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INAP_AR09_10K_Cov_Mech_03.indd 1
4/21/10 6:45 PM
To Our Stockholders,
For our customers, every second counts — from the time it takes them to
contact a network engineer with the insight to answer a question or solve
a problem, to the seconds their own customers spend on their web sites
purchasing products, using applications or consuming multimedia content.
Throughout Internap’s history, this criticality of performance has been a hall-
mark of our competitive differentiation for both our technology and customer
support. We continue to drive this performance commitment through each
of our service offerings: IP, Colocation, CDN and Managed Hosting.
We appreciate that every second counts
for our stockholders as well. I joined the
company in March 2009, with a belief that
Internap represented a ‘diamond in the rough’
in terms of our long-term potential to create
stockholder value. During the past year, we
have worked aggressively to reshape and
reinvigorate Internap, while putting in place
the people, strategy and processes that we
believe will enable us to deliver long-term
profi table growth for our stockholders.
At the end of the first quarter of 2009,
we took decisive action to align operating
expenses with revenues by reducing our staff
by approximately 10 percent, with a focus
on consolidating certain senior management
positions as well as streamlining back-offi ce
functions. During the second quarter of 2009,
we developed and refi ned our strategic plan,
with particular emphasis on strengthening
our sales, engineering and support organi-
zations. In the second half of the year, we
moved in earnest to the implementation
phase of our turnaround strategy. These
wide-ranging, profitable-growth initiatives
included: key executive management hires;
staff investments in sales, engineering devel-
opment and customer support; data center
expansion plans; partner data center migra-
tion programs; development and deployment
of core value propositions; sales training and
incentive programs; service demonstration
tools; and lead generation initiatives.
The results of these efforts have been
encouraging thus far. In the third quarter of
2009, we saw the first sequential increase
in segment margins following two years of
steady decline. In the fourth quarter, we con-
tinued the progress with a 280-basis-point
sequential increase in segment margins.
Results further down the income statement
were even more signifi cant. The fourth quar-
ter of 2009 represented our third consecu-
tive quarter of both adjusted EBITDA and
adjusted EBITDA margin improvement, with
$9.0 million and 14.2 percent, respectively.
While we are pleased with these early signs
of progress, we also recognize that we have
much more to do. With 2009 revenue up only
1 percent versus 2008, our IP services seg-
ment revenue declining more than 10 percent
year over year, and our adjusted EBITDA
down $6 million from 2008, we have a keen
appreciation for the work ahead of us.
A s we m ove i n to 2010, we b e l i eve
Internap is uniquely positioned to bene-
fit from some compelling macro industry
drivers: increasing IP bandwidth demand,
supply shortage for premium data center
capacity and enterprise outsourcing of IT
resources, to name a few. While patience
is not our strong suit, transformation is dif-
fi cult for any company, and it takes time. We
are embracing the challenges and we are
executing the strategy that we believe will
deliver long-term profi table growth.
To all of our stockholders, we thank you
for your commitment and for sharing our
vision of Internap’s future.
y,
Sincerely,
J. Eric Cooney
J. Eric Cooney
President and
President and
Chief Executive Offi cer
Adjusted EBITDA, adjusted EBITDA margin and segment mar-
gin are non-GAAP measures. Reconciliations from adjusted
EBITDA to GAAP loss from operations are available on our web-
site and furnished to the Securities and Exchange Commission.
$
2
5
4
.
0
$
2
5
6
.
3
$
2
3
4
.
1
$
1
8
1
.
4
06 07 08 09
Total Revenue
(in millions)
$
3
7.
2
$
3
4
.
3
$
2
8
.
0
$
2
4
.
7
06 07 08 09
Adjusted EBITDA
(in millions)
Q4
Q3
Q2
Q1
$9.0
$7.6
$6.8
$4.6
2009
Adjusted EBITDA
(in millions)
(Q1–Q4)
INAP_AR09_10K_Cov_Mech_03.indd 2
4/21/10 6:45 PM
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
X□ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR
□ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission file number: 000-31989
INTERNAP NETWORK SERVICES CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
91-2145721
(I.R.S. Employer Identification No.)
250 Williams Street, Atlanta, Georgia
(Address of principal executive offices)
30303
(Zip Code)
(404) 302-9700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Exchange on Which Registered
Common Stock, $0.001 par value
The NASDAQ Stock Market LLC
(NASDAQ Global Market)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes □ No X□
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes □ No X□
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X□ No □
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preced-
ing 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes □ No □
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A. X□
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer □
Non-accelerated filer □
(Do not check if a smaller reporting company)
Accelerated filer X□
Smaller reporting company □
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes □ No X□
The aggregate market value of the registrant’s outstanding common stock held by non-affiliates of the registrant
was $173,352,170 based on a closing price of $3.49 on June 30, 2009, as quoted on the NASDAQ Global Market.
As of February 19, 2010, 50,950,851 shares of the registrant’s common stock, par value $0.001 per share, were
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III – Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days after the end of our 2009 fiscal year. Except as expressly incor-
porated by reference, the registrant’s Proxy Statement shall not be deemed to be a part of this report on Form 10-K.
2
Internap
2009 Form 10-K
TABLE OF CONTENTS
Part I.
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Reserved
Part II.
Item 5.
Market for Registrant’s Common
Equity, Related Stockholder
Matters and Issuer Purchases
of Equity Securities
Item 6. Selected Financial Data
Item 7.
Management’s Discussion and
Analysis of Financial Condition
and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures
Item 9.
Item 8.
about Market Risk
Financial Statements and
Supplementary Data
Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III.
Item 10. Directors, Executive Officers
and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain
Beneficial Owners and Management
and Related Stockholder Matters
Page
3
10
22
22
23
23
24
26
28
49
49
49
50
50
51
51
51
Item 13. Certain Relationships and
Related Transactions,
and Director Independence
51
Item 14. Principal Accounting Fees and Services 51
Part IV.
Item 15. Exhibits and Financial
Statement Schedules
Signatures
52
55
3
Internap
2009 Form 10-K
Part I
Item 1. Business
FORWARD-LOOKING
STATEMENTS
This Annual Report on Form 10-K contains “forward-
looking statements” within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended,
or the Exchange Act. Forward-looking statements
include statements regarding industry trends, our
future financial position and performance, business
strategy, revenues and expenses in future periods,
projected levels of growth and other matters that
do not relate strictly to historical facts. These state-
ments are often identified by words such as “may,”
“will,” “seeks,” “anticipates,” “believes,” “estimates,”
“expects,” “projects,” “forecasts,” “plans,” “intends,”
Part I
Item 1.
BUSINESS
OVERVIEW
We were incorporated as a Washington corporation
in 1996 and reincorporated in Delaware in 2001. Our
principal executive offices are located at 250 Williams
Street, Suite E-100, Atlanta, Georgia 30303, and our
telephone number is (404) 302-9700. Our common
stock trades on the NASDAQ Global Market under the
symbol “INAP.” Our website address is www.internap.com.
We are an Internet solutions and data center company
providing a suite of network optimization and delivery
services and products that manage, deliver and dis-
tribute applications and content with a 100% availabil-
ity serv ice level agreement, as well as a global provider
of secure and reliable data center services. We help
our customers innovate their business, improve serv-
ice levels and lower the cost of information technology
operations. Our services and products, combined with
progressive and proactive technical support, enable
our customers to migrate business-critical applica-
tions from private to public networks.
“continue,” “could,” “should” or similar expressions or
variations. These statements are based on our beliefs
and expectations after consideration of information
currently available. Such forward-looking statements
are not guarantees of future performance and are sub-
ject to risks and uncertainties that could cause actual
results to differ materially from those contemplated
by forward-looking statements. Important factors
currently known to us that could cause or contribute
to such differences include, but are not limited to,
those set forth in this Form 10-K under Item 1A “Risk
Factors.” We undertake no obligation to update any
forward-looking statements as a result of new informa-
tion, future events or otherwise.
As used herein, except as otherwise indicated by con-
text, references to “we,” “us,” “our,” “Internap” or the
“Company” refer to Internap Network Services Corporation.
We provide services through 73 Internet Protocol, or
IP, serv ice points, which include 20 content delivery
network, or CDN, points of presences, or POPs, and
47 data centers across North America, Europe and
the Asia-Pacific region. We also have two additional
international standalone CDN POPs and two addi-
tional domestic standalone data center locations
through which we provide IP services by extension.
However, through December 31, 2009, neither rev-
enues generated nor long-lived assets located outside
the United States were significant (all less than 10%).
Our Private Network Access Points, or P-NAPs, feature
multiple direct high-speed connections to major Internet
backbones, also referred to as network serv ice providers,
or NSPs, such as Verizon Communications Inc.; Global
Crossing Limited; Level 3 Communications, Inc.;
XO Holdings Inc.; and Cogent Communications Group,
Inc. We operate in two business segments: IP services
and data center services. These segments reflect
a change from our historical segments, which also
included CDN services as a separate segment. We
now operate our IP services and the majority of our
CDN services on a combined basis while we operate
the managed hosting portion of our CDN services
as part of our data center services. We discuss the
determination of and changes in our business seg-
ments below in “Segments” and in notes 2 and 4 to the
accompanying consolidated financial statements.
Our intelligent routing technology facilitates traffic
over multiple carriers, as opposed to just one carrier’s
network, to ensure highly-reliable performance over
4
Internap
2009 Form 10-K
Part I
Item 1. Business
the Internet. Our data center, or colocation, services
allow us to expand the reach of our high performance
IP serv ices to customers who wish to take advantage
of locating their network and application assets in
secure, high-performance facilities. We believe that
our unique managed multi-network approach provides
better performance, control and reliability compared
to conventional Internet connectivity alternatives.
Our serv ice level agreements, or SLAs, guarantee
performance across multiple networks and a broader
segment of the Internet in the United States, exclud-
ing local connections, than providers of conventional
Internet connectivity which typically only guarantee
performance on their own network.
On February 20, 2007, we closed the acquisition of
VitalStream in an all-stock transaction accounted for
using the purchase method of accounting for busi-
ness combinations. Our results of operations include
the activities of VitalStream from February 21, 2007
through December 31, 2009.
We currently have approximately 2,900 customers
across more than 25 metropolitan markets, serv-
ing a variety of industries, including entertainment
and media, financial services, healthcare, travel,
e- commerce, retail and technology.
INDUSTRY BACKGROUND
The Emergence of Multiple Internet Networks
The Internet originated as a restricted network
designed to provide efficient and reliable long dis-
tance data communications among the disparate
computer systems used by government-funded
researchers and organizations. As the Internet evolved,
businesses began to use the Internet for functions
critical to their core business and communications.
Telecommunications companies established addi-
tional networks to supplement the original public infra-
structure and satisfy increasing demand. Currently,
the Internet is a global collection of interconnected
computer networks, forming a network of networks.
These networks were developed at great expense
but are nonetheless constrained by the fundamental
limitations of the Internet’s architecture and routing
protocols. Each network must connect to one another
to permit its users to communicate with each other.
Consequently, many Internet network serv ice provid-
ers, or ISPs, have agreed to exchange large volumes
of data traffic through a limited number of public and
private network access points.
The Problem of Inefficient Routing of
Data Traffic on the Internet
An individual ISP only controls the routing of data
within its network and its routing practices tend to
compound the inefficiencies of the Internet. When an
ISP receives a packet that is not destined for one of its
own customers, it must route that packet to another
ISP to complete the delivery of the packet over the
Internet. An ISP will often route the data from private
connections, or peered data, to the nearest point of
traffic exchange, in an effort to get the packet off its
network and onto a competitor’s network as quickly as
possible to reduce capacity and management burdens
on its own transport network. Once the origination
traffic leaves the network of an ISP, SLAs with that ISP
typically do not apply since that carrier cannot control
the quality of serv ice on the network of another ISP.
Consequently, to complete a communication, data
ordinarily passes through multiple networks and peer-
ing points without consideration for congestion or
other factors that inhibit performance. For customers
of conventional Internet connectivity providers, this
transfer can result in lost data, slower and more erratic
transmission speeds and an overall lower quality of
service, especially where the ISP is not familiar with the
performance of the destination network. The quality of
serv ice can be further degraded by basic routing pro-
tocols that make assumptions about the “best” path
or network to route traffic to, without consideration of
the performance of that network. Equally important,
customers have no control over the transmission
arrangements and have no single point of contact that
they can hold accountable for degradation in serv ice
levels, such as poor data transmission performance
or serv ice failures. As a result, it is virtually impossible
for a single ISP to offer a high quality of serv ice across
disparate networks.
The Problem of Poor Application Performance
over Distant Network Paths
The major application protocols often utilized over
data networks perform poorly under congestion when
network latency is high or network paths are subject to
packet and data loss. These applications may timeout,
reset or cause user frustration and abandonment of
an activity or session. Network latency, a measure of
time it takes data to travel between two network points,
is a significant factor when communicating over vast
distances such as the global network paths between
two continents. The more distant the communicating
parties are from each other, the higher the network
latency will be, potentially resulting in lower effective
throughput. Additionally, longer distances typically
5
Internap
2009 Form 10-K
Part I
Item 1. Business
result in more network hops, or data transition points,
and may increase the likelihood of encountering con-
gestion. As a result, business application performance
and resultant user experience may degrade.
The Growing Importance of the Internet
for Business-Critical Internet-Based Applications
The Internet is used as a communications platform for
an increasing number of business-critical Web- and
Internet-based applications, such as those relating to
electronic commerce, Voice over IP, or VoIP, supply
chain management, customer relationship manage-
ment, project coordination, streaming media and
video conferencing and collaboration. Businesses are
redesigning their information technology operations
models to take advantage of new, more cost-effective
application delivery models, such as software-as-a-
service, hosting and cloud computing. In all cases,
these new delivery models rely on the Internet as the
primary means of communicating with customers and
users, and result in enhanced expectations of per-
formance, availability and transparent delivery for the
business application to work as expected.
Businesses often are unable to benefit from the full
potential of the Internet primarily because of perfor-
mance issues discussed above. The emergence of
technologies and applications that rely on network
quality and require consistent, high-speed data trans-
fer, such as VoIP, video conferencing and streaming,
multimedia document distribution and streaming and
audio and video conferencing and collaboration, are
hindered by inconsistent performance. We believe that
companies who provide a consistently high quality of
serv ice that enables businesses to successfully and
cost effectively execute their business-critical Internet-
based applications over the public network infrastruc-
ture through superior performance Internet routing
services will lead the market for Internet services. We
believe that our patented route optimization technolo-
gies facilitate such superior performance by mitigating
the factors that inhibit efficient movement of traffic as
described above.
The Growing Demand for Secure and
Reliable Data Center Environments
Businesses and organizations continue to move more
data, applications and operations online, creating a
demand for secure and reliable data center environ-
ments. Many companies do not have the capital dollars
or the time to manage ongoing data center space and
power requirements for their business. As a result, we
provide companies secure, offsite environments for
their equipment or an outsourced hosting serv ice for
their applications and business-critical websites. Our
data centers improve a company’s ability to directly
connect to NSPs, which avoids local loops and miti-
gates online risk. As our customers’ business models
evolve to leverage rich media content, we help them
stream it globally, and as their media library grows we
provide scalable, secure storage for their content.
The Growing Demand for Delivery
of Rich Media Content over the Internet
The proliferation of Internet-connected devices
and broadband Internet connections coupled with
increased consumption of media over the Internet
including personalized media content have created a
demand for delivery of rich media content. Increasingly,
as the volume and quality of dynamic content pro-
gresses, viewers of all ages are spending more and
more time using the Internet. Viewers now expect to be
able to watch a movie or television show online, view
the latest news clips, take a virtual walk-through of a
home, hear a podcast, watch a live sporting event or
concert or participate in an educational course, just to
name a few examples. Companies that need to deliver
rich media content can either deliver the content using
basic Internet connectivity or utilize a content delivery
network, or CDN. Because of the inherent weaknesses
of the Internet, delivery of rich media content is not reli-
able. To overcome this problem, companies can either
invest substantial capital to build the infrastructure to
bypass the public Internet or utilize a third party’s CDN.
OUR MARKET OPPORTUNITY
Historically, ISPs have maintained at-will agreements
to deliver Internet traffic on a “best efforts” basis with-
out guaranteeing various levels of quality of serv ice
on other networks. This best efforts delivery is sub-
optimal for time-sensitive and real-time applications
that require uninterrupted streams of data such as voice
and video. For companies that rely on the Internet as
a medium for commerce or relationship management,
this unpredictable performance often translates into
lost revenue, decreased productivity and dissatis-
fied customers.
We believe we are well positioned through our pat-
ented and patent-pending network route optimization
technologies and data center services to help busi-
nesses overcome the inherent limitations and unpre-
dictable performance of the Internet. This is especially
relevant for companies that use the Internet as a core
component of their business operations such as direct
sales, supply chain and collaboration strategies or rely
6
Internap
2009 Form 10-K
Part I
Item 1. Business
on the Internet to reach global partners, suppliers and
customers. This changing landscape, combined with
an increasingly dispersed workforce and the adop-
tion of emerging technologies, including VoIP and
streaming media, has increased the need for fast, reli-
able connectivity and delivery of content-rich media.
Additionally, the emergence of bandwidth-intensive
video and the general and rapid increase of digital
information creation and delivery will further drive the
need for highly-available and performance-optimized
network transport service.
Our suite of technology services and products increase
reliability, decrease network latency and optimize rout-
ing to enable customers to effectively leverage the
Internet to promote productivity, decrease transac-
tional costs and generate new revenue streams.
SEGMENTS
During the year ended December 31, 2009, we
changed how we view and manage our business.
We now operate our IP services and the majority of our
CDN services on a combined basis while we operate
the managed hosting portion of our CDN services as
part of our data center services. The change from our
historical segments reflects management’s views of
the business and aligns our segments with our opera-
tional and organizational structure. We have integrated
the primary components of our CDN services with our
IP services in the IP services segment. This includes
integration of our CDN POPs into our P-NAPs along
with combining engineering and operations teams
and internal financial reporting. In addition, a single
manager reports directly to our chief executive officer
for the integrated IP services. Historically, CDN serv-
ices also included managed hosting, or maintaining
network equipment on behalf of customers. Since
these CDN services are a hosting activity, they are
more similar to our data center services, and therefore
we have included these services in our data cen-
ter serv ices segment. We have reclassified financial
information for prior periods to conform to the current
period presentation.
We discuss the determination of and changes in
our business segments below in “Management’s
Discussion and Analysis of Financial Condition and
Results of Operations – Results of Operations –
Segment Information.”
IP Services
IP services represent our IP transit activities and include
our high-performance Internet connectivity, CDN serv-
ices and flow control platform, or FCP, products.
Our patented and patent-pending network route opti-
mization technologies address the inherent weak-
nesses of the Internet, allowing businesses to take
advantage of the convenience, flexibility and reach of
the Internet to connect to customers, suppliers and
partners, and to adopt new information technology
delivery models, in a reliable and predictable man-
ner. Our services and products take into account
the unique performance requirements of each busi-
ness application to ensure performance as designed,
without unnecessary cost. When recommending an
appropriate network solution for our customers’ appli-
cations, we consider key performance objectives such
as bandwidth capacity needed, expected bandwidth
usage, location of services and cost objectives. Our
fees for IP services are based on a fixed-fee, usage or a
combination of both.
Our CDN services enable our customers to quickly and
securely stream and distribute rich media and content,
such as video, audio software and applications to audi-
ences across the globe through strategically located
data POPs. Providing capacity-on-demand to handle
large events and unanticipated traffic spikes, we deliver
high-quality content regardless of audience size or
geographic location and the analytic tool to allow our
customers to refine their marketing programs.
Our FCP products are a premise-based intelligent
routing hardware product for customers who run their
own multiple network architectures, known as multi-
homing. The FCP functions similarly to our P-NAP. We
offer FCP as either a one-time hardware purchase or
as a monthly subscription service. Sales of FCP also
generate annual maintenance fees and professional
serv ice fees for installation.
Data Center Services
Data center, or colocation, services primarily include
physical space for hosting customers’ network and
other equipment plus associated services such as
redundant power and network connectivity, environ-
mental controls and security and the managed host-
ing portion of CDN services. Throughout this Annual
Report on Form 10-K, we refer to data center services
and colocation services interchangeably.
7
Internap
2009 Form 10-K
Part I
Item 1. Business
Our data center services allow us to expand the reach
of our high performance IP services to customers who
wish to take advantage of locating their network and
application assets in secure, high-performance facili-
ties. We operate data centers where customers can
host their applications directly on our network to elimi-
nate issues associated with the quality of local con-
nections. Data center services also enable us to have
a more flexible product offering, such as bundling our
high performance IP connectivity and content delivery,
along with hosting customers’ applications. Our data
center services provide a single source for network
infrastructure, IP connectivity and security, all of which
are designed to maximize solution performance while
providing a more stable, dependable infrastructure,
and are backed by guaranteed serv ice levels and our
team of dedicated support professionals. We also
provide a managed hosting solution that leverages our
IP services. With this service, our customers own and
manage the software applications and content, while
we provide and maintain the hardware, operating sys-
tem, colocation and bandwidth.
We use a combination of facilities operated by us and
by third parties, referred to as company-controlled
facilities and partner sites, respectively. We offer a com-
prehensive solution at 49 serv ice points, consisting of
nine company-controlled facilities and 40 partner sites,
summarized below. We charge monthly fees for data
center services based on the amount of square footage
and power that the customers use. We also have rela-
tionships with various data center providers to extend
our P-NAP model into markets with high demand.
During 2009, we established Statement on Auditing
Standards No. 70, or SAS 70, Type II compliance over
controls and processes in our company-controlled data
centers. SAS 70 Type II compliance provides assur-
ances that controls and processes around our data
center security and environmental protection have
been suitably designed and are operating effectively to
protect and safeguard customers’ equipment and data.
The underlying providers for several of our partner data
centers also maintain SAS 70 Type II compliance.
Other
Other revenues and direct costs of network, sales and
services during the year ended December 31, 2007 con-
sisted of third-party CDN services. Throughout 2007,
other revenues and direct costs of network, sales and
services decreased steadily as the revenue streams
from our acquisition of VitalStream replaced the activity
of the former third-party CDN serv ice provider.
NETWORK ACCESS POINTS, POINTS OF PRESENCE AND DATA CENTERS
We provide our services through our network access points across North America, Europe and the Asia-Pacific
region. Our P-NAPs and data centers feature multiple direct high-speed connections to major Internet back-
bones, also referred to as network serv ice providers or NSPs, such as Verizon Communications Inc.; Global
Crossing Limited; Level 3 Communications, Inc.; XO Holdings Inc.; and Cogent Communications Group, Inc.
We provide access to the Internet for our CDN customers through our CDN POPs. As of December 31, 2009, we
provided services worldwide through 73 IP serv ice points, which includes 20 CDN POPs and 47 data centers.
We also have two additional international standalone CDN POPs and two additional domestic standalone data
center locations through which we provide IP services by extension. We directly operate nine of these data center
sites and have operating agreements with third parties for the remaining locations. We have P-NAPs, CDN POPs
and/or data centers in the following markets, some of which have multiple sites:
Internap operated
Domestic sites operated
under third party agreements
International sites operated
under third party agreements
Atlanta
Boston
Houston
New York
Seattle
Atlanta
Boston
Chicago
Dallas
Denver
Los Angeles
Miami
New York
Oakland
Orange County/
San Diego
Philadelphia
Phoenix
San Francisco
San Jose
Washington DC
Amsterdam
Frankfurt
Hong Kong
London
Mumbai
Osaka(1)
Paris
Singapore
Sydney
Tokyo(1)
Toronto
(1) Through our joint venture in Internap Japan Co., Ltd. with NTT-ME Corporation and Nippon Telegraph and Telephone Corporation.
8
Internap
2009 Form 10-K
Part I
Item 1. Business
We are dependent upon the NSPs noted above as well
as other ISPs, telecommunications carriers and vendors
in the United States, Europe and Asia-Pacific region.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
For each of the three years in the period ended
December 31, 2009, we derived less than 10% of our
total revenues from operations outside the United States.
SALES AND MARKETING
Our sales and marketing objective is to achieve market
penetration and increase brand recognition among
business customers in key industries that use the
Internet for strategic and business-critical operations.
We employ a direct sales team with extensive and rele-
vant sales experience with our target market. Our sales
offices are located in key cities across North America,
as well as an office in the United Kingdom, or U.K.
Our sales and serv ice organization includes approxi-
mately 82 employees in direct and channel sales,
professional services, account management and tech-
nical consulting. As of December 31, 2009, we had
approximately 48 direct sales representatives whose
performance is measured on the basis of achievement
of quota objectives.
To support our sales efforts and promote the Internap
brand, we conduct comprehensive marketing pro-
grams. Our marketing strategies include advertising,
participation at trade shows, direct response pro-
grams, new serv ice point launch events, an active
public relations campaign and continuing customer
communications. As of December 31, 2009, we had
four employees in our marketing department.
network transport. Cloud technologies enable the
delivery of on-demand, scalable serv ice consumption
with self-serv ice and automated subscription, man-
agement, provisioning and billing capabilities. Product
development costs, which we also include in general
and administrative cost and expense as incurred, are
primarily related to network engineering costs associ-
ated with changes to the functionality of our propri-
etary services and network architecture. Research
and development costs were $3.8 million, $5.0 million
and $3.1 million during the years ended December 31,
2009, 2008 and 2007, respectively. These costs do
not include $0.9 million, $1.4 million and $1.6 million in
internal software development costs capitalized during
the years ended December 31, 2009, 2008 and 2007,
respectively. We also expense as incurred those costs
that do not qualify for capitalization as software devel-
opment costs.
CUSTOMERS
As of December 31, 2009, we had approximately
2,900 customers. We provide services to customers
in multiple vertical industry segments including enter-
tainment and media, financial services, healthcare,
travel, e-commerce, retail and technology; however,
our customer base is not concentrated in any particular
industry. In each of the past three years, no single cus-
tomer accounted for 10% or more of our net revenues.
Similarly, in each of the past three years, we did not
derive any significant amounts of revenue from con-
tracts or subcontracts terminable or renegotiable at
the election of the federal government, and we do not
expect such contracts to be a significant percentage of
our total revenue in 2010.
RESEARCH AND DEVELOPMENT
COMPETITION
Research and development costs, which we include
in general and administrative cost and expense as
incurred, primarily consist of compensation related to
our development and enhancement of IP routing tech-
nology, progressive download and streaming technol-
ogy for our CDN, acceleration and cloud technologies.
Acceleration technologies improve the performance
(throughput) of applications that depend upon IP for
The market for our services is intensely competitive
and is characterized by technological change, the
introduction of new products and services and price
erosion. We believe that the principal factors of com-
petition for serv ice providers in our target markets
include: speed and reliability of connectivity, quality of
facilities, level of customer serv ice and technical sup-
port, price and brand recognition. We believe that we
compete favorably on the basis of these factors.
9
Internap
2009 Form 10-K
Part I
Item 1. Business
Our current and potential competition primarily con-
sists of:
business, consolidated financial condition, results of
operations and cash flows.
• NSPs that provide connectivity services, includ-
ing AT&T Inc.; Sprint Nextel Corporation; Verizon
Communications Inc.; Level 3 Communications,
Inc.; Global Crossing Limited; and Verio, an NTT
Communications Company;
• global, national and regional ISPs such as Orange
Business Services, BT Infonet, and Savvis, Inc.;
• providers of specific applications or services, such
as content delivery, security or storage such as
Akamai Technologies, Inc.; Limelight Networks, Inc.;
CD Networks Co., Ltd.; Mirror Image Internet, Inc.;
Symantec Corporation; Network Appliance, Inc. and
Virtela Communications, Inc.;
• software-based, Internet infrastructure companies
focused on IP route control and wide area network
optimization products such as Riverbed Technology,
Inc.; F5 Networks, Inc. and Radware Ltd.; and
• colocation and data center providers, including
Equinix, Inc.; Terremark Worldwide, Inc.; Navisite,
Inc.; 365 Main Inc.; Quality Technology Services and
Savvis, Inc.
Competition has resulted, and will likely continue to
result, in price pressure on our services.
Many of our competitors have longer operating histo-
ries and presence in key markets, greater name recog-
nition, larger customer bases and significantly greater
financial, sales and marketing, distribution, technical
and other resources than we have. As a result, these
competitors may be able to introduce emerging tech-
nologies on a broader scale and adapt to changes in
customer requirements or to devote greater resources
to the promotion and sale of their products. In all of
our target markets, we also may face competition from
newly established competitors, suppliers of services or
products based on new or emerging technologies and
customers that choose to develop their own network
services or products. We also may encounter further
consolidation in the markets in which we compete.
In addition, competitors may develop technologies
that more effectively address our markets with serv-
ices that offer enhanced features or lower costs.
Increased competition could result in pricing pres-
sures, decreased gross margins and loss of market
share, which may materially and adversely affect our
INTELLECTUAL PROPERTY
We rely on a combination of copyright, patent, trade-
mark, trade secret and other intellectual property
law, nondisclosure agreements and other protective
measures to protect our proprietary rights. We also
utilize unpatented, proprietary know-how and trade
secrets and employ various methods to protect such
intellectual property. As of December 31, 2009, we
had 19 patents (14 issued in the United States and five
issued internationally) that extend to various dates
between 2017 and 2026, and 14 registered trade-
marks in the United States. We believe our intellectual
property rights are significant and that the loss of all
or a substantial portion of such rights could have a
material adverse impact on our results of operations.
We can offer no assurance that our intellectual prop-
erty protection measures will be sufficient to prevent
misappropriation of our technology. In addition, the
laws of many foreign countries do not protect our intel-
lectual property rights to the same extent as the laws
of the United States. From time-to-time, third parties
have or may assert infringement claims against us or
against our customers in connection with their use of
our products or services. In addition, we may desire
or be required to renew or to obtain licenses from oth-
ers to further develop and market commercially viable
products or services effectively. We can offer no assur-
ances that any necessary licenses will be available on
reasonable terms.
EMPLOYEES
As of December 31, 2009, we had approximately 390
employees, substantially all of whom are full-time
employees. None of our employees are represented by
a labor union, and we have not experienced any work
stoppages to date. We consider the relationships with
our employees to be good. Competition for technical
personnel in the industries in which we compete is
intense. We believe that our future success depends
in part on our continued ability to hire, assimilate and
retain qualified personnel. We can offer no assurances
that we will be successful in recruiting and retaining
qualified employees in the future.
10
Internap
2009 Form 10-K
Part I
Item 1A. Risk Factors
Item 1A.
RISK FACTORS
We operate in a changing environment that involves
numerous known and unknown risks and uncertain-
ties that could have a materially adverse impact on our
operations. The risks described below highlight some
of the factors that have affected, and in the future could
affect, our operations. You should carefully consider
these risks. These risks are not the only ones we may
face. Additional risks and uncertainties of which we
are unaware or that we currently deem immaterial also
may become important factors that affect us. If any of
the events or circumstances described in the follow-
ings risks occurs, our business, consolidated financial
condition, results of operations, cash flows, or any
combination of the foregoing, could be materially and
adversely affected.
Our risks are described in detail below; however, the
more significant risks we face can be summarized into
several broad categories, including:
The future evolution of the technology industry in which
we operate is difficult to predict and highly competitive
and requires continual innovation, strategic planning,
capital investment, demand planning and space utili-
zation management to remain viable. We face ongoing
challenges to develop new services and products to
maintain current customers and obtain new ones,
whether in a cost-effective manner or at all. In addition,
technological advantages typically devalue rapidly cre-
ating constant pressure on pricing and cost structures
and hinder our ability to maintain or increase margins.
We are dependent on numerous suppliers, vendors
and other third-party providers across a wide spec-
trum of products and services to operate our busi-
ness. These include real-estate, network capacity
and access points, network equipment and supplies,
power and other vendors. In many cases the suppliers
of these products and services are not only vendors,
they are also competitors. While we maintain contrac-
tual agreements with these suppliers, we have limited
ability to guarantee they will meet their obligations, or
that we will be able to continue to obtain the products
and services necessary to operate our business in suf-
ficient supply, or at an acceptable cost.
Our business model involves designing, deploying, and
maintaining a complex set of network infrastructures
at considerable capital expense. We invest signifi-
cant resources to help maintain the integrity of our
infrastructure and support our customers; however,
we face constant challenges related to our network
infrastructure, including capital forecasting, demand
planning, space utilization management, physical fail-
ures, obsolesce, maintaining redundancies, security
breaches, power demand, and other risks.
Our financial results have fluctuated over time and we
have a history of losses, including in each of the past
three years. We have also incurred significant charges
related to impairments and restructuring efforts, which,
along with other factors, may contribute to volatility in
our stock price.
RISKS RELATED TO OUR INDUSTRY
We cannot predict with certainty the future evolu-
tion of the market for technology and products,
and may be unable to respond effectively and on a
timely basis to rapid technological change.
Our industry is characterized by rapidly changing
technology, industry standards and customer needs,
as well as by frequent new product and serv ice intro-
ductions. New technologies and industry standards
have the potential to replace or provide lower cost
alternatives to our services. The adoption of such new
technologies or industry standards could render our
existing services or products obsolete and unmarket-
able to a sufficiently large number of customers. Our
failure to anticipate the prevailing standard, to adapt
our technology to any changes in the prevailing stan-
dard or the failure of a common standard to emerge
could materially and adversely affect our business.
Our pursuit of necessary technological advances may
require substantial time and expense, and we may be
unable to successfully adapt our network and services
to alternative access devices and technologies. If the
Internet becomes subject to a form of central manage-
ment, or if NSPs establish an economic settlement
arrangement regarding the exchange of traffic between
Internet networks, the demand for our IP services
could be materially and adversely affected. Likewise,
technological advances in computer processing, stor-
age, capacity, component size or advances in power
management could change which could result in a
decreased demand for our data center services.
If we are unable to develop new and enhanced
serv ices and products that achieve widespread
market acceptance, or if we are unable to improve
the performance and features of our existing serv-
ices and products or adapt our business model to
11
Internap
2009 Form 10-K
Part I
Item 1A. Risk Factors
keep pace with industry trends, our business and
operating results could be adversely affected.
Our industry is constantly evolving. The process of
expending research and development to create new
services and products, and the technologies that
support them, is expensive, time and labor intensive
and uncertain. We may fail to understand the market
demand for new services and products or not be able
to overcome technical problems with new services.
The demand for top research and development talent
is high, and there is significant competition for these
scarce resources.
Our future success may depend on our ability to
respond to the rapidly changing needs of our cus-
tomers by expending research and development in
a cost-effective manner to acquire talent, develop
and introduce new services, products and product
upgrades on a timely basis. New product development
and introduction involves a significant commitment of
time and resources and is subject to a number of risks
and challenges, including:
• sourcing, identifying, obtaining, and maintain-
ing qualified R&D staff with the appropriate skill
and expertise;
• managing the length of the development cycle for
new products and product enhancements, which
historically has been longer than expected;
• adapting to emerging and evolving industry stan-
dards and to technological developments by our
competitors and customers services and products
• entering into new or unproven markets where we
have limited experience;
• managing new product and serv ice strategies and inte-
grating those with our existing services and products;
• incorporating acquired products and technologies;
• trade compliance issues affecting our ability to ship
new products to international markets;
• developing or expanding efficient sales channels; and
• obtaining required technology licenses and techni-
cal access from operating system software vendors
on reasonable terms to enable the development and
deployment of interoperable products.
In addition, if we cannot adapt our business models
to keep pace with industry trends, our revenue could
be negatively impacted. If we are not successful in
managing these risks and challenges, or if our new
services, products and product upgrades are not
technologically competitive or do not achieve market
acceptance, we may lose market share, resulting in a
decrease in our revenues and earnings.
Our capital investment strategy for data center
expansion may contain erroneous assumptions
causing our return on invested capital to be mate-
rially lower than expected.
Our strategic decision to invest capital in expanding
our data center space in 2010 and beyond is based on
significant assumptions relative to expected growth
of this market, our competitor’s plans, current and
expected occupancy rates and similar factors. We
have no way of ensuring the data or models used to
deploy capital into existing markets, or to create new
markets, will be accurate. Errors or imprecision in
these estimates, especially those related to customer
demand, could cause actual results to differ materially
from expected results and have a material negative
impact on revenue in future periods.
Our management of existing data center space
or estimation of future data center space needs
may be inaccurate, leading to lost revenue through
missed sales opportunities or additional expenses
through unnecessary carrying costs for our data
center space.
Adding data center space involves significant capi-
tal outlays well ahead of planned usage. We strive
to maintain accurate records related to data center
space by classification; however, we may not be able
to ensure accuracy of existing data center space nor
be able to accurately project future space needs due
to significant estimates and assumptions required for
these projections. Errors or imprecision in these esti-
mates could cause actual results to differ materially for
expected results and correspondingly have a material
negative impact on revenue in future periods.
We may not be able to compete successfully
against current and future competitors.
The IP services and data center services markets are
highly competitive, as evidenced by recent declines in
pricing for Internet connectivity services and the sig-
nificant capital invested in data center expansions by
our competitors. We expect competition to continue to
intensify in the future, and we may not have the finan-
cial resources, technical expertise, sales and market-
ing abilities, capital or support capabilities to compete
successfully. Our competitors currently include: NSPs
that offer Internet access; global, national and regional
NSPs and ISPs; providers of specific applications or
serv ice offerings such as content delivery, security
or storage; software-based and other Internet infra-
structure providers and manufacturers; and colocation
and data center providers. In addition, NSPs and ISPs
may make technological advancements, such as the
12
Internap
2009 Form 10-K
Part I
Item 1A. Risk Factors
introduction of improved routing protocols to enhance
the quality of their services, which could negatively
impact the demand for our services and products.
In addition, we expect that we will face additional com-
petition as we expand our product offerings, including
competition from technology and telecommunications
companies. A number of telecommunications com-
panies, NSPs and ISPs have offered or expanded
their network services. Further, the ability of some of
these potential competitors to bundle other services
and products with their network services could place
us at a competitive disadvantage. Various compa-
nies also are exploring the possibility of providing, or
are currently providing, high-speed, intelligent data
services that use connections to more than one net-
work or use alternative delivery methods, including
the cable television infrastructure, direct broadcast
satellites and wireless local loop. Many of our exist-
ing and future competitors may have greater market
presence, engineering and marketing capabilities
and financial, technological and personnel resources
than we have. As a result, our competitors may have
significant advantages over us and may be able to
respond more quickly to emerging technologies and
ensuing customer demands. Increased competition
and technological advancements by our competitors
could materially and adversely affect our business,
consolidated financial condition, results of operations
and cash flows.
Failure to retain existing customers or add new
customers may cause declines in revenue.
In addition to adding new customers, we must sell
additional services to existing customers as well as
encourage them to increase their usage levels to
increase our revenue. If our existing and prospective
customers do not perceive our services to be of suf-
ficiently high value and quality, we may not be able to
retain our current customers or attract new custom-
ers. Our customers have no obligation to renew their
contracts for our services after the expiration of their
initial commitment, and these serv ice agreements may
not be renewed at the same or higher price or level of
service, if at all. Moreover, under some circumstances,
some of our customers have the right to cancel their
serv ice agreements prior to the expiration of the terms
of their agreements. Due to the significant upfront
costs of managing data centers, if our customers fail to
renew or cancel their serv ice agreements, we may not
be able to recover the initial costs associated with the
expansion of our facilities.
Our customers’ renewal rates may decline or fluctuate
as a result of a number of factors, including:
• their satisfaction or dissatisfaction with our services;
• our ability to provide features and functionality
demanded by our customers;
• the prices of our services and products as compared
with those of our competitors;
• mergers and acquisitions affecting our customer
base; and
• reduction in our customers’ spending levels.
If our customers do not renew their serv ice agreements
with us or if they renew on less favorable terms, our rev-
enue may decline and our business may suffer. Similarly,
our customer agreements often provide for minimum
commitments that may be significantly below our cus-
tomers’ historical usage levels. Consequently, even if we
have agreements with our customers to use our serv-
ices, these customers could significantly curtail their
usage without incurring any incremental fees under our
agreements. In this event, our revenue would be lower
than expected and our operating results could suffer.
We have a long sales cycle for our services and
products and the implementation efforts required
by customers to activate our services and prod-
ucts can be substantial.
Our services and products are complex and require
substantial sales efforts and technical consultation to
implement. A customer’s decision to use datacenter
space or acquire IP services typically involves a signifi-
cant commitment of resources. Some customers may
be reluctant to enter into an agreement with us due to
their inability to accurately forecast future demand,
delay in decision-making or inability to obtain neces-
sary internal approvals to commit resources. We may
expend time and resources pursuing a particular sale
or customer that does not result in revenue. Delays due
to the length of our sales cycle may harm our ability to
meet our forecasts and materially and adversely affect
our revenues and operating results.
We may lose customers if they elect to develop IP
or content delivery services or products internally.
Our customers and potential customers may decide
to develop their own IP or content delivery services
or products rather than outsource to services pro-
viders like us. These in-house services or products
could be perceived to be superior to our services and
products. In addition, our customers could decide to
host their Internet applications internally, bypassing
outside vendors like us. This is particularly true as
our customers increase their operations and expend
greater resources on delivering their content using
third-party services. If we fail to offer IP, data center or
13
Internap
2009 Form 10-K
Part I
Item 1A. Risk Factors
CDN services that compete favorably with in-sourced
services, if we fail to differentiate our services and
products or if competitors introduce new products
or services that compete with or surpass the qual-
ity or the price/performance of our services, we may
lose customers or fail to attract customers that
may consider pursuing this in-sourced approach, and our
business and financial results would suffer as a result.
In addition, our customers’ business models may
change in ways that we do not anticipate and these
changes could reduce or eliminate our customers’
needs for our services or products. If this occurred, we
could lose customers or potential customers, and our
business and financial results would suffer. As a result
of these or similar potential developments, in the future
it is possible that competitive dynamics in our market
may require us to reduce our prices, which could harm
our revenue, gross margin and operating results.
Pricing pressure may continue to decrease our
revenue and threaten the at tractiveness of
our premium-priced IP services.
Pricing for Internet connectivity services has declined
significantly in recent years and may continue to
decline. We currently charge, and expect to continue
to charge, premium prices for our high-performance
IP services compared to the prices charged by our
competitors for their connectivity services. By bun-
dling their services and reducing the overall cost of
their serv ice offerings, certain of our competitors may
be able to provide customers with reduced commu-
nications costs in connection with their Internet con-
nectivity services or private network services, thereby
significantly increasing the pressure on us to decrease
our prices. Increased price competition, significant
price deflation and other related competitive pressures
has eroded, and could continue to erode, our revenue
and could materially and adversely affect our results
of operations if we are unable to control or reduce our
costs. Because we rely on NSPs to deliver our services
and have agreed with some of these providers to pur-
chase minimum amounts of serv ice at predetermined
prices, our profitability could be adversely affected by
competitive price reductions to our customers even if
accompanied with an increased number of customers.
In light of economic factors and technological
advances, companies that require Internet connectiv-
ity have evaluated and will continue to evaluate the
cost of such services, particularly high performance
connectivity services such as those we currently
offer. Consequently, existing and potential custom-
ers may be less willing to pay premium prices for high
performance Internet connectivity services and may
choose to purchase lower-quality services at lower
prices, which could materially and adversely affect our
business, consolidated financial condition, results of
operations and cash flows.
In addition, prices for content delivery services have
similarly fallen in recent years from technological
improvements and intensified competition and may
continue to fall in the future. If the price that we are able
to charge customers to deliver their content falls to a
greater extent than we anticipate, if we overestimate
future demand for our services or if our costs to deliver
our services do not fall commensurate with any future
price declines, we may not be able to achieve accept-
able rates of return on our infrastructure investments,
and our gross profit and results of operations may suf-
fer dramatically.
We may acquire other businesses, and these
acquisitions involve integration and other risks
that could harm our business.
We may pursue acquisitions of complementary busi-
nesses, products, services and technologies to
expand our geographic footprint, enhance our existing
services, expand our serv ice offerings or enlarge our
customer base. If we complete future acquisitions, we
may be required to incur or assume additional debt,
make capital expenditures or issue additional shares
of our common stock or securities convertible into our
common stock as consideration, which would dilute
our existing stockholders’ ownership interest and may
adversely affect our results of operations.
If we fail to identify and acquire needed companies or
assets, if we acquire the wrong companies or assets
or if we fail to address the risks associated with inte-
grating an acquired company, we would not be able
to effectively manage our growth through acquisitions
which could adversely affect our results.
If governments modify or increase regulation of
the Internet, or goods or services necessary to
operate the Internet or our data centers, our serv-
ices could become more costly.
International bodies and federal, state and local gov-
ernments have adopted a number of laws and regula-
tions that affect the Internet and are likely to continue
to seek to implement additional laws and regulations.
In addition, federal and state agencies are actively con-
sidering regulation of various aspects of the Internet,
including taxation of transactions, imposition of access
fees for VoIP, enhanced data privacy and retention leg-
islation and various energy regulations. In addition,
laws relating to the liability of private network operators
and information carried on or disseminated through
their networks are unsettled, both in the United States
and abroad.
14
Internap
2009 Form 10-K
Part I
Item 1A. Risk Factors
The adoption of any future laws or regulations might
decrease the growth of the Internet, decrease demand
for our services, impose taxes or other costly techni-
cal requirements, regulate the Internet or otherwise
increase the cost of doing business on the Internet.
Any of these actions could significantly harm our cus-
tomers or us. Moreover, the nature of any new laws and
regulations and the interpretation of applicability to the
Internet of existing laws governing intellectual property
ownership and infringement, copyright, trademark,
trade secret, obscenity, libel, employment, personal
privacy and other issues are uncertain and developing.
Additionally, potential laws and regulations not specifi-
cally directed at the Internet, but targeted at goods or
services necessary to operate the Internet, could have
a negative impact on us. Of specific concern are the
legal, political and scientific developments regarding
climate change. These factors may impact the delivery
of our services or products by driving up the cost of
power, which is a significant cost of operating our data
centers and other serv ice points.
We cannot predict the impact, if any, that future regula-
tion or regulatory changes may have on our business.
RISKS RELATED TO OUR BUSINESS
We depend on third-party suppliers for key ele-
ments of our network infrastructure. If we are
unable to obtain these items on a cost-effective
basis, or at all, or if such services are interrupted,
limited or terminated, our growth prospects and
business operations may be adversely affected.
In delivering our services, we rely on a number of
Internet networks, many of which are built and oper-
ated by third parties. To provide high performance
connectivity services to our customers through our
network access points, we purchase connections from
several NSPs. We can offer no assurances that these
NSPs will continue to provide serv ice to us on a cost-
effective basis or on otherwise competitive terms, if at
all, or that these providers will provide us with addi-
tional capacity to adequately meet customer demand
or to expand our business. Consolidation among NSPs
limits the number of vendors from which we obtain
service, possibly resulting in higher network costs to
us. We may be unable to establish and maintain rela-
tionships with other NSPs that may emerge or that are
significant in geographic areas, such as Asia, India
and Europe, in which we may locate our future network
access points. Any of these situations could limit our
growth prospects and materially and adversely affect
our business.
We also depend on other companies to supply various
key elements of our infrastructure, including the net-
work access loops between our network access points
and our NSP, local loops between our network access
points and our customers’ networks and certain end-
user access networks. Pricing for such network access
loops and local loops has risen significantly over time
and operators of these networks may take measures,
such as the deployment of a variety of filters, that could
degrade, disrupt or increase the cost of our or our
customers’ access to certain of these end-user access
networks by restricting or prohibiting the use of their
networks to support or facilitate our services, or by
charging increased fees to us, our customers or end-
users in connection with our services. Some of our
competitors have their own network access loops and
local loops and are, therefore, not subject to the same
or similar availability and pricing issues.
In addition, we currently purchase routers and switches
from a limited number of vendors. We do not carry sig-
nificant inventories of the products we purchase, and
we have no guaranteed supply arrangements with our
vendors. A loss of a significant vendor could delay any
build-out of our infrastructure and increase our costs. If
our limited source of suppliers fails to provide products
or services that comply with evolving Internet standards or
that interoperate with other products or services we use
in our network infrastructure, we may be unable to meet
all or a portion of our customer serv ice commitments,
which could materially and adversely affect our results.
We depend on third-party suppliers for key ele-
ments of our data center infrastructure. If we are
unable to obtain datacenter facilities on a cost-
effective basis, or at all, our growth prospects and
business operations may be adversely affected.
In establishing data center facilities, we rely on a
number of vendors to provide physical space, convert
or build space to data center specifications, provide
power, internal cabling and wiring, climate control
and system redundancy. Physical space is typically
obtained through long-term lease arrangements, while
multiple other vendors are utilized to perform leasehold
improvements necessary to make the physical space
available for occupancy. The demand for premium data
center space in several key markets has outpaced sup-
ply over recent years and the imbalance is projected to
continue over the near term. This has increased, and
will continue to increase, our costs to add data center
space. If we are not able to contain data center expan-
sion costs, or are not able to pass these costs on to our
customers, our results will be adversely affected.
15
Internap
2009 Form 10-K
Part I
Item 1A. Risk Factors
Our business operations depend on contracts with
vendors and suppliers who may not meet their
contractual obligations.
We maintain contracts with third-party vendors that
govern our IP capacity, P-NAPs, data center space
and various other services and products. Tracking,
monitoring and managing these contract and vendor
relationships is critical to our business operations;
however, we have limited control over the perfor-
mance of these contracts by the vendors related to the
terms, conditions or contractual obligations contained
therein. Even if these contracts contain terms favorable
to us in the event of a breach, there is no guarantee
the damages due us under the contract would cover
the losses suffered or would even be paid. Also, each
contract contains specific terms and conditions that
may change over time based on contract expiration,
assignment, assumption or renegotiation. There is
no guarantee that these changes would be favorable
to us, and to the event they were not, our operations
could be materially impacted.
In addition, these contracts may contain clauses, provi-
sions, triggers, rights, options or obligations that result
in favorable or non-favorable impacts on us depending
on actions taken, or not taken. While we intend to pursue
all contractual provisions favorable to our business,
the appropriate actions under a particular contract
may require estimates, judgments and assumptions to
be made concerning future events for which we have
limited basis for estimation. We cannot guarantee that
we will take the appropriate action under a particular
contract to maximize the benefit to us, which could have
a material, adverse impact on operations.
Our inability to renew our data center leases on favor-
able terms could negatively impact our finan -
cial results.
Our leased data centers have lease terms that expire
between 2010 and 2023. The majority of these leases
provide us with the opportunity to renew the lease at
our option for periods generally ranging from five to 10
years. Many of these options however, if renewed, pro-
vide that rent for the renewal period will be equal to the
fair market rental rate at the time of renewal. If the fair
market rental rates are significantly higher than our cur-
rent rental rates, we may be unable to offset these costs
by charging more for our services, which could have a
negative impact on our financial results. Conversely, if
rental rates drop significantly in the near term, we would
not be able to take advantage of the drop in rates until
the expiration of the lease as we would be bound by the
terms of the existing lease agreement.
If we are unable to deploy new serv ice points (net-
work access points and/or data center space) or
do not adequately control expenses associated
with the deployment of new serv ice points, our
results of operations could be adversely affected.
As part of our strategy, we may continue to expand our
network access points and/or data center space, par-
ticularly into new geographic markets. We face various
risks associated with identifying, obtaining and inte-
grating new serv ice points, negotiating leases for data
centers on competitive terms, cost estimation errors or
overruns, delays in connecting with local exchanges,
equipment and material delays or shortages, the inabil-
ity to obtain necessary permits on a timely basis, if at
all, and other factors, many of which are beyond our
control and all of which could delay the deployment of
new serv ice points. We can offer no assurance that we
will be able to open and operate new serv ice points on
a timely or profitable basis. Deployment of new serv-
ice points will increase operating expenses, including
expenses associated with hiring, training, retaining and
managing new employees, provisioning capacity from
NSPs, purchasing new equipment, implementing new
systems, leasing additional real estate and incurring
additional depreciation expense. In addition, delays in
opening and operating new serv ice points could have a
material, negative impact on our financial results.
Any failure of the physical infrastructure in our
data serv ice centers could lead to significant costs
and disruptions that could harm our business rep-
utation, consolidated financial condition, results of
operations and cash flows.
Our business depends on providing customers with
highly-reliable service. We must protect our infrastruc-
ture and our customers’ data and their equipment
located in our data centers. The services we provide in
each of our data centers are subject to failure resulting
from numerous factors, including:
• human error;
• physical or electronic security breaches;
• fire, earthquake, hurricane, flood, tornado and other
natural disasters;
• improper building maintenance by the landlords of
the buildings in which our data centers are located;
• water damage, extreme temperatures, fiber cuts;
• power loss or equipment failure;
• sabotage and vandalism; and
• failures experienced by underlying serv ice providers
upon which our business relies.
Problems at one or more of the data centers operated
by us or any of our colocation providers, whether or not
16
Internap
2009 Form 10-K
Part I
Item 1A. Risk Factors
within our control, could result in serv ice interruptions
or significant equipment damage. Most of our custom-
ers have serv ice level agreements that require us to
meet minimum performance obligations. As a result,
serv ice interruptions or equipment damage in our
data centers could impact our ability to maintain per-
formance obligations in our serv ice level agreements
to these customers and we could face claims related
to such failures. We have in the past given credits to
our customers as a result of serv ice interruptions due
to equipment failures. Because our data centers are
critical to many of our customers’ businesses, serv ice
interruptions or significant equipment damage in our
data centers also could result in lost profits or other
indirect or consequential damages to our customers.
We cannot guarantee that a court would enforce any
contractual limitations on our liability in the event that a
customer brings a lawsuit against us as the result of a
problem at one of our data centers.
Any loss of services, equipment damage or inability
to meet performance obligations in our serv ice level
agreements could reduce the confidence of our cus-
tomers and could result in lost customers or an inabil-
ity to attract new customers, which would adversely
affect both our ability to generate revenues and our
operating results.
Furthermore, we are dependent upon NSPs and tele-
communications carriers in the United States, Europe
and Asia-Pacific region, some of whom have experi-
enced significant system failures and electrical out-
ages in the past. Users of our services may experience
difficulties due to system failures unrelated to our sys-
tems and services. If, for any reason, these providers
fail to provide the required services, our business, con-
solidated financial condition, results of operations and
cash flows could be materially adversely impacted.
A failure in the redundancies in our network opera-
tions centers, network access points or computer
systems could cause a significant disruption in our
IP services which could impact our ability to serv-
ice our customers.
While we maintain multiple layers of redundancy in
our operating facilities, if we experience a problem
at our network operations centers, including the failure
of redundant systems, we may be unable to provide
IP services to our customers, provide customer serv-
ice and support or monitor our network infrastruc-
ture or network access points, any of which would
seriously harm our business and operating results.
Also, because we provide continuous Internet avail-
ability under our SLAs, we may be required to issue a
significant amount of customer credits as a result of
such interruptions in service. These credits could neg-
atively affect our revenues and results of operations.
In addition, interruptions in serv ice to our customers
could potentially harm our customer relations, require
us to issue credits, expose us to potential lawsuits or
necessitate additional capital expenditures.
A significant number of our network access points are
located in facilities owned and operated by third par-
ties. In many of those arrangements, we do not have
property rights similar to those customarily possessed
by a lessee or subtenant but instead have lesser rights
of occupancy. In certain situations, the financial condi-
tion of those parties providing occupancy to us could
have an adverse impact on the continued occupancy
arrangement or the level of serv ice delivered to us
under such arrangements.
Our network and software are subject to potential
security breaches and similar threats that could
result in liability and harm our reputation.
A number of widespread and disabling attacks on
public and private networks have occurred. The num-
ber and severity of these attacks may increase in the
future as network assailants take advantage of out-
dated software, security breaches or incompatibility
between or among networks. Computer viruses, intru-
sions and similar disruptive problems could cause us
to be liable for damages under agreements with our
customers, and our reputation could suffer, thereby
deterring potential customers from working with us.
Security problems or other attacks caused by third
parties could lead to interruptions and delays or to the
cessation of serv ice to our customers. Furthermore,
inappropriate use of the network by third parties could
also jeopardize the security of confidential information
stored in our computer systems and in those of our
customers and could expose us to liability under unso-
licited commercial e-mail, or “spam,” regulations. In
the past, third parties have occasionally circumvented
some of these industry-standard measures. We can
offer no assurance that the measures we implement
will not be circumvented. Our efforts to eliminate com-
puter viruses and alleviate other security problems,
or any circumvention of those efforts, may result in
increased costs, interruptions, delays or cessation
of serv ice to our customers, and negatively impact
hosted customers’ on-line business transactions.
Affected customers might file claims against us under
such circumstances, and our insurance may not be
adequate to cover these claims.
17
Internap
2009 Form 10-K
Part I
Item 1A. Risk Factors
The increased use of high-power density equip-
ment may limit our ability to fully utilize our
data centers.
Customers continue to increase their use of high-
power density equipment, which has significantly
increased the demand for power. The current demand
for electrical power may exceed our designed capac-
ity in these facilities. As electrical power, rather than
space, is typically the primary factor limiting capacity
in our data centers, our ability to fully utilize our data
centers may be limited in these facilities. If we are
unable to adequately utilize our data centers, our ability
to grow our business cost-effectively could be materi-
ally and adversely affected.
Our business could be harmed by prolonged electri-
cal power outages or shortages, increased costs of
energy or general availability of electrical resources.
Our data centers and P-NAPs are susceptible to
regional costs and supply of power, electrical power
shortages, planned or unplanned power outages and
availability of adequate power resources. Power out-
ages could harm our customers and our business.
While we attempt to limit exposure to system downtime
by using backup generators, uninterruptible power
systems and other redundancies, we may not be able
to limit our exposure entirely. Even with these protec-
tions in place we have experienced power outages in
the past and may in the future. In addition, our energy
costs have increased and may continue to increase for
a variety of reasons including increased pressure on
legislators to pass green legislation. As energy costs
increase, we may not be able to pass on to our custom-
ers the increased cost of energy, which could harm our
business and operating results.
In each of our markets, we rely on utility companies to
provide a sufficient amount of power for current and
future customers. Because we rely on third parties
to provide power, we cannot ensure that these third
parties will deliver such power in adequate quanti-
ties or on a consistent basis. At the same time, power
and cooling requirements are growing on a per-unit
basis. As a result, some customers are consuming an
increasing amount of power per cabinet. We do not
have long-term power agreements in all our markets for
long-term guarantees of provisioned amounts and may
face power limitations in our centers. This limitation
could have a negative impact on the effective available
capacity of a given data center and limit our ability to
grow our business, which could have a negative impact
on our relationships with our customers as well as our
consolidated financial condition, results of operations
and cash flows.
RISKS RELATED TO OUR CAPITAL STOCK AND
OTHER BUSINESS RISKS
We have a history of losses and may not sus-
tain profitability.
We have a history of quarterly and annual period net
losses, including for each of three years in the period
ended December 31, 2009. At December 31, 2009, our
accumulated deficit was $1,036.5 million. Considering
the competitive and evolving nature of the industry
in which we operate, we may not be able to achieve
or sustain profitability on a quarterly or annual basis,
and our failure to do so could materially and adversely
affect our business, including our ability to raise addi-
tional funds.
We may incur additional goodwill and other intan-
gible asset impairment charges, restructuring charges
or both.
As more fully described in notes 8 and 9 to the accom-
panying consolidated financial statements, we have
recently recorded significant impairment and restruc-
turing charges and made changes in estimates that
resulted in acceleration of amortization expense
related to certain intangible assets.
The assumptions, inputs and judgments used in per-
forming the valuation analysis and assessments are
inherently subjective and reflect estimates based on
known facts and circumstances at the time the valu-
ation is performed. The use of different assumptions,
inputs and judgments or changes in circumstances
could materially affect the results of the valuation and
assessments. Due to the inherent uncertainty involved
in making these estimates, actual results could differ
from our estimates.
When circumstances warrant, we may elect to exit cer-
tain business activities or change the manner in which
we conduct ongoing operations. When we make such
a change, we will estimate the costs to exit a business
or restructure ongoing operations. The components of
the estimates may include estimates and assumptions
regarding the timing and costs of future events and
activities that represent our best expectations based
on known facts and circumstances at the time of esti-
mation. Should circumstances warrant, we will adjust
our previous estimates to reflect what we then believe
to be a more accurate representation of expected
future costs. Because our estimates and assump-
tions regarding impairment and restructuring charges
include probabilities of future events, such as expected
operating results, future economic conditions, the
ability to find a sublease tenant within a reasonable
period of time or the rate at which a sublease tenant
18
Internap
2009 Form 10-K
Part I
Item 1A. Risk Factors
will pay for the available space, such estimates are
inherently vulnerable to changes due to unforeseen cir-
cumstances that could materially and adversely affect
our results of operations. Adverse changes in any of
these factors could result in additional impairment and
restructuring charges in the future.
Our results of operations have fluctuated in
the past and likely will continue to fluctuate,
which could negatively impact the price of our
common stock.
We have experienced fluctuations in our results of
operations on a quarterly and annual basis. Fluctuation
in our operating results may cause the market price of
our common stock to decline. We expect to experience
continued fluctuations in our operating results in the
foreseeable future due to a variety of factors, including:
• competition and the introduction of new services by
our competitors;
• continued pricing pressures resulting from competi-
tors’ strategies or excess bandwidth supply;
Failure to sustain or increase our revenues may
cause our business and financial results to suffer.
We have considerable fixed expenses, and we expect
to continue to incur significant expenses, particu-
larly with the expansion of our data center facilities.
We incur a substantial portion of these expenditures
upfront, and are only able to recover these costs over
time. We must, therefore, at least sustain or gener-
ate higher revenues to maintain profitability. Although
revenue from our data center services segment is
growing, this segment has lower margins than our IP
services segment. If we are unable to increase our
margins in the data center services segment, our busi-
ness may suffer.
Numerous factors could affect our ability to increase
revenue, either alone or in combination with other fac-
tors, including:
• failure to increase sales of our services and products;
• pricing pressures;
• significant increases in bandwidth and data center
• fluctuations in the demand and sales cycle for
costs or other operating expenses;
our services;
• fluctuations in the market for qualified sales and
other personnel;
• the cost and availability of adequate public utilities,
including power;
• our ability to obtain local loop connections to our
network access points at favorable prices;
• general economic conditions; and
• any impairment or restructuring charges that we may
• failure of our services or products to operate as expected;
• loss of customers or inability to attract new custom-
ers or loss of existing customers at a rate greater
than our increase in new customers;
• inability of customers to pay for services and prod-
ucts on a timely basis or at all or failure to continue to
purchase our services and products in accordance
with their contractual commitments; or
• network failures and any breach or unauthorized
incur in the future.
access to our network.
In addition, fluctuations in our results of operations
may arise from strategic decisions we have made or
may make with respect to the timing and magnitude of
capital expenditures such as those associated with the
expansion of our data center facilities, the deployment
of additional network access points and the terms
of our network connectivity purchase agreements.
A relatively large portion of our expenses are fixed in
the short-term, particularly with respect to lease and
personnel expense, depreciation and amortization and
interest expense. Our results of operations, therefore,
are particularly sensitive to fluctuations in revenue.
We can offer no assurance that the results of any par-
ticular period are an indication of future performance
in our business operations. Fluctuations in our results
of operations could have a negative impact on our
ability to raise additional capital and execute our busi-
ness plan. Our operating results in one or more future
quarters may fail to meet the expectations of securities
analysts or investors, which could cause an immediate
and significant decline in the trading price of our stock.
Our common stockholders may experience sig-
nificant dilution, which could depress the market
price of our common stock.
Holders of our stock options may exercise those
options to purchase our common stock, which would
increase the number of shares of our common stock
that are outstanding in the future. As of December 31,
2009, options to purchase an aggregate of 4.3 million
shares of our common stock at a weighted average
exercise price of $7.16 were outstanding. Also, the vest-
ing of 1.1 million outstanding shares of restricted stock
will increase the weighted average number of shares
used for calculating diluted net loss per share. Greater
than expected capital requirements could require us
to obtain additional financing through the issuance of
securities, which could be in the form of common stock
or preferred stock or other securities having greater
rights than our common stock. The issuance of our
common stock or other securities, whether upon the
exercise of options, the future vesting and issuance
19
Internap
2009 Form 10-K
Part I
Item 1A. Risk Factors
of stock awards to our executives and employees or
in financing transactions, could depress the market
price of our common stock by increasing the number of
shares of common stock or other securities outstand-
ing on an absolute basis or as a result of the timing of
additional shares of common stock becoming available
on the market.
Any failure to meet our debt obligations and
other long-term commitments would damage
our business.
As of December 31, 2009, our total long-term debt,
including capital leases, was $23.2 million. If we use
more cash than we generate in the future, our level of
indebtedness could adversely affect our future opera-
tions by increasing our vulnerability to adverse changes
in general economic and industry conditions and by
limiting or prohibiting our ability to obtain additional
financing for future capital expenditures, acquisitions
and general corporate and other purposes. In addition,
if we are unable to make interest or principal payments
when due, we would be in default under the terms of
our long-term debt obligations, which would result in all
principal and interest becoming due and payable which,
in turn, would seriously harm our business.
We also have other long-term commitments for
operating leases and serv ice contracts totaling
$226.7 million over the next 15 years with a minimum
of $36.2 million payable in 2010. If we are unable to
make payments when due, we would be in breach
of contractual terms of the agreements, which may
result in disruptions of our services which, in turn,
would seriously harm our business.
Our existing credit agreement puts limitations
upon us.
Our existing credit agreement, which expires in
September 2011, puts operating and financial limita-
tions on us and requires us to meet certain financial
covenants. These limitations may negatively impact
our business, consolidated financial condition, results
of operations and cash flows by limiting or prohibiting
us from engaging in certain transactions. Our credit
agreement contains certain covenants, including those
that limit our ability to incur further indebtedness,
make acquisitions or investments, make certain capital
expenditures and create liens on our assets, in addi-
tion to covenants that require us to maintain minimum
liquidity levels.
If we do not satisfy these covenants, we would be in
default under the credit agreement. Any defaults, if
not waived, could result in our lender ceasing to make
loans or extending credit to us, accelerating or declar-
ing all or any obligations immediately due or taking
possession of or liquidating collateral. If any of these
events occur, we may not be able to borrow sufficient
funds to refinance the credit agreement on terms
that are acceptable to us, which could materially and
adversely impact our business, consolidated financial
condition, results of operations and cash flows.
Finally, our ability to access the capital markets may be
limited at a time when we would like or need to do so,
which could have an impact on our flexibility to pursue
expansion opportunities and maintain our desired level
of revenue growth in the future.
Our ability to use U.S. net operating loss carryfor-
wards might be limited.
As of December 31, 2009, we had net operating loss
carryforwards of $179.5 million for U.S. federal tax pur-
poses. These loss carryforwards expire between 2020
and 2026. To the extent these net operating loss carry-
forwards are available, we intend to use them to reduce
the corporate income tax liability associated with our
operations. Section 382 of the U.S. Internal Revenue
Code generally imposes an annual limitation on the
amount of net operating loss carryforwards that might
be used to offset taxable income when a corporation
has undergone significant changes in stock owner-
ship. To the extent our use of net operating loss car-
ryforwards is significantly limited, our income could be
subject to corporate income tax earlier than it would if
we were able to use net operating loss carryforwards,
which could result in lower profits.
Our stock price may be volatile.
The market for our equity securities has been extremely
volatile. Our stock price could suffer in the future as a
result of any failure to meet the expectations of public
market analysts and investors about our results of
operations from quarter to quarter. The following fac-
tors could cause the price of our common stock in the
public market to fluctuate significantly:
• actual or anticipated variations in our quarterly and
annual results of operations;
• changes in market valuations of companies in the
Internet connectivity and services industry;
• changes in expectations of future financial perfor-
mance or changes in estimates of securities analysts;
• fluctuations in stock market prices and volumes;
• future issuances of common stock or other securities;
• the addition or departure of key personnel; and
• announcements by us or our competitors of acquisi-
tions, investments or strategic alliances.
20
Internap
2009 Form 10-K
Part I
Item 1A. Risk Factors
We previously identified a material weakness
in our internal control over financial reporting.
Although we have remediated this weakness, any
additional control deficiencies could cause us to
fail to meet our financial reporting obligations or
prevent us from providing reliable and accurate
financial reports or avoiding or detecting fraud.
We must maintain effective internal controls to provide
reliable and accurate financial reports and prevent
fraud. These controls are designed and implemented
to help ensure reliable financial statement reporting,
including accurate reserves, estimates, judgments
and disclosures. In connection with our evaluation of
internal control over financial reporting for the year
ended December 31, 2007, we identified a material
weakness related to effective controls over the analysis
of requests for sales credits and billing adjustments.
We remediated this weakness during the year ended
December 31, 2008; however, any additional control
deficiencies, significant deficiencies or material weak-
nesses that we may identify in the future could require
us to incur significant costs, expend significant time
and management resources or make other changes.
Any delay or failure to design and implement new or
improved controls, or difficulties encountered in their
implementation or operation may cause us to fail to
meet our financial reporting obligations or prevent us
from providing reliable and accurate financial reports
or avoiding or detecting fraud.
Our business requires the continued develop-
ment of effective and efficient business support
systems to support our customer growth and
related services.
The growth of our business depends on our ability to
continue to develop effective, efficient business sup-
port policies, processes and systems. This is a compli-
cated undertaking requiring significant resources and
expertise. Business support systems are needed for:
• sourcing, evaluating and targeting potential custom-
ers and managing existing customers;
• implementing customer orders for services;
• delivering these services;
• timely billing for these services;
• budgeting, forecasting, tracking and reporting our
results of operations; and
• providing technical and operational support to custom-
ers and tracking the resolution of customer issues.
If the number of customers that we serve or our serv-
ices portfolio increases, we may need to develop
additional business support systems on a schedule
sufficient to meet proposed serv ice rollout dates. The
failure to continue to develop effective and efficient
business support systems could harm our ability to
implement our business plans and meet our financial
goals and objectives.
We depend upon our key employees and may be
unable to attract or retain sufficient numbers of
qualified personnel.
Our future performance depends upon the continued
contributions of our executive management team and
other key employees. To the extent we are able to
expand our operations and deploy additional network
access points, we may need to increase our work-
force. Accordingly, our future success depends on
our ability to attract, hire, train and retain highly skilled
management, technical, sales, research and develop-
ment, marketing and customer support personnel.
Competition for qualified employees is intense, and
we compete for qualified employees with companies
that may have greater financial resources than we
have. Our employment security plan with our executive
officers provides that either party may terminate their
employment at any time. Consequently, we may not be
successful in attracting, hiring, training and retaining
the people we need, which would seriously impede our
ability to implement our business strategy.
Additionally, changes in our senior management team
during the past several years, both through voluntary
and involuntary separation, have resulted in loss of
valuable company intellectual capital and in paying
significant severance and hiring costs. With reduced
staffing, or staffing new to the organization, we may not
be able to maintain an adequate separation of duties in
key areas of monitoring, oversight and review functions
and may not have adequate succession plans in place
to mitigate the impact of future personnel losses. If we
continue to experience similar levels of turnover in our
senior management team, the execution of our corpo-
rate strategy could be affected and the costs of such
changes could negatively impact our operations.
Our international operations may not be successful.
We have limited experience operating internationally
and have only recently begun to achieve some suc-
cess in our international operations. We currently have
network access points or CDN POPs in Amsterdam,
Hong Kong, London, Mumbai, Singapore, Sydney
and Toronto. We also participate in a joint venture
with NTT-ME Corporation and Nippon Telegraph and
21
Internap
2009 Form 10-K
Part I
Item 1A. Risk Factors
Telephone Corporation, or NTT Holdings, that operates
network access points in Tokyo and Osaka, Japan.
We may develop or acquire network access points or
complementary businesses in additional international
markets. The risks associated with expansion of our
international business operations include:
In addition, the laws of many foreign countries do not
protect our intellectual property to the same extent as
the laws of the United States. From time-to-time, third
parties have or may assert infringement claims against
us or against our customers in connection with their use
of our products or services.
• challenges in establishing and maintaining relation-
ships with foreign customers as well as foreign NSPs
and local vendors, including data center and local
network operators;
• challenges in staffing and managing network opera-
tions centers and network access points across
disparate geographic areas;
• potential loss of proprietary information due to mis-
appropriation or laws that may be less protective of
our intellectual property rights than the laws in the
United States;
• challenges in reducing operating expense or other
costs required by local laws, and longer accounts
receivable payment cycles and difficulties in collect-
ing accounts receivable;
• exposure to fluctuations in foreign currency
exchange rates;
• costs of customizing network access points for for-
eign countries and customers;
• compliance with requirements of foreign laws, regu-
lations and other governmental controls, including
trade and labor restrictions and related laws that
may reduce the flexibility of our business operations
or favor local competition.
We may be unsuccessful in our efforts to address
the risks associated with our international opera-
tions, which may limit our international sales growth
and materially and adversely affect our business and
results of operations.
If we fail to adequately protect our intellectual
property, we may lose rights to some of our most
valuable assets.
We rely on a combination of copyright, patent, trade-
mark, trade secret and other intellectual property law,
nondisclosure agreements and other protective mea-
sures to protect our proprietary rights. We also utilize
unpatented proprietary know-how and trade secrets
and employ various methods to protect such intellectual
property. We believe our intellectual property rights are
significant and that the loss of all or a substantial portion
of such rights could have a material adverse impact on
our results of operations. We can offer no assurance
that our intellectual property protection measures will be
sufficient to prevent misappropriation of our technology.
In addition, we rely on the intellectual property of others.
We may desire or be required to renew or to obtain
licenses from these other parties to further develop and
market commercially-viable products or services effec-
tively. We can offer no assurance that any necessary
licenses will be available on reasonable terms, or at all.
We may face litigation and liabilit y due to
claims of infringement of third-party intellectual
property rights.
The Internet services industry is characterized by the
existence of a large number of patents and frequent
litigation based on allegations of patent infringement.
From time-to-time, third parties may assert patent,
copyright, trademark, trade secret and other intellectual
property rights to technologies that are important to
our business. Any claims that our services or products
infringe or may infringe proprietary rights of third par-
ties, with or without merit, could be time-consuming,
result in costly litigation, divert the efforts of our techni-
cal and management personnel or require us to enter
into royalty or licensing agreements, any of which
could significantly impact our operating results. In
addition, our customer agreements generally provide
for us to indemnify our customers for expenses and lia-
bilities resulting from claimed infringement of patents
or copyrights of third parties, subject to certain limita-
tions. If an infringement claim against us were to be
successful, and we were not able to obtain a license to
the relevant technology or a substitute technology on
acceptable terms or redesign our services or products
to avoid infringement, our ability to compete success-
fully in our market would be materially impaired.
We are currently subject to a securities class
action lawsuit and a derivative action lawsuit,
the unfavorable outcomes of which could have a
material adverse impact on our financial condition,
results of operations and cash flows.
In November 2008, a putative securities class action
lawsuit was filed against us and our former chief exec-
utive officer and in November 2009, a putative deriva-
tive lawsuit was filed purportedly on our behalf against
certain of our directors and officers. While we are, and
will continue to, vigorously contest these lawsuits, we
22
Internap
2009 Form 10-K
Part I
Item 1A. Risk Factors
cannot determine the final resolution of these law-
suits or when they might be resolved. In addition to
the expenses incurred in defending this litigation and
any damages that may be awarded in the event of an
adverse ruling, our management’s efforts and attention
may be diverted from the ordinary business operations
to address these claims. Regardless of the outcome,
this litigation may have a material adverse impact on
our results because of defense costs, including costs
related to our indemnification obligations, diversion of
resources and other factors. We discuss these lawsuits
further in “Legal Proceedings” below.
We may become involved in other litigation that
may adversely affect us.
In the ordinary course of business, we are or may
become involved in litigation, administrative proceed-
ings and governmental proceedings. Such matters can
be time-consuming, divert management’s attention and
resources and cause us to incur significant expenses.
The results of any such actions could have a material
adverse impact on our business, consolidated finan-
cial condition, results of operations and cash flows.
Provisions of our charter documents and Delaware
law may have anti-takeover effects that could
prevent a change in control even if the change in
control would be beneficial to our stockholders.
Provisions of our Certificate of Incorporation and Bylaws,
as well as provisions of Delaware law, could discourage,
delay or prevent a merger, acquisition or other change in
control of our company. These provisions are intended to
protect stockholders’ interests by providing our board of
directors a means to attempt to deny coercive takeover
attempts or to negotiate with a potential acquirer in order
to obtain more favorable terms. Such provisions include a
board of directors that is classified so that only one-third
of directors stand for election each year. These provisions
could also discourage proxy contests and make it more
difficult for stock holders to elect directors and take other
corporate actions.
Item 1B.
UNRESOLVED
STAFF COMMENTS
None.
Item 2.
PROPERTIES
Our principal executive offices are located in Atlanta,
Georgia adjacent to our network operations center, one
of our P-NAPs and data center facilities. Our Atlanta
facility, included in the table below, consists of 120,298
square feet under a lease agreement that expires in
2020. We lease other facilities to fulfill our real estate
requirements in metropolitan areas and specific cities
where our serv ice points are located. We believe our
existing facilities are adequate for our current needs
and that suitable additional or alternative space will
be available in the future on commercially reasonable
terms as needed. The following table shows the num-
ber and gross square footage of our facilities in our top
markets as of December 31, 2009, and includes both
company-controlled facilities and partner sites:
Top Markets
Atlanta
Boston area
Houston
Los Angeles
New York Metro area
Northern California
Seattle
Top Markets Total
Approximate
Number of Gross Square
Footage
our Facilities
1
2
1
1
2
8
3
18
120,298
116,699
36,649
15,320
152,848
27,586
70,535
539,935
We have entered into leases or will expand our pres-
ence in 2010 for additional space in Seattle, Northern
California and Houston, which are not included in the
table above.
23
Internap
2009 Form 10-K
Part I.
Item 3. Legal Proceedings
Item 3.
LEGAL PROCEEDINGS
SECURITIES CLASS ACTION LITIGATION
On November 12, 2008, a putative securities fraud
class action lawsuit was filed against us and our for-
mer chief executive officer, James P. DeBlasio, in the
United States District Court for the Northern District of
Georgia, captioned Catherine Anastasio and Stephen
Anastasio v. Internap Network Services Corp. and
James P. DeBlasio, Civil Action No. 1:08-CV-3462-JOF.
The complaint alleges that we and the individual defen-
dant violated Section 10(b) of the Exchange Act and
that the individual defendant also violated Section 20(a)
of the Exchange Act as a “control person” of Internap.
Plaintiffs purport to bring these claims on behalf of
a class of our investors who purchased our stock
between March 28, 2007 and March 18, 2008.
Plaintiffs allege generally that, during the putative
class period, we made misleading statements and
omitted material information regarding (a) integra-
tion of VitalStream, (b) customer issues and related
credits due to services outages, and (c) our previously
reported 2007 revenue that we subsequently reduced
in 2008 as announced on March 18, 2008. Plaintiffs
assert that we and the individual defendant made
these misstatements and omissions in order to keep
our stock price high. Plaintiffs seek unspecified dam-
ages and other relief.
On August 12, 2009, the Court granted plaintiffs leave
to file an Amended Class Action Complaint (“Amended
Complaint”). The Amended Complaint added a claim
for violation of Section 14(a) of the Exchange Act based
on alleged misrepresentations in our proxy statement
in connection with our acquisition of VitalStream. The
Amended Complaint also added our former Chief
Financial Officer, David A. Buckel, as a defendant and
lengthened the putative class period.
On September 11, 2009, we and the individual defen-
dants filed motions to dismiss. Those motions are
currently pending before the Court. On November 6,
2009, plaintiffs filed a Corrected Amended Class
Action Complaint. On December 7, 2009, plaintiffs filed
a motion for leave to file a Second Amended Class
Action Complaint to add allegations regarding, inter
alia, an alleged failure to conduct due diligence in con-
nection with the VitalStream acquisition and additional
statements from purported confidential witnesses. We
opposed plaintiffs’ motion for leave to file the Second
Amended Class Action Complaint and that motion is
also currently pending before the Court.
DERIVATIVE ACTION LITIGATION
On November 12, 2009, stockholder Walter M. Unick
filed a putative derivative action purportedly on behalf of
Internap against certain of our directors and officers in
the Superior Court of Fulton County, Georgia, captioned
Unick v. Eidenberg, et al., Case No. 2009cv177627.
This action is based upon substantially the same facts
alleged in the securities class action litigation described
above. The complaint seeks to recover damages in an
unspecified amount. On January 28, 2010, the Court
entered the parties’ agreed order staying the matter
until the motions to dismiss are resolved in the securities
class action litigation.
While we intend to vigorously contest these lawsuits,
we cannot determine the final resolution of the law-
suits or when they might be resolved. In addition to
the expenses incurred in defending this litigation and
any damages that may be awarded in the event of an
adverse ruling, our management’s efforts and attention
may be diverted from the ordinary business operations
to address these claims. Regardless of the outcome,
this litigation may have a material adverse impact on
our results because of defense costs, including costs
related to our indemnification obligations, diversion of
resources and other factors.
We currently, and from time to time, are involved in
other litigation incidental to the conduct of our busi-
ness. Although the amount of liability that may result
from these matters cannot be ascertained, we do not
currently believe that, in the aggregate, such matters
will result in liabilities material to our consolidated
financial condition, results of operations or cash flows.
Item 4.
RESERVED
24
Internap
2009 Form 10-K
Part II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Part II
Item 5.
MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED
STOCKHOLDER MATTERS
AND ISSUER PURCHASES
OF EQUITY SECURITIES
Our common stock is listed on the NASDAQ Global
Market under the symbol “INAP.” The following table
presents, for the periods indicated, the range of high
and low per share sales prices of our common stock,
as reported on the NASDAQ Global Market. Our fiscal
year ends on December 31.
Year Ended December 31, 2009:
High
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
$4.81
3.82
3.92
3.30
Low
$2.94
2.57
2.22
2.10
Year Ended December 31, 2008:
High
Low
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
$3.72
5.08
5.90
9.02
$2.00
2.65
4.20
3.63
As of February 17, 2010, we had approximately 1,000 stockholders of record of our common stock.
We have never declared or paid any cash dividends on our capital stock, and we do not anticipate paying cash
dividends in the foreseeable future. We are prohibited from paying cash dividends under covenants contained in
our credit agreement. We currently intend to retain our earnings, if any, for future growth. Future dividends on our
common stock, if any, will be at the discretion of our board of directors and will depend on, among other things,
our operations, capital requirements and surplus, general financial condition, contractual restrictions and such
other factors as our board of directors may deem relevant.
The following table provides information regarding our current equity compensation plans as of December 31,
2009 (shares in thousands):
Equity Compensation Plan Information
Number of
securities to be
issued upon Weighted-average
exercise price
of outstanding
options, warrants
and rights
(b)
exercise of
outstanding
options, warrants
and rights
(a)
Number of
securities remaining
available for future
issuance under equity
compensation plans
(excluding securities
reflected in column (a))
(c)
Plan category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
4,253(1)
–
4,253
$7.16
–
$7.16
4,644(2)
–
4,644
(1) Excludes purchase rights under the 2004 Employee Stock Purchase Plan, or the Purchase Plan. Under the Purchase Plan, each eli-
gible employee may purchase up to $12,500 worth of our common stock at each semi-annual purchase date (the last business day
of June and December each year), but not more than $25,000 worth of such stock (based on the fair market value per share on the
purchase date(s)) per calendar year. The purchase price per share is equal to 95% of the closing selling price per share of our common
stock on the purchase date.
(2) Includes 0.2 million shares available for issuance under the Purchase Plan.
25
Internap
2009 Form 10-K
Part II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
STOCK PERFORMANCE GRAPH
The following graph compares, for the five-year period ended December 31, 2009, the cumulative total
stockholder return on our common stock with that of the NASDAQ Market Index and the Hemscott Group Index. The
graph assumes that $100 was invested on December 31, 2004 and assumes reinvestment of any dividends.
The information in the following table has been adjusted to reflect the one-for-10 reverse stock split implemented
in July 2006. Our fiscal year ends on December 31. The stock price performance on the following graph is not
necessarily indicative of future stock price performance.
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise
subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing
we make under the Securities Act of 1933, as amended, or the Exchange Act.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG INTERNAP NETWORK SERVICES
CORPORATION, NASDAQ MARKET INDEX AND HEMSCOTT GROUP INDEX
$250
200
150
100
50
0
2004
2005
2006
2007
2008
2009
Internap Network Services Corporation Hemscott Group Index NASDAQ Market Index
2004
2005
2006
2007
2008
2009
As of December 31,
Internap Network Services Corporation
Hemscott Group Index
NASDAQ Market Index
$100.00
100.00
100.00
$ 46.24
86.54
102.20
$213.55
82.14
112.68
$ 89.57
87.81
124.57
$26.88
56.38
74.71
$ 50.54
87.36
108.56
ISSUER PURCHASES OF EQUITY SECURITIES
The following table sets forth information regarding our repurchases of securities for each calendar month in the
quarter ended December 31, 2009:
(a)
(b)
(c)
(d)
Period
October 1 to 31, 2009
November 1 to 30, 2009
December 1 to 31, 2009
Total
Total Number
of Shares
(or Units)
Purchased(1)
Average Price
Paid per Share
(or Unit)
–
2,500
7,666
10,166
$ –
3.67
4.41
$4.23
Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
(or Units) that May
Yet Be Purchased
Under the
Plans or Programs
–
–
–
–
–
–
–
–
(1) Employees surrendered these shares to us as payment of statutory minimum payroll taxes due in connection with the vesting of
restricted stock.
26
Internap
2009 Form 10-K
Part II.
Item 6. Selected Financial Data
Item 6.
SELECTED FINANCIAL DATA
We have derived the selected financial data shown
below for each of the five years in the period ended
December 31, 2009 from our consolidated financial
statements. The following data should be read in
conjunc tion with the accompanying consolidated
financial statements and related notes contained and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included in this
Annual Report on Form 10-K (in thousands, except per
share data).
Consolidated Statements of Operations Data:
Revenues
Operating costs and expenses:
Direct costs of network, sales and services,
exclusive of depreciation and amortization,
shown below
Direct costs of customer support
Direct costs of amortization
of acquired technologies
Sales and marketing
General and administrative
Depreciation and amortization
Loss (gain) on disposals of property and equipment
Impairments and restructuring
Other
Total operating costs and expenses
(Loss) income from operations
Non-operating expense (income)
(Loss) income before income taxes and
equity in (earnings) of equity-method investment
Provision (benefit) for income taxes
Equity in (earnings) of equity-method investment,
net of taxes
Year Ended December 31,
2009(1)
2008(2)
2007(3)
2006(4)
2005
$256,259
$ 253,989
$234,090
$181,375
$153,717
143,016
18,527
135,877
16,217
118,394
16,547
8,349
28,131
44,152
28,282
26
54,698
–
325,181
(68,922)
461
6,649
30,888
44,235
23,865
(16)
101,441
–
359,156
(105,167)
(245)
(69,383)
357
(104,922)
174
97,338
11,566
516
27,173
26,579
15,856
(113)
323
–
81,958
10,670
577
25,864
24,960
14,737
(19)
44
60
4,165
31,533
39,076
22,242
(5)
11,349
500
243,801
179,238
158,851
(9,711)
(937)
(8,774)
(3,080)
2,137
(1,551)
3,688
145
(5,134)
(87)
(5,047)
–
Net (loss) income
$ (69,725)
$(104,813)
$ (5,555)
$ 3,657
$ (4,964)
Net (loss) income per share:
Basic
$ (1.41)
$ (2.13)
$ (0.12)
$ 0.10
$
(0.15)
Diluted
$ (1.41)
$ (2.13)
$ (0.12)
$ 0.10
$
(0.15)
(15)
(283)
(139)
(114)
(83)
27
Internap
2009 Form 10-K
Part II.
Item 6. Selected Financial Data
Consolidated Balance Sheets Data:
Cash and cash equivalents, investments in
marketable securities and other related assets and
restricted cash(5)
Total assets
Revolving credit facility, due after one year,
note payable and capital lease obligations,
less current portion
Total stockholders’ equity
2009(1)
2008(2)
2007(3)
2006
2005
December 31,
$80,926
267,502
$61,096
330,083
$75,719
427,010
$58,882
173,702
$40,494
155,369
23,217
184,402
23,244
248,195
17,806
346,633
3,364
126,525
7,903
109,728
Year Ended December 31,
2009
2008
2007
2006
2005
Other Financial Data:
Purchases of property and equipment
Net cash flows provided by operating activities
Net cash flows used in investing activities
Net cash flows (used in) provided by financing activities
$17,278
37,520
(9,900)
(598)
$51,154
37,951
(41,690)
(821)
$30,271
27,526
(36,393)
15,240
$13,382
29,387
(10,399)
1,957
$10,161
5,493
(9,428)
(5,454)
(1) We completed an assessment of goodwill and other intangible assets for impairment as of June 1, 2009, in connection with our
decision to consolidate our business segments, which resulted in aggregate impairment charges of $51.5 million for goodwill and
$4.1 million for other acquired intangible assets.
(2) As a result of our annual goodwill impairment test on August 1, 2008, we recorded a $99.7 million impairment charge to adjust goodwill
in our former CDN services segment to its implied fair value.
(3) On February 20, 2007, we completed our acquisition of VitalStream, whereby VitalStream became our wholly-owned subsidiary. Prior
to this acquisition, we did not offer proprietary CDN services, but instead, we were a reseller of third party CDN services. Under the
purchase method of accounting, we allocated the total estimated purchase price to VitalStream’s net tangible and intangible assets
based on their estimated fair values as of February 20, 2007. We recorded the excess purchase price over the value of the net tangible
and identifiable intangible assets as goodwill. Also, as a result of the acquisition, we issued 12.2 million shares of our common stock.
(4) Effective January 1, 2006, we adopted new accounting guidance for stock-based compensation, using a modified prospective transi-
tion method and therefore have not restated prior periods’ results. Prior to our adoption of this new accounting guidance, we did not
recognize expense for options to purchase our common stock that we granted with an exercise price equal to fair market value at the
grant date and we did not recognize expense in connection with purchases under our employee stock purchase plan for any periods
prior to January 1, 2006.
(5) The following table provides a reconciliation of total cash and cash equivalents, investments in marketable securities and other related
assets and restricted cash to the amounts reported in our audited consolidated balance sheets (in thousands):
Cash and cash equivalents
Investments in marketable securities and
other related assets:
Short-term
Non-current
Restricted cash
2009
2008
2007
2006
2005
December 31,
$73,926
$46,870
$52,030
$45,591
$24,434
7,000
–
–
7,199
7,027
–
19,569
–
4,120
13,291
–
–
16,060
–
–
$80,926
$61,096
$75,719
$58,882
$40,494
Investments in marketable securities and other related assets include auction rate securities and corresponding rights of $7,000,
$7,027 and $7,150 as of December 31, 2009, 2008 and 2007. We classified these as short-term investments as of December 31, 2009
and 2007 and as non-current investments as of December 31, 2008.
28
Internap
2009 Form 10-K
Part II.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7.
MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction
with the accompanying consolidated financial state-
ments and notes provided under Part II, Item 8 of this
Annual Report Form 10-K. Certain prior year disclo-
sures within the following discussion have been reclas-
sified to conform to the current year presentation.
BUSINESS OVERVIEW
We are an Internet solutions and data center company
providing a suite of network optimization and delivery
services and products that manage, deliver and dis-
tribute applications and content with a 100% availabil-
ity serv ice level agreement, as well as a global provider
of secure and reliable data center services. We help
our customers innovate their business, improve serv-
ice levels and lower the cost of information technology
operations. Our services and products, combined with
progressive and proactive technical support, enable
our customers to migrate business-critical applica-
tions from private to public networks.
FINANCIAL HIGHLIGHTS AND OUTLOOK
We continue to experience pricing pressure for our
IP services, which has resulted in part in decreased IP
services revenue year-over-year. We historically have
priced our IP services at a premium compared to
the services offered by conventional Internet con-
nectivity serv ice providers. Due to competitive forces,
however, we have been required to lower pricing of our
IP services, although this decrease in pricing has been
offset by an increase in demand for our IP services.
Our IP traffic has increased as a result of our custom-
ers requiring greater overall capacity due to growth in
the usage of their applications, as well as in the nature
of applications consuming greater amounts of band-
width. We expect that we will continue to experience
pricing pressure as well as gains in IP traffic for the
reasons noted.
Data center services continue to be a source of rev-
enue growth for our business, and we expect this
trend to continue. We have expanded the sites that
we operate and expect to add additional space in the
future as part of our data center growth initiative. The
growth in data center revenues and direct costs of
data center services largely follows our expansion
of data center space, and we believe the demand for
data center services continues to outpace industry-
wide supply. We experienced a net increase in cus-
tomers in this segment.
Segments
During the year ended December 31, 2009, we
changed how we view and manage our business. We
now operate our IP services and the majority of our
CDN services on a combined basis while we operate
the managed hosting portion of our CDN services as
part of our data center services. The change from our
historical segments reflects our view of the business
and aligns our segments with our operational and
organizational structure. We have reclassified financial
information for prior periods to conform to the current
period presentation.
Impairments and Restructuring
Goodwill. Goodwill is not amortized. Instead, we
assess goodwill for impairment at a reporting unit level
on an annual basis. Our decision to consolidate seg-
ments as of June 1, 2009 required us to assess good-
will for impairment as of that date, which was earlier
than the date of our annual assessment (August 1). As
a result of this assessment, we recorded an aggregate
goodwill impairment charge of $51.5 million during the
year ended December 31, 2009 related to our former
CDN services segment and FCP products in the IP
services segment. The goodwill impairment in 2009
was in addition to a $99.7 million goodwill impairment
charge in 2008 in our former CDN services segment.
The goodwill impairments in our former CDN serv-
ices segment were primarily due to declines in CDN
services revenues and operating results compared
to our expectations and declining multiples of our
own and comparable companies. The CDN services
goodwill and technology arose from our acquisition of
VitalStream in February 2007. Similarly, the goodwill
impairment for our FCP products in the IP services
segment was due to declines in our FCP products
revenues and operating results. The declines in FCP
products revenues were primarily attributable to lower
sales associated with a reduced marketing effort as
we reevaluated our equipment sales strategy for FCP
products. At December 31, 2009, the carrying value
29
Internap
2009 Form 10-K
Part II.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
of our goodwill was $39.5 million. We further discuss
goodwill in note 8 to the accompanying consolidated
financial statements.
Other Intangible Assets. We assess other intangible
assets for impairment in conjunction with our assess-
ment of goodwill or whenever events or changes in
circumstances indicate that the carrying amounts may
not be recoverable. In conjunction with the goodwill
impairments discussed above, we recorded impair-
ments of other intangible assets of $4.1 million and
$2.7 million in 2009 and 2008, respectively, and made
changes in estimates that resulted in acceleration
of amortization expense related to certain intangi-
ble assets, as more fully described in note 8 to the
accompanying consolidated financial statements. At
December 31, 2009, the carrying value of other intan-
gible assets was $20.8 million.
Restructuring. During the year ended December 31,
2009, we made adjustments in sublease income
assumptions for certain properties included in our pre-
viously-disclosed 2007 and 2001 restructuring plans,
implemented a restructuring plan to reduce our work-
force by 45 employees and ceased use of four smaller
facilities. We recorded total restructuring charges of
$3.2 million in our accompanying consolidated state-
ments of operations for the year ended December 31,
2009. The adjustments in sublease income assump-
tions for certain properties included in our 2007 and
2001 restructuring plans extended the period during
which we do not anticipate receiving sublease income
from those properties given our expectation that it will
take longer to find sublease tenants and the increased
availability of space in each of these markets where
we have unused space. The workforce reduction of
45 employees in March 2009 represented 10% of our
total workforce at that time and was primarily in back-
office functions as well as the elimination of certain
senior management positions. We further discuss
restructuring activities in note 9 to the accompanying
consolidated financial statements.
Liquidity
Cash flow from operations was $37.5 million dur-
ing the year ended December 31, 2009 compared to
$38.0 million and $27.5 million during the same periods
in 2008 and 2007, respectively. We expect to meet our
cash requirements in 2010 through a combination of
net cash provided by operating activities and existing
cash, cash equivalents and short-term investments in
marketable securities. This includes a plan to com-
mit $50.0 million in capital expenditures over the next
nine to 18 months to grow our data center business
in key markets. We may also utilize additional borrow-
ings under our credit agreement, especially for capital
expenditures, particularly if we consider it economi-
cally favorable to do so.
Executive Transition
On March 16, 2009, J. Eric Cooney became our presi-
dent and chief executive officer and a member of
our board of directors following the resignation of
James P. DeBlasio. Pursuant to the terms of a separa-
tion agreement with Mr. DeBlasio, he received a cash
payment of $0.9 million and full vesting of all equity
awards previously granted to him, which had an incre-
mental value of $0.8 million. Mr. DeBlasio has until
March 16, 2010 to exercise any stock options that were
vested as of March 16, 2009. We recorded all execu-
tive transition costs with general and administrative
costs and expenses in the accompanying statements
of operations.
SUBSEQUENT EVENTS
Rights Agreement and Preferred Stock
As previously disclosed in the Current Report on
Form 8-K filed by us with the Securities and Exchange
Commission, or the SEC, on November 23, 2009, we
approved the termination of the Preferred Stock Rights
Agreement between us and American Stock Transfer
and Trust Company, as Rights Agent, dated as of April 11,
2007, or the Rights Agreement. Originally scheduled
to expire on March 23, 2017, we amended the Rights
Agreement to accelerate its expiration which occurred
on the close of business on December 31, 2009. In con-
nection with the expiration of the Rights Agreement,
we filed a Certificate of Elimination with the Secretary
of State of the State of Delaware on February 26,
2010, to eliminate our series B preferred stock. The
Certificate of Elimination removed the previous des-
ignation of 0.5 million shares of series B preferred
stock and caused such shares of series B preferred stock
to resume their status as undesignated shares of our
preferred stock.
Restated Certificate of Incorporation
As a result of the termination of the Rights Agreement
and the filing of the Certificate of Elimination related to
our previously-designated series B preferred stock,
we filed a Restated Certificate of Incorporation with
the Secretary of State of the State of Delaware on
February 26, 2010. We previously filed our original
30
Internap
2009 Form 10-K
Part II.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certificate of Incorporation in 2001 and subsequently
amended it on a number of occasions (most recently
with the filing of the Certificate of Elimination described
above). As permitted by the Delaware General
Corporation Law, our board of directors determined to
restate our Certificate of Incorporation, as amended,
to consolidate and integrate into a single instrument
all of the provisions of our Certificate of Incorporation,
as amended. The Restated Certificate of Incorporation
simply restates and integrates but does not further
amend our Certificate of Incorporation, as amended,
and no stockholder vote was required.
Payment of Annual Performance Bonuses and
Increases in Base Salary
On February 24, 2010, our compensation committee
approved bonuses for employees (including executive
officers) under our 2009 Short-Term Incentive Plan, which
we previously filed as Exhibit 10.1 to our Current Report
on Form 8-K, filed with the SEC on August 21, 2009.
These bonuses were awarded based upon achievement
of individual objectives and progress toward the fulfill-
ment of long-term strategic objectives. We will pay the
bonuses in cash on or before March 15, 2010.
Name and Title
J. Eric Cooney, President and
Chief Executive Officer
George E. Kilguss III, Chief Financial Officer
Richard P. Dobb, Chief Administrative Officer
Randal R. Thompson, Senior Vice President
of Global Sales
Bonus
$200,000
97,103
55,768
36,885
In addition, our compensation committee approved
an increase in the base salary of certain executive
officers effective April 1, 2010, as follows: Mr. Kilguss,
from $275,000 to $290,000; Mr. Dobb, from $272,800
to $280,000 and Mr. Thompson, from $225,000
to $230,000.
2010 Long-Term Incentive Grants
On February 24, 2010, our compensation committee
approved grants under our 2010 long-term incen-
tive program. Under the program, named executive
officers and other key contributors are eligible for
the award of options to purchase common stock and
restricted common stock. Of each award, 80% of the
total grant is in the form of options to purchase com-
mon stock and 20% of the total grant is in the form of
time-based restricted common stock. The options to
purchase common stock vest 25% after one year and
in equal monthly increments for three years thereafter.
The time-based restricted common stock vests in
four equal annual installments on the anniversary of
the grant date. The options have an exercise price of
$5.03 per share (our fair market value on February 26,
2010, the grant date) and a 10-year term. Our com-
pensation committee made the following grants under
the program:
Name and Title
J. Eric Cooney, President and
Chief Executive Officer
George E. Kilguss III,
Chief Financial Officer
Richard P. Dobb, Chief
Administrative Officer
Randal R. Thompson,
Senior Vice President of
Global Sales
Number of Awards (#)
Restricted
Stock
Options
Total
248,830
32,092 280,921
103,530
13,352 116,883
58,905
7,597
66,502
58,905
7,597
66,502
2010 Short-Term Incentive Plan
On February 24, 2010, our compensation committee
approved the 2010 Short Term Incentive Plan. Under
the plan, all full time exempt and eligible non-exempt
employees (including executive officers) may be eli-
gible for the award of a cash bonus after our 2010 fiscal
year end. The cash bonus of each participant will be
determined based on achievement of corporate and
individual/business unit objectives, with a target award
level expressed as a percentage of salary. The cor-
porate objectives are based on revenue and earnings
before interest, taxes, depreciation and amortization,
or EBITDA. The personal/business unit objectives are
individualized for each participant.
The table below identifies the target incentives as
a percentage of base salary and the split between
corporate and personal/business unit objectives for
executive officers.
STI
Participation
Level
Target
Incentive %
Corporate Personal/BU
Objectives
Objectives
Section 16 Officer
Up to 100%
70%
30%
Our compensation committee may amend, modify,
terminate or suspend operation of the plan at any time.
Our compensation committee recommends to our full
board of directors any changes to the compensation
of our president and chief executive officer. If a partici-
pant is not an employee on the date awards from the
31
Internap
2009 Form 10-K
Part II.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
plan are paid (other than by reason of death or disabil-
ity), the participant forfeits all rights to any payments.
The above description is qualified in its entirety by ref-
erence to the full text of the 2010 Short Term Incentive
Plan, which is being filed as Exhibit 10.35 to this Annual
Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This discussion and analysis of our financial condition
and results of operations is based upon our consoli-
dated financial statements, which we have prepared
in accordance with accounting principles generally
accepted in the United States of America, or GAAP.
The preparation of these financial statements requires
management to make estimates and judgments that
affect the reported amounts of assets, liabilities, rev-
enue and expense and related disclosure of contingent
assets and liabilities. On an ongoing basis, we evaluate
our estimates, including those summarized below. We
base our estimates on historical experience and on
various other assumptions that we believe to be rea-
sonable under the circumstances, the results of which
form the basis for making judgments about the carry-
ing values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ
materially from these estimates.
In addition to our significant accounting policies sum-
marized in note 2 to our accompanying consolidated
financial statements, we believe the following poli-
cies are the most sensitive to judgments and esti-
mates in the preparation of our consolidated financial
statements.
Revenue Recognition
We generate revenues primarily from the sale of IP serv-
ices and data center services. Our revenues typically
consist of monthly recurring revenues from contracts
with terms of one year or more. These contracts usu-
ally have fixed minimum commitments based on a
certain level of usage with additional charges for any
usage over a specified limit. We recognize the monthly
minimum as revenue each month provided that we
have entered into an enforceable contract, we have
delivered the serv ice to the customer, the fee for the
serv ice is fixed or determinable and collection is rea-
sonably assured. If a customer’s usage of our services
exceeds the monthly minimum, we recognize revenue
for such excess in the period of the usage.
We record an amount for serv ice level agreements and
other sales adjustments, which reduces net revenues and
accounts receivable. We identify adjustments for serv ice
level agreements within the billing period and reduce rev-
enues accordingly. We base the amount for sales adjust-
ments upon specific customer information, including
customer disputes, credit adjustments not yet processed
through the billing system and historical activity.
We routinely review the collectability of our accounts
receivable and payment status of our customers. If we
determine that collection of revenue is uncertain, we
do not recognize revenue until collection is reason-
ably assured. Additionally, we maintain an allowance
for doubtful accounts resulting from the inability of our
customers to make required payments on accounts
receivable. The allowance for doubtful accounts is
based upon general customer information, which
primarily includes our historical cash collection expe-
rience and the aging of our accounts receivable. We
assess the payment status of customers by reference
to the terms under which we provide services or goods,
with any payments not made on or before their due
date considered past-due. Once we have exhausted all
collection efforts, we write the uncollectible balance off
against the allowance for doubtful accounts.
Goodwill and Other Intangible Assets
We assess goodwill for impairment at a reporting unit
level on an annual basis. As discussed in “– Results
of Operations – Segment Information” below and in
notes 2 and 4 to our accompanying consolidated finan-
cial statements, we changed how we view and manage
our business beginning June 1, 2009. We now operate
our IP services and the majority of our CDN services
on a combined basis while we operate the managed
hosting portion of our CDN services as part of our data
center services. Our decision to consolidate segments
as of June 1, 2009 required us to assess goodwill for
impairment as of that date, which was earlier than the
date of our annual assessment (August 1). Our newly-
combined IP services operating segment continues
to be comprised of two reporting units: services and
products. Similarly, our data center services operating
segment continues to be a single reporting unit; how-
ever, it does not have any recorded goodwill.
Our assessment of goodwill for impairment includes
comparing the fair value of our reporting units to the
carrying value. We estimate fair value using a com-
bination of discounted cash flow models and market
approaches. If the fair value of a reporting unit exceeds
its carrying value, goodwill is not impaired and no further
testing is necessary. If the carrying value of a reporting
32
Internap
2009 Form 10-K
Part II.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
unit exceeds its fair value, we perform a second test to
measure the amount of impairment to goodwill, if any. To
measure the amount of any impairment, we determine
the implied fair value of goodwill in the same manner as
if we were acquiring the affected reporting unit in a busi-
ness combination. Specifically, we allocate the fair value
of the affected reporting unit to all of the assets and
liabilities of that unit, including any unrecognized intan-
gible assets, in a hypothetical calculation that would
yield the implied fair value of goodwill. If the implied fair
value of goodwill is less than the goodwill recorded on
our consolidated balance sheet, we record an impair-
ment charge for the difference.
We base the impairment analysis of goodwill on esti-
mated fair values. The assumptions, inputs and judg-
ments used in performing the valuation analysis are
inherently subjective and reflect estimates based on
known facts and circumstances at the time the valu-
ation is performed. These estimates and assumptions
primarily include, but are not limited to, discount rates;
terminal growth rates; projected revenues and costs;
EBITDA for expected cash flows; market comparables
and capital expenditures forecasts. The use of differ-
ent assumptions, inputs and judgments, or changes
in circumstances, could materially affect the results of
the valuation. Due to the inherent uncertainty involved
in making these estimates, actual results could differ
from our estimates and could result in additional non-
cash impairment charges in the future. Following is a
description of the valuation methodologies we used
to derive the fair value of our former CDN services and
the FCP products reporting units as of our assessment
date of June 1, 2009:
• Income Approach. To determine fair value, we dis-
counted the expected cash flows of the CDN serv-
ices and the FCP products reporting units. We
calculated expected cash flows using a compounded
annual revenue growth rate of approximately 20% for
CDN services and 3% for FCP products, forecast-
ing existing cost structures and considering capital
reinvestment requirements. We used a discount rate
of 16% for CDN services and 18% for FCP products,
representing the estimated weighted average cost
of capital, which reflects the overall level of inherent
risk involved in the respective operations and the
rate of return an outside investor could expect to
earn. To estimate cash flows beyond the final year
of our models, we used terminal values and incor-
porated the present values of the resulting terminal
values into our estimates of fair value. Changing the
discount rates by 1%, or 100 basis points, with all
other factors remaining the same and disregard-
ing market-based approaches below, would have
increased the 2009 impairments related to the for-
mer CDN services goodwill and FCP products good-
will by $0.9 million and $0.2 million, respectively.
• Market-Based Approach. To corroborate the results
of the income approach described above, we esti-
mated the fair value of our CDN services and FCP
products reporting units using several market-based
approaches, including the enterprise value that
we derive based on our stock price. We also used
the guideline company method, which focuses on
comparing our risk profile and growth prospects, to
select reasonably similar/guideline publicly traded
companies. Using the guideline company method,
we selected revenue multiples below the median for
our comparable companies.
We used similar valuation methodologies to derive the
fair values of our other reporting units. After consoli-
dating the former CDN services reporting unit with the
IP services unit, the fair value of our IP services report-
ing unit exceeded the carrying value by 18% as of the
valuation date. The portion of goodwill from the former
CDN services reporting unit allocated to data center
services was immediately impaired so that data cen-
ter services continues to not have any recorded good-
will. Adverse changes in expected operating results
and/or unfavorable changes in other economic factors
used to estimate fair values could result in an addi-
tional non-cash impairment charge in the future.
We perform our annual goodwill impairment test as
of August 1 of each calendar year absent any impair-
ment indicators or other changes that may cause more
frequent analysis. We did not identify an impairment
as a result of our annual August 1, 2009 impairment
test. We also assess on a quarterly basis whether any
events have occurred or circumstances have changed
that would indicate an impairment could exist. We
have considered the likelihood of triggering events that
might cause us to re-assess goodwill on an interim
basis and concluded that none had occurred subse-
quent to August 1, 2009.
Other intangible assets, including developed tech-
nologies and patents, have finite lives and we have
recorded these assets at cost less accumulated amor-
tization. We calculate amortization on a straight-line
basis over the estimated economic useful life of the
assets, which are three to eight years for developed
technologies and 15 years for patents. We assess
other intangible assets for impairment in conjunction
33
Internap
2009 Form 10-K
Part II.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
with our assessment of goodwill or whenever events
or changes in circumstances indicate that the carrying
amounts may not be recoverable. Our assessment for
other intangible assets is based on estimated future
cash flows directly associated with the asset or asset
group. If we determine that the carrying value is not
recoverable, we may record an impairment charge,
reduce the estimated remaining useful life, or both.
In addition to impairment of other intangible assets
during the years ended December 31, 2009 and 2008,
we also made changes in estimates that resulted in
acceleration of amortization expense related to certain
acquired CDN intangible assets. Changes in estimates
reflect historical churn for acquired CDN customers
and the decreased value of acquired CDN trade names
and noncompete agreements to our business. These
acquired CDN intangible assets either have a remain-
ing estimated economic useful life of less than one year
at December 31, 2009 or were fully amortized during
2009. Additional information is included in note 8 to
the accompanying consolidated financial statements.
Similar to goodwill as noted above, adverse changes
in expected operating results and/or unfavorable
changes in other economic factors used to estimate
fair values could result in additional non-cash impair-
ment charges or acceleration of amortization in the
future. We believe that our remaining intangible assets
are not impaired.
None of the impairment charges or changes in esti-
mated remaining asset lives had any impact on our
cash balances or covenants in our credit agreement.
Restructuring
When circumstances warrant, we may elect to exit cer-
tain business activities or change the manner in which
we conduct ongoing operations. When we make such
a change, we will estimate the costs to exit a business
or restructure ongoing operations. The components of
the estimates may include estimates and assumptions
regarding the timing and costs of future events and
activities that represent our best expectations based
on known facts and circumstances at the time of esti-
mation. Should circumstances warrant, we will adjust
our previous estimates to reflect what we then believe
to be a more accurate representation of expected
future costs. Because our estimates and assumptions
regarding restructuring charges include probabilities
of future events, such as our ability to find a sublease
tenant within a reasonable period of time or the rate
at which a sublease tenant will pay for the available
space, such estimates are inherently vulnerable to
changes due to unforeseen circumstances that could
materially and adversely affect our results of opera-
tions. If the amount of time that we expect it to take to
find sublease tenants in all of the vacant space already
in restructuring were to increase by three months
and assuming no other changes to the properties in
restructuring, we would record an additional $0.3 mil-
lion in restructuring charges in the consolidated state-
ment of operations during the period in which the
change in estimate occurred. We monitor market
conditions at each period end reporting date and will
continue to assess our key assumptions and estimates
used in the calculation of our restructuring accrual.
Income Taxes
We record a valuation allowance to reduce our deferred
tax assets to the amount that is more likely than not to
be realized. Historically, we have recorded a valua-
tion allowance equal to our net deferred tax assets.
Although we consider the potential for future taxable
income and ongoing prudent and feasible tax plan-
ning strategies in assessing the need for the valuation
allowance, in the event we determine we would be
able to realize our deferred tax assets in the future in
excess of our net recorded amount, an adjustment
to reduce the valuation allowance would increase net
income in the period such determination was made.
We may recognize deferred tax assets in future periods
if and when we estimate them to be realizable, such as
establishing our expected continuing profitability or
that of certain of our foreign subsidiaries.
Based on an analysis of our projected future U.S. pre-
tax income, we do not have sufficient positive evidence
within the next 12 months to release the valuation
allowance currently recorded against our U.S. deferred
tax assets. However, if we experience subsequent
changes in stock ownership as defined by Section 382
of the Internal Revenue Code, we may have additional
limitations on the future utilization of our U.S. net oper-
ating losses.
Stock-Based Compensation
We measure stock-based compensation cost at the
grant date based on the calculated fair value of the
award. We recognize the expense over the employee’s
requisite serv ice period, generally the vesting period of
the award. We estimate the fair value of stock options
at the grant date using the Black-Scholes option pric-
ing model with weighted average assumptions for the
34
Internap
2009 Form 10-K
Part II.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
activity under our stock plans. Option pricing model
input assumptions, such as expected term, expected
volatility and risk-free interest rate, impact the fair
value estimate. Further, the forfeiture rate impacts the
amount of aggregate compensation. These assump-
tions are subjective and generally require significant
analysis and judgment to develop.
The expected term represents the weighted average
period of time that we expect granted options to be
outstanding, giving consideration to the vesting sched-
ules and our historical exercise patterns. Because our
options are not publicly traded, assumed volatility
is based on the historical volatility of our stock. The
risk-free interest rate is based on the U.S. Treasury
yield curve in effect at the time of grant for periods
corresponding to the expected term of the options. We
have also used historical data to estimate option exer-
cises, employee termination and stock option forfeiture
rates. Changes in any of these assumptions could
materially impact our results of operations in the period
the change is made. A 10% increase in stock-based
compensation would result in additional expense of
$0.6 million.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards
Board, or FASB, issued new accounting guidance
which amends the evaluation criteria to identify the
primary beneficiary of a variable interest entity, or VIE,
and requires ongoing reassessment of whether an
enterprise is the primary beneficiary of the VIE. The
new guidance significantly changes the consolidation
rules for VIEs including the consolidation of common
structures, such as joint ventures, equity method
investments and collaboration arrangements. The
guidance is applicable to all new and existing VIEs.
This accounting guidance is effective for us beginning
in the first quarter of 2010.
We have concluded that our joint venture in Internap
Japan Co., Ltd. is an equity-method investment under
the voting-interest model, not a VIE and, accordingly,
this new accounting guidance will not impact our con-
solidated financial statements.
Additional recent accounting pronouncements are sum-
marized in note 2 to the accompanying consolidated
financial statements. Currently, we do not expect any
recent accounting pronouncements that we have not
yet adopted will have a material impact on our consoli-
dated financial statements.
RESULTS OF OPERATIONS
Revenues
We generate revenues primarily from the sale of IP
serv ices and data center services. Our revenues typi-
cally consist of monthly recurring revenues from con-
tracts with terms of one year or more. These contracts
usually have fixed minimum commitments based
on a certain level of usage with additional charges
for any usage over a specified limit. We also provide
CDN services and premise-based route optimization
products and other ancillary services, such as server
management and installation services, also referred
to as managed hosting, virtual private networking
services, managed security services, data back-up,
remote storage, restoration services and professional
consulting services.
Direct Costs of Network, Sales and Services
Direct costs of network, sales and services are com-
prised primarily of:
• costs for connecting to and accessing NSPs and
competitive local exchange providers;
• facility and occupancy costs, including power and
utilities, for hosting and operating our and our cus-
tomers’ network equipment;
• costs of FCP products sold;
• costs incurred for providing additional third party
services to our customers; and
• royalties and costs of license fees for operating
systems software.
To the extent a network access point is located at a
distance from the respective Internet serv ice provider,
we may incur additional local loop charges on a recur-
ring basis. Connectivity costs vary depending on cus-
tomer demands and pricing variables while network
access point facility costs are generally fixed in nature.
Direct costs of network, sales and services do not
include compensation, depreciation or amortization.
35
Internap
2009 Form 10-K
Part II.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Direct Costs of Customer Support
Direct costs of customer support consist primarily of
compensation and other personnel costs for employ-
ees engaged in connecting customers to our network,
installing customer equipment into network access
point facilities and servicing customers through our
network operations centers. In addition, we include
facilities costs associated with the network operations
center in direct costs of customer support.
Direct Costs of Amortization
Direct costs of amortization of acquired technolo-
gies are for technologies acquired through business
combinations that are an integral part of the services
and products we sell. We amortize the cost of the
acquired technologies over original lives of three to
eight years. The carrying value of acquired technolo-
gies at December 31, 2009 was $18.4 million and the
weighted average remaining life was approximately
five years. These direct costs also include impairment
of the acquired CDN advertising technology during
both of the years ended December 31, 2009 and 2008,
as discussed below in “– Other Operating Costs and
Expenses – Impairments and Restructuring.”
Sales and Marketing
Sales and marketing costs consist of compensation,
commissions and other costs for personnel engaged in
marketing, sales and field serv ice support functions, as
well as advertising, tradeshows, direct response pro-
grams, new serv ice point launch events, management
of our external website and other promotional costs.
General and Administrative
General and administrative costs consist primarily
of compensation and other expense for executive,
finance, product development, human resources and
administrative personnel, professional fees and other
general corporate costs. General and administrative
costs also include consultant fees and prototype costs
related to the design, development and testing of our
proprietary technology, enhancement of our network
management software and development of internal
systems. We capitalize costs associated with internal
use software when the software enters the application
development stage until the software is ready for its
intended use. We expense all other product develop-
ment costs as incurred.
Summary of Results of Operations
Following is a summary of our results of operations and
financial condition, which is followed by more in-depth
discussion and analysis.
During the year ended December 31, 2009, total rev-
enues were $256.3 million, representing an increase of
nearly 1% over the same period in 2008. Data center
services revenue was the primary growth driver during
the year ended December 31, 2009, increasing 14%
compared with 2008. Data center services revenue
comprised 51% of total revenues during the year ended
December 31, 2009, compared to 45% during the same
period in 2008. Total segment profit was $113.2 mil-
lion for the year ended December 31, 2009, a decrease
of $4.9 million, or 4%, from the same period in 2008,
primarily as a result of the increase in data center rev-
enues as a percentage of total revenues. We reported
a net loss during the year ended December 31, 2009 of
$69.7 million, which included: (a) $51.5 million in impair-
ment charges for goodwill, (b) $4.1 million in impairment
charges for other intangible assets (recorded in direct
costs of amortization of acquired technologies) and
(c) $3.2 million of restructuring charges.
At December 31, 2009, we had $73.9 million in cash
and cash equivalents and $23.2 million in total debt
and capital leases. We have continued to improve
our net cash position from net cash flows provided
by operating activities. The outstanding balance on
our credit facility was $20.0 million at December 31,
2009, with $3.6 million of letters of credit issued and
$11.4 million of available credit. Quarterly days sales
outstanding were 27 days at December 31, 2009.
36
Internap
2009 Form 10-K
Part II.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table sets forth selected consolidated statements of operations data during the periods presented,
including comparative information between the periods (dollars in thousands):
Year Ended December 31,
Increase (decrease)
from 2008 to 2009
Increase (decrease)
from 2007 to 2008
2009
2008
2007
Amount
Percent
Amount
Percent
$125,548 $ 139,737
114,252
–
130,711
–
$139,072
84,590
10,428
$(14,189)
16,459
–
(10)% $ 665
29,662
14
(10,428)
–
256,259
253,989
234,090
2,270
1
19,899
0%
35
(100)
9
Revenues:
IP services
Data center services
Other
Total revenues
Operating costs and expenses:
Direct costs of network, sales and
services, exclusive of depreciation
and amortization, shown below:
IP services
Data center services
Other
Direct costs of customer support
Direct costs of amortization of
acquired technologies
Sales and marketing
General and administrative
Depreciation and amortization
Loss (gain) on disposals of
property and equipment
Impairments and restructuring
Other
48,055
94,961
–
18,527
8,349
28,131
44,152
28,282
26
54,698
–
51,885
83,992
–
16,217
6,649
30,888
44,235
23,865
50,518
59,440
8,436
16,547
4,165
31,533
39,076
22,242
(3,830)
10,969
–
2,310
1,700
(2,757)
(83)
4,417
(7)
13
–
14
26
(9)
–
19
1,367
24,552
(8,436)
(330)
2,484
(645)
5,159
1,623
(16)
101,441
–
(5)
11,349
500
42
(46,743)
–
(263)
(46)
–
(11)
90,092
(500)
3
41
(100)
(2)
60
(2)
13
7
220
794
(100)
47
983
(74)
Total operating costs and expenses
325,181
359,156
243,801
(33,975)
(9)
115,355
Loss from operations
Non-operating expense (income):
(68,922)
461
(105,167)
(245)
(9,711)
(937)
36,245
706
(34)
(288)
(95,456)
692
Loss before income taxes and equity in
(earnings) of equity-method investment
Provision (benefit) for income taxes
Equity in (earnings) of equity-method
(69,383)
357
(104,922)
174
(8,774)
(3,080)
35,539
183
(34)
105
(96,148)
3,254
1,096
(106)
investment, net of taxes
(15)
(283)
(139)
268
(95)
(144)
104
Net loss
$ (69,725) $(104,813)
$ (5,555)
$ 35,088
(33)% $ (99,258)
1,787%
Part II.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Segment Information
We operate in two business segments: IP services and data center services. We have reclassified the historical
comparative financial information below to conform to the current period presentation. Segment results for each
of the three years in the period ended December 31, 2009 are summarized as follows (in thousands):
37
Internap
2009 Form 10-K
Revenues:
IP services
Data center services
Other
Total revenues:
Direct costs of network, sales and services,
exclusive of depreciation and amortization:
IP services
Data center services
Other
Total direct costs of network, sales and services,
exclusive of depreciation and amortization
Segment profit:
IP services
Data center services
Other
Total segment profit
Impairments and restructuring
Other operating expenses, including direct costs of customer support,
depreciation and amortization
Loss from operations
Non-operating expense (income)
Year Ended December 31,
2009
2008
2007
$125,548
130,711
–
$ 139,737
114,252
–
$139,072
84,590
10,428
256,259
253,989
234,090
48,055
94,961
–
51,885
83,992
–
50,518
59,440
8,436
143,016
135,877
118,394
77,493
35,750
–
113,243
54,698
87,852
30,260
–
118,112
101,441
88,554
25,150
1,992
115,696
11,349
127,467
121,838
114,058
(68,922)
461
(105,167)
(245)
(9,711)
(937)
Loss before income taxes and equity in (earnings) of equity-method investment
$ (69,383)
$(104,922)
$ (8,774)
Segment profit is segment revenues less direct costs
of network, sales and services, exclusive of depre-
ciation and amortization and does not include direct
costs of customer support, direct costs of acquired
technologies or any other depreciation or amortiza-
tion associated with direct costs. Segment profit is a
supplemental financial measure that is not prepared
in accordance with GAAP. We view direct costs of
network, sales and services as generally less-con-
trollable, external costs and we regularly monitor the
margin of revenues in excess of these direct costs.
Similarly, we view the costs of customer support to
also be an important component of costs of revenues
but believe that the costs of customer support to be
more within our control and to some degree discre-
tionary as we can adjust those costs by hiring and
terminating employees. We also have excluded depre-
ciation and amortization from segment profit because
they are based on estimated useful lives of tangible
and intangible assets. Further, we base depreciation
and amortization on historical costs incurred to build
out our deployed network and the historical costs of
these assets may not be indicative of current or future
capital expenditures. Although we believe, for the fore-
going reasons, that our presentation of segment profit
non-GAAP financial measures provides useful supple-
mental information to investors regarding our results of
operations, our non-GAAP financial measures should
only be considered in addition to, and not as a substi-
tute for, or superior to, any measure of financial perfor-
mance prepared in accordance with GAAP.
IP Services. Revenue for IP services decreased
$14.2 million, or 10%, to $125.5 million during the year
ended December 31, 2009 compared to $139.7 million
during the same period in 2008. The decrease in IP serv-
ices revenues was driven by a decline in IP pricing for
new and renewing customers and the loss of older cus-
tomers who paid higher effective prices, partially offset
38
Internap
2009 Form 10-K
Part II.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
by an increase in overall traffic. We had a net decrease
in IP services customers from December 31, 2008 to
December 31, 2009. IP traffic increased on an average
annual rate of 27% from the year ended December 31,
2008 to the year ended December 31, 2009, calculated
based on a sum of the months in the respective periods.
Revenue for IP services was flat during the year ended
December 31, 2008, increasing $0.7 million, or less
than 1%, to $139.7 million compared to $139.1 mil-
lion during the same period in 2007. Similar to the
discussion above, demand for our services increased
but was offset by a continuing decline in IP pricing.
IP traffic increased on an annual average rate of 54%
from the year ended December 31, 2007 to the year
ended December 31, 2008. There was a net increase
in IP services customers from December 31, 2007
to December 31, 2008, and new customers added
approximately $8.1 million of revenue during the year
ended December 31, 2008.
IP services revenues also included FCP product
and other hardware sales of $0.9 million, $2.4 mil-
lion and $2.6 million and FCP-related services
and subscription revenue of $0.9 million, $1.0 million and
$0.9 million during the years ended December 31,
2009, 2008 and 2007, respectively.
Direct costs of IP network, sales and services, exclusive
of depreciation and amortization, decreased $3.8 mil-
lion, or 7%, to $48.1 million during the year ended
December 31, 2009 compared to $51.9 million during
the same period in 2008. Direct costs of IP network,
sales and services were 38% and 37% of IP services
revenue during the years ended December 31, 2009
and 2008, respectively. IP services segment profit
decreased $10.4 million to $77.5 million during the year
ended December 31, 2009, from $87.9 million during
the same period in 2008. The increase in direct costs of
IP network, sales and services, exclusive of deprecia-
tion and amortization, as a percentage of revenues and
the decrease in segment profit were primarily due to
lower revenue from ongoing pricing pressure as noted
above. Connectivity costs vary based upon customer
traffic and other demand-based pricing variables. Costs
for IP services are subject to ongoing negotiations for
pricing and minimum commitments. During 2009, we
continued to renegotiate agreements with our major
network serv ice providers, which included cancella-
tion and consolidation of certain contracts that, in the
aggregate, resulted in higher minimum commitments
but lower bandwidth rates. As our IP traffic continues
to grow, we expect to realize lower bandwidth rates
and more opportunities to proactively manage network
costs, such as utilization and traffic optimization among
network serv ice providers.
Direct costs of IP network, sales and services
increased $1.4 million, or 3%, to $51.9 million dur-
ing the year ended December 31, 2008 compared to
$50.5 million during the same period in 2007. Direct
costs of IP network, sales and services were 37% and
36% of IP services revenues during the years ended
December 31, 2008 and 2007, respectively. IP services
segment profit decreased $0.7 million to $87.9 mil-
lion during the year ended December 31, 2008, from
$88.6 million during the same period in 2007. The
increase in direct costs as a percentage of revenues
and the decrease in segment profit were also primarily
due to lower revenue from ongoing pricing pressure.
There have been ongoing industry-wide pricing
declines over the last several years and this trend con-
tinued during the years ended December 31, 2009 and
2008. Technological improvements and excess capac-
ity have been the primary drivers for lower pricing of
IP services as well as the more recent entrance of a
large number of specialty serv ice providers such as
content delivery network vendors. We also continue to
experience increasing traffic volume in our traditional
IP services. The increase in IP traffic resulted from both
new and existing customers using more applications,
as well as the nature of applications consuming greater
amounts of bandwidth. We believe we remain well-
positioned to benefit from an increasing reliance on
the Internet as the medium for business applications,
media distribution, communication and entertainment.
Data Center Services. Data center services have
become a significant source of revenue growth for our
business. Revenues for data center services increased
$16.5 million, or 14%, to $130.7 million during the year
ended December 31, 2009 compared to $114.3 mil-
lion during the same period in 2008. This increase
is primarily due to our ongoing data center growth
initiative, discussed below. We also believe that the
demand for data center space continues to outpace
supply in several key geographic markets. During
the year ended December 31, 2009, we substantially
completed data center expansions and upgrades in
New York, Boston and Seattle. In addition, we had a
net increase of customers from December 31, 2008
to December 31, 2009 with the new customers adding
approximately $11.3 million of revenue during the year
ended December 31, 2009.
Revenues for data center services increased $29.7 mil-
lion, or 35%, to $114.3 million during the year ended
December 31, 2008 compared to $84.6 million dur-
ing the same period in 2007 for the reasons noted
39
Internap
2009 Form 10-K
Part II.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
above. We had a net increase of customers from
December 31, 2007 to December 31, 2008 with new
customers adding approximately $7.8 million of rev-
enue during the year ended December 31, 2008.
Direct costs of data center services, exclusive of
depreciation and amortization, increased $11.0 mil-
lion, or 13%, to $95.0 million during the year ended
December 31, 2009 compared to $84.0 million dur-
ing the same period in 2008. Direct costs of data
center services as a percentage of corresponding
revenues decreased to 73% during the year ended
December 31, 2009 from 74% during the same period
in 2008. Data center services contributed $35.7 million
of segment profit during the year ended December 31,
2009, an increase of $5.5 million from $30.3 million
during the same period in 2008. The increase in total
direct costs of data center services was also primarily
due to our data center growth initiative. The improve-
ment in direct costs as a percentage of revenues and
the increase in segment profit were primarily due to an
increase in total occupancy at higher rates. Once we
sell services in new data center space, each incremen-
tal dollar of revenue tends to be more profitable as we
offset more fixed costs, improving direct costs of data
center services, exclusive of depreciation and amorti-
zation, as a percentage of revenue.
Direct costs of data center services increased
$24.6 million, or 41%, to $84.0 million during the year
ended December 31, 2008 compared to $59.4 million
during the same period in 2007. Data center services
contributed $30.3 million of segment profit during
the year ended December 31, 2008, an increase of
$5.1 million from $25.2 million during the same period
in 2007. Direct costs of data center services as a per-
centage of corresponding revenues increased to 74%
during the year ended December 31, 2008 from 70%
during the same period in 2007 due to pre-operating
costs incurred for new and expanded locations ahead
of revenues in those locations.
As previously noted, the growth in data center rev-
enues and direct costs of data center services has
largely followed our ongoing expansion of data center
space that we began in 2007. Industry data indicates
that the demand for data center services is greater
than industry-wide supply in several key geographic
markets. As a result, we have and expect to continue
investing in and expanding our data center business.
This includes a plan to commit $50.0 million in capital
expenditures over the next nine to 18 months to grow
our data center business in key markets, in addition to
$43.8 million that we have already incurred since 2007.
Direct costs of data center services, exclusive of
depreciation and amortization, have substantial fixed
cost components, primarily for rent, but also signifi-
cant demand-based pricing variables, such as utilities,
which are highest in the summer for cooling the facili-
ties. Direct costs of data center services as a percent-
age of revenues vary with the mix of usage between
facilities operated by us and third parties, referred to as
company-controlled facilities and partner sites, respec-
tively, as well as the occupancy of total available space.
Assuming comparably high levels of utilization, we
expect company-controlled facilities to be more profit-
able than partner sites. However, company-controlled
facilities are initially less profitable than partner sites
because we recognize significant initial operating costs,
especially rent, for company-controlled facilities in
advance of revenues. Conversely, costs in partner sites
are more demand-based and, therefore, we generally
incur such costs in closer proximity to our recognition
of revenues. Nevertheless, many of the costs in partner
sites were subject to previously negotiated rates.
We will continue to focus on increasing revenues from
company-controlled facilities compared to partner
sites and to proactively exit less profitable partner
sites. We also expect direct costs of data center
serv ices as a percentage of corresponding revenues
to decrease as our recently-expanded company-
controlled facilities continue to contribute to revenue
and become more fully occupied. This is evidenced by
the improvement in direct costs of data center services
as a percentage of corresponding revenues of 73%
during the year ended December 31, 2009 compared
to 74% during the same period in 2008 noted above.
During the year ended December 31, 2009, we added
approximately 12,000 net sellable square feet of data
center space in sites operated by us and approximately
4,000 net sellable square feet in partner sites. Our
expansion of data center space has contributed to total
lower overall utilization of net sellable square feet as
of December 31, 2009 compared to the same period
in 2008. At December 31, 2009, we had approximately
202,000 net sellable square feet of data center space
with a utilization rate of 77% compared to approxi-
mately 186,000 net sellable square feet of data center
space with a utilization rate of 79% at December 31,
2008. We expect our recent data center expansion and
our strategy to exit less profitable partner sites will con-
tinue to increase our share of occupied square footage
in data centers operated by us. At December 31, 2009,
53% of our total net sellable square feet were in data
centers operated by us versus partner sites as com-
pared to 51% of our total net sellable square feet at
December 31, 2008.
40
Internap
2009 Form 10-K
Part II.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Other. Other revenues and direct costs of network,
sales and services consisted of third party CDN serv-
ices. These third party CDN services were steadily
replaced throughout 2007 by our own internal CDN
services following our acquisition of VitalStream in
February 2007.
Other Operating Costs and Expenses
Other than direct costs of network, sales and services,
compensation has the most pervasive impact on oper-
ating costs and expenses. We discuss compensation
on an aggregate basis below followed by discussion of
functional costs and expenses.
Compensation. Total compensation and benefits,
including stock-based compensation, was $59.3 mil-
lion, $57.9 million and $61.3 million during the
years ended December 31, 2009, 2008 and 2007,
respectively.
Cash-based compensation and benefits increased
$3.3 million to $53.7 million during the year ended
December 31, 2009 from $50.4 million during the same
period in 2008. The increase during the year ended
December 31, 2009 compared to the same period
in 2008 was primarily due to an increase in sever-
ance payments, including $0.9 million to our former
president and chief executive officer, and a $0.3 mil-
lion signing bonus paid to our new president and chief
executive officer. However, severance does not include
$0.9 million associated with the March 2009 reduc-
tion in force noted below. Additionally, we accrued
$2.9 million during the year ended December 31,
2009 representing a portion of targeted payments for
annual performance bonuses and associated payroll
taxes that we did not accrue during the same period in
2008. As noted below, we eliminated the 2008 annual
performance bonus accrual as a result of our com-
pensation committee’s determination not to award
employee bonuses given that we did not meet estab-
lished performance goals. These increases were offset
by decreases in salary and wages expense of $0.8 mil-
lion primarily based on lower headcount, as well as a
$0.4 million reduction in commissions due primarily to
lower sales.
Additionally, we did not record a Georgia Headquarters
Tax Credit, or HQC, in 2009 compared to a $1.3 million
credit recorded in 2008, which included credits for two
years. The HQC is an incentive to relocate corporate
headquarters to and increase associated employment
within Georgia. We record the HQC when approved
by the Georgia Department of Revenue and we are
required to apply credits against our payroll tax liability.
The cash-based compensation and benefits decrease
during the year ended December 31, 2008 as com-
pared to the same period in 2007 was primarily due
to the elimination of the annual performance bonus
accrual, a larger HQC and a reduction in commis-
sions. As discussed above, we eliminated the 2008
annual performance bonus accrual compared to an
accrual of $2.9 million during the same period in 2007.
The HQC increased to $1.3 million during the year
ended December 31, 2008 (which included credits
for two years) from $0.3 million (for one year) during
the same period in 2007. The availability of any HQC
is a function of the timing of approval by the Georgia
Department of Revenue. The reduction in commis-
sions was primarily due to higher sales quotas under
a new commission plan, adjustments for failing to
meet sales quotas, an increase in the number of new
sales personnel that were not yet fully productive and
open sales positions. These decreases were par-
tially offset by annual pay increases for employees
effective April 1, 2008 and having a full 12 months
of CDN employee expense during the year ended
December 31, 2008 compared to 10 months during the
year ended December 31, 2007.
The lower headcount of approximately 390 employees
at December 31, 2009 compared to approximately
430 employees at December 31, 2008 reflected our
March 2009 reduction in force that reduced headcount
by 45 employees, or 10% of our workforce at that time.
As discussed in note 9 to the accompanying consoli-
dated financial statements, the reduction was primarily
in back-office functions as well as the elimination of
certain senior management positions. Total headcount
in prior years was relatively consistent increasing
to approximately 430 employees at December 31,
2008 compared to approximately 420 employees at
December 31, 2007.
Stock-based compensation decreased $1.9 million
to $5.6 million during the year ended December 31,
2009 from $7.5 million during the same period in 2008
and decreased $1.2 million during the year ended
December 31, 2008 from $8.7 million during the same
period in 2007. The decreases were due to an increase
in adjustments for actual and estimated forfeitures of
unvested stock options and awards through employee
turnover, especially at the senior management level,
and a lower fair value for new stock options and
awards based predominantly on our lower stock price.
Stock-based compensation during the year ended
December 31, 2009 also included $0.8 million related
to the resignation of our former president and chief
executive officer, as discussed above, which resulted
from the full vesting as of March 16, 2009 of all equity
41
Internap
2009 Form 10-K
Part II.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
awards previously granted to him. The following table
summarizes the amount of stock-based compen-
sation, net of estimated forfeitures, included in the
accompanying consolidated statements of operations
during the years ended December 31, 2009, 2008 and
2007 (in thousands):
Year ended December 31,
2009
2008
2007
Direct costs of customer support $1,112
1,395
Sales and marketing
3,106
General and administrative
$1,369
1,782
4,348
$1,892
2,135
4,654
$5,613
$7,499
$8,681
Total unrecognized compensation costs related to
unvested stock-based compensation as of December 31,
2009 was $8.6 million with a weighted-average remain-
ing recognition period of 3.0 years.
Direct Costs of Customer Support. Direct costs of
customer support increased 14% to $18.5 million dur-
ing the year ended December 31, 2009 from $16.2 mil-
lion during the same period in 2008. The increase of
$2.3 million was primarily due to a $1.9 million increase
in cash-based compensation and benefits and a
$0.7 million increase in outside professional services
offset by a $0.3 million decrease in stock-based com-
pensation. The increase in cash-based compensa-
tion and benefits included severance payments for
employees terminated separately from the March 2009
restructuring plan.
Direct costs of customer support decreased 2% to
$16.2 million during the year ended December 31,
2008 from $16.5 million during the same period in
2007. The decrease of $0.3 million was primarily due
to a $0.5 million decrease in stock-based compensa-
tion due to forfeitures of unvested stock options and
awards through employee turnover, partially offset by a
$0.3 million increase in cash-based compensation and
benefits due to annual pay increases for employees
and having a full 12 months of CDN employee expense
as discussed above. The increase in cash-based com-
pensation and benefits was primarily due to annual
employee pay increases.
Direct Costs of Amortization of Acquired Technologies.
Direct costs of amortization of acquired technolo-
gies were $8.3 million, $6.6 million and $4.2 million
during the years ended December 31, 2009, 2008
and 2007, respectively. The increases in direct costs
of amortization in both 2009 and 2008 were due to
impairment charges. In conjunction with consolidat-
ing our business segments in 2009, we performed an
analysis of the potential impairment and re-assessed
the remaining asset lives of other identifiable intan-
gible assets. The analysis and re-assessment of other
identifiable intangible assets resulted in an impairment
charge of $4.1 million in acquired CDN advertising
technology during 2009 due to a strategic change in
market focus. We also recorded a similar impairment
charge of $1.9 million during 2008. See “– Impairments
and Restructuring” below for further discussion of the
impairment of goodwill and other intangible assets.
Also included in direct costs of amortization of acquired
technologies during the year ended December 31,
2008 was additional amortization expense attributable
to a full 12 months of amortization of post-acquisition
intangible technology assets related to the VitalStream
acquisition compared to 10 months during the year
ended December 31, 2007.
Sales and Marketing. Sales and marketing costs
during the year ended December 31, 2009 decreased
9% to $28.1 million from $30.9 million during the same
period in 2008. The decrease of $2.8 million was pri-
marily due to lower cash-based compensation, as
well as commissions and stock-based compensation,
during the year ended December 31, 2009. The reduc-
tion in cash-based compensation was primarily due
to lower headcount. The decrease in commissions
was primarily due to lower sales while the reduction
in stock-based compensation resulted from adjust-
ments for actual and estimated forfeitures of unvested
stock options and awards through employee turnover,
especially at the senior management level, and a lower
fair value for new stock options and awards based pre-
dominantly on our lower stock price.
Sales and marketing costs during the year ended
December 31, 2008 decreased 2% to $30.9 million
from $31.5 million during the same period in 2007. The
decrease of $0.6 million was comprised primarily of a
$0.4 million decrease for cash-based compensation
and benefits and a $0.4 million decrease in stock-
based compensation. The decrease in cash-based
compensation included a $2.0 million decrease in
commissions. The reduction in commissions and
stock-based compensation was primarily due to higher
sales quotas under a new commission plan, adjust-
ments for failing to meet sales quotas and an increase
in the number of new sales personnel that were not yet
fully productive and open sales positions. Stock-based
compensation also decreased due to an increase in
adjustments for actual and estimated forfeitures of
unvested stock options and awards through employee
turnover, especially at the senior management level,
and a lower fair value for new awards based on our
lower stock price.
42
Internap
2009 Form 10-K
Part II.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General and Administrative. General and admin-
istrative costs during the year ended December 31,
2009 were $44.2 million, consistent with the same
period in 2008. During the year ended December 31,
2009, cash-based compensation increased $3.6 mil-
lion compared to the same period in 2008, partially
offset by a year-over-year reduction in stock-based
compensation of $1.2 million. The increase in cash-
based compensation and the decrease in stock-based
compensation during the year ended December 31,
2009 compared to the same period in 2008 are dis-
cussed above in “– Compensation.” The increase in
cash-based compensation was also partially offset by
decreases in the provision for doubtful accounts and
professional services.
The provision for doubtful accounts decreased to
$2.7 million during the year ended December 31, 2009
from $5.1 million during the same period in 2008. The
higher provision during the year ended December 31,
2008 was primarily attributable to our former CDN
services and IP services segments. A number of the
CDN customers that we reserved as doubtful accounts
were customers in 2007 and early 2008, but we dis-
connected their serv ice in 2008 for failing to make
payment. In addition, bankruptcies of certain of our
customers in the financial services industry negatively
impacted IP services. We continue to place a strong
emphasis on the credit worthiness of our customers
and their ability to meet obligations to us. To mitigate
default risk with certain new customers, we place
additional upfront requirements such as prepayments
or deposits before delivering our services. These
enhancements to our credit and collection procedures
have enabled us to mitigate credit and collection risk,
which has resulted in reduced bad debt expense.
Professional services costs decreased $1.1 million to
$9.4 million during the year ended December 31, 2009
compared to $10.5 million during the same period in
2008. During 2008 and early 2009, professional serv-
ices costs were substantially higher than at the end
of 2009. Professional services included the use of
consultants for contract labor, process improvements
and other outside services, particularly in finance and
information technology, and for personnel recruiting
fees. Throughout 2009, we significantly reduced the
number of consultants that we utilized.
General and administrative costs during the year ended
December 31, 2008 increased 13% to $44.2 million
from $39.1 million during the same period in 2007. The
increase of $5.2 million reflected a $4.1 million increase in
professional services costs and a $2.8 million increase
in the provision for doubtful accounts, partially offset by
a $1.6 million decrease in cash-based compensation.
The increases in professional services costs and the
provision for doubtful accounts during the year ended
December 31, 2008 were due to an increased use of
outside consultants and customers failing to make
payment. Cash-based compensation decreased due
primarily to the elimination of the bonus accrual of
$2.9 million during the year ended December 31, 2008.
Depreciation and Amortization. Depreciation and
amortization, including other intangible assets but
excluding acquired technologies, increased 19% to
$28.3 million during the year ended December 31, 2009
compared to $23.9 million during the same period in
2008. The increase of $4.4 million primarily related to
the expansion of data center facilities and P-NAP capa-
bilities as well as changes in estimates of remaining
lives for certain of our other intangible assets. Capital
expenditures were $17.3 million during the year ended
December 31, 2009 compared to $51.2 million during the
same period in 2008. We plan to commit $50.0 million in
capital expenditures over the next nine to 18 months to
grow our data center business in key markets.
Depreciation and amortization increased 7% to
$23.9 million during the year ended December 31, 2008
compared to $22.2 million during the same period in
2007. The increase of $1.6 million primarily related to
the expansion of P-NAPs and our on-going expansion
of data center facilities.
Impairments and Restructuring. During the years
ended December 31, 2009, 2008 and 2007, we
recorded aggregate impairment and restructuring
charges of $54.7 million, $101.4 million and $11.3 mil-
lion, respectively. We also recorded impairments of
acquired CDN advertising technology of $4.1 million
and $1.9 million during the years ended December 31,
2009 and 2008, respectively. We recorded the impair-
ments of acquired CDN advertising technology in
conjunction with the impairments of goodwill, but
recorded the charges in direct costs of amortization
noted above.
Impairments. The goodwill impairments during the year
ended December 31, 2009 included $48.0 million for
goodwill related to our former CDN services segment
and $3.5 million to adjust goodwill related to our FCP
products in the IP services segment, while all of the
$99.7 million goodwill impairment plus a $0.8 million
impairment of trade names in 2008 related to our for-
mer CDN services segment. Similarly, the impairments
of acquired technology included in direct costs of
amortization were related to advertising technology
of our former CDN services segment. The intan-
gible asset impairments in our former CDN services
43
Internap
2009 Form 10-K
Part II.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
segment were primarily due to declines in CDN serv-
ices revenues and operating results compared to our
expectations and declining multiples of our own and
comparable companies. The CDN services good-
will and technology arose from our acquisition of
VitalStream in February 2007. We initially recorded
goodwill of $154.7 million in the acquisition, which
represented 72% of the $214.0 million purchase price.
These declines in CDN services revenues and oper-
ating results were primarily attributable to contin-
ued pricing pressures, which were partially offset by
increased traffic. This was combined with higher costs
of sales related to traffic mix, as well as a weakened
economy and steadily increasing levels of customer
churn. Given the declines in CDN services revenues
and operating results, in 2009 we renewed our empha-
sis on and dedicated our internal resources within
our IP services to strengthen our services offering
and leverage our entire IP backbone and cost struc-
ture. Similarly, the goodwill impairment related to our
FCP products in the IP services segment was due to
declines in our FCP products revenues and operating
results. The declines in FCP products revenues were
primarily attributable to lower sales associated with a
reduced marketing effort as we reevaluated our equip-
ment sales strategy for FCP products.
During the year ended December 31, 2009, we also
re-assessed the remaining asset lives of other identifi-
able intangible assets which resulted in acceleration of
amortization expense over shorter estimated remaining
useful lives of (a) acquired CDN customer relationships
to reflect our historical churn rate for those customers
in both 2009 and 2008, and (b) acquired CDN trade
names and non-compete agreements to reflect the
decreased value of these assets to our business in
2009. The increased amortization expense is reflected
in depreciation and amortization, noted above.
four smaller office and partner data center facilities.
We also recorded a $1.1 million restructuring charge
during the year ended December 31, 2008 for adjust-
ments in sublease income assumptions for certain
properties included in our previously-disclosed 2007
and 2001 restructuring plans offset by non-cash ben-
efit of $0.1 million to reduce our restructuring liability
for employee terminations initially recorded during the
year ended December 31, 2007.
The adjustments in sublease income assumptions
for certain properties included in our 2007 and 2001
restructuring plans extended the period during which
we do not anticipate receiving sublease income from
those properties. The extensions in both 2009 and
2008 were based on our expectation that it will take
longer to find sublease tenants and the increased
availability of space in each of these markets where we
have unused space.
The workforce reduction of 45 employees in March
2009 represented 10% of our total workforce at that
time and was primarily in back-office functions as
well as the elimination of certain senior management
positions. All of the $0.9 million in charges during the
year ended December 31, 2009 were cash expen-
ditures. The restructuring charge for the four leased
facilities was $0.2 million and all amounts related to
these leases were due within 12 months of the date we
ceased use. Due to the short remaining terms of these
leases, we did not expect to earn any sublease income
in future periods.
We also recorded a non-cash benefit of $0.1 million
during the year ended December 31, 2008 to reduce
our restructuring liability for employee terminations.
This non-cash adjustment eliminated the remaining
liability for employee terminations since we had paid
all amounts.
Impairments during the year ended December 31, 2007
included $1.4 million in leasehold improvements and
other assets related to restructured leases discussed
below and $1.1 million in capitalized software for a
sales order-through-billing system.
None of the impairment charges or changes in esti-
mated remaining asset lives had any impact on our
cash balances or covenants in our credit agreement.
Restructuring. Total restructuring charges during the
year ended December 31, 2009 were $3.2 million,
including $2.1 million for adjustments in sublease
income assumptions for certain properties included
in our previously-disclosed 2007 and 2001 restruc-
turing plans, $0.9 million for a workforce reduction in
March 2009 and $0.2 million for cessation of use of
During the year ended December 31, 2007, we incurred
a restructuring charge of $10.3 million, which included
$1.4 million for the impairment of leasehold improve-
ments and other assets. We took this charge following
a review of our business, particularly in light of our
acquisition of VitalStream and our plan to finalize the
overall integration and implementation of the acqui-
sition. In addition to the $1.4 million impairment of
leasehold improvements and other assets, the charge
to expense included $7.8 million for leased facilities
and $1.1 million of severance payments for the termi-
nation of employees. The charge for leased facilities
represents both the costs less anticipated sublease
recoveries that we will continue to incur without eco-
nomic benefit to us and costs to terminate leases
before the end of their term. The impaired leasehold
44
Internap
2009 Form 10-K
Part II.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
improvements and other assets were associated with
the restructured lease facilities. We estimated cost
savings from the restructuring to be approximately
$0.8 million per year through 2016, primarily for rent.
We may recognize deferred tax assets in future peri-
ods when they are estimated to be realizable, such as
establishing expected continuing profitability of us or
certain of our foreign subsidiaries.
Non-operating Expense (Income). Interest expense
decreased to $0.7 million during the year ended
December 31, 2009 compared to $1.3 million and
$1.2 million during the same periods in 2008 and 2007,
respectively. Similarly, interest income decreased
to $0.2 million during the year ended December 31,
2009 compared to $1.9 million and $3.2 million during
the same periods in 2008 and 2007, respectively. The
decreases in interest expense reflected lower levels
of average outstanding debt and lower overall inter-
est rates. As with interest expense, the decreases
in interest income also reflected a reduction in total
interest-earning investments along with a move toward
lower-risk investments and lower overall interest
rates. Non-operating income and expense during
the years ended December 31, 2009 and 2008 also
included net changes in the fair value of our auc-
tion rate securities and the corresponding rights. We
describe the corresponding rights below in “Liquidity
and Capital Resources – Capital Resources – Short-
Term Investments in Marketable Securities and Other
Related Assets.”
During the year ended December 31, 2007, we incurred
a charge of $1.2 million representing the write-off of the
remaining carrying value of our investment in series D
preferred stock of Aventail Corporation.
Provision (Benefit) for Income Taxes. The provi-
sion for income taxes was $0.4 million during the
year ended December 31, 2009, $0.2 million during
the same period in 2008 and a net benefit of $3.1 mil-
lion during the same period in 2007. During the year
ended December 31, 2007, the tax provision included
a $4.4 million benefit related to the release of the valu-
ation allowance associated with our U.K. deferred tax
assets. The U.K. benefit was offset by a reserve of
$0.9 million and a U.S. deferred tax liability relating to
the VitalStream acquisition.
The reduction in valuation allowance was due to
the existence of sufficient positive evidence as of
December 31, 2007 to indicate that our net operating
losses in the U.K. would more likely than not be real-
ized in the future. The evidence primarily consisted
of the results of prior performance in the U.K. and our
expectation of future performance based on historical
results. We will continue to assess the recoverability
of U.S. and other deferred tax assets, and whether the
valuation allowance should be reduced relative to the
U.S. and other deferred tax assets outside the U.K.
Based on analysis of our projected future U.S. pre-tax
income, we do not have sufficient positive evidence
within the next 12 months to release the valuation
allowance currently recorded against our U.S. deferred
tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We continue to monitor and review our performance
and operations in light of global economic condi-
tions. The economic recession in 2008 and 2009 has
negatively impacted spending by our customers and
potential customers. In addition, the current economic
environment may impact the ability of our custom-
ers to meet their obligations to us, which could result
in delayed collection of accounts receivable and an
increase in our provision for doubtful accounts. We
monitor all of our investments in marketable securi-
ties to ensure, to the extent possible, that instability in
liquidity and credit markets does not adversely impact
the fair value of these investments. This monitoring
resulted in transferring investments in corporate debt
securities to money market accounts as the debt secu-
rities matured. We do not believe that the instability in
the credit markets over the last few years had or will
have a material adverse impact on our liquidity or capi-
tal resources, although we continue to monitor these
markets closely.
We expect to meet our cash requirements in 2010
through a combination of net cash provided by oper-
ating activities and existing cash, cash equivalents
and short-term investments in marketable securities.
This includes a plan to commit $50.0 million in capital
expenditures over the next nine to 18 months to grow
our data center business in key markets. We may also
utilize additional borrowings under our credit agree-
ment, especially for capital expenditures, particularly
if we consider it economically favorable to do so. Our
capital requirements depend on a number of factors,
including the continued market acceptance of our
services and products and the ability to expand and
retain our customer base. If our cash requirements
vary materially from those currently planned, if our cost
reduction initiatives have unanticipated adverse effects
on our business or if we fail to generate sufficient cash
flows from the sales of our services and products, we
may require greater or additional financing sooner than
anticipated. We can offer no assurance that we will be
45
Internap
2009 Form 10-K
Part II.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
able to obtain additional financing on commercially
favorable terms, or at all, and provisions in our exist-
ing credit agreement limit our ability to incur additional
indebtedness. We believe we have sufficient cash to
operate our business for the foreseeable future.
We have experienced significant impairments and
operational restructurings in recent years, which
included substantial changes in our senior manage-
ment team, streamlining our cost structure, con-
solidating network access points and terminating
non-strategic real estate leases and license arrange-
ments. We have a history of quarterly and annual net
losses. During the year ended December 31, 2009, we
recorded a net loss of $69.7 million. As of December 31,
2009, our accumulated deficit was $1,036.5 million.
Our net loss during the year ended December 31,
2009 included $51.5 million in impairment charges for
goodwill and $4.1 million in impairment charges for
other acquired intangible assets as well as restructur-
ing charges of $3.2 million and transition costs related
to our president and chief executive officer. We also
recorded significant similar charges in prior years,
including 2008 and 2007. We do not expect to continue
to incur any of these charges on a regular basis, but
we cannot guarantee that we will not incur other simi-
lar charges in the future or that we will be profitable in
the future, due in part to the competitive and evolving
nature of the industry in which we operate. Also, due
to the global economic conditions, we continue to see
signs of cautious behavior from our customers. We
continue to analyze our business to control our costs,
principally through making process enhancements and
renegotiating network contracts for more favorable
pricing and terms. We may not be able to achieve or
sustain profitability on a quarterly or annual basis, and
our failure to do so would adversely affect our busi-
ness, including our ability to raise additional funds.
Cash Flows
Operating Activities. Net cash provided by operat-
ing activities was $37.5 million during the year ended
December 31, 2009. Our net loss, after adjustments
for non-cash items, generated cash from operations
of $28.8 million, while changes in operating assets and
liabilities generated cash from operations of $8.7 mil-
lion. We anticipate continuing to generate cash flows
from our results of operations, or net loss adjusted for
non-cash items. We also expect to use cash flows from
operating activities and cash on hand to fund a sig-
nificant portion of our capital expenditures and other
requirements and to meet our other commitments
and obligations, including outstanding debt, as they
become due.
The primary non-cash adjustment during the year
ended December 31, 2009 was $55.6 million for
impairment of goodwill and other intangible assets
further discussed above in the section “Critical
Accounting Policies and Estimates – Goodwill and
Other Intangible Assets” and “Results of Operations –
Other Operating Costs and Expenses – Impairments
and Restructuring – Impairments.” Non-cash adjust-
ments also included $32.5 million for depreciation
and amortization, which included the effects of the
expansion of our network and data center facilities,
and $5.6 million for stock-based compensation, which
we discuss above in “Results of Operations – Other
Operating Costs and Expenses – Compensation.”
Changes in operating assets and liabilities had a
net favorable impact on cash provided by opera-
tions, particularly from accounts receivable. Net
accounts receivable decreased $7.2 million, primar-
ily as a result of our focus on credit and collections
and a continued focus on mitigating default risk in
our customer base. Quarterly days sales outstand-
ing at December 31, 2009 decreased to 27 days from
40 days at December 31, 2008. Days sales outstanding
are measured as of a point in time and may fluctuate
based on a number of factors, including, among other
things, changes in revenues, cash collections, allow-
ance for doubtful accounts and the amount of rev-
enues billed in advance. Inventory, prepaid expenses,
deposits and other assets decreased $2.2 million from
December 31, 2008 to December 31, 2009, primarily
from amortization of annual prepaid insurance pre-
miums and lower prepaid colocation expenses at our
partner sites as we concentrate on selling into com-
pany-controlled facilities. Accrued liabilities increased
$1.4 million, mainly due to the accrual of $2.9 million
representing a portion of targeted payments for annual
performance bonuses and associated payroll taxes
during the year ended December 31, 2009. We did not
accrue any amounts for annual performance bonuses
during the year ended December 31, 2008 following
our compensation committee’s determination not to
award employee bonuses given that we did not meet
established performance goals. The increase in the
annual performance bonus accrual and associated
payroll taxes was partially offset by lower professional
fees and commissions. Accounts payable decreased
$2.4 million from December 31, 2008 to December 31,
2009, representing a use of cash.
Net cash provided by operating activities was $38.0 mil-
lion during the year ended December 31, 2008. Our net
loss, after adjustments for non-cash items, generated
cash from operations of $41.7 million while changes in
operating assets and liabilities represented a use of
46
Internap
2009 Form 10-K
Part II.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
cash from operations of $3.8 million. The primary non-
cash adjustment during the year ended December 31,
2008 was $102.3 million for impairment of goodwill
and other intangible assets further discussed above in
the section “Results of Operations – Other Operating
Costs and Expenses – Impairments and Restructuring
– Impairments.” We also had a non-cash adjustment of
$28.7 million for depreciation and amortization, which
included the amortizable intangible assets acquired
through the VitalStream acquisition in 2007 and the
expansion of our P-NAP and data center facilities
throughout 2007 and 2008. Non-cash adjustments in
2008 also included $7.5 million for stock-based com-
pensation and $5.1 million for the provision for doubtful
accounts, both of which we further discuss above in
the section “Results of Operations – Other Operating
Costs and Expenses – Compensation” and “– General
and Administrative,” respectively. The changes in oper-
ating assets and liabilities included increases in inven-
tory, prepaid expenses, deposits and other assets
of $2.9 million, mostly due to increases in prepaid
colocation setup costs and prepaid rent, as well as two
initial deposits required by real estate leases. We had
a decrease in accrued liabilities of $1.4 million given
that we did not accrue any amounts for bonuses dur-
ing the year ended December 31, 2008. We also had
a net decrease in accrued restructuring of $1.1 million
due primarily to scheduled cash payments during the
year ended December 31, 2008. These changes were
partially offset by a decrease in accounts receivable of
$2.4 million. Accounts receivable as of December 31,
2007 reflected some collection delays on certain
larger, high credit quality customers that tended to pay
over longer terms and an increase from the migration
of legacy VitalStream and other customers to our bill-
ing and systems platforms. Quarterly days sales out-
standing at December 31, 2008 decreased to 40 days
from 53 days at December 31, 2007. The 53 days sales
outstanding at December 31, 2007 was unusually high
and related to an increased accounts receivable, dis-
cussed below.
Net cash provided by operating activities was
$27.5 million during the year ended December 31, 2007.
Our net loss, after adjustments for non-cash items,
generated cash from operations of $32.1 million while
changes in operating assets and liabilities, excluding
effects of the VitalStream acquisition, represented
a use of cash from operations of $4.5 million. The
primary non-cash adjustment during the year ended
December 31, 2007 was $26.4 million for deprecia-
tion and amortization, which included the amortizable
intangible assets acquired through the VitalStream
acquisition in February 2007 and the expansion of
our P-NAP and data center facilities throughout 2007.
Non-cash adjustments also included $8.7 million for
stock-based compensation. The change in working
capital included an increase in accounts receivable
of $15.8 million. The increase in accounts receiv-
able resulted in quarterly days sales outstanding at
December 31, 2007 increasing to 53 days from 38 days
as of December 31, 2006. This increase in accounts
receivable was largely due to revenue growth and also,
in part, our day sales outstanding trending up from
lower than historical levels at December 31, 2006. We
also experienced collection delays on certain larger,
high credit quality customers that tended to pay over
longer terms and in conjunction with the migration of
some former VitalStream and other customers to our
billing and systems platforms. The change in working
capital also included a net increase in accounts pay-
able of $7.9 million due to the growth of our business,
primarily attributed to the acquisition of VitalStream
and our data center growth initiative. A portion of the
increase was also caused by the implementation near
year-end of a new telecommunications expense man-
agement system for our direct costs.
Investing Activities. Net cash used in investing activi-
ties during the year ended December 31, 2009 was
$9.9 million, primarily due to capital expenditures of
$17.3 million, partially offset by proceeds from the
maturities of investments in marketable securities of
$7.4 million. Our capital expenditures related to the
continued expansion and upgrade of our data center
facilities and network infrastructure.
Net cash used in investing activities during the year
ended December 31, 2008 was $41.7 million, primar-
ily due to capital expenditures of $51.2 million, par-
tially offset by net proceeds from the maturities and
sales of short-term investments in marketable securi-
ties of $5.2 million and a decrease in restricted cash of
$4.1 million. Similar to 2009, our capital expenditures
were principally for the continued expansion of our
data center facilities, CDN infrastructure and upgrad-
ing our P-NAP facilities. Restricted cash decreased
due to the maturity of certificates of deposit that had
secured certain letters of credit, which we replaced.
These letters of credit are now secured by our revolv-
ing credit facility.
Net cash used in investing activities during the year
ended December 31, 2007 was $36.4 million, primar-
ily due to capital expenditures of $30.3 million and
net purchases of short-term investments of $6.1 mil-
lion. Our capital expenditures were principally for the
expansion of our data center facilities, CDN infra-
structure and upgrading our P-NAP facilities and were
47
Internap
2009 Form 10-K
Part II.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
funded from both cash from operations and borrow-
ings from the credit agreement we entered into on
September 14, 2007. We discuss the credit agreement
in greater detail below in “Capital Resources – Credit
Agreement.” Investing activities during the year ended
December 31, 2007 also included purchases and sales
of auction rate securities.
Financing Activities. Net cash used in financing
activities during the year ended December 31, 2009
was $0.6 million, primarily due to payments on capital
leases of $0.3 million and $0.2 million for the reacquisi-
tion of shares of treasury stock as payment of taxes
due from employees for stock-based compensation,
net of proceeds from employee ESPP purchases and
option exercises. We also repaid and re-borrowed a
cumulative $78.5 million under our credit facility during
the year ended December 31, 2009 to optimize liquid-
ity and net interest income and expense; however, at
no one time during the year did we borrow more than
$20.0 million. As a result of these activities, we had
balances of $20.0 million on our revolving credit facil-
ity and $3.2 million in capital lease obligations as of
December 31, 2009. We may also borrow additional
funds under our credit agreement if we consider it eco-
nomically favorable to do so.
Net cash used in financing activities during the year
ended December 31, 2008 was $0.8 million, primarily
for payments on capital leases of $0.8 million. We also
repaid and re-borrowed $20.0 million under our credit
facility to optimize liquidity and net interest income
and expense. At December 31, 2008, we had balances
of $20.0 million outstanding on our credit facility and
$3.5 million in capital lease obligations with $0.3 million
in the capital leases scheduled as due within the next
12 months.
Net cash provided by financing activities during the
year ended December 31, 2007 was $15.2 million. Cash
provided by financing activities was primarily due to
proceeds from note payable of $19.7 million, net of
discount, and proceeds from stock-based compensa-
tion plan activity of $8.6 million, partially offset by the
repayment of prior outstanding debt of $11.3 million
and payments on capital leases of $1.6 million. The
proceeds from the note payable were a result of enter-
ing into our new credit facility on September 14, 2007.
Capital Resources
Short-Term Investments in Marketable Securities
and Other Related Assets. Short-term investments
in marketable securities and other related assets at
December 31, 2009 consisted of auction rate securi-
ties and corresponding rights, described below. The
carrying value (which approximates fair value) of our
auction rate securities as of December 31, 2009 was
$6.5 million compared to a par value of $7.0 million.
Auction rate securities are variable rate bonds tied to
short-term interest rates with maturities on the face of
the securities in excess of 90 days and have interest
rate resets through a modified Dutch auction, at pre-
determined short-term intervals, usually every seven,
28 or 35 days. Auction rate securities generally trade
at par value and are callable at par value on any inter-
est payment date at the option of the issuer. Interest
received during a given period is based upon the
interest rate determined through the auction process.
The underlying assets of our auction rate securities
are state-issued student and educational loans that
are substantially backed by the federal government
and carried AAA/Aaa or A3 ratings as of December 31,
2009. Although these securities are issued and rated
as long-term bonds, they have historically been priced
and traded as short-term investments because of the
liquidity provided through the interest rate resets.
While we continue to earn and accrue interest on our
auction rate securities at contractual rates, these
investments have not been actively trading since
early 2008 when auctions failed to attract sufficient
buyers and, as a result, the auction rate securities
lost their liquidity. Our auction rate securities do not
currently have a readily observable market value and
their estimated fair value no longer approximates par
value. Accordingly, we changed the classification of
the auction rate securities to non-current investments.
In November 2008, we accepted an offer providing us
with rights, or ARS Rights, from one of our investment
providers to sell at par value auction rate securities
originally purchased from the investment provider
($7.0 million as of December 31, 2009) at any time dur-
ing a two-year period beginning June 30, 2010. The
carrying value (which approximates fair value) of our
ARS Rights as of December 31, 2009 was $0.5 mil-
lion. In conjunction with our acceptance of the ARS
Rights, we changed the investment classification of
our auction rate securities from available for sale to
trading. We intend to exercise the ARS Rights within
the next 12 months if they are not redeemed by the
issuers or sold to third parties and, therefore, have
reclassified both the underlying securities and the ARS
Rights from non-current assets to current assets as
of December 31, 2009. The combined carrying value
(which approximates fair value) of our auction rate
securities and the ARS Rights was $7.0 million as of
December 31, 2009 and represented 21% or our total
financial assets measured at fair value. The investment
classification of the underlying securities and the ARS
48
Internap
2009 Form 10-K
Part II.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Rights continues to be trading. During the year ended
December 31, 2009, $0.2 million of our auction rate
securities were called by the issuers at par value.
Credit Agreement. On September 14, 2007, we
entered into a $35.0 million credit agreement, or the
Credit Agreement, with Bank of America, N.A., as
the administrative agent. We amended the Credit
Agreement on May 14, 2008 and September 30, 2008,
or the Amendment (we refer to the Credit Agreement
along with the Amendment as the Amended Credit
Agreement). The Amended Credit Amendment
includes a revolving credit facility of $35.0 million with
a letter of credit sublimit of $7.0 million and an option
to enter into a lease financing agreement not to exceed
$10.0 million. The revolving credit facility is available to
finance working capital, capital expenditures and other
general corporate purposes.
As of December 31, 2009, the revolving credit facility
had an outstanding principal amount of $20.0 million
due September 14, 2011, a total of $3.6 million of letters
of credit issued and $11.4 million in borrowing capac-
ity. The interest rate on the revolving credit facility
as of December 31, 2009 was 3.25% and was based
on our bank’s prime rate. In January 2010, we repaid
$19.5 million of the outstanding balance.
The Amended Credit Agreement includes customary
representations, warranties, negative and affirmative
covenants (including certain financial covenants relat-
ing to a net funded debt to EBITDA ratio, a debt serv ice
coverage ratio and a minimum liquidity requirement,
as well as a prohibition against paying dividends,
limitations on capital expenditures of $25.0 million,
plus prior-year carryover, or an amount to be mutually
agreed upon for 2010 and 2011, customary events of
default and certain default provisions that could result
in acceleration of all outstanding amounts due under
the Amended Credit Agreement). As of December 31,
2009, we were in compliance with the various cov-
enants in the Amended Credit Agreement.
Our obligations under the Amended Credit Agreement
are pledged by substantially all of our assets including
the capital stock of our domestic subsidiaries and 65%
of the capital stock of our foreign subsidiaries.
Capital Leases. Our future minimum lease payments
on remaining capital lease obligations at December 31,
2009 were $3.2 million.
Commitments and Other Obligations. We have commitments and other obligations that are contractual in
nature and will represent a use of cash in the future unless the agreements are modified. Serv ice commitments
primarily represent purchase commitments made to our largest bandwidth vendors and contractual payments to
license data center space used for resale to customers. Our ability to improve cash provided by operations in the
future would be negatively impacted if we do not grow our business at a rate that would allow us to offset the serv-
ice commitments with corresponding revenue growth.
The following table summarizes our credit obligations and future contractual commitments as of December 31,
2009 (in thousands):
Revolving credit facility (1)
Capital lease obligations
Operating lease commitments
Serv ice commitments
Total
$ 21,109
8,617
210,811
18,474
$259,011
Less than
1 year
$ 650
562
29,805
9,003
$40,020
Payments Due by Period
1–3
Years
$20,459
1,135
59,080
9,471
$90,145
3–5
Years
More than
5 years
$ –
1,180
51,420
–
$52,600
$ –
5,740
70,506
–
$76,246
(1) As noted above in “– Credit Agreement,” the interest rate on the revolving credit facility is based on our bank’s prime rate. As of
December 31, 2009, the interest rate was 3.25% and the projected interest included in the debt payments above incorporates this
rate. We subsequently paid $19.5 million on the revolving credit facility in January 2010 which would significantly lower the projected
interest included above. We plan to borrow on the revolving credit facility from time-to-time, particularly if we consider it economically
favorable to do so.
49
Internap
2009 Form 10-K
Part II.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 7A.
QUANTITATIVE AND
QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
AUCTION RATE SECURITIES AND ARS RIGHTS
As discussed above under “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations – Liquidity and Capital Resources – Capital
Resources – Short-Term Investments in Marketable
Securities and Other Related Assets,” the estimated
fair values of our auction rate securities and the ARS
Rights were $6.5 million and $0.5 million, respectively,
as of December 31, 2009. We estimate that a change
in the effective yield of 100 basis points in the auction
rate securities and the ARS Rights would change our
interest income by $0.1 million per year. During the
year ended December 31, 2009, a small portion of our
auction rate securities, $0.2 million, were called by the
issuer at par value. In addition, we intend to exercise
the ARS Rights within the next 12 months if they are not
redeemed by the issuers or sold to third parties.
OTHER INVESTMENTS
We invested $4.1 million in Internap Japan, a joint ven-
ture with NTT-ME Corporation and NTT Holdings. We
account for this investment using the equity-method
and to date we have recognized $3.0 million in equity-
method losses, representing our proportionate share
of the aggregate joint venture losses and income.
Furthermore, the joint venture investment is subject
to foreign currency exchange rate risk. The market
for services offered by Internap Japan has not been
proven and may never materialize.
INTEREST RATE RISK
Our objective in managing interest rate risk is to main-
tain a favorable long-term fixed rate or a balance of
fixed and variable rate debt that will lower our overall
borrowing costs within reasonable risk parameters.
Currently, our strategy for managing interest rate risk
does not include the use of derivative securities. As of
December 31, 2009, our long-term debt consisted of
a revolving credit facility with an outstanding principal
balance of $20.0 million and an interest rate of 3.25%,
based on our bank’s prime rate. The outstanding prin-
cipal amount is due September 14, 2011. We estimate
that a change in the interest rate of 100 basis points
would change our interest expense and payments by
$0.2 million per year, assuming we maintain a compa-
rable amount of outstanding principal throughout the
year. We subsequently paid $19.5 million on the revolv-
ing credit facility in January 2010 and plan to borrow on
the revolving credit facility from time-to-time particu-
larly, if we consider it economically favorable to do so.
FOREIGN CURRENCY RISK
Substantially all of our revenue is currently in U.S. dol-
lars and from customers in the U.S. Accordingly, we do
not believe that we currently have any significant direct
foreign currency exchange rate risk.
Item 8.
FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
Our accompanying consolidated financial statements,
financial statement schedule and the report of our
independent registered public accounting firm appear
in Part IV of this Form 10-K. Our report on internal con-
trols over financial reporting appears in Item 9A of this
Form 10-K.
Item 9.
CHANGES IN AND
DISAGREEMENTS WITH
ACCOUNTANTS ON
ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
50
Internap
2009 Form 10-K
Part II.
Item 9A. Controls and Procedures
Item 9A.
CONTROLS AND
PROCEDURES
EVALUATION OF DISCLOSURE
CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures
that are designed to provide reasonable assurance that
information required to be disclosed in our reports filed
under the Exchange Act, is recorded, processed, sum-
marized and reported within the time periods specified
in the SEC’s rules and forms, and that such information
is accumulated and communicated to management,
including our chief executive officer and chief finan-
cial officer, as appropriate, to allow timely decisions
regarding required disclosure. Management neces-
sarily has applied its judgment in assessing the costs
and benefits of such controls and procedures, which,
by nature, can provide only reasonable assurance
regarding management’s control objectives. Our man-
agement, including our chief executive officer and chief
financial officer, does not expect that our disclosure
controls can prevent all errors and all fraud. A control
system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. There
are inherent limitations in all control systems, including
the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of sim-
ple error, mistake, management override or collusion.
The design of any system of controls also is based in
part upon certain assumptions about the likelihood
of future events. While our disclosure controls and
procedures are designed to be effective under circum-
stances where they should reasonably be expected to
operate effectively, we can offer no assurance that any
design will succeed in achieving its stated goals under
all potential future conditions. Because of the inherent
limitations in any control system, misstatements due to
error or fraud may occur and may not be detected.
the Exchange Act. Based on this evaluation, our chief
executive officer and our chief financial officer con-
cluded that our disclosure controls and procedures
were effective as of December 31, 2009.
REPORT OF MANAGEMENT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and
maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Under the supervision and with the par-
ticipation of our management, including our chief exec-
utive officer and chief financial officer, we conducted
an evaluation of the effectiveness of our internal con-
trol over financial reporting based on the framework
in Internal Control – Integrated Framework issued by
the Committee of Sponsoring Organizations of the
Treadway Commission, or COSO.
Based on our evaluation under the framework in
Internal Control – Integrated Framework issued by
COSO, our management concluded that our internal
control over financial reporting was effective as of
December 31, 2009. The effectiveness of our internal
control over financial reporting as of December 31,
2009 has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm,
as stated in their report which is included herein.
CHANGES IN INTERNAL CONTROL
OVER FINANCIAL REPORTING
There was no change in our internal control over finan-
cial reporting that occurred during the quarter ended
December 31, 2009 that has materially affected, or
that is reasonably likely to materially affect, our internal
control over financial reporting.
Item 9B.
OTHER INFORMATION
Under the supervision and with the participation of our
management, including our chief executive officer and
chief financial officer, we conducted an evaluation of
our disclosure controls and procedures, as such term
is defined under Rule 13a-15(e) promulgated under
None.
Part III.
Item 10. Directors, Executive Offi cers and Corporate Governance
51
Internap
2009 Form 10-K
Part III
Item 10.
DIRECTORS, EXECUTIVE
OFFICERS AND
CORPORATE GOVERNANCE
Item 12.
SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
AND RELATED
STOCKHOLDER MATTERS
We will include information regarding our directors and
executive officers in our definitive proxy statement for
our 2010 annual meeting of stockholders, which we will
file within 120 days after the end of the fiscal year cov-
ered by this report. This information is incorporated in
this Form 10-K by reference.
CODE OF CONDUCT
We have adopted a code of conduct that applies
to our officers and all of our employees. A copy of
the code of conduct is available on our website at
www.internap.com. We will furnish copies without
charge upon request at the following address: Internap
Network Services Corporation, Attn: General Counsel,
250 Williams Street, Atlanta, Georgia 30303.
If we make any amendments to the code of conduct
other than technical, administrative or other non-sub-
stantive amendments, or grant any waivers, including
implicit waivers, from the addendum to this code, we
will disclose the nature of the amendment or waiver, its
effective date and to whom it applies on our website or
in a current report on Form 8-K filed with the SEC.
Item 11.
EXECUTIVE COMPENSATION
The information under the captions, “Executive Officers
and Compensation” and “Compensation Committee
Report” contained in our definitive proxy statement for
our 2010 annual meeting of stock holders, which we will
file within 120 days after the end of the fiscal year cov-
ered by this report, is incorporated in this Form 10-K
by reference.
The information under the caption “Security Ownership
of Certain Beneficial Owners and Management” con-
tained in our definitive proxy statement for our 2010
annual meeting of stockholders, which we will file within
120 days after the end of the fiscal year covered by this
report, is incorporated in this Form 10-K by reference.
Item 13.
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
T he info r m atio n un de r the c a ptio n “C e r t a in
Relationships and Related Transactions” contained
in our definitive proxy statement for our 2010 annual
meeting of stockholders, which we will file within
120 days after the end of the fiscal year covered by this
report, is incorporated in this Form 10-K by reference.
Item 14.
PRINCIPAL ACCOUNTING
FEES AND SERVICES
The information under the caption “Ratification of
Appointment of Independent Registered Public
Accounting Firm” in our definitive proxy statement for our
2010 annual meeting of stockholders, which we will file
within 120 days after the end of the fiscal year covered by
this report, is incorporated in this Form 10-K by reference.
52
Internap
2009 Form 10-K
Part IV.
Item 15. Exhibits and FinancialStatement Schedules
Part IV
Item 15.
EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES
Item 15(a)(1).
Exhibit
Number Description
3.1* Cer tificate of Elimination of the Series B
Preferred Stock.
3.2* Restated Cer tificate of Incorporation of
the Company.
3.3
Amended and Restated Bylaws of the Company
(incorporated by reference herein to Exhibit 4.2
to the Company’s Registration Statement
on Form S-3, filed September 8, 2003, File
No. 333-108573).
Financial Statements. The following consolidated
financial statements of the Company and its subsidiar-
ies are filed herewith:
4.1*
Report of Independent Registered
Public Accounting Firm
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Stockholders’
Equity and Comprehensive Income (Loss)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 15(a)(2).
Page
F-2
F-3
F-4
F-5
F-6
F-7
Financial Statement Schedules. The following financial
statement schedule of the Company and its subsidiar-
ies is filed herewith:
Schedule II – Valuation and Qualifying
Accounts for the Three Years
Ended December 31, 2009
Item 15(a)(3).
Page
S-1
Exhibits. The following exhibits are filed as part of
this report:
Amendment No. 1 to Preferred Stock Rights
Agreement, dated as of December 31, 2009,
between the Company and American Stock
Transfer & Trust Company, as Rights Agent.
10.1 Amended and Restated Internap Network
Services Corporation 1998 Stock Option/Stock
Issuance Plan (incorporated by reference herein
to Exhibit 10.1 to the Company’s Annual Report
on Form 10-K, filed March 13, 2009).+
10.2
Internap Network Services Corporation 1999
Non-Employee Directors’ Stock Option Plan
(incorporated by reference herein to Exhibit 10.2
to the Company’s Annual Report on Form 10-K,
filed March 13, 2009).+
10.3 First Amendment to the Internap Network
Services Corporation 1999 Non-Employee
Directors’ Stock Option Plan (incorporated
by reference herein to Exhibit 10.3 to the
Company’s Annual Report on Form 10-K, filed
March 13, 2009).+
10.4 Amended and Restated Internap Network
Services Corporation 1999 Stock Incentive Plan
for Non-Officers (incorporated by reference
herein to Exhibit 10.5 to the Company’s Annual
Report on Form 10-K, filed March 13, 2009).+
10.5 A m e n d e d
I n t e r n a p N e t w o r k S e r v i c e s
Corporation 1999 Equity Incentive Plan (incor-
porated herein by reference to Exhibit 10.7 to the
Company’s Registration Statement on Form S-1,
File No. 333-95503 dated January 27, 2000).+
10.6
10.7
Form of 1999 Equity Incentive Plan Stock Option
Agreement (incorporated herein by reference to
Exhibit 10.8 to the Company’s Registration
Statement on Form S-1, File No. 333-84035
dated July 29, 1999).+
Internap Network Services Corporation 2000
Non-Officer Equity Incentive Plan (incorpo-
rated herein by reference to Exhibit 99.1 to the
Company’s Registration Statement on Form S-8,
File No. 333-37400 dated May 19, 2000).+
53
Internap
2009 Form 10-K
Part IV.
Item 15. Exhibits and FinancialStatement Schedules
Exhibit
Number Description
Exhibit
Number Description
10.8
Internap Network Services Corporation 2002 Stock
Compensation Plan (incorporated by reference
herein to Exhibit 10.9 to the Company’s Annual
Report on Form 10-K, filed March 13, 2009).+
10.18 2008 Executive Bonus Award Incentive Plan
(incorporated herein by reference to Exhibit 10.1
to the Company’s Current Report on Form 8-K,
filed March 24, 2008).+
10.9 Form of Nonstatutory Stock Option Agreement
under the Internap Network Services Corporation
2002 Stock Compensation Plan (incorporated
by reference herein to Exhibit 10.10 to the
Company’s Annual Report on Form 10-K, filed
March 13, 2009).+
10.10 Amended and Restated 2005 Incentive Stock
Plan, dated March 15, 2006 (incorporated herein
by reference to Appendix B to the Company’s
Definitive Proxy Statement, filed May 8, 2008).+
10.11 Employment Agreement dated as of July 10,
2007 between the Company and James
DeBlasio (incorporated herein by reference to
Exhibit 99.1 to the Company’s Current Report
on Form 8-K, filed July 11, 2007).+
10.12 First Amendment to Employment Agreement
between James P. DeBlasio and the Company
dated November 14, 2007 (incorporated
herein by reference to Exhibit 99.1 to the
Company’s Current Report on Form 8-K, filed
November 19, 2007).+
10.13 Amended and Restated 2004 Internap Network
S e r v i c e s C o r p o r a ti o n Em p l oye e S to c k
Purchase Plan, dated January 11, 2006 (incor-
porated herein by reference to Exhibit 10.2 to
the Company’s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2006, filed
May 10, 2006).+
10.14* Form of Stock Grant Certificate under the
Amended and Restated Internap Network
Services Corporation 2005 Incentive Stock Plan.+
10.15* Form of Stock Option Certificate under the
Amended and Restated Internap Network
Services Corporation 2005 Incentive Stock Plan.+
10.16 VitalStream Holdings, Inc. 2001 Stock Incentive
Plan (Third Amended and Restated) (incorpo-
rated herein by reference to Exhibit 4.4 to the
Company’s Registration Statement on Form S-8,
File No. 333-141245, filed March 13, 2007).+
10.17 General Release Agreement dated as of
April 9, 2008 between the Company and
Vincent Molinaro (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report
on Form 8-K, filed on April 18, 2008).+
10.19 2008 Long-Term Incentive Plan (incorporated
herein by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K, filed
March 24, 2008).+
10.20 Form of Indemnity Agreement for directors and
officers of the Company (incorporated herein
by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K, filed May 29, 2009).+
10.21 2009 Short Term Incentive Plan (incorpo-
rated herein by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K, filed
August 21, 2009).+
10.22 Credit Agreement dated as of September 14,
20 07 by and among the Company, a s
the Borrower, Bank of America, N.A., as
Administrative Agent, Swing Line Lender and
L/C Issuer, and the other Lenders party thereto
(incorporated herein by reference to Exhibit 10.1
to the Company’s Current Report on Form 8-K,
filed September 19, 2007).
10.23 Pledge and Security Agreement dated as of
September 14, 2007 among the Company,
and certain of its Subsidiaries party thereto
from time to time, as Grantors, and Bank of
America, N.A., as Administrative Agent (incor-
porated herein by reference to Exhibit 10.2 to
the Company’s Current Report on Form 8-K,
filed September 19, 2007).
10.24 Intellectual Property Security Agreement dated
as of September 14, 2007 among the Company,
and certain of its Subsidiaries party thereto
from time to time, as Grantors, and Bank of
America, N.A., as Administrative Agent (incor-
porated herein by reference to Exhibit 10.3 to
the Company’s Current Report on Form 8-K,
filed September 19, 2007).
10.25 Amendment No. 1 to Credit Agreement entered
into as of May 14, 2008 by and among Bank of
America, N.A. as Administrative Agent, Swing
Line Lender, L/C Issuer and sole Lender, the
Company and the Subsidiaries of the Company
party thereto as Guarantors (incorporated
herein by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K, filed
May 16, 2008).
54
Internap
2009 Form 10-K
Part IV.
Item 15. Exhibits and FinancialStatement Schedules
Exhibit
Number Description
Exhibit
Number Description
10.26 Amendment No. 2 dated September 30, 2008 to
Credit Agreement, dated as of September 14,
20 07, by and among the Company, as
the Borrower, Bank of America, N.A., as
Administrative Agent, Swing Line Lender and
L/C Issuer, and the other Lenders party thereto
(incorporated herein by reference to Exhibit 10.1
to the Company’s Current Report on Form 8-K,
filed October 6, 2008).
10.27 Joinder Agreement to the Employment Security
Plan executed by Richard Dobb (incorpo-
rated herein by reference to Exhibit 99.3 to the
Company’s Current Report on Form 8-K, filed
November 19, 2007).+
10.28 Joinder Agreement to the Employment Security
Plan executed by George E. Kilguss (incorpo-
rated herein by reference to Exhibit 99.1 to the
Company’s Current Report on Form 8-K, filed
March 28, 2008).+
10.29 Joinder Agreement to the Employment Security
Plan executed by Tim Sullivan (incorporated
herein by reference to Exhibit 10.28 to the
Company’s Annual Report on Form 10-K, filed
March 13, 2009).+
10.30 Joinder Agreement to the Employment Security
Plan executed by Randal R. Thompson (incor-
porated herein by reference to Exhibit 10.1 to
the Company’s Quarterly Report on Form 10-Q,
filed May 7, 2009).+
10.31 Offer Letter between the Company and Eric
Cooney, dated January 16, 2009 (incorpo-
rated herein by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K, filed
February 2, 2009).+
10.32 Joinder Agreement to the Employment Security
Plan executed by Eric Cooney (incorporated
herein by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K, filed
February 2, 2009).+
10.33 Agreement between the Company and James
P. DeBlasio, dated January 29, 2009 (incorpo-
rated herein by reference to Exhibit 10.3 to the
Company’s Current Report on Form 8-K, filed
February 2, 2009).+
10.34 General Release, Separation and Settlement
Agreement between the Company and Tim
Sullivan, dated August 19, 2009 (incorpo-
rated herein by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K, filed
August 28, 2009).+
10.35* 2010 Short Term Incentive Plan.+
21.1* List of Subsidiaries
23.1* Consent of PricewaterhouseCoopers LLP,
Independent Registered Public Accounting Firm.
31.1* Rule 13a-14(a)/15d-14(a) Certification, executed
by J. Eric Cooney, President, Chief Executive
Officer and Director the Company.
31.2* Rule 13a-14(a)/15d-14(a) Certification, executed
by George E. Kilguss, III, Vice President and
Chief Financial Officer of the Company.
32.1* Section 1350 Certification, executed by J. Eric
Cooney, President, Chief Executive Officer and
Director the Company.
32.2* Section 1350 Certification, executed by George
E. Kilguss, III, Vice President and Chief Financial
Officer of the Company.
* Documents filed herewith.
+ Management contract and compensatory plan and arrangement.
55
Internap
2009 Form 10-K
Signatures
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, as amended, the
Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INTERNAP NETWORK SERVICES CORPORATION
Date: March 2, 2010
By: /s/ George E. Kilguss, III
George E. Kilguss, III
Vice President and Chief Financial Officer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed
below by the following persons on behalf of the Company and in the capacities and on the dates indicated:
Signature
/s/ J. Eric Cooney
J. Eric Cooney
/s/ George E. Kilguss, III
George E. Kilguss, III
/s/ Daniel C. Stanzione
Daniel C. Stanzione
/s/ Charles B. Coe
Charles B. Coe
/s/ Eugene Eidenberg
Eugene Eidenberg
/s/ Patricia L. Higgins
Patricia L. Higgins
/s/ Kevin L. Ober
Kevin L. Ober
/s/ Gary M. Pfeiffer
Gary M. Pfeiffer
/s/ Michael A. Ruffolo
Michael A. Ruffolo
/s/ Debora J. Wilson
Debora J. Wilson
Title
Date
President, Chief Executive Officer and Director
(Principal Executive Officer)
March 2, 2010
Vice President and Chief Financial Officer
(Principal Accounting Officer)
March 2, 2010
Non-Executive Chairman and Director
March 2, 2010
Director
Director
Director
Director
Director
Director
Director
March 2, 2010
March 2, 2010
March 2, 2010
March 2, 2010
March 2, 2010
March 2, 2010
March 2, 2010
56
Internap
2009 Form 10-K
Internap Network
Services Corporation
Index to Consolidated
Financial Statements
Report of Independent Registered
Public Accounting Firm
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of
Stockholders’ Equity and
Comprehensive Income (Loss)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Financial Statement Schedule
Page
F-2
F-3
F-4
F-5
F-6
F-7
S-1
57
Internap
2009 Form 10-K
Financial Section
Report of Independent Registered Public Accounting Firm
Report of Independent
Registered Public
Accounting Firm
To the Board of Directors and Stockholders of
Internap Network Services Corporation:
In our opinion, the consolidated financial statements
listed in the accompanying index present fairly, in all
material respects, the financial position of Internap
Network Services Corporation and its subsidiaries
at December 31, 2009 and 2008, and the results of
their operations and their cash flows for each of the
three years in the period ended December 31, 2009
in conformity with accounting principles generally
accepted in the United States of America. In addi-
tion, in our opinion, the financial statement schedule
listed in the accompanying index presents fairly, in
all material respects, the information set forth therein
when read in conjunction with the related consoli-
dated financial statements. Also in our opinion, the
Company maintained, in all material respects, effec-
tive internal control over financial reporting as of
December 31, 2009, based on criteria established in
Internal Control – Integrated Framework issued by
the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s man-
agement is responsible for these financial statements
and financial statement schedule, for maintaining
effective internal control over financial reporting and
for its assessment of the effectiveness of internal con-
trol over financial reporting, included in Management’s
Report on Internal Control Over Financial Reporting
appearing under Item 9A. Our responsibility is to
express opinions on these financial statements, on the
financial statement schedule, and on the Company’s
internal control over financial reporting based on our
integrated audits. We conducted our audits in accor-
dance with the standards of the Public Company
Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits
to obtain reasonable assurance about whether the
financial statements are free of material misstatement
and whether effective internal control over financial
reporting was maintained in all material respects. Our
audits of the financial statements included 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. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial report-
ing, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating
effectiveness of internal control based on the assessed
risk. Our audits also included performing such other
procedures as we considered necessary in the circum-
stances. We believe that our audits provide a reason-
able basis for our opinions.
A company’s internal control over financial reporting
is a process designed to provide reasonable assur-
ance regarding the reliability of financial reporting and
the preparation of financial statements for external
purposes in accordance with generally accepted
accounting principles. A company’s internal control
over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets
of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit
preparation of financial statements in accordance with
generally accepted accounting principles, and that
receipts and expenditures of the company are being
made only in accordance with authorizations of man-
agement and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposi-
tion of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstate-
ments. Also, projections of any evaluation of effec-
tiveness to future periods are subject to the risk that
controls may become inadequate because of changes
in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
March 2, 2010
58
Internap
2009 Form 10-K
Financial Section
Consolidated Statements of Operations
(In thousands, except per share amounts)
Revenues:
Internet protocol (IP) services
Data center services
Other
Total revenues
Operating costs and expenses:
Direct costs of network, sales and services, exclusive of
depreciation and amortization, shown below:
IP services
Data center services
Other
Direct costs of customer support
Direct costs of amortization of acquired technologies
Sales and marketing
General and administrative
Depreciation and amortization
Loss (gain) on disposals of property and equipment
Impairments and restructuring
Other
Total operating costs and expenses
Loss from operations
Non-operating expense (income):
Interest expense
Interest income
Write-off of investment
Other, net
Total non-operating expense (income)
Year Ended December 31,
2009
2008
2007
$125,548
130,711
–
$ 139,737
114,252
–
$139,072
84,590
10,428
256,259
253,989
234,090
48,055
94,961
–
18,527
8,349
28,131
44,152
28,282
26
54,698
–
325,181
51,885
83,992
–
16,217
6,649
30,888
44,235
23,865
(16)
101,441
–
359,156
(68,922)
(105,167)
720
(150)
–
(109)
461
1,251
(1,884)
–
388
(245)
50,518
59,440
8,436
16,547
4,165
31,533
39,076
22,242
(5)
11,349
500
243,801
(9,711)
1,150
(3,228)
1,178
(37)
(937)
(8,774)
(3,080)
(139)
Loss before income taxes and equity in (earnings) of equity-method investment
Provision (benefit) for income taxes
Equity in (earnings) of equity-method investment, net of taxes
(69,383)
357
(15)
(104,922)
174
(283)
Net loss
Basic and diluted net loss per share
$ (69,725)
$(104,813)
$ (5,555)
$ (1.41)
$
(2.13)
$
(0.12)
Weighted average shares outstanding used in computing basic and
diluted net loss per share
49,577
49,238
46,942
The accompanying notes are an integral part of these consolidated financial statements.
59
Internap
2009 Form 10-K
Financial Section
Consolidated Balance Sheets
(In thousands, except per share amounts)
Assets
Current assets:
Cash and cash equivalents
Short-term investments in marketable securities and other related assets
Accounts receivable, net of allowance for doubtful accounts of $1,953 and $2,777, respectively
Inventory
Prepaid expenses and other assets
Total current assets
Property and equipment
Investments and other related assets, $0 and $7,027, respectively, measured at fair value
Intangible assets, net
Goodwill
Deposits and other assets
Deferred tax asset, non-current, net
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued liabilities
Deferred revenues, current portion
Capital lease obligations, current portion
Restructuring liability, current portion
Other current liabilities
Total current liabilities
Revolving credit facility, due after one year
Deferred revenues, less current portion
Capital lease obligations, less current portion
Restructuring liability, less current portion
Deferred rent
Other long-term liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value, 20,000 shares authorized; no shares issued or outstanding
Common stock, $0.001 par value; 60,000 shares authorized;
50,763 and 50,224 shares outstanding, respectively
Additional paid-in capital
Treasury stock, at cost, 42 and 83 shares, respectively
Accumulated deficit
Accumulated items of other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
December 31,
2009
2008
$ 73,926
7,000
18,685
375
8,768
$ 46,870
7,199
28,634
381
10,867
108,754
91,151
1,804
20,782
39,464
2,637
2,910
93,951
97,350
8,650
33,942
90,977
2,763
2,450
$ 267,502
$ 330,083
$ 17,237
10,192
3,817
25
2,819
125
$ 19,642
8,756
3,710
274
2,800
116
34,215
20,000
2,492
3,217
6,123
16,417
636
83,100
35,298
20,000
2,248
3,244
6,222
14,114
762
81,888
–
–
51
1,221,456
(127)
(1,036,548)
(430)
50
1,216,267
(370)
(966,823)
(929)
184,402
248,195
$ 267,502
$ 330,083
60
Internap
2009 Form 10-K
Financial Section
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)
For the Three Years Ended
December 31, 2009
(In thousands)
Common Stock
Shares Par Value
Additional
Total
Paid-In Treasury Accumulated Comprehensive Stockholders’
Equity
Capital
Income (Loss)
Deficit
Stock
Accumulated
Items of
Balance, December 31, 2006
Net loss
Change in unrealized gains and losses on
investments, net of taxes
Foreign currency translation adjustment
Total comprehensive loss
Stock issued in connection with
VitalStream acquisition
Stock-based compensation plans
activity and stock-based compensation
Balance, December 31, 2007
Net loss
Change in unrealized gains and losses on
investments, net of taxes
Foreign currency translation adjustment
Total comprehensive loss
Stock-based compensation plans activity
and stock-based compensation
Balance, December 31, 2008
Net loss
Change in unrealized gains and losses on
investments, net of taxes
Foreign currency translation adjustment
Total comprehensive loss
Stock-based compensation plans activity
and stock-based compensation
35,873
–
$36 $ 982,624
–
–
$ – $ (856,455)
(5,555)
–
$ 320
–
$ 126,525
(5,555)
–
–
–
–
–
–
12,206
12
208,281
1,680
49,759
–
2
17,286
50 1,208,191
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
465
50,224
–
–
8,076
50 1,216,267
–
–
(370)
(370)
–
–
–
–
–
–
–
–
–
539
1
5,189
243
–
–
–
–
(862,010)
(104,813)
–
–
–
(966,823)
(69,725)
–
–
–
(25)
107
–
–
402
–
(29)
(1,302)
–
(929)
–
25
474
(25)
107
(5,473)
208,293
17,288
346,633
(104,813)
(29)
(1,302)
(106,144)
7,706
248,195
(69,725)
25
474
(69,226)
–
5,433
Balance, December 31, 2009
50,763
$51 $1,221,456
$(127) $(1,036,548)
$ (430)
$ 184,402
The accompanying notes are an integral part of these consolidated financial statements.
61
Internap
2009 Form 10-K
Year Ended December 31,
2009
2008
2007
$(69,725)
$(104,813)
$ (5,555)
Financial Section
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization
Loss (gain) on disposal of property and equipment, net
Goodwill and other intangible asset impairments
Acquired in-process research and development
Stock-based compensation
Write-off of investment
Equity in (earnings) from equity-method investment
Provision for doubtful accounts
Non-cash changes in deferred rent
Deferred income taxes
Other, net
Changes in operating assets and liabilities, excluding effects of acquisition:
Accounts receivable
Inventory, prepaid expenses, deposits and other assets
Accounts payable
Accrued and other liabilities
Deferred revenue
Accrued restructuring liability
32,496
26
55,647
–
5,613
–
(15)
2,711
2,303
(459)
178
7,238
2,205
(2,405)
1,436
351
(80)
28,663
(16)
102,336
–
7,499
–
(283)
5,083
3,102
644
(477)
2,424
(2,919)
18
(1,404)
(836)
(1,070)
Net cash flows provided by operating activities
37,520
37,951
Cash flows from investing activities:
Purchases of investments in marketable securities
Maturities of investments in marketable securities
Purchases of property and equipment
Proceeds from disposal of property and equipment
Cash received from acquisition, net of costs incurred for the transaction
Change in restricted cash, excluding effects of acquisition
Net cash flows used in investing activities
Cash flows from financing activities:
Proceeds from credit facility, due after one year and net of discount
Principal payments on credit facility, due after one year
Payments on capital lease obligations
Stock-based compensation plans
Other, net
Net cash flows (used in) provided by financing activities
Effect of exchange rates on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
–
7,374
(17,278)
4
–
–
(9,900)
78,500
(78,500)
(276)
(205)
(117)
(598)
34
27,056
46,870
(21,422)
26,591
(51,154)
175
–
4,120
(41,690)
20,000
(20,000)
(807)
108
(122)
(821)
(600)
(5,160)
52,030
Cash and cash equivalents at end of period
$ 73,926
$ 46,870
$ 52,030
The accompanying notes are an integral part of these consolidated financial statements.
26,407
(5)
2,454
450
8,681
1,178
(139)
2,261
(421)
(3,095)
(150)
(15,825)
(2,182)
7,920
(2,466)
2,704
5,309
27,526
(38,508)
32,395
(30,271)
5
3,203
(3,217)
(36,393)
19,742
(11,318)
(1,617)
8,582
(149)
15,240
66
6,439
45,591
62
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1. DESCRIPTION OF THE COMPANY
AND NATURE OF OPERATIONS
Internap Network Services Corporation (“we,” “us” or
“our”) provides services through 73 Internet Protocol,
or IP, serv ice points, which includes 20 content deliv-
ery network, or CDN, points of presences, or POPs,
and 47 data centers across North America, Europe and
the Asia-Pacific region. We also have two additional
international standalone CDN POPs and two addi-
tional domestic standalone data center locations
through which we provide IP services by extension.
Our Private Network Access Points, or P-NAPs, fea-
ture multiple direct high-speed connections to major
Internet backbones, also referred to as network serv-
ice providers, such as Verizon Communications Inc.;
Global Crossing Limited; Level 3 Communications,
Inc.; XO Holdings Inc.; and Cogent Communications
Group, Inc. As described in note 4, we operate in
two business segments: IP services and data center
services. We now operate our IP services and the
majority of our CDN services on a combined basis
while we operate the managed hosting portion of our
CDN services as part of our data center services.
The nature of our business subjects us to certain risks
and uncertainties frequently encountered by rapidly
evolving markets. These risks are described in “Risk
Factors” in this Annual Report on Form 10-K.
Although we have been in existence since 1996, we
have incurred significant operational restructurings in
recent years, which have included substantial changes
in our senior management team, streamlining our cost
structure, consolidating network access points and
terminating certain non-strategic real estate leases
and license arrangements. We have a history of quar-
terly and annual period net losses including for each
of the three years in the period ended December 31,
2009. At December 31, 2009, our accumulated deficit
was $1,036.5 million. However, during the years ended
December 31, 2009, 2008 and 2007, we generated net
cash flows from operating activities of $37.5 million,
$38.0 million and $27.5 million, respectively.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Accounting Principles
We prepare our consolidated financial statements and
accompanying notes in accordance with accounting
principles generally accepted in the United States of
America, or GAAP. The consolidated financial state-
ments include our accounts and those of our wholly-
owned subsidiaries. We have eliminated significant
inter-company transactions in consolidation.
Estimates and Assumptions
The preparation of these financial statements requires
us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue and
expense and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our
estimates, including those related to revenue rec-
ognition, doubtful accounts, auction rate securities,
goodwill and intangible assets, accruals, stock-based
compensation, income taxes, restructuring charges,
leases, long-term serv ice contracts, contingencies and
litigation. We base our estimates on historical experi-
ence and on various other assumptions that we believe
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.
Cash and Cash Equivalents
We consider all highly-liquid investments purchased
with an original 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 equiva-
lents 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.
Investments in Marketable Securities and
Other Related Assets
We determine the appropriate classification of all
marketable securities at the time of purchase and
reevaluate such classification as of each reporting
period. Trading securities are carried at fair value
with all changes in fair value reported in “Non-
operating expense (income)” in our consolidated
statements of operations. Available-for-sale secu-
rities are carried at fair value, with the unrealized
gains and losses reported in “Accumulated items of
63
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
other comprehensive income,” a component of stock-
holders’ equity in our consolidated balance sheets. We
also review available-for-sale securities each report-
ing period for declines in value that we consider to be
other-than-temporary and, if appropriate, write down
the securities to their estimated fair value. Any declines
in value judged to be other-than-temporary on avail-
able-for-sale securities are included in “Non-operating
expense (income)” in our consolidated statements of
operations. The cost of securities sold is based on the
specific identification method. As of December 31,
2009, our investments in marketable securities and
other related assets were comprised of auction rate
securities and corresponding rights recorded at fair
value equal to $7.0 million and classified as trading
securities. We classify the auction rate securities and
corresponding rights as current in our consolidated
balance sheets because we intend to liquidate our
holdings in the auction rate securities at par value
within the next 12 months through redemption by the
issuers, sales to third parties or exercise of our cor-
responding rights in the auction rate securities. At
December 31, 2008, the fair value of our short-term
investments in marketable securities was $7.2 mil-
lion, comprised of corporate debt securities and
U.S. Treasury bills, all designated as available for
sale. The fair value of our non-current investments in
marketable securities and other related assets were
comprised of auction rate securities and correspond-
ing rights recorded at fair value equal to $6.4 million,
all designated as trading. See note 5 for further discus-
sion of our investments in marketable securities and
other related assets.
Other Investments
We account for investments that provide us with
the ability to exercise significant influence, but not
control, over an investee using the equity method of
accounting. Significant influence, but not control, is
generally deemed to exist if we have an ownership
interest in the voting stock of the investee of between
20% and 50%, although we consider other factors,
such as minority interest protections, in determining
whether the equity method of accounting is appropri-
ate. As of December 31, 2009, Internap Japan Co.
Ltd., or Internap Japan, a joint venture with NTT-ME
Corporation and Nippon Telegraph and Telephone
Corporation, or NTT Holdings, qualified for equity
method accounting. We record our proportional share
of the income and losses of Internap Japan one month
in arrears on the accompanying consolidated bal-
ance sheets as a component of non-current invest-
ments and our share of Internap Japan’s income
and losses, net of taxes, as a separate caption in our
accompanying consolidated statements of operations.
We incurred a charge during the year ended December 31,
2007, totaling $1.2 million, representing the write-off
of the remaining carrying value of our investment
in series D preferred stock of Aventail Corporation,
or Aventail. See note 5 for further discussion of this
investment and the recorded loss.
Fair Value of Financial Instruments
Effective January 1, 2008, we adopted the provi-
sions of new accounting guidance which defined fair
value and provided direction for using fair value to
measure assets and liabilities. In accordance with the
accounting guidance, we adopted the new provisions
with regard to all financial assets and liabilities in our
financial statements in the first quarter of 2008 and
all nonfinancial assets and nonfinancial liabilities in
the first quarter of 2009. The major categories of non-
financial assets and liabilities that we measure at fair
value include reporting units measured at fair value in
the first step of a goodwill impairment test. Our adop-
tion for measuring nonfinancial assets and liabilities
beginning in 2009 did not have a material impact on
our consolidated financial statements. The new guid-
ance is applicable whenever other standards require
or permit assets or liabilities to be measured at fair
value but does not expand the use of fair value in any
new circumstances. Accordingly, we continue to value
the carrying amounts of certain of our financial instru-
ments, including cash equivalents and marketable
securities, at fair value on a recurring basis.
The new guidance also introduced new disclosures
about how we value certain assets. Much of the disclo-
sure focuses on the inputs used to measure fair value,
particularly in instances in which the measurement
uses significant unobservable inputs. The fair value
estimates presented in this report reflect the infor-
mation available to us as of December 31, 2009. We
adopted the optional provisions of an accounting stan-
dard to record certain financial assets and financial lia-
bilities at fair value. The accounting standard permitted
us to choose to measure, on an instrument-by-instru-
ment basis, many financial instruments and certain
other assets and liabilities at fair value that we are not
currently required to measure at fair value. We applied
the optional provisions of this accounting standard to
rights, or the ARS Rights, from one of our investment
providers to sell at par value our auction rate securities
originally purchased from the investment provider at
anytime during a two-year period beginning June 30,
2010. Recording the ARS Rights at fair value enabled
64
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
us to match changes in the fair value of the ARS Rights
to changes in the fair value of the associated auction
rate securities. See note 5 for further discussion of the
ARS Rights and note 6 for further discussion of the fair
value of our financial instruments.
The carrying amounts of our financial instruments,
including cash and cash equivalents, accounts receiv-
able and other current liabilities, approximate fair value
due to the short-term nature of these assets and liabili-
ties. Due to the nature of our credit facility and variable
interest rate, the fair value of our debt approximates the
carrying value.
amortization. We calculate depreciation and amortiza-
tion on a straight-line basis over the estimated useful
lives of the assets. Estimated useful lives used for
network equipment are generally three years; furniture,
equipment and software are three to seven years; and
leasehold improvements are seven years or over the
lease term, depending on the nature of the improve-
ment, but in no event beyond the expected lease term
and none over 20 years. We capitalize additions and
improvements that increase the value or extend the life
of an asset. We expense maintenance and repairs as
incurred. We charge gains or losses from disposals of
property and equipment to operations.
Financial Instrument Credit Risk
Financial instruments that potentially subject us to a
concentration of credit risk principally consist of cash,
cash equivalents, marketable securities and trade
receivables. We currently invest the majority of our
cash and cash equivalents in money market funds.
We also have invested, in accordance with our formal
investment policy, in high credit quality corporate
debt securities, U.S. Treasury bills and commercial
paper. Our investments in marketable securities and
other related assets also include auction rate securi-
ties whose underlying assets are state-issued stu-
dent and educational loans which are substantially
backed by the federal government. Although auction
rate securities are not eligible investments under
our current investment policy, we intend to exercise
the ARS Rights within the next 12 months if they are
not redeemed by the issuers or sold to third parties.
Accordingly, we now classify the auction rate securities
and ARS Rights as current assets. As of December 31,
2009, our investments in auction rate securities hav-
ing a par value of $7.0 million had a carrying value of
$6.5 million and as of December 31, 2008, the invest-
ments had par and carrying values of $7.2 million and
$6.4 million, respectively. During 2009, $0.2 million of
the securities were called by the issuer at par value.
We recorded the ARS Rights at fair value of $0.5 million
and $0.6 million as of December 31, 2009 and 2008,
respectively. We further discuss auction rate securities
and ARS Rights in note 5.
Inventory
We carry inventory at the lower of cost or market using
the first-in, first-out method. Cost includes materials
related to the assembly of our Flow Control Platform,
or FCP, products.
Property and Equipment
We carry property and equipment at original acqui-
sition cost less accumulated depreciation and
Leases and Leasehold Improvements
We record leases in which we have substantially all of
the benefits and risks of ownership as capital leases
and all other leases as operating leases. For leases
determined to be capital leases, we record the assets
held under capital lease and related obligations at
the lesser of the present value of aggregate future
minimum lease payments or the fair value of the assets
held under capital lease. We amortize the assets over
seven years or over the lease term, depending on the
nature of the improvement, but in no event beyond
the expected lease term and none over 20 years. The
duration of lease obligations and commitments ranges
from two years for office equipment to 25 years for
facilities. For leases determined to be operating leases,
we record lease expense on a straight-line basis over
the lease term. Certain leases include renewal options
that, at the inception of the lease, are considered
reasonably assured of being renewed. The lease term
begins when we control the leased property, which is
typically before lease payments begin under the terms
of the lease. The difference between the expense
recorded in our consolidated statements of operations
and the amount paid is recorded as deferred rent and
is included in our consolidated balance sheets.
Costs of Computer Software Development
We capitalize certain direct costs incurred develop-
ing internal use software. We capitalized $0.9 million,
$1.4 million and $1.6 million in internal software devel-
opment costs during the years ended December 31,
2009, 2008 and 2007, respectively. During the year
ended December 31, 2007, we impaired $1.1 million
of software development costs capitalized prior to
December 31, 2006 related to the implementation
of a billing and order entry system initiated during
2004. Subsequent to our acquisition of VitalStream,
we determined that we would utilize our legacy bill-
ing system and abandon the former project because
(a) the developer of our financial software purchased
65
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
the developer of our legacy billing system, and (b) the
legacy billing system would be more flexible in integrat-
ing the VitalStream business. Amortization expense on
internally developed software commences when the
software project is ready for its intended use.
As of December 31, 2009 and 2008, the balance of
unamortized software costs was $4.0 million and
$3.8 million, respectively, and during the years ended
December 31, 2009 and 2008, amortization expense
was $0.7 million and $0.4 million, respectively.
Valuation of Long-Lived Assets
We periodically evaluate the carrying value of our long-
lived assets, including, but not limited to, property and
equipment. We consider the carrying value of a long-
lived asset impaired when the undiscounted cash flows
from such asset are separately identifiable and we
estimate them to be less than its carrying value. In that
event, we would recognize a loss based on the amount
by which the carrying value exceeds the fair value of
the long-lived asset. We determine fair value based on
either market quotes, if available, or discounted cash
flows using a discount rate commensurate with the risk
inherent in our current business model for the specific
asset being valued. We would determine losses on
long-lived assets to be disposed of in a similar manner,
except that we would reduce fair values by the cost of
disposal. We charge losses due to impairment of long-
lived assets to operations during the period in which
we identify the impairment.
Goodwill and Other Intangible Assets
Goodwill is not amortized. Instead, we assess goodwill
for impairment at a reporting unit level on an annual
basis. As discussed in note 4, we changed how we
view and manage our business beginning June 1,
2009. We now operate our IP services and the major-
ity of our CDN services on a combined basis while we
operate the managed hosting portion of our CDN serv-
ices as part of our data center services. Our decision to
consolidate segments as of June 1, 2009 required us to
assess goodwill for impairment as of that date, which
was earlier than the date of our annual assessment
(August 1). Our newly-combined IP services operating
segment continues to be comprised of two report-
ing units: services and products. Similarly, our data
center services operating segment continues to be
a single reporting unit; however, it does not have any
recorded goodwill.
As a result of this assessment, we recorded an aggre-
gate impairment charge of $55.6 million for goodwill
and other intangible assets during the year ended
December 31, 2009. This charge included $48.0 million
for goodwill related to our former CDN services
segment, $3.5 million to adjust goodwill in our IP
services segment related to our FCP products and
$4.1 million for acquired CDN advertising technology.
The impairments in 2009 are in addition to impair-
ments of $99.7 million for goodwill and $2.7 million for
other intangible assets in 2008 related to our former
CDN services segment. We present the impairment
charges for goodwill and trade names in “Impairments
and restructuring” while we present the impairment
charges for acquired CDN advertising technologies in
“Direct costs of amortization of acquired technologies”
in our consolidated statements of operations.
Our assessment of goodwill for impairment includes
comparing the fair value of our reporting units to the
carrying value. We estimate fair value using a com-
bination of discounted cash flow models and market
approaches. If the fair value of a reporting unit exceeds
its carrying value, goodwill is not impaired and no further
testing is necessary. If the carrying value of a reporting
unit exceeds its fair value, we perform a second test
to measure the amount of impairment to goodwill, if
any. To measure the amount of any impairment, we
determine the implied fair value of goodwill in the same
manner as if we were acquiring the affected reporting
unit in a business combination. Specifically, we allocate
the fair value of the affected reporting unit to all of the
assets and liabilities of that unit, including any unrec-
ognized intangible assets, in a hypothetical calculation
that would yield the implied fair value of goodwill. If the
implied fair value of goodwill is less than the goodwill
recorded on our consolidated balance sheet, we record
an impairment charge for the difference.
We base the impairment analysis of goodwill on esti-
mated fair values. The assumptions, inputs and judg-
ments used in performing the valuation analysis are
inherently subjective and reflect estimates based on
known facts and circumstances at the time the valu-
ation is performed. These estimates and assumptions
primarily include, but are not limited to, discount rates;
terminal growth rates; projected revenues and costs;
earnings before interest, taxes, depreciation and
amortization, or EBITDA, for expected cash flows; mar-
ket comparables and capital expenditures forecasts.
The use of different assumptions, inputs and judg-
ments, or changes in circumstances, could materially
affect the results of the valuation. Due to the inherent
uncertainty involved in making these estimates, actual
results could differ from our estimates.
We perform our annual goodwill impairment test as
of August 1 of each calendar year absent any impair-
ment indicators or other changes that may cause more
frequent analysis. We did not identify an impairment as
a result of our annual August 1, 2009 impairment test.
66
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
We also assess on a quarterly basis whether any
events have occurred or circumstances have changed
that would indicate an impairment could exist. We
have considered the likelihood of triggering events that
might cause us to re-assess goodwill on an interim
basis and concluded that none had occurred subse-
quent to August 1, 2009.
Other intangible assets, including developed tech-
nologies and patents, have finite lives and we have
recorded these assets at cost less accumulated amor-
tization. We calculate amortization on a straight-line
basis over the estimated economic useful life of the
assets, which are three to eight years for developed
technologies and 15 years for patents. We assess
other intangible assets for impairment in conjunction
with our assessment of goodwill or whenever events
or changes in circumstances indicate that the carrying
amounts may not be recoverable. Our assessment for
other intangible assets is based on estimated future
cash flows directly associated with the asset or asset
group. If we determine that the carrying value is not
recoverable, we may record an impairment charge,
reduce the estimated remaining useful life, or both.
In addition to impairment of other intangible assets
during the years ended December 31, 2009 and 2008,
we also made changes in estimates that resulted in
acceleration of amortization expense related to cer-
tain acquired CDN intangible assets. These acquired
CDN intangible assets either have a remaining esti-
mated economic useful life of less than one year at
December 31, 2009 or were fully amortized during
2009. Additional information is included in note 8.
Similar to goodwill as noted above, adverse changes
in expected operating results and/or unfavorable
changes in other economic factors used to estimate
fair values could result in additional non-cash impair-
ment charges or acceleration of amortization in the
future. We believe that our remaining intangible assets
are not impaired.
None of the impairment charges or changes in esti-
mated remaining asset lives had any impact on our
cash balances or covenants in our credit agreement.
Restructuring
on known facts and circumstances at the time of esti-
mation. Should circumstances warrant, we will adjust
our previous estimates to reflect what we then believe
to be a more accurate representation of expected
future costs. Because our estimates and assumptions
regarding restructuring charges include probabilities
of future events, such as our ability to find a sublease
tenant within a reasonable period of time or the rate
at which a sublease tenant will pay for the available
space, such estimates are inherently vulnerable to
changes due to unforeseen circumstances that could
materially and adversely affect our results of opera-
tions. We monitor market conditions at each period
end reporting date and will continue to assess our key
assumptions and estimates used in the calculation of
our restructuring accrual.
Taxes
We account for income taxes under the liability method.
We determine deferred tax assets and liabilities based
on differences between financial reporting and tax
bases of assets and liabilities, and we measure the
tax assets and liabilities using the enacted tax rates and
laws that will be in effect when we expect the differ-
ences to reverse. We provide a valuation allowance to
reduce our deferred tax assets to their estimated realiz-
able value. We may realize deferred tax assets in future
periods if and when we estimate them to be realizable,
such as establishing our expected continuing profitabil-
ity or that of certain of our foreign subsidiaries.
We evaluate liabilities for uncertain tax positions and,
as of December 31, 2009 and 2008, we did not rec-
ognize any associated liabilities. We have recorded
nominal interest and penalties arising from the under-
payment of income taxes in “General and adminis-
trative” expenses in our consolidated statements of
operations. As of December 31, 2009 and 2008, we
had no accrued interest or penalties related to uncer-
tain tax positions, given our substantial U.K. net oper-
ating loss carryforwards.
We account for telecommunication, sales and other
similar taxes on a net basis in “General and administrative
expense” in our consolidated statements of operations.
When circumstances warrant, we may elect to exit cer-
tain business activities or change the manner in which
we conduct ongoing operations. When we make such
a change, we will estimate the costs to exit a business
or restructure ongoing operations. The components of
the estimates may include estimates and assumptions
regarding the timing and costs of future events and
activities that represent our best expectations based
Stock-Based Compensation
We measure stock-based compensation at the grant
date based on the calculated fair value of the award.
We recognize the expense over the employee’s req-
uisite serv ice period, generally the vesting period of
the award. We estimate the fair value of stock options
at the grant date using the Black-Scholes option pric-
ing model with weighted average assumptions for the
67
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
activity under our stock plans. Option pricing model
input assumptions such as expected term, expected
volatility and risk-free interest rate, impact the fair
value estimate. Further, the forfeiture rate impacts the
amount of aggregate compensation. These assump-
tions are subjective and generally require significant
analysis and judgment to develop.
for the serv ice is fixed or determinable and collection
is reasonably assured. If a customer’s usage of our
services exceeds the monthly minimum, we recognize
revenue for such excess in the period of the usage. We
record installation fees as deferred revenue and recog-
nize the revenue ratably over the estimated life of the
customer arrangement.
We do not recognize a deferred tax asset for unrealized
tax benefits associated with the tax deductions in excess
of the compensation recorded (excess tax benefit). We
apply the “with and without” approach for utilization of
tax attributes upon realization of net operating losses in
the future. This method allocates stock-based compen-
sation benefits last among other tax benefits recognized.
In addition, we apply the “direct only” method of calculat-
ing the amount of windfalls or shortfalls.
Treasury Stock
As permitted by our stock-based compensation plans,
from time-to-time we acquire shares of treasury stock
as payment of statutory minimum payroll taxes due
from employees for stock-based compensation. In
2009, we reissued a portion of the shares of treasury
stock acquired in 2008 and 2009 as part of our stock-
based compensation plans. We also expect to reis-
sue the remaining shares as part of our stock-based
compensation plans. When we reissue the shares,
we use the weighted average cost method for deter-
mining cost. The difference between the cost of the
shares and the issuance price is added or deducted
from additional contributed capital. We did not acquire
shares of treasury stock during 2007.
Revenue Recognition
We generate revenues primarily from the sale of IP
serv ices and data center services. Our revenues typi-
cally consist of monthly recurring revenues from con-
tracts with terms of one year or more. These contracts
usually have fixed minimum commitments based on a
certain level of usage with additional charges for any
usage over a specified limit.
We recognize IP services revenues on a fixed- or
usage-based pricing. Data center revenues include
both physical space for hosting customers’ network
and other equipment plus associated services such
as redundant power and network connectivity, envi-
ronmental controls and security. We determine data
center revenues by occupied square feet and both
allocated and variable-based usage. We recognize the
monthly minimum as revenue each month provided
that we have entered into an enforceable contract,
we have delivered the serv ice to the customer, the fee
We use contracts and sales or purchase orders as
evidence of an arrangement. We test for availability
or connectivity to verify delivery of our services. We
assess whether the fee is fixed or determinable based
on the payment terms associated with the transac-
tion and whether the sales price is subject to refund
or adjustment. Because the software component of
our FCP product is more than incidental to the product
as a whole, we recognize associated FCP revenue in
accordance with generally accepted accounting prin-
ciples for software. FCP product and other hardware
sales were $0.9 million, $2.4 million and $2.6 million
and FCP-related services and subscription revenues
were $0.9 million, $1.0 million and $0.9 million during
the years ended December 31, 2009, 2008 and 2007,
respectively.
We also enter into multiple-element arrangements
or bundled services, such as combining IP services
with data center services. When we enter into such
arrangements, we account for each element separately
over its respective serv ice period provided that we
have objective evidence of fair value for the separate
elements. Objective evidence of fair value includes the
price charged for the element when sold separately. If
we cannot objectively determine the fair value of each
element, we recognize the total value of the arrange-
ment ratably over the entire serv ice period to the extent
that we have begun to provide the services, and we
have satisfied other revenue recognition criteria.
Deferred revenue consists of revenues for services
to be delivered in the future and consists primar-
ily of advance billings, which we amortize over the
respective serv ice period. We defer and amortize
revenues associated with billings for installation of
customer network equipment over the estimated life
of the customer relationship, which was, on average,
approximately three years for each of the last three
years. We defer and amortize revenues for installation
services because the installation serv ice is integral to
our primary serv ice offering and does not have value
to customers on a stand-alone basis. We also defer
and amortize the associated incremental direct costs.
We amortize deferred post-contract customer support
associated with sales of our FCP product ratably over
the contract period, which is generally one year.
68
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
We record an amount for serv ice level agreements and
other sales adjustments, which reduces net revenues
and accounts receivable. We identify adjustments for serv-
ice level agreements within the billing period and reduce
revenues accordingly. We base the amount for sales
adjustments upon specific customer information, includ-
ing customer disputes, credit adjustments not yet pro-
cessed through the billing system and historical activity.
If the financial condition of our customers deteriorates, or
if we become aware of new information impacting a cus-
tomer’s credit risk, we may make additional adjustments.
We routinely review the collectability of our accounts
receivable and payment status of our customers. If we
determine that collection of revenue is uncertain, we
do not recognize revenue until collection is reason-
ably assured. Additionally, we maintain an allowance
for doubtful accounts resulting from the inability of our
customers to make required payments on accounts
receivable. The allowance for doubtful accounts is
based upon general customer information, which
primarily includes our historical cash collection expe-
rience and the aging of our accounts receivable. We
assess the payment status of customers by reference
to the terms under which we provide services or goods,
with any payments not made on or before their due
date considered past-due. Once we have exhausted
all collection efforts, we write the uncollectible bal-
ance off against the allowance for doubtful accounts.
We routinely perform credit checks for new and exist-
ing customers and require deposits or prepayments
for customers that we perceive as being a credit risk.
Research and Development Costs
Research and development costs, which we include
in general and administrative cost and expense as
incurred, primarily consist of compensation related to
our development and enhancement of IP routing tech-
nology, progressive download and streaming technol-
ogy for our CDN, acceleration and cloud technologies.
Research and development costs were $3.8 million,
$5.0 million and $3.1 million during the years ended
December 31, 2009, 2008 and 2007, respectively.
Product development costs, which we also include
in general and administrative cost and expense as
incurred, are primarily related to network engineering
costs associated with changes to the functionality of
our proprietary services and network architecture. We
also expense as incurred those costs that do not qual-
ify for capitalization as software development costs.
Advertising Costs
We expense all advertising costs as incurred. Adver-
tising costs during the years ended December 31,
2009, 2008 and 2007 were $1.3 million, $1.3 million and
$1.2 million, respectively.
Net Loss Per Share
We compute basic net loss per share by dividing net
loss attributable to our common stockholders by the
weighted average number of shares of common stock
outstanding during the period. We have excluded all out-
standing options and unvested restricted stock as such
securities are anti-dilutive for all periods presented.
On January 1, 2009, we adopted a recently-issued
accounting standard related to whether instruments
granted in share-based payment transactions are par-
ticipating securities for calculating earnings per share.
This new accounting standard causes all unvested
share-based payment awards that contain non-
forfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) to be participating securities.
The new accounting standard further requires partici-
pating securities to be included in the computation of
earnings per share pursuant to the two-class method.
Under the two-class method, earnings (after any divi-
dends) are allocated to common stock and partici-
pating securities to the extent that each security may
share in earnings. While our unvested restricted stock
participate in any dividends equally with common
stock, no losses are attributed to the awards. Upon
adoption, we adjusted all prior-period earnings per
share data presented retrospectively. The adoption of
this new accounting standard did not have any impact
on our basic or diluted net loss per share for any year in
the three year period ended December 31, 2009.
Basic and diluted net loss per share during the years
ended December 31, 2009, 2008 and 2007 is calculated
as follows (in thousands, except per share amounts):
Net loss and net loss
available to
common stockholders
Weighted average shares
outstanding, basic
and diluted
Net loss per share,
basic and diluted
Anti-dilutive securities
excluded from diluted net
loss per share calculation
for stock-based
compensation plans
Year ended December 31,
2009
2008
2007
$(69,725) $(104,813) $ (5,555)
49,577
49,238
46,942
$ (1.41) $ (2.13) $ (0.12)
5,356
3,651
3,894
69
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
Segment Information
We use the management approach for determining
which, if any, of our services and products, loca-
tions, 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
any reportable segments. As described in note 4, we
operate in two business segments: IP services and
data center services. These segments reflect a change
from our historical segments, which also included CDN
services as a separate segment. We have reclassified
financial information for prior periods to conform to the
current period presentation.
Reclassifications
In addition to reclassifications for changes in our seg-
ments, discussed in note 4, we also have reclassified
other prior period amounts to conform to the current
period presentation.
Recent Accounting Pronouncements
Recently Issued Accounting Pronouncements
That We Have Adopted In June 2009, the Financial
Accounting Standards Board, or FASB, issued authori-
tative guidance codifying GAAP. While the guidance
was not intended to change GAAP, it did change
the way we reference these accounting principles in the
notes to our consolidated financial statements. This
guidance was effective for interim and annual reporting
periods ending after September 15, 2009. Our adoption
of this authoritative guidance as of September 30, 2009
changed how we reference GAAP in our disclosures.
On January 1, 2009, we adopted new accounting
guidance for business combinations as issued by
the FASB. The new accounting guidance establishes
principles and requirements for how an acquirer in a
business combination recognizes and measures in its
financial statements the identifiable assets acquired,
liabilities assumed and any noncontrolling interests
in the acquiree, as well as the goodwill acquired and
determination of the useful life of intangible assets.
The new guidance also amends provisions related to
the initial recognition and measurement, subsequent
measurement and accounting and disclosures for
assets and liabilities arising from contingencies in
business combinations. In addition, the new guidance
amends the factors that an acquirer should consider in
developing the renewal or extension assumptions used
to determine the useful life of a recognized intangible
asset. Significant changes from previous guidance
resulting from this new guidance include expanded
definitions of “business” and “business combination,”
expanded disclosure regarding the determination of
intangible asset useful lives and the elimination of the
distinction between contractual and non-contractual
contingencies, including initial recognition and mea-
surement. For all business combinations (whether
partial, full or step acquisitions): (a) the acquirer must
record 100% of all assets and liabilities of the acquired
business, including goodwill, generally at their fair
values; (b) the acquirer must recognize contingent
consideration at its fair value on the acquisition date;
(c) for certain arrangements, the acquirer must recog-
nize changes in fair value in earnings until settlement;
and (d) the acquirer must expense acquisition-related
transaction and restructuring charges rather than
treat them as part of the cost of the acquisition. The
new accounting guidance also establishes disclosure
requirements to enable users to evaluate the nature
and financial effects of the business combination. Our
adoption of this accounting guidance did not have a
material impact on our consolidated financial state-
ments, although it could have a material impact on any
business combinations we enter into in future periods.
On January 1, 2009, we adopted new accounting guid-
ance as issued by the FASB for the determination of
whether instruments granted in share-based payment
transactions are participating securities. As discussed
above in “– Net Loss Per Share,” our adoption of this
accounting guidance did not have an impact on net
loss per share for any periods presented.
On January 1, 2009, we adopted new accounting
guidance as issued by the FASB which clarifies the
accounting for certain transactions and impair-
ment considerations involving equity method invest-
ments. Our adoption of this accounting guidance
did not have a material impact on our consolidated
financial statements.
On January 1, 2009, we adopted new accounting guid-
ance as issued by the FASB which previously delayed
the effective date by one year for nonfinancial assets
and liabilities that we recognize or disclose at fair
value in the financial statements on a non-recurring
basis. The major categories of nonfinancial assets and
liabilities that we measure at fair value include report-
ing units in the first step of a goodwill impairment test.
Our adoption of this accounting guidance did not have
a material impact on our consolidated financial state-
ments. See note 8 for additional information.
70
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
On July 1, 2009, we adopted three related sets of
accounting guidance as issued by the FASB.
The accounting guidance sets forth rules related to
determining the fair value of financial assets and finan-
cial liabilities when the activity levels have significantly
decreased in relation to the normal market, guidance
related to the determination of other-than-temporary
impairments to include the intent and ability of the
holder as an indicator in the determination of whether
an other-than-temporary impairment exists and interim
disclosure requirements for the fair value of financial
instruments. Our adoption of the three sets of account-
ing guidance did not have a material impact on our
consolidated financial statements.
Recently Issued Accounting Pronouncements That
We Have Not Yet Adopted In June 2009, the FASB
issued new accounting guidance which amends the
evaluation criteria to identify the primary beneficiary of
a variable interest entity, or VIE, and requires ongoing
reassessment of whether an enterprise is the primary
beneficiary of the VIE. The new guidance significantly
changes the consolidation rules for VIEs including the
consolidation of common structures, such as joint
ventures, equity method investments and collaboration
arrangements. The guidance is applicable to all new
and existing VIEs. This accounting guidance is effec-
tive for us beginning in the first quarter of 2010. We
have concluded that our joint venture in Internap Japan
Co., Ltd. is an equity-method investment under the
voting-interest model, not a VIE and, accordingly, this
new accounting guidance will not impact our consoli-
dated financial statements.
In September 2009, the FASB issued new accounting
guidance related to revenue recognition of multiple
element arrangements. The new guidance states that
if vendor specific objective evidence or third party
evidence for deliverables in an arrangement cannot be
determined, companies will be required to develop a
best estimate of the selling price to separate deliver-
ables and allocate arrangement consideration using
the relative selling price method. The accounting guid-
ance will be applied prospectively and will become
effective during the first quarter of 2011. Early adoption
is allowed. We are currently evaluating the impact of
this accounting guidance on our consolidated financial
statements, but do not expect adoption will materially
impact our consolidated financial statements.
In September 2009, the FASB issued new account-
ing guidance related to certain revenue arrangements
that include software elements. Previously, companies
that sold tangible products with “more than incidental”
software were required to apply software revenue rec-
ognition guidance. This guidance often delayed reve-
nue recognition for the delivery of the tangible product.
Under the new guidance, tangible products that have
software components that are “essential to the func-
tionality” of the tangible product will be excluded from
the software revenue recognition guidance. The new
guidance includes factors to help companies deter-
mine what is “essential to the functionality.” Software-
enabled products will not be subject to other revenue
recognition guidance and will likely follow the guidance
for multiple deliverable arrangements issued by the
FASB in September 2009, noted above. The new guid-
ance is to be applied on a prospective basis for rev-
enue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010, with
early application permitted. If a company elects earlier
application and the first reporting period of adoption
is not the first reporting period in the company’s fiscal
year, the guidance must be applied through retrospec-
tive application from the beginning of the company’s
fiscal year and the company must disclose the impact
of the change to those previously reported periods. We
are currently evaluating the impact of this accounting
guidance on our consolidated financial statements,
but do not expect adoption will materially impact our
consolidated financial statements.
In addition to the accounting pronouncements described
above, we have adopted and considered other recent
accounting pronouncements that either did not have
a material impact on our consolidated financial state-
ments or are not relevant to our business. We do not
expect other recently issued accounting pronounce-
ments that are not yet effective will have a material
impact on our consolidated financial statements.
3. BUSINESS COMBINATION
On February 20, 2007, we completed the acquisi-
tion of VitalStream Holdings, Inc., or VitalStream,
for $214.0 million, whereby VitalStream became our
wholly-owned subsidiary. The acquisition enabled
us to provide services and products for storing and
delivering digital media to large audiences over the
Internet and provide complementary serv ice offerings
in the content delivery market. We accounted for the
transaction using the purchase method of account-
ing. Our results of operations include the activities of
VitalStream from February 21, 2007.
71
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
Purchase Price
We recorded assets acquired and liabilities assumed
at their fair values as of February 20, 2007. The total
$214.0 million purchase price is comprised of the fol-
lowing (in thousands):
Value of Internap stock issued
Fair value of stock options assumed
Direct transaction costs
$197,272
11,021
5,729
$214,022
period. Prior to the acquisition, VitalStream was a cus-
tomer of ours, and during the year ended December 31,
2007, we recognized revenues of $0.4 million from
VitalStream which we exclude from pro forma revenues
below. The related receivables were settled in the
normal course of business. The pro forma results pre-
sented below are not necessarily indicative of what our
operating results would have been had the acquisition
actually taken place at the beginning of the period (in
thousands, except per share amounts):
As a result of the acquisition, we issued 12.2 million
shares of our common stock based on an exchange
ratio of 0.5132 shares of our common stock for each
outstanding share of VitalStream common stock
as of February 20, 2007. This fixed exchange ratio
gave effect to the one-for-10 reverse stock split we
implemented on July 11, 2006 and the one-for-four
reverse stock split VitalStream implemented on April 4,
2006. The average market price per share of our
common stock of $16.16 was based on an average
of the closing prices for a range of trading days from
October 10, 2006 through October 16, 2006, which
range spanned the announcement date of the transac-
tion on October 12, 2006.
Under the terms of the merger agreement, each
VitalStream stock option that was outstanding and
unexercised was converted into an option to purchase
our common stock and we assumed those stock
options in accordance with the terms of the applicable
VitalStream stock-based compensation plan and terms
of the stock option agreement. Based on VitalStream’s
stock options outstanding at February 20, 2007, we
converted options to purchase 3.0 million shares of
VitalStream common stock into options to purchase
1.5 million shares of our common stock.
In-Process Research and Development
As of the closing date, one project was in develop-
ment that had not reached technological feasibility
and therefore qualified as in-process research and
development. We charged the amount allocated to
in-process research and development of $0.5 million
to the consolidated statements of operations as of the
date of acquisition.
Pro Forma Results (Unaudited)
The following unaudited pro forma consolidated finan-
cial information reflects the results of our operations for
the year ended December 31, 2007, as if the acquisition
of VitalStream had occurred at the beginning of the
Year Ended
December 31, 2007
Pro forma revenues
Pro forma net loss
Pro forma net loss per share, basic and diluted
$236,418
(14,269)
(0.25)
4. OPERATING SEGMENTS
We operate in two business segments: IP services and
data center services. IP services represent our IP transit
activities and include our high performance Internet
connectivity, CDN services and FCP products. Data
center services primarily include physical space for
hosting customers’ network and other equipment plus
associated services such as redundant power and net-
work connectivity, environmental controls and security.
During the year ended December 31, 2009, we changed
how we view and manage our business. We now
operate our IP services and the majority of our CDN
services on a combined basis while we operate the
managed hosting portion of our CDN services as part
of our data center services. The change from our his-
torical segments reflects our view of the business and
aligns our segments with our operational and orga-
nizational structure. We have integrated the primary
components of our CDN services with our IP services
in the IP services segment. This includes integration of
our CDN POPs into our P-NAPs, along with combining
engineering and operations teams and internal finan-
cial reporting. In addition, a single manager reports
directly to our chief executive officer for the integrated
IP services. Historically, CDN services also included
managed hosting, or maintaining network equipment
on behalf of customers. Since these CDN services
are a hosting activity, they are more similar to our data
center services and therefore we have included these
services in our data center services segment. We
have reclassified financial information during the years
ended December 31, 2008 and 2007 to conform to the
current period presentation.
72
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
The following tables show operating results for our report-
able segments, along with reconciliations from segment
gross profit to loss before income taxes and equity in
earnings of equity-method investment (in thousands):
We present goodwill by segment in note 8. We present
total assets by segment as of December 31, 2009 and
2008 in the following table (in thousands):
Year Ended December 31,
2009
2008
2007
Revenues:
IP services
Data center services
Other
$125,548 $ 139,737
114,252
–
130,711
–
$139,072
84,590
10,428
Total revenues:
256,259
253,989
234,090
Direct costs of network,
sales and services,
exclusive of depreciation
and amortization:
IP services
Data center services
Other
Total direct costs of network,
48,055
94,961
–
51,885
83,992
–
50,518
59,440
8,436
sales and services,
exclusive of depreciation
and amortization
Segment profit:
IP services
Data center services
Other
143,016
135,877
118,394
77,493
35,750
–
87,852
30,260
–
88,554
25,150
1,992
Total segment profit
113,243
118,112
115,696
Impairments and
restructuring
Other operating expenses,
including direct costs of
customer support,
depreciation and
amortization
Loss from operations
Non-operating
expense (income)
Loss before income taxes
and equity in (earnings)
of equity-method
investment
54,698
101,441
11,349
127,467
121,838
114,058
(68,922)
(105,167)
(9,711)
461
(245)
(937)
$ (69,383) $(104,922) $ (8,774)
As discussed in note 8, we recorded the following
impairment charges by segment during the years
ended December 31, 2009 and 2008 (in thousands):
Year Ended
December 31, 2009:
Goodwill
Other intangible assets
Year Ended
December 31, 2008:
Goodwill
Other intangible assets
IP
Services
Data
Center
Services
Total
$37,848
4,134
$13,665
–
$ 51,513
4,134
$41,982
$13,665
$ 55,647
$74,775
2,440
$24,925
196
$ 99,700
2,636
$77,215
$25,121
$102,336
Total assets:
IP services
Data center services
December 31,
2009
2008
$191,743
75,759
$233,268
96,815
$267,502
$330,083
Through December 31, 2009, neither revenues gen-
erated nor long-lived assets located outside the
United States were significant (all less than 10%).
5. INVESTMENTS
Investments in Marketable Securities and Other
Related Assets
We invest excess funds are invested pursuant to a
formal investment policy. At December 31, 2009,
investments in marketable securities and other related
assets were comprised of $7.0 million of auction rate
securities and the ARS Rights, described below, all
designated as trading securities. We invested other
excess funds in money market funds classified with
cash and cash equivalents at December 31, 2009. In
addition to money market funds, auction rate securi-
ties and the ARS Rights, investments in marketable
securities and other related assets at December 31,
2008 also included high credit quality corporate debt
securities and U.S. Treasury bills having original matur-
ities greater than 90 days but less than one year. At
December 31, 2008, we designated all of the invest-
ments as available for sale, except for auction rate
securities and the ARS Rights, which we designated as
trading securities.
Auction Rate Securities. Auction rate securities are
variable rate bonds tied to short-term interest rates
with maturities on the face of the securities in excess of
90 days and have interest rate resets through a modi-
fied Dutch auction, at predetermined short-term inter-
vals, usually every seven, 28 or 35 days. Auction rate
securities generally trade at par value and are callable
at par value on any interest payment date at the option
of the issuer. Interest received during a given period is
based upon the interest rate determined through the
auction process. The underlying assets of our auction
rate securities are state-issued student and educa-
tional loans that are substantially backed by the federal
government and carried AAA/Aaa or A3 ratings as of
73
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
December 31, 2009 and AAA/Aaa as of December 31,
2008. Although these securities are issued and rated
as long-term bonds, they have historically been priced
and traded as short-term investments because of the
liquidity provided through the interest rate resets.
While we continue to earn and accrue interest on our
auction rate securities at contractual rates, these
investments have not been actively trading since early
2008 when auctions failed to attract sufficient buyers.
During 2008, we reclassified our auction rate securities
from current to non-current investments as presented
in our consolidated balance sheet as of December 31,
2008. This change in classification was initially due to
the uncertainty as to when the auction rate securities
markets would improve. In November 2008, as further
described below, we accepted an offer for the ARS
Rights on our auction rate securities. In conjunction
with our acceptance of the ARS Rights, we changed
the designation of our auction rate securities from
available for sale to trading securities.
We intend to exercise the ARS Rights within the next
12 months if they are not redeemed by the issuers
or sold to third parties. Accordingly, we have reclas-
sified both the underlying securities and the ARS
Rights from non-current assets to current assets
as of December 31, 2009. During the years ended
December 31, 2009 and 2008, we recorded unreal-
ized gains (losses) on the auction rate securities of
$0.3 million and $(0.8) million, respectively, included
in “Non-operating (income) expense” in the consoli-
dated statements of operations. The unrealized loss of
$0.8 million during the year ended December 31, 2008
represented the immediate recognition in earnings of
the other-than-temporary impairment on our auction
rate securities in connection with our acceptance of
the ARS Rights and transferring our auction rate secu-
rities from available for sale to trading securities. We
previously recorded the other-than-temporary impair-
ment on our auction rate securities in “Accumulated
items of other comprehensive income” in our con-
solidated balance sheets. The fair values of our auc-
tion rate securities were $6.5 million and $6.4 million,
recorded in “Short-term investments in marketable
securities and other related assets” and “Investments
and other related assets” in the consolidated balance
sheets as of December 31, 2009 and 2008, respec-
tively. During the year ended December 31, 2009,
$0.2 million of our auction rate securities were called
by the issuer at par value. New or additional auction
rate securities are not eligible investments under our
current investment policy.
ARS Rights. In November 2008, we accepted an offer
from one of our investment providers providing us with
the ARS Rights, which gave us the right to sell at par
value auction rate securities originally purchased from
the investment provider at any time during a two-year
period beginning June 30, 2010. By accepting the offer,
we are able to sell our auction rate securities back to
our investment provider at par value, which is defined
as the price equal to the liquidation preference of the
auction rate securities plus accrued but unpaid divi-
dends or interest, during the period of June 30, 2010
to July 2, 2012. In consideration for the ARS Rights,
we granted the investment provider the right to sell or
otherwise dispose of, and/or enter orders in the auc-
tion process for, our auction rate securities until July 2,
2012 without prior notification, so long as we receive
payment of par value upon any sale or disposition.
The ARS Rights represent a firm agreement, that is,
an agreement with an unrelated party, binding on
both parties and usually legally enforceable, with the
following characteristics: (a) the agreement speci-
fies all significant terms, including the quantity to be
exchanged, the fixed price and the timing of the trans-
action, and (b) the agreement includes a disincentive
for nonperformance that is sufficiently large to make
performance probable. The enforceability of the ARS
Rights results in a put option and should be recognized
as a free standing asset separate from the auction rate
securities. The ARS Rights cannot be net settled, so it
does not meet the definition of a derivative instrument.
Therefore, we have elected to measure the ARS Rights
at fair value in accordance with applicable account-
ing standards that permit an entity to elect the fair
value option for selected recognized financial assets.
Measuring the ARS Rights at fair values enables us
to match the changes in the fair value of the auction
rate securities. As a result, changes in fair value are
and will continue to be included in earnings in future
periods. During the years ended December 31, 2009
and 2008, we recorded unrealized (losses) gains of
$(0.1) million and $0.6 million, respectively, on the ARS
Rights. The unrealized (losses) gains are included in
“Non-operating (income) expense” in the consoli-
dated statements of operations and we include the fair
values of $0.5 million and $0.6 million in “Short-term
investments in marketable securities and other related
assets” and “Investments and other related assets” in
the consolidated balance sheets at December 2009
and 2008, respectively.
74
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
Other Investments in Marketable Securities. Sum-
maries of our other investments in short-term available
for sale securities as of December 31, 2008 are as fol-
lows (in thousands):
Corporate debt securities
U.S. Treasury bills
Cost Unrealized
Basis Gain (Loss)
Carrying
Value
$5,706
1,500
$7,206
$(7)
–
$(7)
$5,699
1,500
$7,199
During the year ended December 31, 2009, we had
investment proceeds of $7.4 million, representing
$7.2 million from the maturity of available for sale secu-
rities at par value and $0.2 million from issuer calls of
auction rate securities at par value. Accordingly, we
did not recognize any realized gains or losses on the
disposals of these securities. Proceeds from the matu-
rity of short-term available-for-sale securities, primarily
commercial paper, were $3.2 million during the year
ended December 31, 2008 and the related gross real-
ized gains and losses were less than $0.1 million. As
noted above, our investments in marketable securities
and other related assets at December 31, 2009 were
comprised of auction rate securities and ARS Rights,
designated as trading securities.
Investment in Internap Japan
We invested $4.1 million for a 51% ownership inter-
est in Internap Japan, a joint venture with NTT-ME
Corporation and NTT Holdings. 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, liabili-
ties, revenue and expense would be consolidated (due
to certain minority interest protections afforded to our
joint venture partners). We are, however, able to assert
significant influence over the joint venture and, there-
fore, account for our joint venture investment using the
equity-method of accounting.
We include our investment activity in the joint venture
in the IP services operating segment, which is summa-
rized as follows (in thousands):
Investment balance, January 1
Proportional share of net income
Unrealized foreign currency
translation gain, net
Year Ended
December 31,
2009
2008
$1,623
15
$1,138
283
166
202
Balance, December 31, 2009
$1,804
$1,623
Investment in Aventail
We account for investments without readily determin-
able fair values at cost. We include realized gains and
losses and declines in value of securities judged to be
other-than-temporary in other expense. We incurred
a charge during the year ended December 31, 2007,
totaling $1.2 million, representing the write-off of the
remaining carrying value of our investment in series
D preferred stock of Aventail. We made an initial cash
investment of $6.0 million in Aventail series D pre-
ferred stock pursuant to an investment agreement in
February 2000. In connection with a subsequent round
of financing by Aventail, we recognized an initial loss
on our investment of $4.8 million in 2001. On June 12,
2007, SonicWall, Inc. announced that it entered into an
agreement to acquire Aventail for $25.0 million in cash.
The transaction closed on July 11, 2007, with all shares
of series D preferred stock being cancelled and the
holders of series D preferred stock not receiving any
consideration for such shares.
6. FAIR VALUE MEASUREMENTS
Effective January1, 2008, we adopted the provisions of
new accounting guidance which defined fair value and
provided director for using fair value to measure assets
and liabilities. In accordance with the accounting guid-
ance, we adopted the new provisions with regard to
all financial assets and liabilities in our financial state-
ments in the first quarter of 2008 and all nonfinancial
assets and nonfinancial liabilities in the first quarter of
2009. The major categories of nonfinancial assets and
liabilities that we measure at fair value include report-
ing units measured at fair value in the first step of a
goodwill impairment test. Our adoption for measuring
nonfinancial assets and liabilities beginning in 2009 did
not have a material impact on our consolidated finan-
cial statements.
The new accounting standard describes a fair value
hierarchy based on three levels of inputs, of which the
first two are considered observable and the last unob-
servable, that may be used to measure fair value. See
note 2 for a further description of this standard. The fair
value hierarchy is summarized as follows:
• Level 1: Quoted prices in active markets for identical
assets or liabilities;
• Level 2: Inputs other than Level 1 that are observ-
able, either directly or indirectly, such as quoted
prices for similar assets or liabilities; quoted prices
in markets that are not active or other inputs that
are observable or can be corroborated by observ-
able market data for substantially the full term of the
assets or liabilities; and
Management’s Discussion and Analysis
Financial Review 2009
• Level 3: Unobservable inputs that are supported by
little or no market activity and that are significant to
the fair value of the assets or liabilities.
We also adopted optional provisions of an accounting
standard to record certain financial assets and finan-
cial liabilities at fair value. The accounting standard
permitted us to choose to measure, on an instrument-
by-instrument basis, many financial instruments and
certain other assets and liabilities at fair value that
we are not currently required to measure at fair value. We
applied the optional provisions of this accounting stan-
dard to the ARS Rights as discussed in note 5.
The following table represents the fair value hierarchy for our financial assets (cash equivalents, investments in marketable securi-
ties and other related assets) measured at fair value on a recurring basis as of December 31, 2009 and 2008 (in thousands):
75
Internap
2009 Form 10-K
December 31, 2009:
Available for sale securities:
Money market funds(1)
Trading securities:
Auction rate securities(2)
ARS Rights(2)
December 31, 2008:
Available for sale securities:
Money market funds and other(1)
Corporate debt securities(2)
U.S. Treasury bills(2)
Trading securities:
Auction rate securities(3)
ARS Rights(3)
Level 1
Level 2
Level 3
Total
$26,019
$ –
$ –
$26,019
–
–
–
–
6,503
497
6,503
497
$26,019
$ –
$7,000
$33,019
$21,877
–
–
–
–
$ –
5,699
1,500
–
–
$ –
–
–
6,378
649
$21,877
5,699
1,500
6,378
649
$21,877
$7,199
$7,027
$36,103
(1) Included in “Cash and cash equivalents” in the consolidated balance sheets as of December 31, 2009 and 2008 in addition
to $47.9 million and $25.0 million, respectively, of cash. Unrealized gains and losses on money market funds were nominal due to
the short-term nature of the investments.
(2) Included in “Short-term investments in marketable securities and other related assets” in the consolidated balance sheets as of
December 31, 2009 and 2008, respectively.
(3) Included in “Investments and other related assets” in the consolidated balance sheets as of December 31, 2008 in addition to
$1.6 million of equity-method investment in Internap Japan (note 5).
While we continue to earn and accrue interest on our
auction rate securities at contractual rates, these invest-
ments have not been actively trading since early 2008
when auctions failed to attract sufficient buyers, and,
as a result, the auction rate securities lost their liquid-
ity. Our auction rate securities do not currently have a
readily observable market value and their estimated
fair value no longer approximates par value. Given that
observable auction rate securities market information
was not sufficiently available to determine the fair value
of our auction rate securities, we estimated the fair
value of the auction rate securities based on a wide
array of market evidence related to each security’s
collateral, ratings and insurance to assess default risk,
credit spread risk and downgrade risk that we believe
market participants would use in pricing the securities in
a current transaction. These assumptions could change
significantly over time based on market conditions. We
then used a trinomial discount model where the future
cash flows of the auction rate securities were priced
76
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
by summing the present value of the future principal
and forecasted interest payments. We also considered
probabilities of default, auction failure, a successful auc-
tion at par value or repurchase at par value and recovery
rates in default for each of the securities. We then dis-
counted the weighted average cash flow for each period
back to present value at the determined discount rate
for each auction rate security.
Similar to the auction rate securities, observable mar-
ket information was not available to determine the fair
value of the ARS Rights. We estimated the fair value of
the ARS Rights based on a valuation approach com-
monly used for forward contracts in which one party
agrees to sell a financial instrument (generating cash
flows) to another party at a particular time for a pre-
determined price. In this approach, we subtracted the
present value of all expected future cash flows from
the current fair value of the security, and calculated
the resulting value as a future value at an interest rate
reflective of counterparty risk.
The following table provides a summary of changes in
fair value of our Level 3 financial assets, auction rate
securities and ARS Rights, for each of the two years in
the period ended December 31, 2009 (in thousands):
Auction
Rate
Securities
ARS
Rights
Balance, December 31, 2007
Total losses (realized and unrealized)
$7,150
$ –
included in earnings
Issuance of ARS Rights
Balance, December 31, 2008
Total gains (losses) (realized and
unrealized) included in earnings
Settlements
(772)
–
6,378
275
(150)
–
649
649
(152)
–
Balance, December 31, 2009
$6,503
$ 497
The total amount of gains or losses included in earnings
attributable to the change in unrealized gains or losses
relating to assets still held as of December 31, 2009 and
2008 were $0.1 million and $0.8 million, respectively.
The following table summarizes our nonfinancial assets measured at fair value on a nonrecurring basis as of
December 31, 2009 and 2008 (in thousands):
December 31, 2009:
Goodwill
Other intangible assets
December 31, 2008:
Goodwill
Other intangible assets
Level 1
Level 2
Level 3
Total
$ –
–
$ –
$ –
–
$ –
$ –
–
$ –
$ –
–
$ –
$ 39,464
20,782
$ 39,464
20,782
$ 60,246
$ 60,246
$ 90,977
33,942
$ 90,977
33,942
$124,919
$124,919
We further discuss goodwill and other intangibles assets, along with the associated impairments, in note 8.
Market risk associated with our variable rate revolving credit facility and fixed rate other liabilities relates to
the potential negative impact to future earnings and reduction in fair value, respectively, from an increase
in interest rates. The following table presents information about our revolving credit facility and other liabilities at
December 31, 2009 and 2008 (in thousands):
Revolving credit facility
Other liabilities
December 31,
2009
2008
Carrying
Amount
$20,000
761
$20,761
Fair
Value
$20,000
789
$20,789
Carrying
Amount
$20,000
878
$20,878
Fair
Value
$20,000
897
$20,897
We estimate the fair values of our revolving credit facility and other liabilities based on current market rates of interest.
Management’s Discussion and Analysis
Financial Review 2009
7. PROPERTY AND EQUIPMENT
8. GOODWILL AND OTHER INTANGIBLE ASSETS
77
Internap
2009 Form 10-K
Property and equipment consisted of the following
(in thousands):
December 31,
2009
2008
Network equipment
Network equipment under capital lease
Furniture, equipment and software
Leasehold improvements
Buildings under capital lease
$ 101,705 $ 96,958
1,596
33,853
147,835
3,003
1,581
31,637
156,252
3,003
Property and equipment, gross
Less: Accumulated depreciation
and amortization ($1,914 and
$1,721 related to capital leases
at December 31, 2009 and
2008, respectively)
294,178
283,245
(203,027)
(185,895)
$ 91,151 $ 97,350
We retired $6.4 million of assets with accumu-
lated depreciation of $6.3 million during the year
ended December 31, 2009, $2.0 million of assets
with accumulated depreciation of $1.9 million during
the year ended December 31, 2008 and $2.7 million
of fully depreciated assets during the year ended
December 31, 2007. The amount of interest we capital-
ized was immaterial for each of the three years in the
period ended December 31, 2009.
We summarize depreciation and amortization of prop-
erty and equipment associated with direct costs of
network, sales and services and other depreciation
expense as follows (in thousands):
Year ended December 31,
2009
2008
2007
Direct costs of network,
sales and services
Other depreciation
and amortization
Subtotal
Amortization of
acquired technologies(1)
Total depreciation
and amortization
$22,134
$20,650
$18,313
6,148
3,215
3,929
28,282
23,865
22,242
8,349
6,649
4,165
$36,631
$30,514
$26,407
(1) Amortization of acquired technologies during the years ended
December 31, 2009 and 2008 included impairment charges of
$4.1 million and $1.9 million, respectively, for acquired CDN
advertising technology. See note 8 for further details.
Goodwill
We recorded an aggregate goodwill impairment charge
of $51.5 million during the year ended December 31,
2009. This charge included $48.0 million for good-
will related to our former CDN services segment and
$3.5 million to adjust goodwill in our IP services seg-
ment related to our FCP products. The goodwill impair-
ments in 2009 are in addition to a goodwill impairment
of $99.7 million in 2008 related to our former CDN
services segment. We present the goodwill impair-
ment charges in “Impairments and restructuring” in the
consolidated statements of operations. We reclassified
the original goodwill in the former CDN services seg-
ment and the 2008 impairment charge from the former
CDN services segment to IP services and data center
services based on the respective estimated relative fair
value of those segments.
The goodwill impairment in our former CDN serv-
ices segment was primarily due to declines in CDN
services revenues and operating results compared
to our expectations and declining multiples of our
own and comparable companies. The CDN services
goodwill arose from our acquisition of VitalStream
in February 2007. We initially recorded goodwill of
$154.7 million in the acquisition, which represented
72% of the $214.0 million purchase price. These
declines in CDN services revenues and operating
results were primarily attributable to continued pricing
pressures, which were partially offset by increased
traffic. This was combined with higher costs of sales
related to traffic mix, as well as a weakened economy
and steadily increasing levels of customer churn. Given
the declines in CDN services revenues and operat-
ing results, in 2009 we renewed our emphasis on and
dedicated our internal resources within our IP services
to strengthen our services offering and leverage our
entire IP backbone and cost structure. Similarly, the
goodwill impairment related to our FCP products in our
IP services segment was due to declines in our FCP
products revenues and operating results. The declines
in FCP products revenues were primarily attributable to
lower sales associated with a reduced marketing effort
as we reevaluated our equipment sales strategy for
FCP products. The impairment charges did not impact
our current cash balance or result in violation of any
covenants in our credit agreement.
78
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
The changes in the carrying amount of goodwill for
each of the two years in the period ended December 31,
2009 are as follows (in thousands):
IP
Services
Data
Center
Services
Total
$ 152,087
(74,775)
$38,590 $ 190,677
(99,700)
(24,925)
152,087
38,590
190,677
Balance,
December 31, 2007:
Goodwill
Impairment
Balance,
December 31, 2008:
Goodwill
Accumulated
impairment losses
(74,775)
(24,925)
(99,700)
Subtotal
77,312
13,665
90,977
Impairment
(37,848)
(13,665)
(51,513)
Balance,
December 31, 2009:
Goodwill
Accumulated
152,087
38,590
190,677
impairment losses
(112,623)
(38,590)
(151,213)
$ 39,464
$ – $ 39,464
We base impairment analysis of goodwill on estimated
fair values. 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 is per-
formed. These estimates and assumptions primarily
include, but are not limited to, discount rates; terminal
growth rates; projected revenues and costs; earnings
before interest, taxes, depreciation and amortization,
or EBITDA, for expected cash flows; market compara-
bles and capital expenditures forecasts. The use of dif-
ferent assumptions, inputs and judgments, or changes
in circumstances, could materially affect the results of
the valuation. Due to the inherent uncertainty involved
in making these estimates, actual results could differ
from our estimates and could result in an additional
non-cash impairment charge in the future. Following is
a description of the valuation methodologies we used
to derive the fair value the former CDN services and
the FCP products reporting units as of our assessment
date of June 1, 2009:
• Income Approach: To determine fair value, we
discounted the expected cash flows of the CDN
serv ices and the FCP products reporting units. We
calculated expected cash flows using a compounded
annual revenue growth rate of approximately 20% for
CDN services and 3% for FCP products, forecast-
ing existing cost structures and considering capital
reinvestment requirements. We used a discount rate
of 16% for CDN services and 18% for FCP products,
representing the estimated weighted average cost
of capital, which reflects the overall level of inherent
risk involved in the respective operations and the
rate of return an outside investor could expect to
earn. To estimate cash flows beyond the final year
of our models, we used terminal values and incor-
porated the present values of the resulting terminal
values into our estimates of fair value.
• Market-Based Approach: To corroborate the results
of the income approach described above, we esti-
mated the fair value of our CDN services segment
and FCP products reporting unit using several mar-
ket-based approaches, including the enterprise
value that we derive based on our stock price. We
also used the guideline company method, which
focuses on comparing our risk profile and growth
prospects, to select reasonably similar/guideline
publicly traded companies. Using the guideline com-
pany method, we selected revenue multiples below
the median for our comparable companies.
We used similar valuation methodologies to derive
the fair value of our other reporting units. The portion
of goodwill from the former CDN services reporting
unit allocated to data center services was immedi-
ately impaired so that data center services continues
to not have any recorded goodwill. Adverse changes
in expected operating results and/or unfavorable
changes in other economic factors used to estimate
fair values could result in an additional non-cash
impairment charge in the future.
We perform our annual goodwill impairment test as of
August 1 each calendar year absent any impairment
indicators or other changes that may cause more
frequent analysis. We did not identify an impairment
as a result of our annual August 1, 2009 impair-
ment test. We also assess on a quarterly basis whether
any events have occurred or circumstances have
changed that would indicate an impairment could
exist. We have considered the likelihood of triggering
events that might cause us to re-assess goodwill on an
interim basis and concluded that none had occurred
subsequent to August 1, 2009.
The goodwill impairment during the year ended
December 31, 2008 also caused us to reverse a
deferred tax liability and create an income tax benefit
79
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
of $0.6 million associated with the former CDN serv-
ices goodwill. The goodwill impairment during the
year ended December 31, 2009 similarly resulted in a
deferred tax asset of $0.5 million associated with the
former CDN services goodwill that we fully offset by a
valuation allowance.
Other Intangible Assets
In conjunction with the change in our business seg-
ments and the associated review of our long-term
financial outlook during the year-ended December 31,
2009, we also performed an analysis of the potential
impairment and re-assessed the remaining asset lives
of other identifiable intangible assets. The analysis and
re-assessment of other identifiable intangible assets
resulted in:
• an impairment charge of $4.1 million in acquired CDN
advertising technology due to a strategic change in
market focus,
• a change in estimates that resulted in an accel-
eration of amortization expense of our acquired CDN
customer relationships over a shorter estimated
remaining useful life (from 38 months remaining as
of June 1, 2009 to 11 months) to reflect our historical
churn rate for acquired CDN customers,
• a change in estimates that resulted in an accel-
eration of amortization expense of our acquired CDN
trade names over a shorter estimated remaining use-
ful life (from 32 months remaining as of June 1, 2009
to 17 months) to reflect the decreased value of our
acquired CDN trade names to our business, and
• a change in estimates that resulted in acceleration
of amortization expense of our CDN non-compete
agreements over a shorter estimated remaining
useful life (from nine months remaining as of June 1,
2009 to one month) to reflect the decreased value of
the non-compete agreements to our business.
Similarly, the review of our long-term financial outlook
during the year-ended December 31, 2008 resulted in:
• an impairment charge of $1.9 million in acquired
CDN advertising technology,
• an impairment charge of $0.8 million in trade names
as a result of discontinuing use of the VitalStream
trade name, and
• a change in our estimates that resulted in an accel-
eration of amortization expense of our acquired CDN
customer relationships over a shorter estimated useful
life (from nine years remaining as of August 1, 2008 to
four years) due to customer churn resulting in higher
than expected attrition as of the acquisition date.
The impairment charges and changes in estimated
remaining useful lives of CDN intangible assets did not
impact our cash balances or result in violation of any cov-
enants in our credit agreement. We continue to believe
that our remaining intangible assets are not impaired.
We included the impairment charges for acquired CDN
advertising technology of $4.1 million and $1.9 mil-
lion during the years ended December 31, 2009 and
2008, respectively, in “Direct costs of amortization of
acquired technologies” in the consolidated statements
of operations. We include the impairment charge for
the VitalStream trade name of $0.8 million during
the year ended December 31, 2008 in “Impairments
and restructuring” in the consolidated statements of
operations. The change in estimates of remaining use-
ful lives for the intangible assets as of June 1, 2009
noted above resulted in an increase to our net loss of
$2.8 million, or $0.06 per basic and diluted share, dur-
ing the year ended December 31, 2009. The change
in estimate for our customer relationship intangible
asset as of August 1, 2008 noted above resulted in
an increase to our net loss of $0.4 million, or less than
$0.01 per basic and diluted share, during the year
ended December 31, 2008.
The components of our amortizing intangible assets are as follows (in thousands):
Technology based
Contract based
December 31, 2009
December 31, 2008
Gross
Carrying Accumulated
Amount Amortization
$35,927
24,232
$60,159
$(17,532)
(21,845)
$(39,377)
Gross
Carrying
Amount
$40,061
24,232
$64,293
Accumulated
Amortization
$(13,317)
(17,034)
$(30,351)
80
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
Amortization expense for intangible assets during the
years ended December 31, 2009, 2008 and 2007 was
$9.0 million, $6.4 million and $5.3 million, respectively.
This amortization expense does not include impair-
ment charges of $4.1 million and $2.7 million during the
years ended December 31, 2009 and 2008, respec-
tively. As of December 31, 2009, remaining amor-
tization expense for the next six years is as follows
(in thousands):
2010
2011
2012
2013
2014
2015
$ 6,083
3,528
3,528
3,528
3,528
587
$20,782
9. RESTRUCTURING AND OTHER IMPAIRMENTS
During the year ended December 31, 2009, we made
adjustments in sublease income assumptions for
certain properties included in our previously-dis-
closed 2007 and 2001 restructuring plans, imple-
mented a restructuring plan to reduce our workforce by
45 employees and ceased use of four smaller facilities
which were office and partner data center facilities.
The adjustments in sublease income assumptions
for certain properties included in our 2007 and 2001
restructuring plans extended the period during which
we do not anticipate receiving sublease income from
those properties given our expectation that it will take
longer to find sublease tenants and the increased
availability of space in each of these markets where
we have unused space. The related analyses were
based on discounted cash flows using the same credit-
adjusted risk-free rate that we used to measure the ini-
tial restructuring liability for leases that were part of the
2007 restructuring plan and undiscounted cash flows
for leases that were part of the 2001 restructuring plan,
in accordance with accounting standards in effect at
the time we initiated the restructuring plans. The new
assumptions resulted in an increase to our restruc-
turing accrual of $2.0 million, which we recorded as
a restructuring charge and an increase to the related
liability. We made similar adjustments during 2008
resulting in a $1.1 million increase in the restructuring
liability and additional restructuring expense as of and
during the year ended December 31, 2008.
The workforce reduction of 45 employees in March 2009
represented 10% of our total workforce at that time and
was primarily in back-office functions as well as the
elimination of certain senior management positions. All
of the $0.9 million of associated non-recurring sever-
ance charges during the year ended December 31, 2009
were cash expenditures. The restructuring charge for
the four leased facilities was $0.2 million and all amounts
related to these leases were due within 12 months of the
date we cased use. Due to the short remaining terms of
these leases, we did not expect to earn any sublease
income in future periods.
We also recorded a non-cash benefit of $0.1 million
during the year ended December 31, 2008 to reduce
our restructuring liability for employee terminations.
This non-cash adjustment eliminated the remaining
liability for employee terminations since we had paid
all amounts.
During the year ended December 31, 2007, we incurred
a restructuring and impairment charge of $10.3 million,
which included $1.4 million for the impairment of lease-
hold improvements and other assets. We took this
charge following a review of our business, particularly
in light of our acquisition of VitalStream and our plan to
finalize the overall integration and implementation of
the acquisition. In addition to the $1.4 million impair-
ment of leasehold improvements and other assets,
the charge to expense included $7.8 million for leased
facilities and $1.1 million of severance payments for the
termination of employees. After considering the adjust-
ments for anticipated changes in sublease income
described above, we estimated net related expendi-
tures for the 2007 restructuring plan to be $14.0 million,
of which we paid $5.9 million through December 31,
2009, and the balance continuing through December
2016, the last date of the longest lease term. We expect
to pay these expenditures from operating cash flows.
The $1.4 million impairment charge during 2007 con-
sisted of $1.3 million for restructured leases and less
than $0.1 million for other assets. We estimated cost
savings from the restructuring to be approximately
$0.8 million per year through 2016, primarily for rent.
In 2001, we implemented significant restructuring
plans that resulted in substantial charges for real
estate and network infrastructure obligations, person-
nel and other charges. We subsequently incurred addi-
tional related charges as we continued to evaluate our
restructuring reserve.
Management’s Discussion and Analysis
Financial Review 2009
The following table displays the activity and balances for the restructuring and asset impairment activity during
the years ended December 31, 2009 and 2008 (in thousands):
81
Internap
2009 Form 10-K
December 31,
2007
Restructuring
Non-Cash
December 31,
2008
Plan Restructuring Restructuring
Initial Subsequent
Plan
Cash
Liability Payments Adjustments
Liability
Charges Adjustments(1) Payments
December 31,
2009
Cash Restructuring
Liability
Activity for 2009
restructuring charge:
Employee terminations $ –
–
Real estate obligations
$ –
–
–
–
$ –
–
–
$ –
–
–
$ 877
239
1,116
$ 31
5
$ (872)
(66)
36
(938)
$ 36
178
214
Activity for 2007
restructuring charge:
Real estate obligations
Employee terminations
Activity for 2001
restructuring charge:
Real estate obligations
6,312
406
(1,120)
(260)
6,718
(1,380)
1,084
(146)
938
6,276
–
6,276
3,374
(647)
19
$10,092
$(2,027)
$ 957
2,746
$9,022
–
–
–
–
1,694
–
1,694
(1,722)
–
(1,722)
309
(575)
$1,116
$2,039
$(3,235)
6,248
–
6,248
2,480
$8,942
(1) Includes $0.1 million of reclassifications of accrued liabilities and deferred rent related to prior restructuring activities.
10. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
A summary of the revolving credit facility as of December 31,
2009 and 2008 follows (dollars in thousands):
Compensation and benefits payable
Telecommunications, sales, use
and other taxes
Other
December 31,
2009
2008
$ 5,818
$2,918
1,743
2,631
1,902
3,936
$10,192
$8,756
Credit limit
Outstanding principal balance,
due September 14, 2011
Letters of credit issued
Borrowing capacity
Interest rate, based on our
bank’s prime rate
December 31,
2009
2008
$35,000
$35,000
20,000
3,610
11,390
20,000
4,200
10,800
3.25%
3.00 %
11. REVOLVING CREDIT FACILITY
On September 14, 2007, we entered into a $35.0 mil-
lion credit agreement, or the Credit Agreement, with
Bank of America, N.A., as the administrative agent.
We amended the Credit Agreement on May 14, 2008
and September 30, 2008, or the Amendment (we refer
to the Credit Agreement along with the Amendment
as the Amended Credit Agreement). The Amended
Credit Agreement includes a revolving credit facility of
$35.0 million with a letter of credit sublimit of $7.0 mil-
lion and an option to enter into a lease financing agree-
ment not to exceed $10.0 million. The revolving credit
facility is available to finance working capital, capital
expenditures and other general corporate purposes.
The Amended Credit Agreement includes customary
representations, warranties, negative and affirmative
covenants (including certain financial covenants relat-
ing to a net funded debt to EBITDA ratio, a debt serv ice
coverage ratio and a minimum liquidity requirement,
as well as a prohibition against paying dividends,
limitations on capital expenditures of $25.0 million,
plus prior-year carryover, or an amount to be mutually
agreed upon for 2010 and 2011, customary events of
default and certain default provisions that could result
in acceleration of all outstanding amounts due under
the Amended Credit Agreement).
Our obligations under the Amended Credit Agreement
are pledged by substantially all of our assets including
the capital stock of our domestic subsidiaries and 65%
of the capital stock of our foreign subsidiaries.
The fair value of our debt approximates the carrying
value due to the nature of our credit facility.
82
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
12. CAPITAL LEASES
We record capital lease obligations and the leased
property and equipment at the time of acquisition at
the lesser of the present value of future lease payments
based upon the terms of the related lease agreement
or the fair value of the assets held under capital leases.
As of December 31, 2009, our capital leases had expi-
ration dates ranging from 2010 to 2023.
Historically, our capital leases related to equipment;
however, in May 2008 we entered into a capital lease
agreement for one of our data center locations that
expires in 2023.
Future minimum capital lease payments together with
the present value of the minimum lease payments as of
December 31, 2009, are as follows (in thousands):
2010
2011
2012
2013
2014
Thereafter
Remaining capital lease payments
Less: amounts representing imputed interest
Present value of minimum lease payments
Less: current portion
$ 562
566
569
581
599
5,740
8,617
(5,375)
3,242
(25)
$3,217
and liabilities using the enacted tax rates and laws
that will be in effect when we expect the differences to
reverse. We provide a valuation allowance to reduce our
deferred tax assets to their estimated realizable value.
A reconciliation of the effect of applying the federal
statutory rate and the effective income tax rate on our
income tax provision (benefit) is as follows:
Year Ending December 31,
2009
2008
2007
Federal income tax (benefit)
at statutory rates
Goodwill impairment
Foreign and state income
tax (benefit)
Stock-based compensation
Tax reserves
Change in valuation allowance
(34)%
24
(34)%
29
(34)%
–
–
1
–
8
–
1
–
4
(4)
6
11
(14)
Effective tax rate
(1)%
–%
(35)%
Temporary differences between the financial statement
carrying amounts and tax bases of assets and liabili-
ties that give rise to significant portions of deferred
taxes related to the following (in thousands):
December 31,
2009
2008
13. INCOME TAXES
The current and deferred income tax provision (benefit)
during the years ended December 31, 2009, 2008 and
2007 was as follows (in thousands):
Current deferred income tax assets:
Provision for doubtful accounts
Accrued compensation
Other accrued expenses
Deferred revenue
Restructuring liability
Other
$ 2,192 $ 1,378
84
205
304
213
1,347
1,298
1,071
973
66
63
Current:
Federal
State
Foreign (including change
in unrecognized
tax benefits)
Deferred:
Federal
State
Foreign
–
509
–
4
(156)
(152)
(668)
(233)
(398)
(16)
821
407
921
936
356
42
(4,414)
(4,016)
Year Ended December 31,
2009
2008
2007
Current deferred income tax assets
Less: valuation allowance
5,064
(5,064)
Net current deferred income tax assets
–
$ 153
356
$ 254
181
$ 15
–
Non-current deferred income tax assets:
Property and equipment
Goodwill
Intangible assets
4,130
(4,129)
1
23,719
3,897
2,574
767
2,455
5,689
3,378
71,616
5,481
2,271
690
539
27,577
5,724
4,508
933
5,514
2,271
712
877
Deferred revenue, less current portion
Restructuring liability,
less current portion
2,327
6,513
Deferred rent
1,647
Stock-based compensation
U.S. net operating loss carryforwards 68,221
Foreign net operating loss
carryforwards, less current portion
Capital loss carryforwards
Tax credit carryforwards
Other
Non-current deferred
income tax assets
Less: valuation allowance
Non-current deferred income
tax assets, net
126,824
(123,914)
123,076
(120,626)
2,910
2,450
Net deferred tax assets
$ 2,910 $ 2,451
Net income tax
provision (benefit)
$ 357
$ 174
$(3,080)
We account for income taxes under the liability method. We
determine deferred tax assets and liabilities based on
differences between financial reporting and tax bases
of assets and liabilities, and we measure the tax assets
83
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
Based upon a study conducted in 2008, we reduced
our net operating loss carryforwards due to limita-
tions under Section 382 of the Internal Revenue Code
with regard to an ownership change in 2001. As of
December 31, 2009, we had U.S. net operating loss
carryforwards for federal tax purposes of $179.5 mil-
lion that will expire beginning 2020 through 2026. We
have revised all periods presented to reflect these
limitations. Of the total U.S. net operating loss carry-
forwards, $16.8 million of net operating losses related
to the deduction of stock-based compensation that will
be tax-effected and the benefit credited to additional
paid-in capital when realized. In addition, we have alter-
native minimum tax and research and development tax
credit carryforwards of approximately $0.7 million.
Alternative minimum tax credits have an indefinite car-
ryforward period while our research and development
credits will begin to expire in 2026. Finally, we have for-
eign net operating loss carry forwards of $18.7 million
that will begin to expire in 2009.
We determined that through December 31, 2009, no
further ownership changes have occurred since 2001.
Therefore, as of December 31, 2009, no additional mate-
rial limitations exist on the U.S. net operating losses
related to Section 382 of the Internal Revenue Code.
However, if we experience subsequent changes in stock
ownership as defined by Section 382 of the Internal
Revenue Code, we may have additional limitations on
the future utilization of our U.S. net operating losses.
A deferred tax asset is also created by accelerated
depreciable lives of fixed assets for income tax pur-
poses. Network equipment and leasehold improve-
ments comprise the majority of the income tax basis
differences. These assets are deductible over a shorter
life for financial reporting than for income tax pur-
poses. As we retire assets in the future, the income tax
basis differences will reverse and become deductible
for income taxes.
We periodically evaluate the recoverabilit y of
the deferred tax assets and the appropriateness of the
valuation allowance. For U.S. income tax purposes,
we established a valuation allowance of $125.4 mil-
lion against the U.S. deferred tax assets that we do
not believe are more likely than not to be realized. We
will continue to assess the requirement for a valuation
allowance on a quarterly basis and, at such time when
we determine that it is more likely than not that the
deferred tax assets will be realized, we will reduce
the valuation allowance accordingly.
During the year ended December 31, 2007, we con-
cluded that it was more likely than not that we will
realize our deferred tax assets generated in the United
Kingdom, or U.K., in future years. The U.K. deferred
tax assets primarily consist of net operating loss carry-
forwards and were $11.6 million as of December 31,
2007. We released $4.4 million of the valuation allow-
ance associated with U.K. deferred tax assets, which
resulted in the recognition of a $4.4 million tax benefit.
The tax benefit was offset by a liability for uncertain
tax positions of $0.9 million, for a net recognized
tax benefit of $3.5 million during the year ended
December 31, 2007.
Changes in our deferred tax asset valuation allowance
are summarized as follows (in thousands):
Balance, January 1,
Decrease (increase) in
deferred tax assets
Recognition of
deferred tax assets
Year Ended December 31,
2009
2008
2007
$124,755
$128,561
$117,747
4,223
(3,806)
15,228
–
–
(4,414)
Balance, December 31,
$128,978
$124,755
$128,561
The impairment of goodwill and other intangible assets
during the year ended December 31, 2009 had a mate-
rial impact on the income tax provision. While we
may deduct a component of the former CDN services
goodwill for tax purposes, the majority of the goodwill
associated with both the former CDN services and
FCP products as well as other intangible assets had no
basis for tax purposes. Accordingly, the impairments
of goodwill and other intangible assets of $55.6 million
during the year ended December 31, 2009 resulted in a
$49.6 million permanent difference that impacted our
effective income tax rate. The remainder of the good-
will impairment resulted in a termporary tax difference.
Our effective income tax rate was not impacted as the
tax basis over the book basis in goodwill created a
deferred tax asset for financial reporting basis which
was offset by a valuation allowance.
We intend to reinvest future earnings indefinitely within
each country; however, it is not practicable to determine
the amount of the unrecognized deferred income tax
liability related to future foreign earnings. Accordingly,
we have not recorded deferred taxes for the differ-
ence between our financial and tax basis investment in
foreign entities. Based on limited cumulative earnings
from foreign operations, we expect the unrecognized
deferred assets or liabilities to be an immaterial compo-
nent of our consolidated financial statements.
Our accounting for uncertainty in income taxes
requires us to determine whether it is more likely than
not that a tax position will be sustained upon examina-
tion based upon the technical merits of the position.
84
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
If the more-likely-than-not threshold is met, we must
measure the tax position to determine the amount to
recognize in the financial statements.
Changes in our unrecognized tax benefits are summa-
rized as follows (in thousands):
Year Ended December 31,
2009
2008
2007
Unrecognized tax benefits
balance, January 1,
Additions for tax positions
of current year
Foreign exchange (loss)
Lapse of statute of limitations
Unrecognized tax benefits
balance, December 31,
$ –
$ 921
$ –
–
–
–
–
(253)
(668)
921
–
–
$ –
$ –
$921
The changes in the liability for unrecognized tax ben-
efits had no impact on our effective income tax rate in
the respective periods of change due to the offsetting
changes in our U.K. deferred tax asset for the corre-
sponding periods.
We classify interest and penalties arising from the
underpayment of income taxes in the consolidated
statements of operations as a component of “General
and administrative expenses.” As of December 31,
2009 and 2008, we had no accrued interest or penalties
related to uncertain tax positions. Our federal income
tax returns remain open to examination for the tax years
2006 through 2008; however, tax authorities have the
right to adjust the net operating loss carryovers for years
prior to 2006. Returns filed in other jurisdictions are sub-
ject to examination for years prior to 2006.
14. EMPLOYEE RETIREMENT PLAN
We sponsor a defined contribution retirement savings
plan that qualifies under Section 401(k) of the Internal
Revenue Code. Plan participants may elect to have a
portion of their pre-tax compensation contributed to
the plan, subject to certain guidelines issued by the
Internal Revenue Service. Employer contributions are
discretionary and were $0.7 million, $0.9 million and
$0.8 million during the years ended December 31,
2009, 2008 and 2007, respectively.
15. COMMITMENTS, CONTINGENCIES,
CONCENTRATIONS OF RISK AND LITIGATION,
INCLUDING SUBSEQUENT EVENT
Operating Leases
We, as a lessee, have entered into leasing arrange-
ments relating to data center, P-NAP and office space
and office equipment that are classified as oper-
ating leases. Initial lease terms range from two to
25 years and contain various periods of free rent and
renewal options. However, we record rent expense on
a straight-line basis over the initial lease term and any
renewal periods that are reasonably assured. Certain
leases require that we maintain letters of credit or
restricted cash balances to ensure payment. Future
minimum lease payments on non-cancelable operating
leases having terms in excess of one year were as fol-
lows at December 31, 2009 (in thousands):
2010
2011
2012
2013
2014
Thereafter
$ 29,430
29,515
29,565
26,773
24,647
70,506
$210,436
Rent expense was $26.6 million, $21.5 million and
$15.1 million during the years ended December 31,
2009, 2008 and 2007, respectively. Sublease income,
recorded as a reduction of rent expense, was $0.2 mil-
lion, $0.3 million and $0.5 million during the years ended
December 31, 2009, 2008 and 2007, respectively.
Serv ice Commitments
We have entered into serv ice commitment contracts
with Internet network serv ice providers to provide
interconnection services and data center providers to
provide data center services for our customers. Future
minimum payments under these serv ice commitments
having terms in excess of one year were as follows at
December 31, 2009 (in thousands):
2010
2011
2012
$6,772
3,356
6,116
$16,244
Concentrations of Risk
We participate in an industry that is characterized by rel-
atively high volatility and strong competition for market
share. We and others in the industry encounter aggres-
sive pricing practices, evolving customer demands and
continual technological developments. Our operating
results could be negatively affected if we are not able
to adequately address pricing strategies, customers’
demands and technological advancements.
We depend on other companies to supply various key
elements of our infrastructure including the network
access local loops between our network access points
85
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
and our Internet network serv ice providers and the
local loops between our network access points and
our customers’ networks. In addition, a limited number
of vendors currently supply the routers and switches
used in our network. Furthermore, we do not carry
significant supply inventories of the products and
equipment that we purchase and use, and we have no
guaranteed supply arrangements with our vendors. A
loss of a significant vendor could delay maintenance
or expansion of our infrastructure and increase our
costs. If our limited number of suppliers fail to provide
products or services that comply with evolving Internet
standards or that interoperate with other products or
services we use in our network infrastructure, we may
be unable to meet all or a portion of our customer serv-
ice commitments, which could adversely affect our
business, results of operations and financial condition.
Litigation
Securities Class Action Litigation. On November 12,
2008, a putative securities fraud class action lawsuit
was filed against us and our former chief executive
officer, James P. DeBlasio, in the United States District
Court for the Northern District of Georgia, captioned
Catherine Anastasio and Stephen Anastasio v. Internap
Network Services Corp. and James P. DeBlasio, Civil
Action No. 1:08-CV-3462-JOF. The complaint alleges
that we and the individual defendant violated Section
10(b) of the Securities Exchange Act of 1934, or the
Exchange Act and that the individual defendant also
violated Section 20(a) of the Exchange Act as a “con-
trol person” of Internap. Plaintiffs purport to bring
these claims on behalf of a class of our investors who
purchased our stock between March 28, 2007 and
March 18, 2008.
Plaintiffs allege generally that, during the putative
class period, we made misleading statements and
omitted material information regarding (a) integra-
tion of VitalStream, (b) customer issues and related
credits due to services outages, and (c) our previously
reported 2007 revenue that we subsequently reduced
in 2008 as announced on March 18, 2008. Plaintiffs
assert that we and the individual defendant made
these misstatements and omissions in order to keep
our stock price high. Plaintiffs seek unspecified dam-
ages and other relief.
On August 12, 2009, the Court granted plaintiffs leave
to file an Amended Class Action Complaint (“Amended
Complaint”). The Amended Complaint added a claim
for violation of Section 14(a) of the Exchange Act based
on alleged misrepresentations in our proxy statement
in connection with our acquisition of VitalStream. The
Amended Complaint also added our former Chief
Financial Officer, David A. Buckel, as a defendant and
lengthened the putative class period.
On September 11, 2009, we and the individual defen-
dants filed motions to dismiss. Those motions are
currently pending before the Court. On November
6, 2009, plaintiffs filed a Corrected Amended Class
Action Complaint. On December 7, 2009, plaintiffs filed
a motion for leave to file a Second Amended Class
Action Complaint to add allegations regarding, inter
alia, an alleged failure to conduct due diligence in con-
nection with the VitalStream acquisition and additional
statements from purported confidential witnesses. We
opposed plaintiffs’ motion for leave to file the Second
Amended Class Action Complaint and that motion is
also currently pending before the Court.
Derivative Action Litigation. On November 12, 2009,
stockholder Walter M. Unick filed a putative derivative
action purportedly on behalf of Internap against certain
of our directors and officers in the Superior Court of
Fulton County, Georgia, captioned Unick v. Eidenberg,
et al., Case No. 2009cv177627. This action is based
upon substantially the same facts alleged in the secu-
rities class action litigation described above. The
complaint seeks to recover damages in an unspeci-
fied amount. On January 28, 2010, the Court entered
the parties’ agreed order staying the matter until the
motions to dismiss are resolved in the securities class
action litigation.
While we intend to vigorously contest these lawsuits,
we cannot determine the final resolution of the law-
suits or when they might be resolved. In addition to
the expenses incurred in defending this litigation and
any damages that may be awarded in the event of an
adverse ruling, our management’s efforts and attention
may be diverted from the ordinary business operations
to address these claims. Regardless of the outcome,
this litigation may have a material adverse impact on
our results because of defense costs, including costs
related to our indemnification obligations, diversion of
resources and other factors.
We are subject to other 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
impact on our financial condition, results of operations
or cash flows.
86
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
16. PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Treasury Stock
Preferred Stock
Effective July 11, 2006, we implemented a one-for-10
reverse stock split for our common stock. At the time,
although we intended the reverse stock split to reduce
the authorized number of shares of preferred stock, we
did not amend our certificate of incorporation to make
this change and, therefore, the authorized number
of shares of preferred stock remained at 200.0 million
shares. To implement this change, effective June 19,
2008, we reduced the number of authorized shares of
preferred stock from 200.0 million shares to 20.0 mil-
lion shares.
On March 15, 2007, our board of directors declared
a dividend of one preferred share purchase right, or
a Right, for each outstanding share of our common
stock, par value $0.001 per share. The dividend was
payable on March 23, 2007 to the stockholders of
record on that date. Each Right entitled the registered
holder to purchase from us 1/1000 of a share of our
series B preferred stock, par value $0.001 per share, or
the Preferred Shares, at a price of $100.00 per 1/1000
of a Preferred Share, subject to adjustment. The
description and terms of the Rights were set forth in
the Preferred Stock Rights Agreement between us and
American Stock Transfer & Trust Company, as Rights
Agent, dated April 11, 2007, or the Rights Agreement.
During 2009, of the 20.0 million authorized shares of
preferred stock, 19.5 million shares were designated
as blank check preferred stock, the terms and condi-
tions of which our board of directors could designate,
with the remaining 0.5 million shares of preferred stock
designated as series B preferred stock.
On November 23, 2009, we approved the termination
of the Rights Agreement. Originally scheduled to expire
on March 23, 2017, we amended the Rights Agreement
to accelerate its expiration which occurred on the
close of business on December 31, 2009. In connec-
tion with the expiration of the Rights Agreement, we
filed a Certificate of Elimination with the Secretary of
State of the State of Delaware on February 26, 2010, to
eliminate our series B preferred stock. The Certificate
of Elimination removed the previous designation of
0.5 million shares of series B preferred stock and
caused such shares of series B preferred stock to
resume their status as undesignated shares of our
preferred stock. Accordingly, all 20.0 million authorized
shares of preferred stock are now designated as blank
check preferred stock.
We have no shares of preferred stock outstanding.
From time to time, we acquire shares of treasury
stock as payment of statutory minimum payroll taxes
on stock-based compensation from employees. We
expect to reissue shares of treasury stock as part of
our stock-based compensation plans.
17. STOCK-BASED COMPENSATION PLANS
We have granted employees options to purchase
shares of stock and issued unvested stock awards,
commonly referred to as stock options and restricted
stock, respectively. We measure stock-based com-
pensation cost at the grant date based on the calcu-
lated fair value of the option or award. We recognize the
expense over the employees’ requisite serv ice period,
generally the vesting period of the option or award.
We estimate the fair value of stock options at the grant
date using the Black-Scholes option pricing model.
Stock option pricing model input assumptions such as
expected term, expected volatility and risk-free interest
rate, impact the fair value estimate. Further, the forfei-
ture rate impacts the amount of aggregate compensa-
tion. These assumptions are subjective and generally
require significant analysis and judgment to develop.
Stock-Based Compensation
The following table summarizes the amount of stock-
based compensation, net of estimated forfeitures,
included in the consolidated statements of operations
during the years ended December 31, 2009, 2008 and
2007 (in thousands):
Direct costs of
customer support
Sales and marketing
General and administrative
Year ended December 31,
2009
2008
2007
$1,112
1,395
3,106
$5,613
$1,369
1,782
4,348
$7,499
$1,892
2,135
4,654
$8,681
We have not recognized any tax benefits associated
with stock-based compensation due to our tax net
operating losses. We capitalized less than $0.1 million
of stock-based compensation during each of the three
years in the period ended December 31, 2009.
The significant weighted average assumptions used
for estimating the fair value of the option grants under
our stock-based compensation plans during the years
ended December 31, 2009, 2008 and 2007, were
expected terms of 4.3, 4.0 and 6.2, respectively; histor-
ical volatilities of 82%, 72% and 114% respectively; risk
87
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
free interest rates of 1.8%, 2.6% and 4.4%, respectively
and no dividend yield. The weighted average estimated
fair value per share of our stock options at grant date
was $1.65, $3.79 and $13.71 during the years ended
December 31, 2009, 2008 and 2007, respectively. The
expected term represents the weighted average period
of time that the stock options are expected to be out-
standing, giving consideration to the vesting schedules
and our historical exercise patterns. Because our stock
options are not publicly traded, assumed volatility
is based on the historical volatility of our stock. The
risk-free interest rate is based on the U.S. Treasury
yield curve in effect at the time of grant for periods
corresponding to the expected term of the options. We
have also used historical data to estimate stock option
exercises, employee terminations and forfeiture rates.
Stock-Based Compensation and Option Plans
Under the Internap Network Services Corporation
2005 Incentive Stock Plan, or the 2005 Plan, we may
issue stock options, stock appreciation rights, stock
grants and stock unit grants to eligible employees and
directors. Our historical practice has been to grant only
stock options and stock grants (i.e., restricted stock).
The compensation committee of our board of directors
administers the 2005 Plan. We have reserved a total
of 10.8 million shares of stock for issuance under the
2005 Plan, comprised of 6.0 million shares designated
in the 2005 Plan plus 1.0 million shares that remain
available for issuance of stock options and awards
and 3.8 million shares of unexercised stock options
under certain pre-existing plans. We will not make any
future grants under these pre-existing plans, but each
of the pre-existing plans were made a part of the 2005
Plan so that the shares available for issuance under
the 2005 Plan may be issued in connection with grants
made under those plans. As of December 31, 2009,
3.2 million stock options were outstanding, 1.1 million
shares of unvested restricted stock were outstanding
and 3.3 million shares of stock were available for issu-
ance under the 2005 Plan.
Under the 2005 Plan, we may not grant a stock option to
any employee or director to purchase more than 1.4 mil-
lion shares of stock or a stock appreciation right based
on the appreciation with respect to more than 1.4 mil-
lion shares of stock in any calendar year. Similarly, we
may not make a stock grant or stock unit grant to any
employee or director where the fair market value of the
stock subject to such grant on the grant date exceeds
$3.0 million in any calendar year. Furthermore, we may
not issue more than 0.7 million non-forfeitable shares of
stock pursuant to stock grants.
As a result of our acquisition of VitalStream as dis-
cussed in note 3, we assumed the VitalStream Stock
Option/Stock Issuance Plan, or the VitalStream Plan,
and all of outstanding stock options granted under
such plan. Each VitalStream stock option that was
outstanding and unexercised was converted into
an option to purchase Internap common stock and
we assumed that stock option in accordance with
the terms of the applicable VitalStream stock-based
compensation plan and stock option agreement. We
converted 3.0 million stock options to purchase shares
of VitalStream common stock into 1.5 million stock
options to purchase shares of our common stock. We
determined the fair value of the outstanding options
using a Black-Scholes valuation model with the follow-
ing assumptions: volatility of 48.8% to 120.1%; risk-free
interest rates ranging from 4.7% to 5.1%; remaining
expected lives ranging from 0.18 to 6.25 years; and
dividend yield of zero.
There were 5.4 million VitalStream shares, or 2.8 million
Internap shares on a post-converted basis, reserved
for issuance under the VitalStream Plan and 0.5 million
VitalStream shares, or 0.3 million Internap shares on
a post-converted basis, available for grant. Generally,
the assumed options had exercise prices equal to the
stock price on the grant date and had contractual terms
of five years. Vesting schedules ranged from quarterly
periods over one year to four years with 1/4th vesting after
one year and 1/16th vesting each quarter thereafter.
Under the 1999 Non-Employee Directors’ Stock Option
Plan, or the Director Plan, we granted non-qualified
stock options to non-employee directors. A total of
0.4 million shares of our common stock were reserved
for issuance under the Director Plan. Under the Director
Plan, non-employee directors received 8,000 stock
options 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, each
non-employee director received 5,000 stock options,
provided such person was a non-employee director
for at least the prior six months. The stock options
had an exercise price equal to 100% of the fair market
value of our common stock on the grant date and were
fully vested and exercisable as of the grant date. Each
director also received an annual grant of restricted
stock, which vested ratably over three years, subject
to the terms of the 2005 Plan, under which these
shares of restricted stock were granted. Beginning in
2009, the actual number of stock options and shares
of restricted stock to be granted was the lesser of
dividing $55,000 by either (a) our closing stock price
on the grant date, or (b) $3.00 per share. In addition,
new non-employee directors were to receive a grant
88
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
of 12,500 shares of restricted to vest ratably over three
years. As of December 31, 2009, 0.3 million stock
options were outstanding and 0.2 million shares were
available for grant pursuant to the Director Plan. The
Director Plan expired by its terms in July 2009. We will
make future grants of stock options and/or restricted
stock to non-employee directors from the 2005 Plan.
For all stock-based compensation plans, the exer-
cise price for each stock option generally may not
be less than the fair market value of a share of our
common stock on the grant date. Stock options gen-
erally have a maximum term of 10 years from the
grant date. Incentive stock options, or ISOs, may be
granted only to eligible employees and if granted to a
10% stockholder, the terms of the grant will be more
restrictive than for other eligible employees. Terms for
stock appreciation rights are similar to those of stock
options. Upon exercise of a stock appreciation right,
the compensation committee of our board of direc-
tors determines the form of payment as cash, shares
of stock issued under the 2005 Plan based on the fair
market value of a share of stock on the date of exercise
or a combination of cash and shares.
Stock options and stock appreciation rights, if any,
become exercisable in whole or in part from time-to-
time as determined at the grant date by our board of
directors or the compensation committee of our board
of directors, as applicable. Stock options generally vest
25% after one year and monthly or quarterly over the fol-
lowing three years, except for non-employee directors
who usually receive immediately exercisable options.
Conditions, if any, under which stock will be issued
under stock grants or cash will be paid under stock unit
grants and the conditions under which the interest in any
stock that has been issued will become non-forfeitable
are determined at the grant date by the compensation
committee. If the only condition to the forfeiture of a
stock grant or stock unit grant is the completion of a
period of service, the minimum period of serv ice will
generally be three years from the grant date. We have
reserved common stock under each of the stock-based
compensation plans to satisfy stock option exercises
with newly issued stock. However, we may also use
treasury stock to satisfy stock option exercises.
Stock option activity during the year ended December 31,
2009 under all of our stock-based compensation plans is
as follows (shares in thousands):
Weighted
Average
Exercise
Price
Shares
Balance, December 31, 2008
Granted
Exercised
Forfeitures and post-vesting cancellations
Balance, December 31, 2009
2,781
2,224
(5)
(747)
4,253
$11.91
2.66
2.14
10.53
$ 7.16
Exercisable, December 31, 2009
2,084
$10.59
Fully vested and exercisable stock options and stock
options expected to vest as of December 31, 2009 are
further summarized as follows (shares in thousands):
Fully
Vested and
Exercisable
Expected
to Vest
Total shares
Weighted-average exercise price
Aggregate intrinsic value
Weighted-average remaining
contractual term, in years
2,084
3,815
$ 10.59 $ 7.58
$170,194 $3,181,769
3.8
6.1
The total intrinsic value of stock options exercised was
less than $0.1 million, $0.2 million and $11.8 million dur-
ing the years ended December 31, 2009, 2008 and 2007,
respectively. None of our stock options or the underlying
shares is subject to any right to repurchase by us.
Restricted stock activity during the year ended
December 31, 2009 is as follows (shares in thousands):
Weighted-
Average
Grant Date
Shares Fair Value
Unvested balance, December 31, 2008
Granted
Vested
Forfeited
845
944
(384)
(317)
Unvested balance, December 31, 2009
1,088
$7.76
2.61
7.95
5.87
$3.61
The total fair value of restricted stock vested during the
years ended December 31, 2009, 2008 and 2007 was
$1.1 million, $1.1 million and $2.3 million, respectively.
The total intrinsic value at December 31, 2009 of all
unvested restricted stock was $5.1 million.
89
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
Total unrecognized compensation costs related to
unvested stock-based compensation as of December 31,
2009 is summarized as follows (dollars in thousands):
Unrecognized compensation
Weighted-average remaining
Stock Restricted
Stock
Options
Total
$5,218
$3,384
$8,602
recognition period (in years)
3.1
2.9
3.0
Employee Stock Purchase Plan
Our 2004 Internap Network Services Corporation
Employee Stock Purchase Plan, or the Purchase
Plan encourages ownership of our common stock by
our employees by permitting eligible employees to
purchase our common stock at a discount. Eligible
employees may elect to participate in the Purchase
Plan for two consecutive calendar quarters, referred
to as a “purchase period,” during a designated period
immediately preceding the purchase period. Purchase
periods have been established as the six-month peri-
ods ending June 30 and December 31 of each year. A
participation election is in effect until it is amended or
revoked by the participating employee, which may be
done at any time on or before the last day of the pur-
chase period.
The price for shares of common stock purchased
under the Purchase Plan is 95% of the closing sale
price per share of common our stock on the last day
of the purchase period. The Purchase Plan is intended
to be a non-compensatory plan for both tax and
financial reporting purposes. We granted less than
0.1 million shares under the Purchase Plan during
each of the years during the three year period ended
December 31, 2009. Cash received from participation
in the Purchase Plan was $0.1 million during the year
ended December 31, 2009 and $0.2 million for each
of the years ended December 31, 2008 and 2007. At
December 31, 2009, 0.2 million shares were reserved
for future issuance under the Purchase Plan.
At December 31, 2009, we had reserved 8.9 million
total shares for future awards under all stock-based
compensation plans. Cash received from all stock-
based compensation arrangements was $0.1 million,
$0.5 million and $8.6 million during the years ended
December 31, 2009, 2008 and 2007, respectively.
18. RELATED PARTY TRANSACTIONS
As discussed in note 5, we have a 51% ownership inter-
est in Internap Japan, a joint venture that we account
for using the equity method. Transactions with Internap
Japan are summarized as follows (in thousands):
Revenues
Direct costs of network
sales and services
Accounts receivable
Accounts payable
Year Ended December 31,
2009
2008
2007
$390
$366
$357
168
181
139
December 31,
2009
2008
$95
51
$89
26
Also as discussed in note 5, we had an investment in
Aventail, who was also a customer for data center and
connectivity services. We invoiced Aventail $0.2 million
during 2007. As of December 31, 2007, our outstanding
receivable balance with Aventail was less than $0.1 mil-
lion. We incurred a charge during the year ended
December 31, 2007, totaling $1.2 million, representing
the write-off of the remaining carrying value of our
investment in series D preferred stock of Aventail.
19. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows
(in thousands):
Year Ended December 31,
2009
2008
2007
Supplemental disclosure
of cash flow information:
Common stock issued
and stock options
assumed in VitalStream
acquisition
$ –
$ –
$208,293
Cash paid for interest,
net of amounts capitalized 795
681
Cash paid for income taxes
Non-cash acquisition of
1,403
361
1,152
103
property and equipment
under capital leases
Capitalized stock-
based compensation
–
24
3,069
97
148
25
90
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Review 2009
20. UNAUDITED QUARTERLY RESULTS
The following table sets forth selected unaudited quarterly data during the years ended December 31, 2009 and
2008. The quarterly operating results below are not necessarily indicative of those in future periods (in thousands,
except for share data).
2009
March 31
June 30 September 30 December 31
Quarter Ended
Revenues
Direct costs of network, sales and services,
exclusive of depreciation and amortization
Direct costs of customer support
Direct costs of amortization of acquired technologies
Impairments and restructuring
Net loss
Basic and diluted net loss per share
$63,924
$ 64,372
$64,414
$63,549
35,665
4,403
1,158
870
(6,608)
(0.13)
36,579
4,438
5,233
53,735
(60,645)
(1.22)
36,497
4,767
979
–
(1,975)
(0.04)
34,275
4,919
979
93
(497)
(0.01)
2008
March 31
June 30 September 30 December 31
Quarter Ended
Revenues
Direct costs of network, sales and services,
exclusive of depreciation and amortization
Direct costs of customer support
Direct costs of amortization of acquired technologies
Impairments and restructuring
Net income (loss)
Basic net income (loss) per share
Diluted net income (loss) per share
$62,053
$62,325
$ 65,399
$64,212
31,363
4,365
1,229
–
739
0.02
0.01
33,484
4,203
1,229
–
(3,237)
(0.07)
(0.07)
35,404
3,950
3,049
100,415
(101,405)
(2.06)
(2.06)
35,626
3,699
1,142
1,026
(910)
(0.02)
(0.02)
91
Internap
2009 Form 10-K
Management’s Discussion and Analysis
Financial Statement Schedule
FINANCIAL STATEMENT SCHEDULE
Valuation and Qualifying Accounts and Reserves (in thousands)
Year ended December 31, 2007:
Allowance for doubtful accounts
Year ended December 31, 2008:
Allowance for doubtful accounts
Year ended December 31, 2009:
Allowance for doubtful accounts
Balance at
Beginning
of Fiscal
Period
Charges to
Costs and
Expense
Charges to
Other
Accounts
Deductions
Balance at
End of
Fiscal
Period
$ 381
$2,261
$928(1)
$(1,219)(2)
$2,351
2,351
2,777
5,083
2,711
–
–
(4,657)(2)
2,777
(3,535)(2)
1,953
(1) Purchase price adjustment associated with our acquisition of VitalStream Holdings, Inc.
(2) Deductions in the allowance for doubtful accounts represent write-offs of uncollectible accounts net of recoveries.
92
Internap
2009 Form 10-K
Exhibit 31.1
Certifi cation
CERTIFICATION
I, J. Eric Cooney, certify that:
1. I have reviewed this Annual Report on Form 10-K of Internap Network Services Corporation (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such state-
ments were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s inter-
nal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 2, 2010
/s/ J. Eric Cooney
J. Eric Cooney
President and Chief Executive Officer
93
Internap
2009 Form 10-K
Exhibit 31.2
Certifi cation
CERTIFICATION
I, George E. Kilguss, III, certify that:
1. I have reviewed this Annual Report on Form 10-K of Internap Network Services Corporation (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such state-
ments were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s inter-
nal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 2, 2010
/s/ George E. Kilguss, III
George E. Kilguss, III
Vice President and Chief Financial Officer
94
Internap
2009 Form 10-K
Exhibit 32.1
Statement Required by 18 U.S.C. Section 1350
STATEMENT REQUIRED BY 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
This certificate is being delivered pursuant to the requirements of Section 1350 of Chapter 63 (Mail Fraud) of
Title 18 (Crimes and Criminal Procedures) of the United States Code and shall not be relied on by any other person
for any other purpose.
In connection with the Annual Report on Form 10-K of Internap Network Services Corporation (the “Company”) for
the year ended December 31, 2009, as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), the undersigned, J. Eric Cooney, President and Chief Executive Officer of the Company, certifies that
•
the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
•
information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: March 2, 2010
/s/ J. Eric Cooney
J. Eric Cooney
President and Chief Executive Officer
95
Internap
2009 Form 10-K
Exhibit 32.2
Statement Required by 18 U.S.C. Section 1350
STATEMENT REQUIRED BY 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
This certificate is being delivered pursuant to the requirements of Section 1350 of Chapter 63 (Mail Fraud) of Title
18 (Crimes and Criminal Procedures) of the United States Code and shall not be relied on by any other person for
any other purpose.
In connection with the Annual Report on Form 10-K of Internap Network Services Corporation (the “Company”)
for the year ended December 31, 2009, as filed with the Securities and Exchange Commission on the date hereof
(the “Report”), the undersigned, George Kilguss, III, Vice President and Chief Finance Officer of the Company,
certifies that
•
the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
•
information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: March 2, 2010
Date: March 2, 2010
/s/ George E. Kilguss, III
George E. Kilguss, III
Vice President and Chief Financial Officer
96
Internap
2009 Form 10-K
Stockholder Information
CORPORATE HEADQUARTERS
Internap Network Services Corporation
250 Williams Street
Atlanta, Georgia 30303
404.302.9700
FINANCIAL AND OTHER COMPANY INFORMATION
The Form 10-K for the year ended December 31, 2009,
which is included as part of this annual report, as
well as other information about Internap, including
financial reports, recent filings with the Securities and
Exchange Commission, and news releases are avail-
able in the Investor Services section of the Internap’s
website at www.internap.com. For a printed copy of
our Form 10-K without charge, please contact:
Internap Network Services
Attn: Investor Services
250 Williams Street
Atlanta, Georgia 30303
404.302.9700
or via email to ir@internap.com
TRANSFER AGENT
American Stock Transfer & Trust Company
59 Maiden Lane
New York, New York 10038
800.937.5449
admin2@amstock.com
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers, LLP
10 Tenth Street NW, Suite 1400
Atlanta, Georgia 30309
678.419.1000
MARKET INFORMATION
Internap’s common stock is traded on the Nasdaq Stock
Market under the symbol INAP.
MANAGEMENT
Executive Officers
J. Eric Cooney
President and Chief Executive Officer
George E. Kilguss III
Chief Financial Officer
Richard P. Dobb
Chief Administrative Officer
Steven A. Orchard
Senior Vice President of Operations
and Customer Support
Randal R. Thompson
Senior Vice President of Global Sales
Board of Directors
Dr. Daniel C. Stanzione
Chairman
President Emeritus, Bell Laboratories
and former Chief Operating Officer,
Lucent Technologies
Charles B. Coe
Former President
BellSouth Network Services
J. Eric Cooney
President and Chief Executive Officer
Dr. Eugene Eidenberg
Strategic Advisor, Granite Venture Associates LLC
and Principal, Hambrecht Quist Venture Associates
Patricia L. Higgins
Former President and Chief Executive Officer,
Switch & Data Facilities Company
Kevin L. Ober
Managing Partner
Divergent Venture Partners
Gary M. Pfeiffer
Former Senior Vice President
and Chief Financial Officer
The DuPont Company
Michael A. Ruffolo
President and Chief Executive Officer
Crossbeam Systems
Debora J. Wilson
Former President and Chief Executive Officer
The Weather Channel
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