on a note receivable. During 2002, our other expense items consisted of $1.3 mil-
lion in losses related to our equity-method investment and $2.2 million of interest income (expense),
which decreased due to lower cash balances and higher levels of debt during 2002 as compared to 2001.
We expect other expenses in 2003 to be generally consistent with 2002 levels.
Years Ended December 31, 2001 and 2000
Revenues. Revenues for the year ended December 31, 2001, increased by 69% to $117.4 million, up from
$69.6 million for the year ended December 31, 2000. The increase during 2001 was primarily driven by
increased connectivity service revenues (accounting for 70% of the increase), for a full year of operations
at the 17 service points that were opened during 2000, 6 additional service points deployed during 2001
and an increase in our overall customer base across all markets. Of the remaining 30% of the increase,
10% can be attributable to collocation services and the remaining 20% of the revenue increase stems from
revenues generated from our other products and services, including facilities charges, content delivery
network services, and collocation services, as well as contract termination revenues collected from
customers that discontinued service during the year.
Direct Cost of Network. Direct cost of network for the year ended December 31, 2001, increased 58%
to $98.9 million from $62.5 million for the year ended December 31, 2000. The increase of $36.4 million
in 2001 reflects higher costs relating to our service point facility costs for providing collocation services
to our customers (representing 49% of the increase) and connections to Internet backbone providers
(representing 43% of the increase). Both collocation facility costs and connectivity costs vary depending
on customer demands and pricing variables and are expected to increase during 2003 due to additions
of new customers.
I N T E R N A P 2 0 0 2 A R
23
INTERNAP 2002 MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Customer Support. Customer support costs for the year ended December 31, 2001, increased 6% to
$21.5 million from $20.3 million for the year ended December 31, 2000. The increase of $1.2 million was
primarily driven by higher compensation and facility costs which increased costs 14% and 6% during the
current year, respectively, offset by consultant, travel and entertainment and other costs which decreased
current year costs 8%, 5%, and 1%, respectively.
Product Development. Product development costs increased 3% to $12.2 million from $11.9 million
during the years ended December 31, 2001 and 2000, respectively. The increase of $0.3 million reflects
increases in facilities and compensation costs which increased costs by 9% and 1%, respectively, offset by
decreases in consultant and other costs which reduced costs by 5% and 2%, respectively.
Sales and Marketing. Sales and marketing costs for the year ended December 31, 2001, increased 8%
to $38.2 million from $35.4 million for the year ended December 31, 2000. The increase was primarily
attributed to a marketing and advertising campaign launched during 2001.
General and Administrative. General and administrative costs for the year ended December 31, 2001,
increased 35% to $44.5 million from $33.0 million for the year ended December 31, 2000. The increase
of $11.5 million was primarily driven by increased taxes, facilities costs and bad debt expenses, which
increased costs by 12%, 11% and 10%, respectively. Other costs, net of certain cost reductions, increased
current period costs by 2%.
Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2001,
increased 137% to $48.6 million from $20.5 million for the year ended December 31, 2000. The increase
was primarily attributable to increased depreciation and amortization expense relating to network and
service point assets, representing 78% of the increase, including the deployment of 17 service points
during 2000, resulting in a full year of depreciation during 2001.
Other Income (Expense). Other income (expense) consists of interest income, interest and financing
expense, investment losses and other non-operating expenses. Other income (expense), net, decreased
to $27.6 million for the year ended December 31, 2001 from other income of $11.5 million for the year
ended December 31, 2000. This decrease was primarily due to losses incurred on our investments in
360networks and Aventail of $14.5 million and $4.8 million, respectively, and the provision we recorded
on a note receivable of $6.0 million.
Provision for Income Taxes
We have incurred operating losses from inception through December 31, 2002. We have recorded a
valuation allowance for the full amount of our net deferred tax assets due to the uncertainty of our ability
to realize those assets in future periods.
As of December 31, 2002, we had net operating loss carryforwards of approximately $435.0 million,
capital loss carryforwards of approximately $14.0 million and tax credit carryforwards of approximately
$2.0 million. Due to limitations imposed by provisions of the Internal Revenue Code of 1986, as amended,
upon certain substantial changes in our ownership, approximately $169.0 million of the aggregate net
operating loss and capital loss carryforwards, and $1.0 million of the tax credit carryforwards will not be
utilized. Loss carryforwards of approximately $280.0 million are available to reduce future taxable income
and expire at various dates beginning in 2006, and the amount that could be utilized annually in the
future to offset taxable income will be limited.
24
I N T E R N A P 2 0 0 2 A R
INTERNAP 2002 MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Cash Flow for the Years Ended December 31, 2002, 2001, and 2000
Net Cash Used in Operating Activities. Net cash used in operating activities was $40.3 million for the year
ended December 31, 2002, and was primarily due to the loss from continuing operations of $72.3 million,
adjusted for non-cash items of $58.0 million, an increase in accounts receivable of $2.4 million, a decrease in
accounts payable of $802,000, a decrease in deferred revenue of $4.3 million, a decrease in accrued restruc-
turing costs of $15.3 million and a decrease in accrued liabilities of $3.9 million. These uses of cash were
offset by a $712,000 decrease in prepaid and other assets. The increase in receivables was related to higher
overall revenue offset by a seven-day improvement in day’s sales outstanding compared to the prior year. The
decrease in payables is primarily related to a lower overall level of operating expenses in 2002 compared
to 2001.
Net cash used in operating activities was $123.0 million for the year ended December 31, 2001 and was
primarily due to the loss from continuing operations (adjusted for non-cash items) of $153.5 million, a
decrease in accounts payable of $8.5 million, a decrease in deferred revenue of $2.2 million and a decrease
in accrued liabilities of $3.1 million. These uses of cash were partially offset by decreases in receivables of
$0.7 million and an increase in accrued restructuring costs of $39.3 million. The decreases in accounts
payable and accrued liabilities are a result of our efforts to streamline operations during 2001, resulting in
lower monthly operating costs in the final quarter of 2001. The accounts receivable decrease is largely a
result of improved collections during 2001. Day’s sales outstanding were 62 days at December 31, 2000,
and reached 65 days during the first half of 2001, ending 2001 at 45 days. The decrease in prepaid expenses
is due to our focus on cash flow during 2001 and a related reduction in prepayment activities.
Net cash used in operating activities was $95.1 million for the year ended December 31, 2000, and was
primarily due to the loss from continuing operations (adjusted for non-cash items) of $80.0 million, an
increase in accounts receivable of $17.3 million, an increase in prepaid expenses and other assets of
$7.4 million and a decrease in accounts payable of $5.3 million. These uses of cash were partially offset by
a $4.0 million increase in deferred revenue and a $10.9 million increase in accrued liabilities. The increase
in accounts receivable was primarily related to the overall growth in the business during 2000 as total
revenue for the year increased by $57.1 million compared to 1999, an increase of 456%. The increase in
accounts payable, prepaid expense and accrued liabilities was a result of significant growth in operating
expenses as we deployed more service points and expanded into new geographical markets.
Net Cash Provided by (Used In) Investing Activities. Net cash provided by investing activities was
$9.6 million for the year ended December 31, 2002, and was primarily from proceeds of $18.7 million
received on the redemption or maturity of investments. Cash received was partially offset by $8.6 million
used for purchases of property and equipment and $1.3 million contributed to our joint venture invest-
ment, Internap Japan. Of the $8.6 million used for purchases of property and equipment, $5.8 million
related to the purchase of assets from our primary provider of leased networking equipment as part of
terms of an amendment to our master lease arrangement with the lessor.
I N T E R N A P 2 0 0 2 A R
25
INTERNAP 2002 MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net cash provided by investing activities was $12.3 million for the year ended December 31, 2001, and
was primarily from proceeds of $62.0 million received on the redemption or maturity of investments and
$6.1 million received from restricted cash related to a real estate settlement of a corporate office facility.
As part of the settlement, the lessor was paid from a restricted cash deposit. Cash provided from invest-
ing activities was offset by $32.1 million used for purchases of property and equipment and $22.7 million
used to purchase investments. The purchases of property and equipment primarily represent leasehold
improvements and infrastructure purchases for our collocation facilities that were not financed through
lease facilities. The majority of the cash paid for purchases of property and equipment occurred during
the first two quarters of 2001 to complete certain collocation facilities under construction during 2000. In
connection with the restructuring plan adopted by management during February 2001, capital spending
for new collocation facilities was significantly reduced.
On April 10, 2001, we announced the formation of a joint venture with NTT-ME Corporation of Japan.
The formation of the joint venture involved our cash investment of $2.8 million to acquire 51% of the
common stock of the newly formed entity, Internap Japan. The investment in the joint venture is being
accounted for as an equity-method investment under Accounting Principles Board Opinion No. 18 “The
Equity Method of Accounting for Investments in Common Stock.” Subsequent to December 31, 2001,
the joint venture authorized a second capital call, and we invested an additional $1.3 million into the
partnership in proportion to our ownership interest.
Net cash used in investing activities was $106.2 million for the year ended December 31, 2000, and was
primarily related to $161.1 million used to purchase investments, $57.7 million used to purchase property
and equipment, $12.2 million used in the purchase of CO Space, Inc. and VPNX.com during 2000 (net of
cash acquired) and $8.5 million used to support restricted cash balances required in certain real estate
transactions. The use of cash was partially offset by $132.8 million redemption of investments. Note that
the purchase of property and equipment represents leasehold improvements and infrastructure purchases
for our collocation facilities that were not financed through lease facilities.
During 2000, pursuant to an investment agreement among Internap, Ledcor Limited Partnership, Worldwide
Fiber Holdings Ltd. and 360networks, Inc., we purchased 374,182 shares of 360networks Class A Non-Voting
Stock at $5.00 per share and 1,122,545 shares of 360networks Class A Subordinate Voting Stock at $13.23
per share. The total cash investment was $16.7 million. During 2001 we liquidated our entire investment in
360networks for cash proceeds of $2.2 million and recognized a loss on investment totaling $14.5 million.
Also during 2000, pursuant to an investment agreement, we purchased 588,236 shares of Aventail
Corporation Series D preferred stock at $10.20 per share for a total cash investment of $6.0 million.
Because Aventail is a privately held enterprise for which no active market for its securities exists, the
investment is recorded as a cost basis investment. During the second quarter of 2001, we concluded
based on available information, specifically Aventail’s most recent round of financing, that our invest-
ment in Aventail had experienced a decline in value that was other than temporary. As a result during
June 2001, we recognized a $4.8 million loss on investment when we reduced its recorded basis to
$1.2 million, which remains its estimated value as of December 31, 2002.
26
I N T E R N A P 2 0 0 2 A R
INTERNAP 2002 MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Additionally, we entered into a joint marketing agreement with Aventail which, among other things, granted
us limited exclusive rights to sell Aventail’s managed extranet service and granted Aventail specified rights to
sell our services. In return, we committed to either sell Aventail services or pay Aventail, or a combination of
both, which would result in Aventail’s receipt of $3.0 million over a two-year period. The joint marketing
agreement expired during 2002 and we accrued a liability for the $1.8 million shortfall as a component of
accrued expenses. During the second quarter of 2002 we entered into a note payable to Aventail in lieu
of immediate payment of the shortfall amount and reclassified the $1.8 million accrued expense to notes
payable. The note matures October 5, 2003, is payable in quarterly principal and interest payments, bears
interest of 6.0% and is collateralized by certain network equipment. Outstanding borrowings under this
note were $900,000 as of December 31, 2002.
Net Cash Provided by (Used In) Financing Activities. Since our inception, we have financed our
operations primarily through the issuance of our equity securities, capital leases and bank loans. As of
December 31, 2002, we have raised an aggregate of approximately $499.6 million, net of offering
expenses, through the sale of our equity securities.
Net cash used in financing activities for the year ended December 31, 2002 was $7.7 million. Cash used
included $10.3 million related to payments on capital lease obligations and $3.4 million for payments of
notes payable. These uses were offset by proceeds of $0.4 million related to exercises of stock options
and warrants and $0.7 million related to the sale of common stock, including stock issued to employees
pursuant to the Amended and Restated 1999 Employee Stock Purchase Plan. During 2002 we amended
the terms of our master lease agreement with our primary supplier of networking equipment. The amended
terms of the master lease included a retroactive effective date to March 1, 2002, and extended the pay-
ment terms and provided for a deferral of lease payments of the underlying lease schedules for a period
of 24 months in exchange for a buy-out payment of $12.1 million in satisfaction of the outstanding lease
obligation on 14 schedules totaling $6.3 million and for the purchase of the equipment leased under the
same schedules totaling $5.8 million.
We paid $10.3 million under capital lease agreements for the year ended December 31, 2002. Capital
equipment leases have been used since inception to finance the majority of our networking equipment
located in our service points other than leasehold improvements related to our collocation facilities.
Approximately $61.7 million of networking equipment has been purchased under capital leases from
inception through December 31, 2002.
Net cash provided by financing activities for the year ended December 31, 2001, was $72.1 million,
primarily related to a $95.6 million issuance of Series A convertible preferred stock (net of $5.4 million in
issuance costs) and $2.2 million proceeds from the issuance of common stock and the exercise of stock
options. Net cash provided by financing activities was offset by $23.4 million in payments on capital leases
and $2.3 million paid on a note payable. Net proceeds from financing activities were primarily used to
fund operating losses during 2001 and, to a lesser extent, for purchases of property and equipment.
I N T E R N A P 2 0 0 2 A R
27
INTERNAP 2002 MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On September 14, 2001, we completed a $101.5 million private placement of units at a per unit price
of $1.60 per unit and issued an aggregate of 63,429,976 units, with each unit consisting of 1/20 of a share
of Series A convertible preferred stock and a warrant to purchase 1/4 of a share of common stock, result-
ing in the issuance of 3,171,499 shares of Series A convertible preferred stock and 17,113,606 warrants
to purchase equivalent shares of common stock at an exercise price of $1.48256 per share, which are
exercisable for a period of five years. The aggregate amount of common stock issuable upon conversion
of the Series A convertible preferred stock and the exercise of the warrants is 85,568,119 shares at
September 30, 2001.
Holders of Series A convertible preferred stock shall be entitled to the number of votes equal to the
number of shares of common stock into which the shares of Series A convertible preferred stock could
be converted. Each share of Series A convertible preferred stock is initially convertible into 21.58428
shares of common stock subject to adjustments for certain dilutive events. Each share of Series A con-
vertible preferred stock may be converted at any time at the option of the holder. Subject to satisfaction
of certain conditions, including the listing of the Company’s common stock on the NASDAQ National
Market System, shares of Series A convertible preferred stock automatically convert to common stock
on the earlier of September 14, 2004, a date more than six months after issuance on which the common
stock has traded in excess of $8.00 for a period of 45 consecutive trading days or upon the affirmative
vote of 60% of the outstanding shares of Series A convertible preferred stock.
Upon the liquidation, dissolution, merger or other event in which existing stockholders own less than 50%
of the post-event voting power, holders of Series A convertible preferred stock are entitled to be paid out
of existing assets an amount equal to $32.00 of preferred per share prior to distributions to holders of
common stock. Upon completion of distribution to holders of Series A convertible preferred stock,
remaining assets will be distributed ratably between holders of Series A convertible preferred stock and
holders of common stock until holders of Series A convertible preferred stock have received an amount
equal to three times the original issue price.
We received net proceeds of $95.6 million from the issuance of the Series A convertible preferred stock and
allocated $86.3 million to the Series A convertible preferred stock and $9,321,000 to the warrants to purchase
shares of common stock based upon their relative fair values on the date of issuance (September 14, 2001)
pursuant to Accounting Principles Board Opinion No. 14 “Accounting for Convertible Debt and Debt Issued
with Stock Purchase Warrants.” The fair value used to allocate proceeds to the Series A convertible preferred
stock was based upon a valuation that among other considerations was based upon the closing price of the
common stock on the date of closing, on an as converted basis, and liquidation preferences. The fair value
used to allocate proceeds to the warrants to purchase common stock was based on a valuation using the
Black Scholes model and the following assumptions: exercise price $1.48256; no dividends; term of
5 years; risk free rate of 3.92%; and volatility of 80%.
Net cash provided from financing activities for the year ended December 31, 2000, was $148.3 million,
primarily from the issuance of $145.2 million of common stock, $8.5 million drawn under a revolving line
of credit and $6.3 million in proceeds from the exercise of common stock options and warrants partially
offset by $12.4 million in payments on capital lease and note payable obligations.
28
I N T E R N A P 2 0 0 2 A R
INTERNAP 2002 MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On April 6, 2000, 8,625,000 shares of our common stock were sold in a public offering at a price of
$43.50 per share. Of these shares, we sold 3,450,000 and 5,175,000 shares were sold by selling stock-
holders. We did not receive any of the proceeds from the sale of shares of common stock by the selling
stockholders. Our proceeds from the offering were $142.9 million, net of underwriting discounts and
commissions of $7.1 million.
Liquidity
We have experienced significant net operating losses since inception. During fiscal 2002, we incurred net
losses of $72.3 million and used $40.3 million of cash in our operating activities. Management expects
operating losses will continue through December 31, 2003, and negative cash flows to continue for sev-
eral more quarters. We have decreased the size of our workforce by 216 employees, or 40% as compared
to the number of employees at December 31, 2001, and terminated certain real estate leases and com-
mitments in order to control costs. Our plans indicate our existing cash and investments are adequate to
fund our operations in 2003. However, our capital requirements depend on several factors, including the
rate of market acceptance of our services, the ability to expand and retain our customer base and other
factors. If we fail to realize our planned revenues or costs, management believes it has the ability to curtail
capital spending and reduce expenses to ensure cash and investments will be sufficient to meet our cash
requirements in 2003. If, however, our cash requirements vary materially from those currently planned, or if
we fail to generate sufficient cash flow from the sales of our services, we may require additional financing
sooner than anticipated. We cannot assure you such financing will be available on acceptable terms, if at all.
Our cash requirements through the end of 2003 are primarily to fund operations, restructuring outlays,
payments to service capital leases, payments on notes payable and capital expenses.
With a slowdown in the macroeconomic environment during 2001 and continuing into 2002, we have
been focused on significantly reducing the cost structure of the business while maintaining a continued
focus on growing revenue. During fiscal year 2001 we announced two separate restructurings of our busi-
ness. Under the 2001 restructuring programs, management made decisions to exit certain non-strategic
real estate lease and license arrangements, consolidate and exit redundant network connections and to
streamline the operating cost structure. The total charges include restructuring costs of $71.6 million and
a charge for asset impairment of $196.0 million. We completed the majority of our restructuring activities
related to the 2001 plan during 2002, although certain remaining restructured real estate and network
obligations represent long-term contractual obligations that extend through 2015.
With the continuing decline and uncertainty in the telecommunications market, we committed to addi-
tional restructuring actions during 2002 to align our business with market opportunities. As a result, we
recorded a business restructuring charge and asset impairments of $7.6 million. The charges were primarily
comprised of real estate obligations related to a decision to relocate our corporate headquarters from
Seattle, Washington, to an existing leased facility in Atlanta, Georgia, net asset write-downs related to the
departure from the Seattle office and costs associated with further personnel reductions. We expect to
complete the restructuring activities related to the 2002 plan during 2003.
I N T E R N A P 2 0 0 2 A R
29
INTERNAP 2002 MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Based on savings from our 2001 and 2002 restructuring programs and other forecasted cash savings, we
believe our cash should be sufficient to meet our cash requirements in 2003. If we fail to realize our planned
revenues or costs, management believes it has the ability to curtail capital spending and reduce expenses
to ensure cash and investments will be sufficient to meet our cash requirements in 2003.
However, the cash impact of continuing uncertain market demand and the timing of cost reduction is
difficult to project. Our cost reduction initiatives may have unanticipated adverse effects on our business.
A portion of our planned operating cash improvement is expected to come from an increase in revenues
and cash collections from customers.
Commitments and Other Obligations. We have commitments and other obligations that are contractual
in nature and will represent a use of cash in the future unless there are modifications to the terms of those
agreements. The amounts in the table below captioned “Network commitments” primarily represent pur-
chase commitments made to our largest bandwidth vendors and, to a lesser extent, contractual payments
to license collocation space used for resale to customers. Our ability to improve cash used in operations
in the future would be negatively impacted if we did not grow our business at a rate that would allow us
to offset the service commitments with corresponding revenue growth.
The following table summarizes our credit obligations and future contractual commitments (in thousands)
as of December 31, 2002:
Line of credit
Notes Payable
Capital Lease Obligations
Operating leases commitments
Network commitments
Payment due by period
Total
Less than
1 year
1 to
3 years
4 to
5 years
$ 10,000
$10,000
$
–
$
9,710
38,975
139,801
85,032
4,514
1,784
16,652
36,264
5,196
24,356
25,083
28,424
–
–
3,474
18,439
19,778
After
5 years
$
–
–
9,181
79,629
566
Total
$283,388
$69,214
$83,059
$41,691
$89,374
One of our network commitment contracts with an Internet backbone service provider, representing
$20 million of scheduled minimum payments in 2003 and $11.7 million in 2004, includes a provision
allowing us to defer portions of our minimum commitments into future periods in the event we do not
meet annual contract minimums.
Credit Facilities. At December 31, 2001, we had a revolving line of credit of $10.0 million and had drawn
all available amounts under the facility. In October 2002, the line was renewed and amended, allowing us to
borrow an additional $5.0 million, up to $15.0 million in aggregate. The renewed facility originally was due
to expire on December 31, 2002. Our ability to maintain the drawn amount under the line of credit and have
access to the additional $5.0 million depended on a number of factors including the level of eligible receiv-
able balances and liquidity. The facility allowed advances equal to 80% of eligible accounts receivable or
25% of cash and short-term investments, whichever is greater. The facility also contained financial covenants
that required us to grow revenues, limit the cash losses, and require minimum levels of liquidity and tangi-
ble net worth as defined in the agreement.
30
I N T E R N A P 2 0 0 2 A R
INTERNAP 2002 MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In October 2002, we entered into a revised loan and security agreement, refinancing the line of credit facility
and other equipment notes with the same lender. Under the terms of the new loan and security agreement,
the $15 million outstanding under the previous facility was refinanced into a $15 million revolving line of
credit and a $5 million equipment note. Availability under the revolver is based on 80% of eligible accounts
receivable plus 25% of unrestricted cash and investments. Availability is further restricted by the $5 million
outstanding under the term loan until the Company achieves a specified minimum debt coverage service
level for six consecutive months as defined in the agreement. The amount available under the revolver at the
time of the refinancing and at December 31, 2002, was $10 million and $10 million was drawn under the line
at December 31, 2002. On March 28, 2003 we entered into an amended loan and security agreement.
The revolving line of credit facility is a 24-month facility expiring during October 2004 and bears interest
at a rate ranging from prime plus 1% to prime plus 2% per year (6.25% at December 31, 2002), depending
on a certain balance sheet ratio as defined in the agreement. Monthly payments are interest only over
the term of the facility. Both the revolving facility and the equipment notes are governed by a common
security agreement and are collateralized by substantially all the assets of the Company. The agreement
allows the lender to require us to maintain cash and investment accounts with them and allows the lender
greater control over our customer deposits, as defined in the agreement. Both the revolving credit facility
and the term loan also contain financial covenants that require us to maintain a minimum tangible net worth
as defined in the agreement. Further, the lender has the ability to demand repayment in the event, in its
view, there has been a material adverse change in our business. At December 31, 2002, we were in
compliance with the financial covenants.
Preferred Stock. As discussed under the description of financing activities, we received net proceeds
of $95.6 million during 2001 from the sale of preferred stock. Among other things, the preferred stock
purchase agreement establishes restrictions on the amount of new debt that we can incur without specific
preferred stockholder approval. If we should, in the future, decide to obtain additional debt to improve
our liquidity, there can be no assurance that preferred stockholder approval could be obtained.
Lease Facilities. Since our inception, we have financed the purchase of network routing equipment using
capital leases. The present value of these the capital lease payments are $25.5 million at December 31,
2002, with $631,000 to be paid during 2003. We have fully utilized available funds under our lease facilities.
In June 2002, we amended the terms of our master lease agreement with our primary supplier of network-
ing equipment. The amended terms of the master lease included a retroactive effective date to March 1,
2002, and extended the payment terms and provided for a deferral of lease payments of the underlying
lease schedules for a period of 24 months in exchange for a buy-out payment of $12.1 million in satisfac-
tion of the outstanding lease obligation on 14 schedules totaling $6.3 million and for the purchase of the
equipment leased under the same schedules totaling $5.8 million. The terms of our master lease agree-
ment, as amended, include financial covenants that require us to maintain minimum liquidity balances, peri-
odic revenues, EBITDA levels and other customary covenants. Should we breach the covenants, experience
a change-of-control represented by a change in 35% of the aggregate ordinary voting power, or the lessor
believes we have experienced a material adverse change in our business, the lessor has the ability to
demand payment of all amounts due. As of December 31, 2002, we were in compliance with all financial
covenants and have obtained a waiver for a non-financial covenant for which we were not in compliance.
I N T E R N A P 2 0 0 2 A R
31
INTERNAP 2002 MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations,” which is effective January 1, 2003.
This standard addresses financial accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated retirement costs. The Company is currently assessing the appli-
cation of SFAS No. 143.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal
Activities.” This standard requires costs associated with exit or disposal activities to be recognized when
they are incurred. The requirements of SFAS No. 146 apply prospectively to activities that are initiated
after December 31, 2002, and as such, the Company cannot reasonably estimate the impact of adopting
these new rules until and unless it undertakes relevant activities in future periods.
In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness of Others,” which clarifies
the requirements of SFAS No. 5, “Accounting for Contingencies,” relating to a guarantor’s accounting for and
disclosures of certain guarantees issued. FIN 45 requires enhanced disclosures for certain guarantees. It also
will require certain guarantees that are issued or modified after December 31, 2002, including certain third-
party guarantees, to be initially recorded on the balance sheet at fair value. The Company has determined
that the implementation of this standard will not have a material effect on its previously issued financial
statements. Disclosures required under FIN 45 for 2002 are included in the notes to the financial state-
ments. The Company cannot reasonably estimate the impact of adopting FIN 45 until guarantees are issued or
modified in future periods, at which time their results will be initially reported in the financial statements.
In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest
Entities,” which clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial
Statements,” relating to consolidation of certain entities. First, FIN 46 will require identification of the
Company’s participation in variable interests entities (“VIE”), which are defined as entities with a level of
invested equity that is not sufficient to fund future activities to permit them to operate on a standalone
basis, or whose equity holders lack certain characteristics of a controlling financial interest. Then, for enti-
ties identified as VIE, FIN 46 sets forth a model to evaluate potential consolidation based on an assess-
ment of which party to the VIE, if any, bears a majority of the exposure to its expected losses, or stands to
gain from a majority of its expected returns. FIN 46 also sets forth certain disclosures regarding interests in
VIE that are deemed significant, even if consolidation is not required. The Company is currently assessing
the application of FIN 46 as it relates to its variable interests.
32
I N T E R N A P 2 0 0 2 A R
INTERNAP 2002 CONSOLIDATED BALANCE SHEETS
December 31,
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowance of $1,183 and $1,595, respectively
Prepaid expenses and other assets
Total current assets
Property and equipment, net
Restricted cash
Investments
Other intangible assets, net of accumulated amortization
of $7,939 and $13,578, respectively
Goodwill, net of accumulated amortization of $27,177
Deposits and other assets, net
Total assets
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Deferred revenue
Notes payable, current portion
Line of credit
Capital lease obligations, current portion
Restructuring liability, current portion
Total current liabilities
Deferred revenue
Notes payable, less current portion
Capital lease obligations, less current portion
Restructuring liability, less current portion
Total liabilities
Commitments and contingencies (Note 14)
Series A convertible preferred stock, $0.001 par value, 3,500 shares designated;
3,171 and 2,931 shares issued and outstanding, respectively with a liquidation
preference of $101,487 and $93,792 respectively
Stockholders’ equity:
Common stock, $0.001 par value, 600,000 shares authorized,
151,294 and 160,094 shares issued and outstanding, respectively
Additional paid in capital
Deferred stock compensation
Accumulated deficit
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
2001
2002
$ 63,551
18,755
14,749
2,981
100,036
139,589
2,432
2,794
9,196
27,022
3,908
$284,977
$ 13,058
16,727
2,747
2,038
10,000
22,450
16,498
83,518
9,755
954
15,494
22,773
132,494
$ 25,219
–
15,232
5,632
46,083
88,394
2,053
3,047
3,557
27,022
2,813
$172,969
$ 13,247
11,020
6,850
4,514
10,000
631
6,574
42,836
1,317
5,196
24,917
7,078
91,344
86,314
79,790
151
794,459
(4,371)
(724,077)
7
66,169
$284,977
160
798,344
(396)
(796,422)
149
1,835
$172,969
I N T E R N A P 2 0 0 2 A R
33
INTERNAP 2002 CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
(In thousands, except per share amounts)
Revenues
Costs and expenses:
Direct cost of network
Customer support
Product development
Sales and marketing
General and administrative
Depreciation and amortization
Amortization of goodwill and other intangible assets
Amortization of deferred stock compensation
Lease termination expense
Restructuring costs
Impairment of goodwill and other intangible assets
Loss on sales and retirements of property and equipment
In-process research and development
Total operating costs and expenses
Loss from operations
Other income (expense):
Interest income (expense), net
Loss on investments
Total other income (expense)
Net loss
2000
2001
2002
$ 69,613
$ 117,404
$132,487
62,465
20,320
11,924
35,390
32,962
20,522
54,334
10,651
–
–
–
–
18,000
266,568
(196,955)
11,498
–
11,498
98,915
21,480
12,233
38,151
44,491
48,550
38,116
4,217
–
64,096
195,986
2,714
–
568,949
(451,545)
(1,272)
(26,345)
(27,617)
$(185,457)
$(479,162)
83,207
12,913
7,447
21,641
20,848
49,600
5,626
260
804
(3,781)
–
2,829
–
201,394
(68,907)
(2,194)
(1,244)
(3,438)
$ (72,345)
Basic and diluted net loss per share
$
(1.30)
$
(3.19)
$
(.47)
Weighted average shares used in computing basic and diluted
net loss per share
142,451
150,328
155,545
The accompanying notes are an integral part of these consolidated financial statements.
34
I N T E R N A P 2 0 0 2 A R
INTERNAP 2002 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE LOSS
Shares
Par
Value
Additional
Paid-In
Capital
No Par
Value
Common
Deferred
Accumulated
Items of
Stock Accumulated Comprehensive
Income (Loss)
Deficit
Stock Compensation
Total
Stockholders’ Comprehensive
Loss
Equity
132,089
$
$287,186
$ (17,228)
$ (59,458)
$
$210,500
$
(In thousands)
Balance, January 1, 2000
Issuance of common stock, net of costs
of proceeds
Amortization of deferred stock compensation
Exercise of employee stock options
Issuance of Employee Stock Purchase Plan shares
Exercise of warrants to purchase common stock
Purchase of CO Space
Purchase of VPNX.com
Issuance of warrants to purchase common stock
Comprehensive loss:
Net loss
Unrealized gain on investments
Comprehensive loss, December 31, 2000
Balance, December 31, 2000
Amortization of deferred stock compensation
Reversal of deferred stock compensation
for terminated employees
Sale of stock through the Employee
Stock Purchase Plan
Exercise of employee stock options
Issuance of Common Stock warrants
in conjunction with Series A financing
Issuance of a warrants to purchase shares
of common stock to non-employees
Establishment of par value of common stock
Comprehensive loss:
Net loss
Unrealized loss on investments
Realized loss on investments
Comprehensive loss, December 31, 2001
Balance, December 31, 2001
Amortization of deferred stock compensation
Reversal of deferred stock compensation
for terminated employees
Sale of stock through the Employee
Stock Purchase Plan
Exercise of options and warrants to purchase
common stock
Conversion of Series A preferred stock
to common stock
Issuance and exercise of warrants to purchase
common stock to non-employees
Comprehensive loss:
Net loss
Realized loss on investments
Unrealized gain on investments
Comprehensive loss, December 31, 2002
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,450
–
3,686
350
296
6,881
2,027
–
–
–
–
148,779
–
–
1,292
1,223
–
–
–
–
–
–
–
151,294
–
151
–
794,459
(2,668)
–
1,599
1,915
5,174
112
–
–
–
–
–
2
2
5
–
–
–
–
–
(1,047)
696
275
6,518
111
–
–
–
–
–
–
–
–
–
–
–
–
(185,457)
–
–
(244,915)
–
–
–
–
–
–
–
(479,162)
–
–
–
(724,077)
–
–
–
–
–
–
141,953
–
5,895
3,237
443
254,951
92,232
286
–
–
–
–
10,651
–
–
–
–
(5,138)
–
–
–
–
786,183
(1,893)
(11,715)
6,110
(1,234)
1,234
1,745
440
9,321
–
–
–
–
–
–
–
–
–
(4,371)
2,928
1,047
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
151
–
794,459
48
(794,610)
Balance, December 31, 2002
160,094
$160
$798,344
$
The accompanying notes are an integral part of these consolidated financial statements.
–
–
–
–
–
–
–
–
–
–
2,400
–
2,400
–
–
–
–
–
–
–
–
(16,883)
14,490
–
7
–
–
–
–
–
–
141,953
10,651
5,895
3,237
443
254,951
87,094
286
(185,457)
2,400
–
531,953
4,217
–
1,745
440
9,321
48
–
(479,162)
(16,883)
14,490
–
66,169
260
–
698
277
6,523
111
–
–
–
–
–
–
–
–
–
(185,457)
2,400
(183,057)
–
–
–
–
–
–
–
–
(479,162)
(16,883)
14,490
(481,555)
–
–
–
–
–
–
(72,345)
–
–
–
–
(7)
149
–
(72,345)
(7)
149
–
(72,345)
(7)
149
–
$
(396) $(796,422)
$
149
$ 1,835
$(72,203)
I N T E R N A P 2 0 0 2 A R
35
INTERNAP 2002 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Impairment of goodwill and other intangible assets
Loss on disposal of assets
Non-cash restructuring costs/(adjustments)
Non-cash interest expense on capital lease obligations
Provision for doubtful accounts
Provision notes receivable
Loss on write-down of deposits related to a lease termination
Loss on write-down of investment
Loss on sale of investment security
Loss on equity-method investment
Non-cash expense related to warrants issued
Non-cash compensation expense
Acquired in-process research and development
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
Prepaid expenses and other assets
Accounts payable
Deferred revenue
Accrued restructuring
Accrued liabilities
Net cash used in operating activities
Cash flows from investing activities:
Purchases of property and equipment
Sales of property and equipment
Acquisitions, net of cash acquired
Collection of full recourse notes assumed for outstanding common stock
Purchase of investments
Investment in equity-method investee
Redemption of investments
Restriction of cash related to obtaining lease lines and letters of credit
Payments for patents and trademarks
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Proceeds from the issuance of Series A convertible
preferred stock, net of issuance costs
Principal payments on equipment financing notes payable
Proceeds from line of credit
Principal payments on capital lease obligations
Proceeds from equipment leaseback financing
Proceeds from exercise of warrants
Proceeds from exercise of stock options
Proceeds from issuance of common stock, net of issuance costs
Net cash provided by (used in) financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized
Non-cash adjustment to fixed assets and capital leases due to restructuring of capital lease obligation
Impairment of fixed assets due to restructuring
Equipment note transferred from line of credit
Prepayment of future lease obligation via note payable
Accrued expenses transferred to a note payable
Purchase of property and equipment financed with capital leases
Forfeiture of deposits to restructuring
Change in accounts payable attributable to purchases of property and equipment
Non-cash cost of issuing Series A convertible preferred stock
Conversion of preferred stock to common stock
Items of other comprehensive income
The accompanying notes are an integral part of these consolidated financial statements.
36
I N T E R N A P 2 0 0 2 A R
2000
2001
2002
$(185,457)
$(479,162)
$(72,345)
74,856
–
–
–
–
1,643
–
–
–
–
–
286
10,651
18,000
(17,294)
(7,380)
(5,293)
3,963
–
10,921
(95,104)
(57,698)
–
(12,173)
642
(161,080)
–
132,838
(8,515)
(207)
(106,193)
–
(1,442)
8,475
(11,005)
717
443
5,895
145,190
148,273
(53,024)
155,184
$ 102,160
$
$
$
$
$
$
2,851
–
–
–
–
–
$ 35,054
$
–
$ 13,556
$
$
$
–
–
–
86,666
195,986
2,714
4,714
–
4,798
6,000
–
4,824
14,490
1,216
48
4,217
–
744
4,248
(8,477)
(2,228)
39,271
(3,117)
(123,048)
(32,094)
1,880
–
–
(22,729)
(2,833)
61,985
6,083
–
12,292
95,635
(2,317)
–
(23,356)
–
–
440
1,745
72,147
(38,609)
102,160
$ 63,551
$
$
$
$
$
$
5,235
–
–
–
–
–
$ 18,511
$
–
$ (5,311)
$
$
$
500
–
–
55,239
–
2,829
(4,602)
702
1,902
–
474
–
–
1,244
260
–
(2,385)
712
(802)
(4,335)
(15,284)
(3,870)
(40,261)
(8,632)
434
–
–
–
(1,347)
18,747
379
–
9,581
–
(3,420)
5,000
(10,318)
–
111
277
698
(7,652)
(38,332)
63,551
$ 25,219
$ 3,264
$ 3,710
$ 5,175
$ 5,000
$ 3,300
$ 1,838
$
$
$
$
930
558
(991)
–
$ 6,524
$
142
INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
DESCRIPTION OF THE COMPANY
Internap Network Services Corporation (“Internap,” “we,” “us,” “our” or the “Company”) is a leading
provider of Internet Protocol (IP)-based connectivity solutions to businesses that need assured network
availability for mission-critical applications. Customers connected to the Internet through one of our service
points have their data intelligently routed to and from destinations on the Internet using our overlay network,
which analyzes the traffic situation on the major networks that comprise the Internet and delivers mission-
critical information and communications fast and reliably. Use of our overlay network usually results in
lower instances of data loss and greater quality of service than services offered by conventional Internet
connectivity providers. In addition to IP connectivity, we offer colocation services and virtual private net-
working (“VPN”) services. We also complement our service offerings as resellers of VPN, content delivery
network (“CDN”), managed security and managed storage services. The majority of our revenue is derived
from high-performance Internet connectivity and related colocation services. As of December 31, 2002,
we provided our services to 1,273 customers located throughout the United States and globally.
Our high-performance Internet connectivity services are available at speeds ranging from fractional T-1 (256
kbps), T-1 (1.544 mbps) to OC-12 (622 mbps), and Ethernet Connectivity from 10 mbps to 1,000 mbps (Gigabit
Ethernet) from Internap’s 34 service points to customers. We provide our connectivity services through the
deployment of service points, which are redundant network infrastructure facilities coupled with our proprietary
routing technology. Service points maintain high-speed, dedicated connections to major global Internet net-
works, commonly referred to as backbones. As of December 31, 2002, we operated 34 service points in 17
major metropolitan market areas.
On September 17, 2001, Internap changed the state of its incorporation from Washington to Delaware with
the approval of its stockholders. We accomplished the reincorporation by merging Internap Network Services
Corporation with and into our newly formed, wholly owned Delaware subsidiary, Internap Delaware, Inc. Upon
consummation of the merger, stockholders of Internap Network Services Corporation became stockholders
of Internap Delaware, Inc. and Internap Delaware’s name was changed to Internap Network Services Corpo-
ration. As a result of the reincorporation, the amount of authorized common and preferred stock changed to
600,000,000 and 200,000,000, respectively, and par value of $0.001 was established.
During December 1999, we formed a wholly owned subsidiary in the United Kingdom, Internap Network
Services U.K. Limited, and during June 2000, we formed a wholly owned subsidiary in the Netherlands,
Internap Network Services B.V. During 2002, we discontinued our operations in Amsterdam and are pro-
viding service to our Amsterdam customers from our London service point. The consolidated financial
statements of the Internap Network Services Corporation include all activity of these subsidiaries since
their dates of incorporation forward. Foreign exchange gains and losses have not been material to date.
We have a limited operating history and our operations are subject to certain risks and uncertainties
frequently encountered by rapidly evolving markets. These risks include the failure to develop or supply
technology or services, the ability to obtain adequate financing, competition within the industry and
technology trends.
We have experienced significant net operating losses since inception. During fiscal 2002, we incurred net
losses of $72.3 million and used $40.3 million of cash in our operating activities. Management expects
operating losses will continue through December 31, 2003, and negative cash flows to continue until
October 2003. During 2002, we have decreased the size of our workforce by 216 employees, or 40% as
compared to the number of employees at December 31, 2001, and terminated certain real estate leases
and commitments in order to control costs. Our plans indicate our existing cash and investments are ade-
quate to fund our operations through December 31, 2003. However, our capital requirements depend on
several factors, including the rate of market acceptance of our services, the ability to expand and retain
our customer base and other factors. If we fail to realize our planned revenues or costs, management
I N T E R N A P 2 0 0 2 A R
37
INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
believes it has the ability to curtail capital spending and reduce expenses to ensure cash and investments
will be sufficient to meet our cash requirements through December 31, 2003. If, however, our cash
requirements vary materially from those currently planned, or if we fail to generate sufficient cash flow
from the sales of our services, we may require additional financing sooner than anticipated. We cannot
assure such financing will be available on acceptable terms, if at all.
Note 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Accounting principles
The consolidated financial statements and accompanying notes are prepared in accordance with accounting
principles generally accepted in the United States of America. The consolidated financial statements include
the accounts of Internap Network Services Corporation and all majority owned subsidiaries. Significant
inter-company transactions have been eliminated in consolidation.
Estimates and assumptions
The consolidated financial statements of Internap Network Services Corporation have been prepared in accor-
dance with accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates, including those related to revenue recognition, doubtful accounts,
investments, intangible assets, income taxes, restructuring costs, long-term service contracts, contingencies
and litigation. We base our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ materially from these estimates under different assumptions or conditions.
Cash and cash equivalents
We consider all highly liquid investments purchased with an original or remaining maturity of three months
or less at the date of purchase and money market mutual funds to be cash equivalents. We invest our
cash and cash equivalents with major financial institutions and may, at times, exceed federally insured limits.
We believe that the risk of loss is minimal. To date, we have not experienced any losses related to cash
and cash equivalents.
At December 31, 2002 and 2001 we had placed approximately $2.1 and $2.4 million respectively, in
restricted cash accounts to collateralize letters of credit with financial institutions. These amounts are
reported separately as restricted cash and are classified as non-current assets.
Investments
Our investments are comprised of U.S. Treasury, Government Agency, and corporate debt and
equity securities.
We classify our marketable securities for which there is a determinable fair value as available-for-sale in
accordance with the provisions of Statement of Financial Standards (“SFAS”) No. 115, “Accounting for
Certain Investments in Debt and Equity Securities.” Available-for-sale securities are reported at fair value
with the related unrealized gains and losses included in other comprehensive income. The fair values of
investments are determined based on quoted market prices for those securities. The cost of securities
sold is based on the specific identification method. Realized gains and losses and declines in value of
securities judged to be other than temporary are recorded as a component of losses on investments.
38
I N T E R N A P 2 0 0 2 A R
INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We account for investments without readily determinable fair values at historical cost, as determined by
our initial investment. The recorded value of cost basis investments is periodically reviewed to determine
the propriety of the recorded basis. When a decline in the value that is judged to be other than temporary
has occurred based on available data, the cost basis is reduced and an investment loss is recorded.
We account for investments that provide us with the ability to exercise significant influence, but not con-
trol, over an investee using the equity method of accounting. Significant influence, but not control, is gen-
erally deemed to exist if Internap has an ownership interest in the voting stock of the investee of between
20% and 50%, although other factors, such as minority interest protections, are considered in determining
whether the equity method of accounting is appropriate. As of December 31, 2001 and 2002, we have a
single investment that qualifies for equity method accounting, our joint venture with NTT-ME Corporation
of Japan. We record our proportional share of the losses of our investee one month in arrears. We record
our investment in our equity-method investee on the consolidated balance sheets as a component of
non-current investments and our share of the investee’s losses as loss on investment on the consolidated
statements of operations.
Accounts receivable and concentration of credit risk
We extend trade credit terms to our customers based upon credit analysis performed by management.
Further credit reviews are performed on a periodic basis as deemed necessary. Generally, collateral is not
required on accounts receivable, however, advance deposits are collected for accounts considered credit
risks. An allowance is made for customer accounts for which collection has become doubtful. The allow-
ance is maintained until such time as collection becomes probable.
Fair value of financial instruments
Our short-term financial instruments, including cash and cash equivalents, accounts receivable, accounts
payable, notes payable, capital lease obligations, and the line of credit are carried at cost. The cost of our
short-term financial instruments approximate fair value due to their relatively short maturities. The carrying
value of our long-term financial instruments, including notes payable and capital lease obligations, approx-
imate fair value as the interest rates approximate current market rates of similar debt obligations.
Property and equipment
Property and equipment are carried at original acquisition cost less accumulated depreciation and
amortization. Depreciation and amortization are calculated on a straight-line basis over the lesser of the
estimated useful lives of the assets or the duration of the underlying lease obligation or commitment.
Estimated useful lives used for network equipment are three years; furniture, equipment and software are
three to seven years; and leasehold improvements are the shorter of seven years or the duration of the
lease. Lease obligations and commitment durations range from 24 months for certain networking equip-
ment to 180 months for certain leasehold improvements. Additions and improvements that increase the
value or extend the life of an asset are capitalized. Maintenance and repairs are expensed as incurred.
Gains or losses from asset disposals are charged to operations.
Costs of computer software developed or obtained for internal use
In accordance with Statement of Position (“SOP”) 98-1, “Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use,” we capitalize certain direct costs incurred developing internal
use software. During the year ended December 31, 2000, 2001 and 2002, we capitalized approximately
$1.3 million, $3.0 million and $820,000, respectively, of internal software development costs.
Goodwill and other intangible assets
Goodwill and other intangible assets consist of goodwill, covenants not to compete and developed tech-
nology recorded as a result of our acquisition of VPNX.com, Inc. We adopted SFAS No. 142, “Goodwill
and Other Intangible Assets” during 2002. Accordingly, effective January 1, 2002, goodwill is not being
amortized and is being reviewed for impairment on an annual basis, or more frequently if indications of
I N T E R N A P 2 0 0 2 A R
39
INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
impairment arise. We have determined that the remainder of our intangible assets have finite lives and
we have recorded these assets at cost less accumulated amortization. Intangibles, other than goodwill, are
being amortized on a straight-line basis over the economic useful life of the assets, estimated to be three
years, except approximately $435,000 of capitalized patent costs, which are being amortized over 15 years.
Valuation of long-lived assets
Management periodically evaluates the carrying value of its long-lived assets, including, but not limited
to, property and equipment pursuant to the guidance provided by SFAS No. 144, “Accounting for the
Impairment and Disposal of Long-Lived Assets.” The carrying value of a long-lived asset is considered
impaired when the undiscounted cash flow from such asset is separately identifiable and is estimated to
be less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying
value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated
cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be
disposed of would be determined in a similar manner, except that fair values would be reduced by the cost
of disposal. Losses due to impairment of long-lived assets are recorded during the period in which the
impairment is identified.
Income taxes
We account for income taxes under the liability method. Deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and liabilities, and are measured
using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
We provide a valuation allowance to reduce our deferred tax assets to their estimated realizable value.
Stock-based compensation
On December 31, 2002, we had eight stock-based employee compensation plans, which are described
more fully in Note 16. The company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations.
The following table illustrates the effect on net income and earnings per share if the company had
applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
Year Ended December 31
Net loss, as reported
Add: stock-based employee compensation expense
included in reported net loss
Deduct: total stock-based employee compensation
expense determined under fair-value based method
for all awards
Pro Forma net loss
Loss per share:
Basic and diluted – as reported
Basic and diluted – pro forma
2000
2001
2002
$(185,457)
$(479,162)
$(72,345)
10,651
4,217
260
(142,794)
32,844
(37,577)
$(317,600)
$(442,101)
$(34,508)
$
$
(1.30)
(2.23)
$
$
(3.19)
(2.94)
$
$
(.47)
(.22)
The $37.6 million pro forma reduction of employee compensation expense is due to a $115.1 million
reduction related to options cancelled as a result of employee terminations offset by amortization of com-
pensation determined under the fair-value based method.
40
I N T E R N A P 2 0 0 2 A R
INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue recognition
We recognize revenues when persuasive evidence of an arrangement exists, the service has been provided,
the fees for the service rendered are fixed or determinable and collectibility is probable. We review the cred-
itworthiness of our customers routinely. If we determine that collection of service revenues is uncertain, we
do not recognize revenue until cash has been collected. Customers are billed for services as of the first day
of each month either on a usage or a flat-rate basis. The usage based billing relates to the month prior to
the month in which the billing occurs, whereas certain flat rate billings relate to the month in which the
billing occurs.
Revenues associated with billings for installation of customer network equipment are deferred and amor-
tized over the estimated life of the customer relationship in accordance with the Securities and Exchange
Commission Staff Accounting Bulletin No. 101 as the installation service is integral to our primary service
offering. Deferred revenues consist of revenues for services to be delivered in the future, which are amor-
tized over the respective service period, and billings for initial installation of customer network equipment.
Product development costs
Product development costs are primarily related to network engineering costs associated with changes to
the functionality of the Internap’s proprietary services and network architecture. Such costs that do not qual-
ify for capitalization are expensed as incurred. Research and development costs, which are included in prod-
uct development cost, primarily consist of compensation cost related to our service development network
architecture and are expensed as incurred. Research and development costs were approximately, $7.7 mil-
lion, $6.3 million, and $4.1 million for the years ended December 31, 2000, 2001 and 2002, respectively.
Advertising costs
We expense all advertising costs as they are incurred. Advertising costs for 2000, 2001 and 2002 were,
$2.9 million, $4.5 million and $575,000, respectively.
Net loss per share
Basic and diluted net loss per share has been computed using the weighted average number of shares
of common stock outstanding during the period, less the weighted average number of unvested shares of
common stock issued that are subject to repurchase. The Company has excluded all outstanding convert-
ible preferred stock, warrants to purchase convertible preferred stock, outstanding options to purchase
common stock and shares subject to repurchase from the calculation of diluted net loss per share, as such
securities are antidilutive for all periods presented.
The following table presents the calculation of basic and diluted net loss per share (in thousands,
except per share data):
Year Ended December 31,
Net loss
Basic and diluted:
2000
2001
2002
$(185,457)
$(479,162)
$ (72,345)
Weighted average shares of common stock outstanding
used in computing basic and diluted net loss per share
Basic and diluted net loss per share
142,451
150,328
$
(1.30)
$
(3.19)
155,545
(0.47)
$
Antidilutive securities not included in diluted net loss per share calculation:
Convertible preferred stock – equivalent common shares
Options to purchase common stock
Warrants to purchase common and Series B convertible
preferred stock
Unvested shares of common stock subject to repurchase
–
24,159
1,646
100
68,455
25,732
18,259
–
25,905
112,446
63,281
23,321
17,327
–
103,929
I N T E R N A P 2 0 0 2 A R
41
INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment information
The Company uses the management approach for determining which, if any, of its products, locations,
customers or management structures constitute a reportable business segment. The management
approach designates the internal organization that is used by management for making operating deci-
sions and assessing performance as the source of the Company’s reportable segments. Management uses
one measurement of profitability and does not disaggregate its business for internal reporting and there-
fore operates in a single business segment. Through December 31, 2002, long-lived assets and revenues
located outside the United States are not significant.
Recent accounting pronouncements
In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting
for Asset Retirement Obligations,” which is effective January 1, 2003. This standard addresses financial
accounting and reporting for obligations associated with the retirement of tangible long-lived assets and
the associated retirement costs. The Company is currently assessing the application of SFAS No. 143.
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-
Lived Assets.” This supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of
APB Opinion No. 30, Reporting the Results of Operations – Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
for the disposal of a segment of a business. This Statement also amends ARB No. 51, Consolidated
Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is
likely to be temporary. This standard is effective for fiscal years beginning after December 15, 2001
and, therefore, was adopted by the Company during 2002.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal
Activities.” This standard requires costs associated with exit or disposal activities to be recognized when
they are incurred. The requirements of SFAS No. 146 apply prospectively to activities that are initiated
after December 31, 2002, and as such, the Company cannot reasonably estimate the impact of adopting
these new rules until and unless it undertakes relevant activities in future periods.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation –
Transition and Disclosure.” This standard amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary change to the fair-value based
method of accounting for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company adopted the disclosure provisions of this
standard during 2002.
In February 2003, the EITF issued an abstract, Issue No. 00-21, “Revenue Arrangements with Multiple
Deliverables.” This Issue addresses certain aspects of the accounting by a vendor for arrangements under
which it will perform multiple revenue-generating activities. Specifically, this Issue addresses how to deter-
mine whether an arrangement involving multiple deliverables contains more than one unit of accounting.
The Company is currently assessing the impact of EITF No. 00-21 as it relates to revenue arrangements
with multiple deliverables.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation –
Transition and Disclosure.” This standard amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary change to the fair-value based
method of accounting for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company adopted the disclosure provisions of this
standard during 2002.
42
I N T E R N A P 2 0 0 2 A R
INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness of Others,”
which clarifies the requirements of SFAS No. 5, “Accounting for Contingencies,” relating to a guarantor’s
accounting for and disclosures of certain guarantees issued. FIN 45 requires enhanced disclosures for
certain guarantees. It also will require certain guarantees that are issued or modified after December 31,
2002, including certain third-party guarantees, to be initially recorded on the balance sheet at fair value.
The Company has determined that the implementation of this standard will not have a material effect on
its previously issued financial statements. The Company cannot reasonably estimate the impact of adopt-
ing FIN 45 until guarantees are issued or modified in future periods, at which time their results will be
initially reported in the financial statements.
In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest
Entities,” which clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial
Statements,” relating to consolidation of certain entities. First, FIN 46 will require identification of the
Company’s participation in variable interests entities (“VIE”), which are defined as entities with a level of
invested equity that is not sufficient to fund future activities to permit them to operate on a standalone
basis, or whose equity holders lack certain characteristics of a controlling financial interest. Then, for enti-
ties identified as VIE, FIN 46 sets forth a model to evaluate potential consolidation based on an assess-
ment of which party to the VIE, if any, bears a majority of the exposure to its expected losses, or stands
to gain from a majority of its expected returns. FIN 46 also sets forth certain disclosures regarding inter-
ests in VIE that are deemed significant, even if consolidation is not required. The Company is currently
assessing the application of FIN 46 as it relates to its variable interests.
Reclassifications
Certain reclassifications have been made to prior year balances to conform to the current year presentation.
These reclassifications had no impact on previously reported net loss, stockholders’ equity or cash flows.
Note 3
IMPAIRMENT AND RESTRUCTURING COSTS
2001 restructuring charge
During fiscal year 2001, due to the decline and uncertainty of the telecommunications market, we
announced two separate restructurings of our business. Under the restructuring programs, management
decided to exit certain non-strategic real estate lease and license arrangements, consolidate and exit
redundant network connections and streamline the operating cost structure. As part of the 2001 restructur-
ing activity, 313 employees were involuntarily terminated. Employee separations occurred in all Internap
departments. The majority of the costs related to the termination of employees in 2001 were paid during
2001. The total charges include restructuring costs of $71.6 million. During fiscal year 2001, we incurred
cash restructuring expenditures totaling $19.9 million and non-cash restructuring expenditures of $4.7 mil-
lion. We reduced the original 2001 restructuring charge cost estimate by $7.7 million primarily as a result of
favorable lease obligation settlements, leaving a balance of $39.3 million as of December 31, 2001. During
the first and third quarters of 2002, we further reduced our 2001 restructuring charge liability by $5.0 mil-
lion and $7.2 million, respectively. The first reduction was primarily due to settlements to terminate and
restructure certain collocation lease obligations on terms more favorable than our original restructuring esti-
mates. The second reduction was primarily due to the decision to relocate our corporate headquarters to
the previously restructured Atlanta, Georgia, facility. Pursuant to the original restructuring plans, we did not
anticipate using the Atlanta facility in the future. However, due to changes in management, corporate direc-
tion, and other factors, which could not be foreseen at the time of the original restructuring plans, the
Atlanta facility was selected as the location for the new corporate headquarters.
I N T E R N A P 2 0 0 2 A R
43
INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2002 restructuring and asset impairment charge
With the continuing decline and uncertainty in the telecommunications market during 2002, we imple-
mented additional restructuring actions to align our business with market opportunities. As a result, we
recorded a business restructuring charge and asset impairments of $7.6 million in the three months ended
September 30, 2002. The charges were primarily comprised of real estate obligations related to a decision
to relocate the corporate headquarters from Seattle, Washington, to an existing leased facility in Atlanta,
Georgia, net asset write-downs related to the departure from the Seattle office and costs associated with
further personnel reductions. The restructuring and asset impairment charge of $7.6 million during 2002
was offset by a $7.2 million adjustment, described above, resulting from the decision to utilize the Atlanta
facility as our corporate headquarters. The previously unused space in the Atlanta location had been
accrued as part of the restructuring liability established during fiscal year 2001.
Included in the $7.6 million 2002 restructuring charge are $1.1 million of personnel costs related to a
reduction in force of approximately 145 employees. This represents employee severance payments made
during 2002. We expect that there will be additional restructuring costs in the future as additional pay-
ments are made to employees who are subject to deferred compensation arrangements payable at the
completion of interim employment agreements. We expect these costs to total less than $1.0 million.
Additionally, we continue to evaluate the restructuring reserve as plans are being executed, which could
result in additional charges or adjustments.
Real estate obligations. Both the 2001 and 2002 restructuring plans require us to abandon certain leased
properties not currently in use or that will not be utilized by us in the future. Also included in real estate
obligations is the abandonment of certain collocation license obligations. Accordingly, we recorded real
estate related restructuring costs of $40.8 million, net of non-cash plan adjustments, which are estimates
of losses in excess of estimated sublease revenues or termination fees to be incurred on these real estate
obligations over the remaining lease terms expiring through 2015. This cost was determined based upon
our estimate of anticipated sublease rates and time to sublease the facility. If rental rates decrease in
these markets or if it takes longer than expected to sublease these properties, the actual loss could
exceed this estimate.
Network infrastructure obligations. The changes to our network infrastructure require that we decommis-
sion certain network ports we do not currently use and will not use in the future pursuant to the restructuring
plan. These costs have been accrued as components of the restructuring charge because they represent
amounts to be incurred under contractual obligations in existence at the time the restructuring plan was initi-
ated. These contractual obligations will continue in the future with no economic benefit, or they contain
penalties that will be incurred if the obligations are cancelled.
Asset impairments. On June 20, 2000, we completed the acquisition of CO Space, which was accounted
for under the purchase method of accounting. The purchase price was allocated to net tangible assets
and identifiable intangible assets and goodwill.
On February 28, 2001, management and the Board of Directors approved a restructuring plan that
included ceasing development of the executed but undeveloped leases and the termination of core col-
location development personnel. Consequently, financial projections for the business were lowered and,
pursuant to the guidance provided by Financial Accounting Standards Board No. 121, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” (“SFAS 121”), manage-
ment completed a cash flow analysis of the collocation assets, including the assets acquired from CO Space.
The cash flow analysis showed that the estimated cash flows were less than the carrying value of the collo-
cation assets. Accordingly, pursuant to SFAS 121, management estimated the fair value of the collocation
assets to be $79.5 million based upon a discounted future cash flow analysis. As estimated fair value of
the collocation assets was less than their recorded amounts, we recorded an impairment charge of
approximately $196.0 million.
44
I N T E R N A P 2 0 0 2 A R
INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table displays the activity and balances for restructuring and asset impairment activity for
2001 (in millions):
Restructuring costs
Real estate obligations
Employee separations
Network infrastructure obligations
Other
Total
Asset impairments
Goodwill
Assembled workforce
Trade name and trademarks
Completed real estate leases
Customer relationships
Total asset impairments
Total
Charge
$ 60.0
3.3
6.3
2.0
71.6
176.1
1.5
2.2
14.8
1.4
196.0
$267.6
Cash
Reductions
Non-cash
Plan
Write-downs Adjustments
Non-cash
December 31,
2001
Restructuring
Liability
$ (3.7)
$(7.0)
$(14.7)
(3.2)
(1.9)
(0.1)
(19.9)
–
–
–
–
–
–
$(19.9)
–
(1.0)
–
(4.7)
(176.1)
(1.5)
(2.2)
(14.8)
(1.4)
(196.0)
$(200.7)
–
(0.7)
–
(7.7)
–
–
–
–
–
–
$34.6
0.1
2.7
1.9
39.3
–
–
–
–
–
–
$(7.7)
$39.3
Of the $71.6 million recorded during 2001 as restructuring reserves, approximately $50.7 million related
to the direct cost of network, $1.1 million related to customer support, $0.3 million related to product
development, $1.5 million related to sales and marketing and $18.0 million related to general and
administrative costs.
The following table displays the activity and balances for restructuring and asset impairment activity for
2002 (in millions):
December 31,
2001
Restructuring
Liability
Restructuring
and
Impairment
Charge
Cash
Reductions
Non-cash
and
Write-
downs
Non-cash
Plan
Adjustments
December 31,
2002
Restructuring
Liability
Restructuring costs activity for 2001
restructuring charge –
Real estate obligations
Network infrastructure obligations
Other
Restructuring costs activity for 2002
restructuring charge –
Real estate obligations
Personnel
Other
Total
Net asset write-downs for 2002
restructuring charge
Total
$34.6
2.7
2.0
–
–
–
39.3
–
$39.3
$ –
–
–
2.2
1.1
0.2
3.5
4.1
$7.6
$(11.2)
(1.4)
(0.9)
(0.4)
(1.1)
(0.1)
(15.1)
–
$(15.1)
$(1.6)
–
$(12.2)
–
–
–
–
–
–
–
–
–
(1.6)
(12.2)
$ 9.6
1.3
1.1
1.8
–
0.1
13.9
(4.3)
$(5.9)
–
$(12.2)
(0.2)
$13.7
Of the $3.5 million recorded during 2002 as restructuring reserves, approximately $212,000 related to the
direct cost of network and $3.3 million related to general and administrative costs.
I N T E R N A P 2 0 0 2 A R
45
INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We expect to complete the majority of these restructuring activities related to the 2001 and 2002 restruc-
turing charges during 2003, although certain remaining restructured real estate and network obligations
represent long-term contractual obligations that extend beyond 2003.
Note 4
BUSINESS COMBINATIONS
On June 20, 2000, we completed our acquisition of CO Space, Inc. (“CO Space”). CO Space provides collo-
cation, or data center, space to customers who wish to collocate certain computer server and telecommunica-
tions equipment with a third party provider. We have integrated the CO Space service into our primary service
offerings. The acquisition was recorded using the purchase method of accounting under Accounting Principle
Board Opinion No. 16 (“APB 16”). The aggregate purchase price of the acquired company, plus related
charges, was approximately $270.9 million and was comprised of our common stock, cash, acquisition costs
and options to purchase common stock. The Company issued approximately 6,881,000 shares of common
stock and assumed options to purchase CO Space common stock that were subsequently converted into
options to purchase approximately 322,000 shares of our common stock to effect the transaction. Results of
operations of CO Space have been included in our financial results since the closing date of the transaction.
Supplemental disclosure of cash flow information for CO Space is as follows (in thousands):
Cash acquired
Accounts receivable
Property and equipment, net
Full recourse notes receivable for outstanding common stock
Other tangible assets
Tangible assets acquired
Customer relationships
Completed real estate leases
Trade name and trademarks
Workforce in place
Goodwill
Intangible assets acquired
Total assets acquired
Cash paid
Acquisition expenses incurred
Liabilities assumed
Value of stock and options issued
Total cash paid, liabilities assumed, common stock issued and options assumed
$ 3,488
546
36,715
642
1,887
43,278
1,800
19,300
2,800
2,000
229,160
255,060
$298,338
$ 7,200
12,383
23,804
254,951
$298,338
On July 31, 2000, we completed our acquisition of VPNX.com, Inc., formerly Switchsoft Systems, Inc.
(“VPNX”). The acquisition was recorded using the purchase method of accounting under APB 16. The
aggregate purchase price of the acquired company, plus related charges, was approximately $87.4 million
and was comprised of our common stock, cash, acquisition costs and assumed options to purchase com-
mon stock. We issued approximately 2,027,000 shares of common stock and assumed options to pur-
chase VPNX common stock that were subsequently converted into options to purchase approximately
268,000 shares of the our common stock to effect the transaction. Results of operations of VPNX have
been included in our financial results since the closing date of the transaction.
46
I N T E R N A P 2 0 0 2 A R
INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental disclosure of cash flow information for VPNX is as follows (in thousands):
Cash acquired
Property and equipment
Other tangible assets
Tangible assets acquired
Developed technology
Acquired in-process research and development
Covenants not to compete
Workforce in place
Goodwill
Intangible assets acquired
Total assets acquired
Acquisition expenses incurred
Liabilities assumed
Value of stock and options issued
Deferred stock compensation
Total liabilities assumed, common stock issued and options assumed
$ 3,070
834
798
4,702
2,600
18,000
14,100
1,000
50,199
85,899
$90,601
$
329
3,178
92,232
(5,138)
$90,601
In accordance with APB 16, all identifiable assets were assigned a portion of the purchase price of the
acquired companies on the basis of their respective fair values. Identifiable intangible assets and goodwill
are included in “Goodwill and other intangible assets, net” on the accompanying consolidated balance
sheets, intangible assets are amortized over their average estimated useful lives of three years. Intangible
assets were identified and valued by considering our intended use of acquired assets, and analysis of data
concerning products, technologies, markets, historical financial performance and underlying assumptions
of future performance. The economic and competitive environments in which the acquired companies and
we operate were also considered in the valuation analysis. The amount allocated to acquired in-process
research and development is related to technology acquired from VPNX that was expensed immediately
subsequent to the closing of the acquisition since the technology had not completed the preliminary
stages of development, had not commenced application development and did not have alternative future
uses. Furthermore, the technologies associated with the acquired in-process research and development
does not have a proven market and are sufficiently complex so that the probability of completion of a
marketable service or product cannot be determined. The fair value of the acquired in-process research
and development was determined using the income approach, which estimates the expected cash flows
from projects once commercially viable, and discounts expected future cash flows to present value. The
percentage of completion for each project was determined based upon time and costs incurred on the
project in addition to the relative complexity. The percentage of completion varied by individual project
and ranged from 25% to 70%. The discount rate of 35% was used in the present value calculation was
derived from an analysis of weighted average costs of capital, weighted average returns on assets, and
venture capital rates of returns adjusted for the specific risks associated with the in-process research and
development acquired. This analysis resulted in an allocation of $18.0 million to acquired in-process
research and development expense. The development of the acquired technologies remains a significant
risk as the nature of the efforts to develop the acquired technologies into commercially viable services
consists primarily of planning, designing, and testing activities necessary to determine that the products
can meet customer expectations.
I N T E R N A P 2 0 0 2 A R
47
INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The pro forma consolidated financial information for the year ended December 31, 2000, determined as
if the acquisitions of CO Space and VPNX had occurred at the beginning of the year ended December 31,
2000, would have resulted in revenues of approximately $72.0 million, net loss of approximately $241.2 mil-
lion and basic and diluted loss per share of approximately $1.64. This unaudited pro forma information
is presented for illustrative purposes only and is not necessarily indicative of the results of operations in
future periods or results that would have been achieved had we, CO Space and VPNX been combined
during the specified periods.
Note 5
INVESTMENTS
On April 10, 2001, we announced the formation of a joint venture with NTT-ME Corporation of Japan. The
formation of the joint venture involved our cash investment of $2.8 million to acquire 51% of the common
stock of the newly formed entity, Internap Japan. We are unable to assert control over the joint venture’s
operational and financial policies and practices required to account for the joint venture as a subsidiary
whose assets, liabilities, revenues and expenses would be consolidated (due to certain minority interest
protections afforded to our joint venture partner, NTT-ME Corporation). We are, however, able to assert
significant influence over the joint venture and, therefore, account for our joint venture investment using
the equity-method of accounting pursuant to Accounting Principles Board Opinion No. 18 “The Equity
Method of Accounting for Investments in Common Stock” and consistent with EITF 96-16 “Investor’s
accounting for an investee when the investor has a majority of the voting interest but the minority share-
holder or shareholders have certain approval or veto rights.” During the year ended December 31, 2001,
we recognized our proportional share of Internap Japan’s losses totaling $1.2 million, resulting in a net
investment balance of $1.6 million. Our investment in Internap Japan is reflected as a component of
long-term investments and losses are reflected as a component of loss on investments.
During the year ended December 31, 2002, the joint venture authorized a capital call in which we
invested an additional $1.3 million and maintained our 51% ownership interest. Additionally, we recog-
nized our proportional share of Internap Japan’s losses totaling $1.2 million and recorded an unrealized
translation gain of $149,000, resulting in a net investment balance of $1.9 million at December 31, 2002.
Summarized balance sheet and results of operations of our equity-method investee, shown one month in
arrears, are as follows (in thousands):
As of December 31, 2002
Current assets
Total assets
Current liabilities
Total liabilities
For the Year Ended December 31, 2002
Revenues
Net loss from continuing operations
Net loss
$3,434
4,373
708
708
$1,833
(2,183)
(2,169)
48
I N T E R N A P 2 0 0 2 A R
INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to an investment agreement among Internap, Ledcor Limited Partnership, Worldwide Fiber
Holdings Ltd. and 360networks, Inc. (“360networks”), on April 17, 2000, we purchased 374,182 shares
of 360networks Class A Non-Voting Stock at $5.00 per share and, on April 26, 2000, we purchased
1,122,545 shares of 360networks Class A Subordinate Voting Stock at $13.23 per share. The total cash
investment was $16.7 million. During 2001 we liquidated our entire investment in 360networks for cash
proceeds of $2.2 million and recognized a loss on investment totaling $14.5 million.
We account for investments without readily determinable fair values at cost. Realized gains and losses and
declines in value of securities judged to be other than temporary are included in other income (expense).
On February 22, 2000, pursuant to an investment agreement, we purchased 588,236 shares of Aventail
Corporation (“Aventail”) Series D preferred stock at $10.20 per share for a total cash investment of $6.0 mil-
lion. Because Aventail is a privately held enterprise for which no active market for its securities exists, the
investment is recorded as a cost basis investment. During the second quarter of 2001, we concluded based
on available information, specifically Aventail’s most recent round of financing, that our investment in
Aventail had experienced a decline in value that was other than temporary. As a result during June 2001,
we recognized a $4.8 million loss on investment when we reduced its recorded basis to $1.2 million,
which remains its estimated value as of December 31, 2002.
Investments consisted of the following (in thousands):
As of December 31, 2001
U.S. Government and Government Agency Debt Securities
Corporate Debt Securities
Equity Securities
Cost Basis Investments
As of December 31, 2002
Equity-method Investments
Cost Basis Investments
Cost Basis
$ 6,210
12,538
1,618
1,176
$21,542
Cost Basis
$1,722
1,176
$2,898
Unrealized
Gain
$
$
3
4
–
–
7
Recorded
Value
$ 6,213
12,542
1,618
1,176
$21,549
Unrealized
Gain
Recorded
Value
$149
–
$149
$1,871
1,176
$3,047
I N T E R N A P 2 0 0 2 A R
49
INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6
PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
December 31,
Network equipment
Network equipment under capital lease
Furniture, equipment and software
Furniture, equipment and software under capital lease
Leasehold improvements
Less: Accumulated depreciation and amortization ($32,438 and $28,735 related
to capital leases at December 31, 2001 and 2002, respectively)
Property and equipment, net
2001
$ 39,187
60,528
34,921
3,609
71,851
210,096
2002
$ 56,663
37,753
26,024
4,378
68,923
193,741
(70,507)
$139,589
(105,347)
$ 88,394
Assets under capital leases are pledged as collateral for the underlying lease agreements. Assets not
under lease are pledged as collateral under our line of credit facility or notes payable facilities.
During the year ended December 31, 2002, the Company amended the terms of the master lease
agreement with our primary supplier of networking equipment (Note 11). As part of this amendment
we purchased equipment for $5.8 million; this purchase resulted in a $23.7 million transfer from network
equipment under capital lease to network equipment and a transfer of $19.6 million of accumulated
depreciation under capital lease to accumulated depreciation.
Note 7
GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which
establishes new accounting and reporting requirements for goodwill and other intangible assets. Under
SFAS No. 142, all goodwill amortization ceased effective January 1, 2002 and recorded goodwill was
tested for impairment by comparing the fair value of Internap Network Services Corporation as a single
reporting unit, as determined by its implied market capitalization, to its consolidated carrying value includ-
ing recorded goodwill. An impairment test is required to be performed at adoption of SFAS No. 142 and at
least annually thereafter. Generally, any adjustments made as a result of the impairment testing are required
to be recognized as operating expenses. We will perform our annual impairment testing during the third
quarter of each year absent any impairment indicators that may cause more frequent analysis, as required
by SFAS No. 142.
Based on our initial impairment test performed upon adoption of SFAS No. 142, we determined that none
of the recorded goodwill was impaired as of January 1, 2002. During the period ended September 30, 2002,
we performed our annual impairment testing. The Step 1 test, as defined by SFAS No. 142, was performed
by comparing the adjusted book value of the consolidated company to its fair value. In determining
Internap’s fair value we considered both market-based and income-based approaches to estimate value.
Based on the results of the analysis performed we concluded that no goodwill impairment existed as of
September 30, 2002. The assumptions, inputs and judgments used in performing the valuation analysis
are inherently subjective and reflect estimates based on known facts and circumstances at the time the
valuation was performed. The use of different assumptions, inputs and judgments, or changes in cir-
cumstances, could materially affect the results of the valuation. Adverse changes in the valuation would
necessitate an impairment charge for the goodwill held by Internap. As of December 31, 2002, the
recorded amount of goodwill totaled $27.0 million.
50
I N T E R N A P 2 0 0 2 A R
INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with adopting SFAS No. 142, we also reassessed the useful lives and the classification
of our amortizing identifiable intangible assets and determined that they continue to be appropriate.
The components of our amortized intangible assets are as follows (in thousands):
Contract based
Technology based
December 31, 2001
December 31, 2002
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying Accumulated
Amount Amortization
$14,535
2,600
$17,135
$(6,711)
(1,228)
$(7,939)
$14,535
2,600
$17,135
$(11,484)
(2,094)
$(13,578)
Amortization expense for identifiable intangible assets during 2001 and 2002 was $5.6 million.
Estimated amortization expense for the next 5 years and thereafter is as follows (in thousands):
Years Ending December 31,
2003
2004
2005
2006
2007
Thereafter
$3,275
28
28
28
28
170
Actual and adjusted results of operations for the year ended December 31, 2000, 2001 and 2002, had we
applied the non-amortization provisions of SFAS No. 142, is as follows (in thousands, except per share amounts):
Year Ended December 31,
Reported net loss
Add amortization of goodwill
Adjusted net loss
Reported net loss per share
Adjusted net loss per share
Note 8
NOTE RECEIVABLE
2000
2001
$(185,457)
$(479,162)
45,165
17,066
$(140,292)
$(462,096)
$
(1.30)
(0.98)
$
(3.19)
(3.07)
2002
$(72,345)
–
$ 72,345
$ (0.47)
(0.47)
During August 2000, we loaned a private network company $6.0 million in exchange for a convertible
promissory note bearing interest at the prime rate plus 3% and initially maturing during May 2001. In two
separate amendments executed during December 2000 and February 2001, we agreed to modify the note
to eliminate the conversion feature and to extend the note’s maturity through the earlier of May 2004 or
upon the completion of a transaction in which there is a change in control of borrower or in which the bor-
rower sells substantially all its assets.
Subsequent to the February 2001 amendment, we performed an updated analysis of the collection risk
associated with this note receivable. The results of our analysis indicated that there was substantial doubt
that the borrower would be able to repay the $6.0 million obligation to us at the time of maturity. There-
fore, we have recorded a provision of $6.0 million as an allowance against our note receivable. The impact
of the provision is reflected as a component of loss on investments. As of December 31, 2001, the $6.0 mil-
lion loan was outstanding and recorded at the outstanding balance as a note receivable offset in full by a
$6.0 million allowance for doubtful collection.
I N T E R N A P 2 0 0 2 A R
51
INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2002, we entered into negotiations with the borrower to settle the amounts due to us in advance of
the stated May 2004 maturity. As a result of the negotiations, we agreed to release the borrower of its liabil-
ity to us under the note in exchange for a cash payment for outstanding accounts receivable and the note
receivable and equity in the company, for which the estimated fair value is zero. During January of 2002 we
have recognized an investment gain of $0.4 million with respect to the settlement of the note receivable.
Note 9
ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
December 31,
Network commitments
Compensation payable
Property and equipment purchases
Taxes
Other
Insurance payable
Acquisition costs
Note 10
LINE OF CREDIT AND NOTES PAYABLE
Line of credit and notes payable consist of the following (in thousands):
December 31,
Line of credit
Notes payable to financial institutions
Notes payable to vendors
2001
$ 6,609
2,722
2,227
2,120
2,004
747
298
$16,727
2002
$ 3,455
1,478
2,228
2,370
574
915
–
$11,020
2001
$10,000
2,992
–
$12,992
2002
$10,000
6,094
3,616
$19,710
During June 1999, we entered into a line of credit agreement (the “Line”) with a financial institution
allowing aggregate borrowings of up to $3.0 million for the purchase of equipment and working capital.
This Line was amended during December 2000 to extend the maturity of the Line to June 30, 2001 and
increased the allowable aggregate borrowings to $10.0 million as limited by certain borrowing base
requirements which include maintaining certain levels of revenues, customer turnover ratios and tangible
net worth. During 2001, the Line was amended to extend the maturity of the line to December 31, 2001.
The Line required monthly interest only payments at prime plus 1.0% (4.75% at December 31, 2001).
Events of default for the Line, as amended, included failure to maintain certain financial covenants or a
material adverse change in our financial position. A material adverse change was defined as a material
impairment in the perfection or priority of the bank’s collateral or a material impairment of the prospect
of repayment of the Line. As of December 31, 2001, we had drawn all amounts available under the facility.
During February 2002, the Line was renewed and allowed us to borrow an additional $5.0 million, up
to $15.0 million in aggregate. The renewed facility was originally scheduled to expire on December 31,
2002. Our ability to maintain the drawn amount under the line of credit and have access to the additional
$5.0 million depended on a number of factors including the level of eligible receivable balances and
liquidity. The facility allowed advances equal to the greater of 80% of eligible accounts receivable or 25%
of cash and short-term investments, whichever was greater. The facility contained financial covenants that
52
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INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
required us to grow revenues, limit the cash losses, and required minimum levels of liquidity and tangible
net worth as defined in the agreement. The lender also had the ability to demand repayment in the event,
in their view, there has been a material adverse change in our business. At December 31, 2001, we were
in compliance with the financial covenants. Payments under the line were interest only with the full principal
due at maturity or renewal.
As part of our acquisition of CO Space on June 20, 2000, we assumed an equipment financing agree-
ment (the “Equipment Note”) with a financial institution, which provided up to $2.0 million through the
commitment termination date of June 30, 2000 for the purchase of equipment. The Equipment Note was
signed on July 29, 1999, has a 42-month term, and bears interest at 3.25% over the yield of a 42-month
U.S. Treasury Note on the day of funding. There are two loan schedules under the Equipment Financing
Agreement with interest rates of 8.99% and 9.12%. The financing agreement calls for equal monthly prin-
cipal and interest payments over the term of the Equipment Financing Agreement with a final payment
of 8.5% of the original loan amount. As of December 31, 2001 and 2002, we had outstanding borrowings
of approximately $0.9 million and $.3 million respectively under this Equipment Note.
During October 2002, we entered into a revised loan and security agreement, refinancing the Line and
the Equipment Note. Under the terms of the new loan and security agreement the $15 million outstand-
ing under the previous facility was refinanced into a $15 million revolving line of credit and a $5 million
term loan. Availability under the revolver is based on 80% of eligible accounts receivable plus 25% of
unrestricted cash and investments. Availability is further restricted by the $5 million outstanding under the
term loan until the Company achieves a specified minimum debt coverage service level for six consecu-
tive months as defined in the agreement. The amount available under the revolver at the time of the
refinancing and at December 31, 2002 was $10 million.
The revolving line of credit facility is a 24-month facility expiring during October 2004 and bears interest
at a rate ranging from prime plus 1% to prime plus 2% per year (6.25% at December 31, 2002), depend-
ing on a certain balance sheet ratio as defined in the agreement. Monthly payments are interest only over
the term of the facility. The term loan is a 36-month amortizing facility and bears interest at a fixed rate
of 8% per year. Equal monthly payments of principal and interest are due over the term of the facility.
The balance outstanding under the term loan was $5.0 million at December 31, 2002. Both the revolving
facility and the term loan are governed by a common security agreement and are collateralized by sub-
stantially all the assets of the Company. The agreement allows the lender to require us to maintain cash
and investment accounts with them and allows the lender greater control over our customer deposits, as
defined in the agreement. Both the revolving credit facility and the term loan also contain financial cove-
nants that require us to maintain a minimum tangible net worth as defined in the agreement. Further, the
lender has the ability to demand repayment in the event, in its view, there has been a material adverse
change in our business.
During August 1999, we entered into an equipment financing arrangement with a finance company,
which allows borrowings of up to $5.0 million for the purchase of property and equipment. The equip-
ment financing arrangement includes sublimits of $3.5 million for equipment costs and $1.5 million for
the acquisition of software and other service point and facility costs. Loans under the $3.5 million sublimit
require monthly principal and interest payments over a term of 48 months. This facility bears interest at
7.5% plus an index rate based on the yield of 4-year U.S. Treasury Notes. Loans under the $1.5 million
sublimit require monthly principal and interest payments over a term of 36 months. This facility bears
interest at 7.9% plus an index rate based on the yield of 3-year U.S. Treasury Notes. Borrowings under
each sublimit were completed prior to May 1, 2000 in accordance with the facility terms and the aggre-
gate balance outstanding under this facility totaled $2.0 million and $781,000 as of December 31, 2001
and 2002 respectively. The weighted average interest rate for all borrowings under this facility was
approximately 13% as of December 31, 2002.
I N T E R N A P 2 0 0 2 A R
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INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On July 31, 2000, we assumed a senior loan and security agreement in connection with the acquisition of
VPNX. The agreement provided up to $2.0 through the commitment termination date of August 31, 2000
for the purchase of equipment and requires 36 equal monthly payments of principal and interest. The
interest rates on the existing notes range from 6.59% to 8.03%, and each note has a final payment of 15%
of the original balance. Outstanding borrowings at December 31, 2001 and 2002 were, $0.1 million and
$0, respectively.
During 2002, we completed negotiations with a collocation space provider that resulted in a reduction of
the periodic rents paid to the provider for 36 months in exchange for a $2.7 million note payable to be paid
in quarterly installments over 36 months. The note bears interest at a rate of 5.5% and is secured by lease-
holds, equipment, and customer revenues at one of our service points. The note payable was recorded with
an equal prepaid asset that is being amortized to direct cost of network over 36 months. Outstanding bor-
rowings under this note were $2.1 million at December 31, 2002.
During 2002, we completed negotiations with a second collocation space provider that resulted in a
reduction of the periodic rent payments made to the provider in exchange for a $604,000 unsecured
note payable to be paid in monthly installments of principal and interest beginning in April 2003 and
continuing for 28 months. The note bears interest at 12% per annum.
During 2000, we entered into an integrated sales agreement to act as an exclusive reseller for a service
provider. The agreement included a revenue commitment to be fulfilled over a two-year period that
ended during March 2002. We had fully accrued our liability for the $1.8 million shortfall as of the expira-
tion date of the agreement as a component of accrued expenses. During the second quarter of 2002 we
entered into a note payable to the service provider in lieu of immediate payment of the shortfall amount
and reclassified the $1.8 million accrued expense to notes payable. The note matures October 5, 2003, is
payable in quarterly principal and interest payments, bears interest of 6.0% and is collateralized by certain
network equipment. Outstanding borrowings under this note were $900,000 as of December 31, 2002.
Maturities of notes payable at December 31, 2002 are as follows:
Years Ending December 31,
2003
2004
2005
2006 and beyond
Total maturities and principal payments
Less: current portion
Notes payable, less current portion
$4,514
2,931
2,265
–
9,710
(4,514)
$5,196
The carrying value of our notes payable as of December 31, 2002, approximate fair value as the interest
rates approximate current market rates of similar debt obligations.
Note 11
CAPITAL LEASES
Internap leases a significant portion of its property and equipment that are classified as capital leases.
Interest on equipment and furniture leases range from 2.3% to 21.5%, expire through 2015 and generally
include an option allowing us to purchase the leased equipment or furniture at the end of the lease term
for fair market value.
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INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During January 1998, we entered into a Master Agreement to Lease Equipment with one of our equipment
vendors. Individual leases under the Master Agreement to Lease Equipment terms ranging from 24 to
39 months. Since inception we have leased approximately $60.9 million of equipment under the agreement.
During 2002, we amended the terms of our master lease agreement with our primary supplier of net-
working equipment. The amended terms of the master lease included a retroactive effective date to
March 1, 2002 and extended the payment terms and provided for a deferral of lease payments of the
underlying lease schedules for a period of 24 months in exchange for a buy-out payment of $12.1 million
in satisfaction of the outstanding lease obligation on 14 schedules totaling $6.3 million and for the pur-
chase of the equipment leased under the same schedules totaling $5.8 million. The terms of our master
lease agreement, as amended, include financial covenants that require us to maintain minimum liquidity
balances, periodic revenues, EBITDA levels and other customary covenants. Should we breach the
covenants, experience a change-of-control represented by a change in 35% of the aggregate ordinary
voting power, or the lessor believes we have experienced a material adverse change in our business,
the lessor has the ability to demand payment of all amounts due. As of December 31, 2002, we were
in compliance with all financial covenants.
Capital lease obligations and the leased property and equipment are recorded at acquisition at the
present value of future lease payments based upon the terms of the lease agreement. The extension of
payment terms under the amended master lease agreement reduced the present value of our future lease
payments and, therefore, we reduced our capital lease obligation and the cost basis of our related leased
property and equipment by $2.6 million. At December 31, 2002, the capital lease obligation and leased
property accounts were reduced by $2.0 million representing the remaining discount. Interest will con-
tinue to accrue on a periodic basis and add to the capital lease obligation through March 2004, the
remaining deferral period.
Future minimum capital lease payments together with the present value of the minimum lease payments
are as follows (in thousands):
Years Ending December 31,
2003
2004
2005
2006
2007
Beyond 2007
Total minimum lease payments
Less: amount representing interest
Less: amount representing discount
Present value of minimum lease payments
Less: current portion
Capital lease obligations, less current portion
Note 12
INCOME TAXES
$ 3,984
10,733
11,423
2,228
1,246
9,181
38,795
(11,288)
(1,959)
25,548
(631)
$24,917
We account for income taxes under the liability method. Deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and liabilities, and are measured
using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
We provide a valuation allowance to reduce our deferred tax assets to their estimated realizable value.
I N T E R N A P 2 0 0 2 A R
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INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the provision (benefit) for income taxes from continuing operations for the amount
complied by applying the statutory federal income tax rate to loss before income taxes is as follows:
Year Ended December 31,
Federal income tax benefit at statutory rates
State income tax benefit at statutory rates
Foreign operating losses at statutory rates
Amortization and write-down of goodwill
In-process research and development expense
Stock compensation expense
Future utilization of losses precluded by Section 382
Other
Change in valuation allowance
Effective tax rate
2000
2001
2002
(34)%
(4)%
–
10%
4%
2%
–
(3)%
25%
–%
(34)%
(4)%
1%
16%
–
–
11%
(1)%
11%
–%
(34)%
(4)%
–
–
–
–
–
–
38%
–%
Temporary differences between the financial statements carrying amounts and tax basis of assets and
liabilities that give rise to significant portions of deferred taxes relate to the following (in thousands):
Deferred income tax assets:
Net operating loss carryforwards
Capital loss carryforwards
Investments
Restructuring costs
Allowance for doubtful accounts
Deferred revenue
Accrued compensation
Property and equipment
Other
Deferred income tax liabilities:
Amortization of discounts on investments
Purchased intangibles
Valuation allowance
Net deferred tax assets
2001
2002
$ 75,253
5,510
1,824
15,305
393
5,294
149
6,990
261
110,979
(44)
(3,710)
(3,754)
107,225
(107,225)
$
–
$106,391
5,446
1,824
5,425
564
3,538
113
13,993
361
137,655
(23)
(1,584)
(1,607)
136,048
(136,048)
$
–
As of December 31, 2002, we have net operating loss carryforwards, capital loss carryforwards and tax
credit carryforwards of approximately $435.0 million, $14.0 million and $2.0 million, respectively. The net
operating loss and tax credit carryforwards expire during 2012 through 2022. The capital loss carryfor-
wards expire in 2006. Utilization of net operating losses, capital losses and tax credits are subject to the
limitations imposed by Section 382 of the Internal Revenue Code. Due to substantial changes in owner-
ship, we will be precluded from utilizing approximately $169.0 million of our net operating and capital
losses, and $1.0 million of our tax credit carryforwards. We have placed a valuation allowance against our
deferred tax assets in excess of deferred tax liabilities due to the uncertainty surrounding the realization
of such excess tax assets. Management periodically evaluates the recoverability of the deferred tax asset
and the level of the valuation allowance. At such time as it is determined that it is more likely than not
that the deferred tax assets are realizable, the valuation allowance will be reduced.
56
I N T E R N A P 2 0 0 2 A R
INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13
EMPLOYEE RETIREMENT PLAN
Internap sponsors a defined contribution retirement savings plan that qualifies under Section 401(k) of the
Internal Revenue Code. The 401(k) plan covers all employees who have attained 21 years of age. Plan
participants may elect to have up to 15% of their pre-tax compensation contributed to the plan, subject to
certain guidelines issued by the Internal Revenue Service. Beginning January 1, 2000, Internap matches
the employees’ contributions into the plan, up to 3% of the employees’ annual compensation. During
2000 and 2001, the Internap contributed $0.7 million and $1.0 million of participant matching to the plan,
respectively. No contributions were made during 2002.
Note 14
COMMITMENTS, CONTINGENCIES, CONCENTRATIONS OF RISK AND LITIGATION
Operating leases
Internap as lessee, has entered into leasing arrangements relating to office and service point rental space
that are classified as operating. Future minimum lease payments on non-cancellable operating leases are
as follows at December 31, 2002 (in thousands):
Years Ending December 31,
2003
2004
2005
2006
2007
Thereafter
$ 16,652
13,823
11,260
9,194
9,245
79,627
$139,801
Rent expense was approximately $16.1 million, $14.3 million and $14.8 million for the years ended
December 31, 2000, 2001 and 2002, respectively. Sub-lease income, recorded as a reduction of rent
expense, was approximately $406,000 during the year ended December 31, 2002.
Service commitments
We have entered into service commitment contracts with Internet backbone service providers to provide
interconnection services and collocation providers to provide space for customers. Minimum payments
under these service commitments are as follows at December 31, 2002 (in thousands):
Years Ending December 31,
2003
2004
2005
2006
2007
Beyond 2007
$36,264
21,701
6,723
5,108
14,670
566
$86,032
One of our service commitment contracts with an Internet backbone service provider, representing
$20 million of scheduled minimum payments in 2003 and $11.7 million in 2004, includes a provision
allowing us to defer portions of our minimum commitments into future periods in the event we do not
meet annual contract minimums.
I N T E R N A P 2 0 0 2 A R
57
INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentrations of risk
We participate in a highly volatile industry that is characterized by strong competition for market share.
Internap and others in the industry encounter aggressive pricing practices, evolving customer demands
and continual technological developments. Our operating results could be negatively affected should we
not be able to adequately address pricing strategies, customers’ demands, and technological advancements.
We are dependent on other companies to supply various key components of our network infrastructure
including the local loops between our service points and our Internet backbone providers and between
our service points and our customers’ networks. In addition, the routers and switches used in our network
infrastructure are currently supplied by a limited number of vendors. For some components, we may only
use a single supplier. Additional sources of these services and products may not be available in the future
on satisfactory terms, if at all. Furthermore, we purchase these services and products pursuant to purchase
orders placed from time to time. We do not carry significant inventories of the products we purchase, and
we have no guaranteed supply arrangements with our vendors. We have in the past experienced delays in
installation of services and receiving shipments of equipment purchased. To date, these delays have neither
been material nor have adversely affected our operating results. If our limited source of suppliers fails to
provide products or services that comply with evolving Internet and telecommunications standards or that
interoperate with other products or services we use in our network infrastructure, we may be unable to
meet our customer service commitments. Any failure to obtain required products or services from third
party suppliers on a timely basis and at an acceptable cost could adversely impact our operating results.
Litigation
We may be subject to legal proceedings, claims and litigation arising in the ordinary course of business.
Although the outcome of these matters is currently not determinable, we do not expect that the ultimate
costs to resolve these matters will have a material adverse effect on its financial condition, results of
operations or cash flows.
Note 15
CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
During September 2001, Internap changed the state of its incorporation from Washington to Delaware
with the approval of its stockholders. We accomplished the reincorporation by merging Internap
Network Services Corporation with and into our newly formed, wholly owned Delaware subsidiary,
Internap Delaware, Inc. Upon consummation of the merger, shareholders of Internap Network Services
Corporation became stockholders of Internap Delaware, Inc. and Internap Delaware’s name was
changed to Internap Network Services Corporation.
As part of the reincorporation, we increased the number of authorized shares of our common stock from
500,000,000 shares to 600,000,000 shares and the number of our preferred stock from 10,000,000 shares
to 200,000,000 shares. We designated 3,500,000 of the 200,000,000 authorized shares of preferred stock
as “Series A Preferred Stock.” We also changed the par values of our common stock and preferred stock
from no par to $0.001 per share.
Accordingly, the disclosures in the financial statements and related notes have been adjusted to reflect
the September 2001 Certificate of Incorporation and the stock dividend for all periods presented.
58
I N T E R N A P 2 0 0 2 A R
INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Convertible preferred stock
On September 14, 2001, we completed a $101.5 million private placement of units at a per unit price
of $1.60 per unit and issued an aggregate of 63,429,976 units, with each unit consisting of 1/20 of a share
of Series A convertible preferred stock and a warrant to purchase 1/4 of a share of common stock, result-
ing in the issuance of 3,171,499 shares of Series A convertible preferred stock and 17,113,606 warrants
to purchase equivalent shares of common stock at an exercise price of $1.48256 per share, which are
exercisable for a period of five years. The aggregate amount of common stock issuable upon conversion
of the Series A convertible preferred stock and the exercise of the warrants is 80,395,000 shares at
December 31, 2002.
Holders of Series A convertible preferred stock shall be entitled to the number of votes equal to the
number of shares of common stock into which the shares of Series A convertible preferred stock could be
converted. Each share of Series A convertible preferred stock is currently convertible into 21.58428 shares
of common stock subject to adjustments for certain dilutive events. Each share of Series A convertible
preferred stock may be converted at any time at the option of the holder. Shares of Series A convertible
preferred stock automatically convert to common stock on the earlier of September 14, 2004, a date more
than six months after issuance on which the common stock has traded in excess of $8.00 for a period of
45 consecutive trading days or upon the affirmative vote of 60% of the outstanding shares of Series A
convertible preferred stock.
Upon the liquidation, dissolution, merger or event in which existing stockholders own less than 50% of
the post-event voting power, holders of Series A convertible preferred stock are entitled to be paid out of
existing assets an amount equal to $32.00 per share prior to distributions to holders of common stock.
Upon completion of distribution to holders of Series A convertible preferred stock, remaining assets will
be distributed ratably between holders of Series A convertible preferred stock and holders of common
stock until holders of Series A convertible preferred stock have received an amount equal to three times
the original issue price.
We received net proceeds of $95.6 million from the issuance of the Series A convertible preferred stock and
allocated $86.3 million to the Series A convertible preferred stock and $9.3 million to the warrants to pur-
chase shares of common stock based upon their relative fair values on the date of issuance (September 14,
2001) pursuant to Accounting Principles Board Opinion No. 14 “Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants.” The fair value used to allocate proceeds to the Series A convertible
preferred stock was based upon a valuation that among other considerations was based upon the closing
price of the common stock on the date of closing, on an as converted basis, and liquidation preferences.
The fair value used to allocate proceeds to the warrants to purchase common stock was based on a valua-
tion using the Black Scholes model and the following assumptions: exercise price $1.48256; no dividends;
term of 5 years; risk-free rate of 3.92%; and volatility of 80%.
During 2002, Series A convertible preferred stockholders converted 240,000 shares of convertible pre-
ferred stock at a recorded value of $6.5 million into $5.2 million shares of common stock.
Common stock
On April 6, 2000, 8,625,000 shares of our common stock were sold in a public offering at a price of
$43.50 per share. Of these shares, 3,450,000 were sold by Internap and 5,175,000 shares were sold by
selling stockholders. We did not receive any of the proceeds from the sale of shares of common stock
by the selling stockholders. The proceeds we received from the offering were $142.9 million, net of
underwriting discounts and commissions of $7.1 million.
I N T E R N A P 2 0 0 2 A R
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INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants to purchase Series B preferred stock and common stock
During 1997 and 1998, we issued warrants to purchase up to 1,821,520 shares of our then Series B
preferred stock at $.30 per share in conjunction with its various financings during these periods. The
warrants to purchase the Series B preferred stock converted to warrants to purchase common stock
upon the closing of our initial public offering.
On August 2, 2000, we issued a warrant to purchase 20,000 shares of common stock at an exercise price
of $26.88 to an executive recruiting firm. The fair value of these warrants on the date of issuance was
estimated to be approximately $286,000 based upon the Black-Scholes option pricing model and was
charged to expense.
On April 4, 2001, we issued a warrant to purchase 35,000 shares of common stock at an exercise price
of $1.156 to a consultant. The fair value of these warrants on the date of issuance was estimated to be
approximately $22,000 based upon the Black-Scholes option pricing model and was charged to expense.
On July 23, 2001, we issued a warrant to purchase 22,222 shares of common stock at an exercise price
of $2.16 to a consultant. The fair value of these warrants on the date of issuance was estimated to be
approximately $26,000 based upon the Black-Scholes option pricing model and was charged to expense.
On September 14, 2001, in conjunction with our Series A convertible preferred stock financing, we issued
warrants to purchase up to 17,113,606 shares of common stock at $1.48256 per share for a period of five
years. The value allocated to these warrants was estimated to be approximately $9.3 million based upon
the Black-Scholes option-pricing model.
Outstanding warrants to purchase shares of common stock at December 31, 2002, are as follows
(shares in thousands):
Year of Expiration
2003
2004
2005
2006
Weighted
Average
Exercise Price
$2.16
8.38
–
1.48
Shares
22
191
–
17,114
17,327
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INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16
STOCK-BASED COMPENSATION PLANS
During March 1998, our Board of Directors adopted the 1998 Stock Options/Stock Issuance Plan (the
“1998 Plan”), which provides for the issuance of incentive stock options and non-qualified options to
eligible individuals responsible for Internap’s management, growth and financial success. Shares of
common stock reserved for the 1998 Plan during March 1998 totaled 8,070,000 and were increased to
10,070,000 during January 1999. As of December 31, 2002 there were 3,174,000 options outstanding
and 318,000 options available for grant pursuant to the 1998 Plan.
During June 1999, our Board of Directors adopted the 1999 Equity Incentive Plan (the “1999 Plan”),
which provides for the issuance of incentive stock options and nonqualified stock options to eligible indi-
viduals responsible for Internap’s management, growth and financial success. As of December 31, 1999,
13,000,000 shares of common stock were reserved for the 1999 Plan. Upon the first nine anniversaries of
the adoption date of the 1999 Plan, the number of shares reserved for issuance under the 1999 Plan will
automatically be increased by 3.5% of the total shares of common stock then outstanding or, if less, by
6,500,000 shares. Accordingly on June 19, 2000, and June 19, 2001, the number of shares reserved for
the grant of stock options under the 1999 Plan was increased by 4,831,738 and 5,263,537 shares, respec-
tively. The terms of the 1999 Plan are the same as the 1998 Plan with respect to incentive stock options
treatment and vesting. As of December 31, 2002, there were 14,530,000 options outstanding and
7,454,000 options available for grant pursuant to the 1999 Plan.
During May 2000, we adopted the 2000 Non-Officer Equity Incentive Plan (the “2000 Plan”). The 2000
Plan initially authorized the issuance of 1,000,000 shares of Internap’s common stock. On July 18, 2000,
our Board of Directors increased the shares reserved under the 2000 Plan to 4,500,000. Under the 2000
Plan, we may grant stock options only to Internap employees who are not officers or directors. Options
granted under the 2000 Plan are not intended to qualify as incentive stock options under the Internal
Revenue Code. Otherwise, options granted under the 2000 Plan generally will be subject to the same
terms and conditions as options granted under the 1999 Plan. As of December 31, 2002, there were
4,519,000 options outstanding and no options available for grant pursuant to the 2000 Plan.
During July 1999, we adopted the 1999 Non-Employee Directors’ Stock Option Plan (the “Director Plan”).
The Director Plan provides for the grant of non-qualified stock options to non-employee directors. A total
of 1,000,000 shares of Internap’s common stock have been reserved for issuance under the Director Plan.
Under the terms of the Director Plan, 480,000 fully vested options were granted to existing directors on
the effective date of our initial public offering with an exercise price of $10.00 per share. Subsequent to
our 1999 initial public offering, initial grants, which are fully vested as of the date of the grant, of 80,000
shares of Internap’s common stock are to be made under the Director Plan to all non-employee directors
on the date such person is first elected or appointed as a non-employee director. On the day after each
of our annual stockholder meetings, starting with the annual meeting in 2000, each non-employee direc-
tor will automatically be granted a fully vested and exercisable option for 20,000 shares, provided such
person has been a non-employee director for at least the prior six months. The options are exercisable as
long as the non-employee director continues to serve as a director, employee or consultant of Internap or
any of its affiliates. As of December 31, 2002, there were 580,000 options outstanding and 260,000
options available for grant pursuant to the Director Plan.
In connection with the 2000 acquisition of CO Space, we assumed the CO Space, Inc. 1999 Stock
Incentive Plan (the “CO Space Plan”). After applying the acquisition conversion ratio, the CO Space plan
authorizes the issuance of up to 1,346,840 options to purchase shares of Internap’s common stock. As of
December 31, 2002 there were 506,000 options outstanding and 611,000 options available for grant
pursuant to the CO Space Plan.
I N T E R N A P 2 0 0 2 A R
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INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the 2000 acquisition of VPNX, we assumed the Switchsoft Systems, Inc. Founders
1996 Stock Option Plan and the Switchsoft Systems, Inc. 1997 Stock Option Plan (the “VPNX Plans”). After
applying the acquisition conversion ratio, the VPNX Plans authorize the issuance of up to 307,417 options
to purchase shares of Internap’s common stock. As of December 31, 2001, there were 12,000 options
outstanding and 211,000 options available for grant pursuant to the VPNX Plans.
On September 10, 2002, we adopted the Internap Network Services Corporation, 2002 stock compensa-
tion plan (“2002 Plan”). The 2002 Plan provides for the grant of non-qualified stock options to employees
and non-employees. A total of 32,000,000 shares of Internap’s common stock has been reserved for
issuance under the 2002 Plan; however, this overall share reserve is reduced by any outstanding options
issued under the VPNX Plans, the 1998 Plan, the 1999 Plan, the Directors Plan, the CO Space Plan, and
the 2000 Plan, discussed above. The maximum number of shares granted to a single participant in any
particular year is 10,000,000 shares. Also, subject to certain exclusions, the maximum number of awards
issued to officers and directors is limited to 50% of the shares eligible for issuance at the time of the
award or grant.
Incentive stock options may be issued only to Internap employees and have a maximum term of 10 years
from the date of grant. The exercise price for incentive stock options may not be less than 100% of the
estimated fair market value of the common stock at the time of the grant. In the case of options granted
to holders of more than 10% of the voting power of Internap, the exercise price may not be less than
110% of the estimated fair market value of the common stock at the time of grant, and the term of the
option may not exceed five years. Options become exercisable in whole or in part from time to time as
determined by the Board of Directors at the date of grant, which will administer the Plan. Both incentive
stock options and non-qualified options generally vest over four years.
We have elected to account for stock-based compensation using the intrinsic value method prescribed in
APB 25. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair value
of Internap’s common stock at the date of grant over the exercise price to be paid to acquire the stock.
On May 4, 2001, we allowed employees to cancel certain outstanding stock option grants to purchase
8.9 million shares of common stock. On that date we agreed to grant to the same employees options to
purchase 8.9 million shares of common stock to be granted six months plus one day after the cancellation,
or November 5, 2001, provided, however, that (i) the exercise price of the future grant was the fair value
of our common stock on the date of grant, the participating employees cancelled all options granted six
months prior to the May 2001 offer exchange date, (ii) the participating employees did not receive any
additional grants of options prior to the November 5, 2001 grant date, and (iii) the participating employees
were common law employees of Internap on the date of grant. Since Internap accounts for stock-based
compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
compensation cost for stock options is measured as the excess, if any, of the fair value of Internap’s stock at
the date of grant over the exercise price to be paid to acquire the stock. Therefore, we did not recognize
compensation expense related to the grant of the new options.
Similarly, on January 6, 2003, under the terms of a related tender offer to allow domestic employees to
cancel certain outstanding stock option grants, we accepted cancellation of 1.6 million options to purchase
shares of common stock. On that date, we agreed to grant the same employees options to purchase
1.6 million shares of common stock to be granted six months and one day after the cancellation, or sub-
sequent to June 7, 2003. The tender offer provides, however, that (i) the exercise price of the future grant
must be the fair value of our common stock on the date of grant; the participating employees must also
cancel all options granted six months prior to November 18, 2002, the offer to exchange date; (ii) the par-
ticipating employees must not receive any additional grants of options prior to the future grant date; and
(iii) the participating employees must be domestic common law employees of Internap on the date of
62
I N T E R N A P 2 0 0 2 A R
INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
grant. Since Internap accounts for stock-based compensation using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, compensation cost for stock options is measured as the excess,
if any, of the fair value of Internap’s stock at the date of grant over the exercise price to be paid to acquire
the stock. Therefore, we will not recognize compensation expense related to the grant of the new options.
Option activity for 2000, 2001 and 2002 under all of our stock option plans is as follows
(shares in thousands):
Balance, December 31, 1999
Granted
Assumed from acquisitions
Exercised
Cancelled
Balance, December 31, 2000
Granted
Exercised
Cancelled
Balance, December 31, 2001
Granted
Exercised
Cancelled
Balance, December 31, 2002
Weighted
Average
Exercise Price
$ 4.10
39.44
5.53
1.60
36.88
21.71
1.40
0.36
31.69
4.21
0.60
0.25
4.49
2.43
Shares
15,481
12,894
590
(3,686)
(1,120)
24,159
16,729
(1,223)
(13,933)
25,732
11,668
(1,252)
(12,827)
23,321
The following table summarizes information about options outstanding at December 31, 2002
(shares in thousands):
Options Outstanding
Exercise Prices
$0.03 - $0.21
$0.22 - $0.43
$0.48 - $0.48
$0.52 - $0.54
$0.59 - $0.77
$0.78 - $0.96
$0.98 - $1.87
$1.88 - $4.00
$4.12 - $87.19
$105.91
$0.03- $105.91
Number of
Shares
2,646
2,029
3,160
546
2,515
5,520
2,637
2,611
1,647
10
23,321
Weighted
Average
Remaining
Contractual Life
(In years)
(Options Exercisable Excluding
Options Which Shares Would
Be Subject to the Company’s
Right of Repurchase)
Number of
Shares
Weighted Average
Exercise Prices
8.48
8.83
9.97
9.83
9.27
8.84
8.81
7.04
7.15
7.16
8.70
823
531
–
80
–
3,646
1,364
2,062
1,325
7
9,838
$0.05
0.35
0.48
0.54
–
0.96
1.51
2.64
20.36
105.91
3.96
I N T E R N A P 2 0 0 2 A R
63
INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
With the exception of options assumed in conjunction with the CO Space and VPNX acquisitions, the exercise
price of options granted during 2000 equaled the fair value of the underlying shares at the date of grant. The
weighted average grant date fair value of options granted during 2000, 2001 and 2002 was approximately
$363.9 million, $16.8 million and $7.0 million or $28.22, $1.00 and $.60 per share, respectively.
During July 1999, we adopted the 1999 Employee Stock Purchase Plan (the “ESPP”). The ESPP provides
a means by which employees may purchase Internap common stock through payroll deductions. The pur-
chase plan is implemented by offering rights to eligible employees. Under the purchase plan, management
may specify offerings with duration of not more than 27 months, and may specify shorter purchase periods
within each offering. The first offering began on September 29, 1999 and terminated on September 30, 2002.
Purchase dates occur each March 31 and September 30. Employees who participate in an offering under the
purchase plan may have up to 15% of their earnings withheld. The amount withheld is then used to purchase
shares of the common stock on specified dates determined by the Board of Directors. The price of common
stock purchased under the purchase plan is equal to 85% of the lower of the fair market value of the common
stock at the commencement date of each offering period or the relevant purchase date. Employees may end
their participation in an offering at any time during the offering except during the 15-day period immediately
prior to a purchase date. Employees’ participation in all offerings ends automatically on termination of their
employment with Internap or one of its subsidiaries. A total of 3,000,000 shares of common stock have been
reserved for issuance pursuant to the ESPP. Upon the first nine anniversaries of the adoption date of the ESPP,
the number of shares reserved for issuance under the ESPP will be increased by 2% of the total number of
shares of common stock then outstanding or, if less, by 3,000,000 shares, subject to Series A shareholder
approval. Accordingly, on July 24, 2000 and July 23, 2001, pursuant to the terms of the ESPP, the number of
shares reserved for the grant of stock options under the ESPP was increased by 1,500,000 shares on each
date. There was no increase to shares reserved during 2002. The purchase plan is intended to qualify as
an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Code.
We have adopted the disclosure only provisions of Financial Accounting Standards No. 123 (“SFAS
No. 123”), “Accounting for Stock-Based Compensation.” Pro forma information regarding the net loss
is required by SFAS No. 123, and has been determined as if we had accounted for its employee stock
options (including ESPP participation) under the fair value method. The fair value of options granted in
2000, 2001 and 2002 (including ESPP participation) subsequent to Internap’s initial public offering was
estimated at the date of grant using the Black-Scholes option-pricing model assuming no expected
dividends and the following weighted average assumptions:
Year Ended December 31,
Risk free interest rate
Volatility
Expected life (excluding ESPP)
ESPP expected life
2000
6.00%
100%
4 years
1 year
2001
4.5%
100%
4 years
1 year
2002
3.52%
100%
4 years
1 year
For purposes of the pro forma disclosures, the estimated fair value of options is amortized to expense
over the options’ vesting periods. If we had accounted for compensation expense related to stock options
(including ESPP participation) under the fair value method prescribed by SFAS No. 123, the net loss and
the basic and diluted net loss per share for the years ended December 31, 2000, 2001 and 2002 would
have been approximately, $317.6 million, $442.1 million and $34.5 million and $2.23, 2.94, and $0.22,
respectively. The pro forma effect of applying SFAS No. 123 in future years will be significantly reduced
since all deferred stock compensation will be fully amortized during 2003.
Deferred stock compensation
Prior to 2000, we issued stock options to certain employees under the 1998 and 1999 Plans with exercise
prices below the deemed fair value of Internap’s common stock at the date of grant. In accordance with
the requirements of APB 25, we recorded deferred stock compensation for the difference between the
exercise price of the stock options and the deemed fair value of the common stock at the date of grant.
Additionally, in connection with the acquisition of VPNX, we recorded deferred stock compensation
related to the unvested options assumed, totaling $5.1 million.
64
I N T E R N A P 2 0 0 2 A R
INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred stock compensation is amortized to expense over the period during which the options or common
stock subject to repurchase vest, generally four years, using an accelerated method as described in Financial
Accounting Standards Board Interpretation No. 28.
During 2001 and 2002, primarily related to reductions in our workforce, we cancelled the options of indi-
viduals for whom we had recognized deferred stock compensation and had recognized related expense
on unvested options using an accelerated amortization method. Accordingly, during the year ended
December 31, 2001 and 2002, we reduced our deferred stock compensation, which would have been
amortized to future expense, by $1.2 million and $1.0 million, and we reduced our amortization to
expense of deferred stock compensation by $1.9 million and $2.7 million to record the benefit of
previously recognized expense on unvested options.
As of December 31, 2002, we have recorded deferred stock compensation related to such options
granted in the total amount of $28.9 million, of which $10.7 million, $4.2 million and $2.9 million has
been amortized to expense during 2000, 2001 and 2002, respectively.
Note 17
RELATED PARTY TRANSACTIONS
On January 1, 2002, we entered into a consulting agreement with Lyford Cay Securities Corp., an affiliate
of one of our stockholders, INT Investments, Inc., that beneficially owns more than 5% of our outstanding
common stock. Under the terms of this consulting agreement, which was completed in 2002, we paid
Lyford Cay Securities Corp. $400,000 to provide us with financial advisory and strategic advice.
In 2002, we engaged Korn/Ferry International, a national executive recruiting firm, to assist in the identifi-
cation and recruitment of senior executives. We also entered into agreement with other nationally known
recruiting firms for additional senior executive searches. For the 2002 fiscal year, we paid Korn/Ferry
$262,096 in connection with executive placements. Gregory A. Peters, our President and Chief Executive
Officer, is the son-in-law of a managing director of Korn/Ferry.
We have entered into indemnification agreements with our directors and executive officers for the
indemnification of and advancement of expenses to such persons to the fullest extent permitted by law.
We also intend to enter into these agreements with our future directors and executive officers.
(THIS SECTION IS A PICKUP FROM 10-K. CLIENT PLEASE UPDATE.)
Note 18
SUBSEQUENT EVENTS
On March 25, 2003, we entered into an amendment to our existing loan and security agreement with
Silicon Valley Bank ("SVB"). Pursuant to the loan amendment, the amount available under our credit
facility with SVB will be increased by an additional $5 million subject to certain conditions precedent.
In addition, SVB will make available to us an additional $5 million under a term loan if we meet certain
debt coverage ratios.
On March 31, 2003, we entered into an agreement to amend out equipment lease obligations with Cisco
Systems Capital Corporation. Specifically, this lease amendment provides for adjustments to our required
minimum quarterly revenue levels and minimum quarterly EBITDA levels. In addition, the lease amend-
ment provides for a revision to one non-financial covenant. The lease amendment also requires our pay-
ment on April 1, 2003 of a total of $2.2 million to Cisco Systems Capital (representing advance payment
of our lease payments due in March and April 2004). As a consequence of the advance payment, we will
resume lease payments to Cisco Systems Capital commencing in May 2004 and ending February 2007.
(THIS SECTION IS A PICKUP FROM 10-K. CLIENT PLEASE UPDATE.)
I N T E R N A P 2 0 0 2 A R
65
INTERNAP 2002 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19
UNAUDITED QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly results of operations for the Company for the
years ended December 31, 2001 and 2002. In the opinion of management, this information has been pre-
pared on the same basis as the audited financial statements and all necessary adjustments, consisting of
only normal recurring adjustments, have been included in the amounts stated below to present fairly, in all
material respects, the quarterly information when read in conjunction with the audited financial statements
and notes thereto included elsewhere in this annual report on Form 10-K. The quarterly operating results
below are not necessarily indicative of those of future periods (in thousands).
Revenues
Costs and expenses:
Direct cost of network
Customer support
Product development
Sales and marketing
General and administrative
Depreciation and amortization
Amortization of goodwill and
March 31,
June 30, September 30, December 31,
March 31,
June 30, September 30, December 31,
2001
2001
2001
2001
2002
2002
2002
2002
$ 28,440
$ 29,285
$ 29,163
$ 30,516
$ 32,614
$ 33,030
$ 32,711
$ 34,132
23,208
26,594
24,637
24,476
24,105
22,627
17,302
19,173
6,723
3,785
14,253
15,154
10,473
5,990
3,415
9,866
12,352
12,192
4,789
2,760
7,496
9,820
3,978
2,273
6,536
7,165
3,826
1,957
6,057
6,492
3,669
1,977
5,801
5,047
2,867
1,836
5,330
4,548
2,551
1,677
4,453
4,762
13,468
12,417
12,812
13,504
12,390
10,894
other intangible assets
19,828
6,972
5,658
5,658
1,427
1,606
1,165
1,428
Amortization of deferred
stock compensation
Lease termination expense
Restructuring costs
Impairment of goodwill and
2,209
–
4,342
other intangible assets
195,986
Loss on sale and retirements
of property and equipment
–
109
–
–
–
–
–
–
814
–
1,085
–
352
–
67,211
(7,457)
(4,954)
–
–
(11)
–
–
–
(316)
–
352
–
235
804
821
–
2,714
298
841
1,510
180
Total operating costs and expenses
295,961
77,490
136,653
58,845
52,372
55,061
46,984
46,977
Loss from operations
(267,521)
(48,205)
(107,490)
(28,329)
(19,758)
(22,031)
(14,273)
(12,846)
Other income (expense):
Interest income (expense), net
Loss on investments
Total other income
Net loss
702
–
702
(750)
(19,314)
(20,064)
(861)
(6,428)
(7,289)
(363)
(603)
(966)
(231)
(349)
(580)
(464)
(313)
(777)
(629)
(334)
(963)
(870)
(248)
(1,118)
$(266,819)
$(68,269) $(114,779)
$(29,295)
$(20,338)
$(22,808)
$(15,236)
$(13,964)
Basic and diluted net loss per share $
(1.79)
$ (0.45) $
(0.76)
$ (0.19)
$ (0.13)
$ (0.15)
$ (0.10)
$ (0.09)
Weighted average shares used in
computing basic and diluted
net loss per share
149,115
150,251
150,541
151,221
152,002
153,537
157,177
159,433
66
I N T E R N A P 2 0 0 2 A R
INTERNAP 2002 REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Internap Network Services Corporation
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements
of operations, of stockholders’ equity and comprehensive loss and of cash flows present fairly, in all mate-
rial respects, the financial position of Internap Network Services Corporation at December 31, 2002 and
2001, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company’s management; our responsi-
bility is to express an opinion on these financial statements based on our audits. We conducted our audits
of these statements in accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 7, effective January 1, 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” resulting in
cessation of the amortization of goodwill in 2002.
PricewaterhouseCoopers LLP
Seattle, Washington
March 31, 2003
I N T E R N A P 2 0 0 2 A R
67
INTERNAP 2002 SHAREHOLDER INFORMATION
Corporate Headquarters
Form 10-K
Internap Network Services Corporation
A copy of Internap’s Form 10-K filing with the Securities
250 Williams Street, Suite E-100
and Exchange Commission is posted to the investor
Atlanta, GA 30303
404-302-9700
Corporate Web Address
www.internap.com
relations section of our website, www.internap.com.
A printed copy is available without charge to shareholders
upon written request to Investor Relations at the corporate
addresses listed above.
Product/Services Information
Stock Trading Information
To obtain information on Internap’s products and
Internap’s common stock trades on the NASDAQ.
services, contact:
David L. Abrahamson
Chief Marketing Officer &
Vice President, Sales
404-302-9700
Safe Harbor
Forward-looking statements in this annual report are
subject to change based on various important factors,
including without limitation, competitive actions in the
marketplace and adverse actions of governmental and
other third-party payors. Further information on potential
factors that could affect the Company’s financial results is
included in the Company’s Form 10-K for the year ended
December 31, 2002 and subsequent filings.
Ticker symbol (NASDAQ)
INAP
Independent Auditors
PricewaterhouseCoopers LLP
1420 Fifth Avenue, Suite 1900
Seattle, WA 98101
206-398-8000
PricewaterhouseCoopers LLP
10 Tenth Street, Suite 1400
Atlanta, GA 30309
678-419-1000
Transfer Agent
American Stock Transfer & Trust Company
59 Maiden Lane
New York, NY 10038
800-937-5449
info@amstock.com
Inquiries regarding stock transfers, lost certificates or address changes should be directed to the transfer agent listed here.
68
68
I N T E R N A P 2 0 0 2 A R
I N T E R N A P 2 0 0 2 A R
2003 EXECUTIVE MANAGEMENT TEAM
Allen Tothill
Gregory A. Peters
Marla Eichmann
Robert Jenks
Vice President,
Government Solutions
President & Chief
Executive Officer
Vice President,
Operations
Chief Financial
Officer
Walter DeSocio
Vice President,
Chief Administrative
Officer &
General Counsel
David L. Abrahamson
Chief Marketing
Officer &
Vice President, Sales
Ali Marashi
Chief Technical
Officer &
Vice President,
Engineering
BOARD OF DIRECTORS
Robert D. Shurtleff, Jr.
Director since January 1997.
Kevin L. Ober
Director since October 1997.
Gregory A. Peters
President and Chief Executive Officer
since April 2002.
Eugene Eidenberg
Director and Chairman of the Board of
Directors since November 1997.
Fredic W. Harman – need info
William J. Harding
Director since January 1999.
Anthony C. Naughtin
Co-founded Internap and served as our
Chief Executive Officer from May 1996
until July 2001, and as our President
from May 1996 until May 2001.
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I N T E R N A P 2 0 0 2 A R
69
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