Internap Corporation
Annual Report 2014

Plain-text annual report

ANNUAL REPORT 2014ANNUAL REPORT 2014PERFORMANCE WITHOUT COMPROMISEOne Ravinia Drive • Suite 1300 • Atlanta, Georgia 30346877.843.7627internap.comTOPPAN VITE NEW YORK JOB: TVNY / t1500676-10k / 00a-letter 747 Third Avenue, New York NY 10017 Tel: (212) 596-7747 Page: 1 / 1 E-mail: cs@toppanlf.com (SYSTEM) Proof Date: 03/30/15 @ 16:46 p.m. TOPPAN VITE NEW YORK JOB: TVNY / t1500676-10k / 13-bcv 747 Third Avenue, New York NY 10017 Tel: (212) 596-7747 Page: 1 / 1 E-mail: cs@toppanlf.com (SYSTEM) Proof Date: 03/30/15 @ 16:46 p.m. -------------------- -------------------- Dear Fellow Internap Stockholders, During 2014, Internap advanced our mission to power the world’s most innovative and high-performance Internet applications. Successful execution with both organic and inorganic initiatives, including new product introductions and the integration of the iWeb business, allowed Internap to help our customers transform their Internet infrastructure into a competitive advantage. We continue to see our unique combination of hybrid, high-performance Internet infrastructure services, as well as our award-winning, fully-redundant network operations centers provide a basis for long-term competitive differentiation. We believe our 2014 results affirm both the strategic direction we have chosen for the Company, as well as demonstrate strong operational execution across the business. We expanded our e-commerce route to market in 2014 to represent approximately 25% of sales, up from roughly 5% in 2013, primarily through the successful integration of the iWeb acquisition which was closed in December 2013. This route-to-market capability requires extensive digital market- ing, multi-lingual inside sales, campaign management and customer support skill sets. We believe there is a significant opportunity to further leverage our e-commerce route to market capabilities to sell IT infrastructure services to an enterprise customer base increasingly comfortable with on-line purchases. Going forward, we will continue to lever- age diverse routes to market across a common platform of IT infrastructure services to maximize the opportunity for profitable growth while simultaneously minimizing the risk of incremental capital investment. New product launches with a performance based dif- ferentiation are a key component of our growth strategy. The launch of our OpenStack-powered, next-generation AgileCLOUD in four global locations, including the New York metro area, Dallas, Amsterdam and Montreal, Canada, illustrates this commitment to product expansion. Internap’s AgileCLOUD provides a faster and more scalable public cloud for customers’ performance-sensitive applications. In addition to broad reach, AgileCLOUD offers high- performance features like dedicated CPU options, all-SSD ephemeral and persistent storage, OpenStack API support and easy access to the OpenStack-native Horizon cloud management portal. Also in 2014, we enhanced our high performance value proposition with the introduction of our patented next- generation Managed Internet Route Optimizer™, MIRO, which is designed to deliver on our promise of providing consistent “performance without compromise.” MIRO optimizes network traffic for applications and content run- ning on our cloud, hosting and colocation services. Internap was founded on the MIRO technology, which evaluates network performance across the global Internet and routes traffic to the best performing network at any point in time. While the classic version of MIRO consistently outperformed individual carrier networks and has been the gold standard for IP transit, this next-generation MIRO decidedly improves upon prior performance while also add- ing an inherently scalable architecture to enable the new generation of real-time data intensive applications our customers are developing. We also successfully completed the data center migration in our New York metro market, further improving Company profitability. In financial terms, 2014 was highlighted by record levels of annual revenue, segment profit, adjusted EBITDA and adjusted EBITDA margin. Our strategy to deliver high- performance hybridized Internet infrastructure service offer- ings and generate a higher proportion of revenue from company-controlled colocation, hosting and cloud services is successfully producing revenue growth and significantly expanding margins. Revenue increased 18% to $335.0 mil- lion, underpinned by both organic growth and the acquisi- tion of the iWeb business. Segment profit increased 26% to $190.0 million, while segment profit margin expanded 330 basis points to 56.7%. Importantly, while we have made solid progress in driving revenue and segment profit growth, we have also been disciplined in managing our cash operat- ing expenses and maintaining our focus on operational excellence. As a result, adjusted EBITDA increased 36% to $78.7 million and adjusted EBITDA margin expanded 300 basis points to 23.5%. In addition to tight operational controls and the positive operating leverage we are building in the business model, there are three primary drivers of our margin expansion. First, as a result of the strategy we put in place several years ago, we are delivering margin expansion from the favorable mix shift towards selling more company- controlled colocation, hosting and cloud services. As the revenue from these services increases in proportion relative to the other sources of revenue in the business, we would expect our margins to increase. Second, we continue to benefit from the product mix shift associated with hosting and cloud growth surpassing the company-controlled colocation growth rates. Additionally, hosting and cloud tend to have higher segment margins than our company- controlled colocation. Third, we are able to derive higher incremental margins as we increase utilization rates within our company-controlled data centers. From a company- wide perspective, we believe we have significant available capacity across our company-controlled data center footprint, which provides an attractive selling point for our colocation and hosting services. Internap’s solid financial position provides us with capital flexibility. We ended the year with $20.1 million in cash and cash equivalents and $33.7 million in borrowing capacity on our revolving credit facility. Over the past several years the majority of our non-maintenance capital expenditures have been geared toward expansion capital to build new company controlled data centers. Going forward, we expect the mix to shift towards success-based capital expenditures supporting the growth in our hosting and cloud businesses. We have a disciplined approach to capital allocation and believe we have significant opportunity to generate substantial returns on capital in the coming years. Looking into 2015 and beyond, we feel the market increas- ingly coming to us in terms of our strategy to deliver high- performance hybridized Internet infrastructure service offerings. We will continue to leverage our company- controlled data center capacity and expect to fill this capac- ity with our full portfolio of colocation, hosting and cloud offerings. We will continue to focus on launching new performance-differentiated service offerings and leverage the benefits of multiple routes to market in support of long- term profitable growth for our shareholders. We thank you, or stockholders, for your support and for sharing our vision of Internap’s future. Sincerely, J. Eric Cooney President and Chief Executive Officer April 2, 2015 Adjusted EBITDA and segment profit are non-GAAP measures. Segment profit is segment revenues less direct costs of network, sales and services, exclusive of depreciation and amortization, as presented in the notes to our consolidated financial statements. A reconciliation of adjusted EBITDA to GAAP loss from operations can be found in the attachment to our fourth quarter and full-year 2014 earnings press release, which is available on our website and furnished to the Securities and Exchange Commission. This letter contains forward-looking statements that are based on management’s current beliefs, expectations, plans and intentions. These statements are subject to risks and uncertainties. For a more complete discussion of the risks and uncertainties associated with these statements, please see the information under “Forward-Looking State- ments” and “Risk Factors” in our Annual Report on Form 10-K, which accompanies this letter. MANAGEMENT EXECUTIVE OFFICERS J. Eric Cooney President and Chief Executive Officer Kevin M. Dotts Chief Financial Officer Steven A. Orchard Senior Vice President and General Manager, Data Center and Network Services Satish Hemachandran Senior Vice President and General Manager, Cloud and Hosting 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 Patricia L. Higgins Former President and Chief Executive Officer, Switch & Data Facilities Company Gary M. Pfeiffer Former Senior Vice President and Chief Financial Officer, The DuPont Company Michael A. Ruffolo Former President and Chief Executive Officer, Crossbeam Systems Debora J. Wilson Former President and Chief Executive Officer, The Weather Channel CORPORATE HEADQUARTERS Internap Corporation One Ravinia Drive, Suite 1300 Atlanta, Georgia 30346 877.843.7627 FINANCIAL AND OTHER COMPANY INFORMATION The Form 10-K for the year ended December 31, 2014, 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 available in the Investor Relations section of Internap’s website at www.internap.com. For a printed copy of our Form 10-K without charge, please contact: Internap Corporation Attn: Investor Relations One Ravinia Drive, Suite 1300 Atlanta, Georgia 30346 877.843.7627 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 1075 Peachtree Street NE, Suite 2600 Atlanta, Georgia 30309 678.419.1000 MARKET INFORMATION Internap’s common stock is traded on the NASDAQ Stock Market under the symbol “INAP”. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2014 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: 001-31989 INTERNAP 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.) One Ravinia Drive, Suite 1300 Atlanta, Georgia (Address of Principal Executive Offices) 30346 (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 Common Stock, $0.001 par value Name of exchange on which registered 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 ☒ 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 ☒ 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 ☒ 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 incor- porated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒ 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 com- pany” 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 ☒ 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 ☒ The aggregate market value of the registrant’s outstanding common stock held by non-affiliates of the registrant was $238,539,239 based on a closing price of $7.05 on June 30, 2014, as quoted on the NASDAQ Global Market. As of February 2, 2015, 54,473,757 shares of the registrant’s common stock, par value $0.001 per share, were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement for the registrant’s annual meeting of stockholders to be held May 29, 2015 are incorporated by reference into Part III of this report. Except as expressly incorporated by reference, the registrant’s Proxy Statement shall not be deemed to be a part of this report on Form 10-K. 2 Internap 2014 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. Item 4. Mine Safety Disclosures Legal Proceedings 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 Item 8. Disclosures About Market Risk Financial Statements and Supplementary Data Item 9. 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 Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accountant Fees and Services Part IV Item 15. Exhibits and Financial Statement Schedules Signatures Page 3 7 19 19 19 19 20 21 23 34 34 34 35 35 36 36 36 36 36 37 39 3 Internap 2014 Form 10-K Part I Item 1. Business FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K, particularly Manage- ment’s Discussion and Analysis of Financial Condition and Results of Operations set forth below, and notes to our accompanying audited consolidated financial state- ments, contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include state- ments regarding industry trends, our future financial position and performance, business strategy, revenues and expenses in future periods, projected levels of growth and other matters that do not relate strictly to historical facts. These statements are often identified by words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “projects,” “fore- casts,” “plans,” “intends,” “continue,” “could” or “should,” that an “opportunity” exists, that we are “posi- tioned” for a particular result, statements regarding our vision or similar expressions or variations. These state- ments are based on the beliefs and expectations of our management team based on information currently avail- able. Such forward-looking statements are not guaran- tees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by forward-looking statements. Important factors currently known to our management that could cause or contribute to such dif- ferences include, but are not limited to, those refer- enced in Item 1A “Risk Factors.” We undertake no obli- gation to update any forward-looking statements as a result of new information, 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 Corporation and our sub- sidiaries. PART I Item 1. BUSINESS OVERVIEW Internap’s vision is to help people build and manage the world’s best performing Internet infrastructure. Today, our infrastructure services power many of the applica- tions that shape the way we live, work and play. Internap’s hybrid Internet infrastructure services deliver “performance without compromise” – blending virtual and bare-metal cloud, hosting and colocation services across a global network of data centers, optimized from the application to the end user and backed by our team of dedicated professionals. Many of the world’s most innovative companies rely on Internap to make their applications faster and more scalable. OUR INDUSTRY Internap competes in the large and fast-growing market for Internet infrastructure services (outsourced data center, compute, storage and network services). Three complementary trends are driving demand for Internet infrastructure services: the growth of the digital economy, the outsourcing of information technology (“IT”) and the adoption of cloud computing. The Growth of the Digital Economy The digital economy continues to impact existing busi- ness models with a new generation of networked appli- cations. Widespread adoption of mobile Internet devices combined with rising expectations around the performance and availability of both consumer and business applications places increasing pressure on enterprises to deliver a seamless end-user experience on any device at any time at any location. Simultane- ously, Software-as-a-Service (“SaaS”) models have changed data usage patterns with information tradition- ally maintained on individual machines and back-office servers now being streamed across the Internet. These applications require new diligence and focus on predict- able performance and data security. Finally, the growth of big data analytics is giving rise to a new breed of “fast data” applications that collect and analyze massive amounts of data in real time to drive immediate busi- ness decisions – for example, real-time ad bidding plat- forms and personalized e-commerce portals. The Outsourcing of IT As distributed applications, security concerns and com- pliance issues are placing new burdens on the tradi- tional IT model and driving new costs and complexity, IT organizations are increasingly turning to infrastructure outsourcing to free up valuable internal resources to focus on their core business, improve service levels and lower the overall cost of their IT operations. The macro- economic trends over the past several years have led to a significant reduction of operating and capital budgets. Companies are forced to balance this growing complex- ity with a cost-cutting culture and staff resource limita- tions that require they do more with less. The Adoption of Cloud Computing Amidst this environment, the emergence of public cloud Infrastructure-as-a-Service (“IaaS”) offerings has accel- erated digital innovation by lowering the barrier to entry for new business creation. IaaS offerings allow new enterprises to procure and pay for infrastructure on an as-needed basis while minimizing upfront operating expenses, reducing complexity and increasing agility. Although most organizations initially rely on cloud ser- vices for non-mission critical workloads, such as testing 4 Internap 2014 Form 10-K Part I Item 1. Business and development, growing adoption and the maturation of cloud platforms have increased confidence in migrat- ing key business applications to the cloud. This, in turn, has led to a new generation of applications that are being architected from the ground up, to run on stan- dardized public cloud infrastructure. OUR BUSINESS The Internet infrastructure services market comprises a range of infrastructure offerings that have emerged in response to shifting business and technology drivers. Internap competes specifically in the markets for retail colocation, hosting and IaaS. Different customer use cases and business requirements dictate the need for specific services or a combination of services enabled through hybridization. Internap provides high-performance, hybrid Internet infrastructure services that make our customers’ appli- cations faster and more scalable. We offer: • hybrid infrastructure services: customers can mix and match cloud, hosting and colocation for the optimal combination of services to meet specific application and business requirements; • availability across a global network of data centers; • patented network services that leverage our propri- etary technologies to maximize uptime and minimize latency for customer applications; and • a “single-pane-of-glass” customer portal, backed by service level agreements (“SLAs”) and our team of dedicated support professionals. OUR SEGMENTS Data Center Services Segment Our data center services segment includes colocation, hosting and cloud services. Colocation involves provid- ing physical space within data centers and associated services such as power, interconnection, environmental controls, monitoring and security while allowing our customers to deploy and manage their servers, storage and other equipment in our secure data centers. Host- ing and cloud services involve the provision and mainte- nance of hardware, operating system software, man- agement and monitoring software, data center infrastructure and interconnection, while allowing our customers to own and manage their software applica- tions and content. We sell our data center services at 52 data centers across North America, Europe and the Asia-Pacific region. We refer to 16 of these facilities as “company- controlled,” meaning we control the data center opera- tions, staffing and infrastructure and have negotiated long-term leases for the facilities. For company- controlled facilities, in most cases we design the data center infrastructure, procure the capital equipment, deploy the infrastructure and are responsible for the operation and maintenance of the facility. We refer to the remaining 36 data centers as “partner” sites. In these locations, a third party designs and deploys the infrastructure and provides for the operation and main- tenance of the facility. Within the data center services segment, we identify between “core” and “partner colocation” revenues. Core revenues are from our company-controlled colocation, hosting and cloud services and include all revenue from iWeb Technologies Inc., formerly known as iWeb Group Inc., (“iWeb”), which we acquired in November 2013. Partner colocation revenues are from our partner sites. Internet Protocol Services Segment Our Internet Protocol (“IP”) services segment includes our patented Performance IP™ service, content delivery network (“CDN”) services and IP routing hardware and software platform. By intelligently routing traffic with redundant, high-speed connections over multiple, major Internet backbones, our IP services provide high- performance and highly-reliable delivery of content, applications and communications to end users globally. We deliver our IP services through 88 IP service points around the world. Our patented and patent-pending network route optimi- zation technologies address inherent weaknesses of the Internet, allowing businesses to take advantage of the convenience, flexibility and reach of the Internet to con- nect to customers, suppliers and partners, and to adopt new IT delivery models in a scalable, reliable and pre- dictable manner. 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 points of presence (“POPs”). Providing capacity-on- demand to handle large events and unanticipated traffic spikes, we deliver scalable high-quality content distri- bution and audience-analytic tools. Additional information regarding our segments can be found in note 12 to the accompanying consolidated financial statements. 5 Internap 2014 Form 10-K Part I Item 1. Business DATA CENTERS, PRIVATE NETWORK ACCESS POINTS AND CDN POPS Our data centers and private network access points (“P-NAPs”) feature multiple direct high-speed connections to major Internet service providers (“ISPs”). We have data centers, P-NAPs and CDN POPs in the following markets, some of which have multiple sites: Internap operated Atlanta Boston Dallas Houston Los Angeles Montreal New York Metro Santa Clara Seattle Domestic sites operated under third party agreements International sites operated under third party agreements Atlanta Boston Chicago Dallas Denver Los Angeles Miami New York Metro Oakland Orange County San Diego Philadelphia Phoenix San Francisco San Jose Santa Clara Seattle Washington DC Amsterdam Frankfurt Hong Kong London Osaka(1) Paris Singapore Sydney Tokyo(1) Toronto (1) Through our joint venture in Internap Japan Co., Ltd. (“Internap Japan”) with NTT-ME Corporation and Nippon Telegraph and Telephone Corporation (“NTT Holdings”). FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS During December 31, 2014, we derived more than 10% of our total revenues from operations outside the United States. During each of the two years ended Decem- ber 31, 2013 and 2012, we derived less than 10% of our total revenues from operations outside the United States. We summarize our geographic information in note 12 to the accompanying consolidated financial statements. RESEARCH AND DEVELOPMENT Research and development costs, including product development costs, are included in general and admin- istrative costs and are expensed as incurred. These costs primarily relate to our development and enhance- ment of IP routing technology, hosting and cloud tech- nologies and network engineering costs associated with changes to the functionality of our services. Research and development costs were $2.8 million, $2.1 million and $2.0 million during the years ended December 31, 2014, 2013 and 2012, respectively. These costs do not include $8.5 million, $7.5 million and $6.7 million of soft- ware costs capitalized during the years ended Decem- ber 31, 2014, 2013 and 2012, respectively. CUSTOMERS As of December 31, 2014, we had approximately 12,000 customers in various industries. We serve the following key industries: software and Internet, including advertis- ing technology; media and entertainment, including gaming; business services; hosting and IT infrastruc- ture; health care technology infrastructure and telecom- munications. Our customer base is not concentrated in any particular industry; in each of the past three years, no single customer accounted for 10% or more of our revenues. COMPETITION The market for Internet infrastructure services is intensely competitive, remains highly fragmented and is characterized by rapid innovation, steady price erosion and consolidation. We believe that the principal factors of competition for service providers in our target mar- kets include breadth of product offering, product fea- tures and performance, level of customer service and technical support, price and brand recognition. We believe that we can compete on the basis of these fac- tors to varying degrees. Our current and potential com- petition primarily consists of: • colocation, hosting and cloud providers, including Equinix, Inc.; Rackspace, Inc.; Amazon Web Ser- vices; Telx Group, Inc.; CyrusOne; CenturyLink, Inc.; Softlayer (IBM); and QTS Realty Trust, Inc.; and • ISPs that provide connectivity services and storage solutions, including AT&T Inc.; Sprint Nextel Corpora- tion; Verizon Communications Inc.; Level 3 Communi- cations, Inc.; Akamai Technologies, Inc. and Zayo Group, LLC. OUR COMPETITIVE DIFFERENTIATION Internap aims to be the partner of choice for people developing the world’s most innovative applications by creating and operating the best-performing Internet infrastructure. We are uniquely positioned to help our customers make their applications faster and more scal- able in the following ways: Our High-Performance Service Offering Providing the best performing infrastructure services is in Internap’s DNA. The company was founded in 1996 to provide a better way to deliver packets across the Inter- net and, today, our Performance IP™ service is a lead- ing standard for business Internet connectivity. As we 6 Internap 2014 Form 10-K Part I Item 1. Business have expanded and evolved our business, delivering the best performance has remained a central value starting with the design of company-controlled data centers, which are the foundation for our hybrid infrastructure services and feature industry-leading power densities and complete infrastructure redundancy to efficiently support business growth while minimizing downtime. Similarly, we have designed our public cloud offering to support high-performance workloads with bare-metal and virtual computing options built atop the open- source OpenStack cloud computing platform. Our bare- metal cloud supports big data applications better than virtualized cloud alternatives by delivering faster throughput and processing, more consistent perfor- mance by removing the “noisy neighbor effect” and more efficient price to performance – with significant cost savings over nominal virtual equivalents. Our Hybrid Approach to Internet Infrastructure and Hosting Venue Interoperability We believe the breadth of our services offering provides additional compelling differentiation. Customers require a range of infrastructure offerings to support specific workload, business and compliance, and we are unique in our ability to allow customers to easily mix and match colocation, cloud and hosting (virtual and physical, managed and unmanaged environments) to create the best-fit infrastructure for their application and business requirements. Our infrastructure services seamlessly interconnect via a single unified network to enable hybridized IT environ- ments for maximum scalability, efficiency and flexibility. Our unified customer portal provides a single pane of glass view into customers’ hybrid infrastructure, allow- ing them to provision, manage and monitor colocation, hosting and cloud environments through a single, robust interface. This simplifies management of the colocation footprint, minimizes expensive trips to the data center and enables customers to easily leverage cloud-to-colocation hybridization for immediate access to elastic, on-demand resources. Our Customer Support Ultimately, our services are only as strong as the people behind them. Internap’s award-winning, fully-redundant Network Operations Centers (“NOCs”) deliver outstand- ing service and act as a virtual extension of our custom- ers’ infrastructure teams. Our NOCs are staffed by experienced engineers who proactively monitor our ser- vices and network to resolve issues before problems arise. The performance and availability of our services is mission-critical to our customer businesses and we guarantee those services with a competitive SLA, which features proactive alerts and credits. INTELLECTUAL PROPERTY Our success and ability to compete depend in part on our ability to develop and maintain the proprietary aspects of our IT infrastructure services and operate without infringing on the proprietary rights of others. We rely on a combination of patent, trademark, trade secret and contractual restrictions to protect our proprietary technology. As of December 31, 2014, we had 21 pat- ents (16 issued in the United States and five issued internationally) that extend to various dates between 2017 and 2031, and 14 registered trademarks in the United States. Although we believe the protection afforded by our patents, trademarks and trade secrets has value, the rapidly changing technology in our indus- try and uncertainties in the legal process make our future success dependent primarily on the innovative skills, technological expertise and management abilities of our employees rather than on the protection afforded by patent, trademark and trade secret laws. We seek to limit disclosure of our intellectual property by requiring employees and consultants with access to our propri- etary information to execute confidentiality agreements with us. EMPLOYEES As of December 31, 2014, we had approximately 700 employees. None of our employees are represented by a labor union, and we have not experienced any work stoppages. We consider the relationships with our employees to be good. ADDITIONAL INFORMATION We make available through our company web site, free of charge, our company filings with the Securities and Exchange Commission (the “SEC”) as soon as reason- ably practicable after we electronically file them with, or furnish them to the SEC. These include our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, registration statements and any amendments to those documents. Our web site is www.internap.com and the link to our SEC filings is http://ir.internap.com/ financials.cfm. Our principal executive offices are located at One Ravinia Drive, Suite 1300, Atlanta, Geor- gia 30346, and our telephone number is (404) 302-9700. We incorporated in Washington in 1996 and reincorpo- rated in Delaware in 2001. Our common stock trades on the Nasdaq Global Market under the symbol “INAP.” The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public 7 Internap 2014 Form 10-K Part I Item 1A. Risk Factors may access information about the operation of the Pub- lic Reference Room by calling the SEC at 1-800-SEC- 0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information filed electronically with the SEC, at http:// www.sec.gov . Item 1A. RISK FACTORS We operate in a changing environment that involves numerous known and unknown risks and uncertainties 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 following 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 industries in which we operate is difficult to predict, highly competi- tive and requires continual innovation and development, strategic planning, capital investment, demand planning and space utilization management to remain viable. We face on-going challenges to develop new services and products to maintain current customers and obtain new ones. In addition, technological advantages can rapidly decrease value, creating constant pressure on pricing and cost structures and hindering our ability to maintain or increase margins. We are dependent on numerous suppliers, vendors and other third-party providers across a wide spectrum of products and services to operate our business. These include real estate, network capacity and access points, network equipment and supplies, power and other ven- dors. In many cases the suppliers of these products and services are not only vendors, they are also competi- tors. While we maintain contractual 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 sufficient 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 significant resources to help maintain the integrity of our infrastruc- ture and support our customers; however, we face con- stant challenges related to our infrastructure, including capital forecasting, demand planning, space utilization management, physical failures, obsolescence, main- taining redundancies, physical and electronic 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 INDUSTRIES We cannot predict with certainty the future evolution of the IT infrastructure market in which we compete, and may be unable to respond effectively or on a timely basis to rapid technological change. The IT infrastructure market in which we compete is characterized by rapidly changing technology, industry standards and customer needs, as well as by frequent new product and service introductions. As evidenced by our investment in and offering to our enterprise custom- ers of a full portfolio of IT infrastructure solutions, inno- vative new IT technologies and evolving industry stan- dards have the potential to become the “new normal,” either replacing or providing efficient, potentially lower- cost alternatives to other, more traditional, IT communi- cations services. The adoption of such new technolo- gies or industry standards could render our existing services obsolete and unmarketable. Our failure to anticipate new technology trends that may eventually may become the preferred technology choice of our customers, to adapt our technology to any changes in the prevailing industry standards (or, con- versely, for there to be an absence of generally accepted standards) could materially and adversely affect our business. Our pursuit of and investment in necessary technological advances may require sub- stantial time and expense, but will not guarantee that we can successfully adapt our network and services to alternative access devices and technologies. Techno- logical advances in computer processing, storage, capacity, component size or power management could result in a decreased demand for our data center and hosting services. Likewise, if the Internet backbone becomes subject to a form of central management or gatekeeping control, or if ISPs establish an economic settlement arrangement regarding the exchange of traf- fic between Internet networks that is passed on to Inter- net users, the demand for our IP and CDN services could be materially and adversely affected. 8 Internap 2014 Form 10-K Part I Item 1A. Risk Factors If we are unable to develop new and enhanced ser- vices and products that achieve widespread market acceptance, or if we are unable to improve the per- formance and features of our existing services and products or adapt our business model to keep pace with industry trends, our business and operating results could be adversely affected. The market in which we compete 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 not understand the market demand for new services and products or not be able to overcome technical problems with new services and products. The demand for top research and develop- ment 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 customers by expending research and development in a cost- effective manner to acquire talent, develop and intro- duce new services, products and 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 maintaining quali- fied research and development staff with the appro- priate skill and expertise; • managing the length of the development cycle for new products and product enhancements, which his- torically has been longer than expected; • identifying and adapting to emerging and evolving industry standards and to technological develop- ments by our competitors’ and customers’ services and products; • developing or expanding efficient sales channels; • entering into new or unproven markets where we have limited experience; • managing new service and product service strategies and integrating them with our existing services and products; • incorporating acquired products and technologies; • trade compliance issues affecting our ability to ship new products to international markets; and • obtaining required technology licenses and technical 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 manag- ing these risks and challenges, or if our new services, products and upgrades are not technologically com- petitive or do not achieve market acceptance, we may experience a decrease in our revenues and earnings. Our capital investment strategy for data center and IT infrastructure services expansion may contain erroneous assumptions causing our return on than invested capital expected. to be materially lower Our strategic decision to invest capital in expanding our data center and IT infrastructure services is based on, among other things, significant assumptions related to expected growth of these markets, our competitors’ plans and current and expected server utilization and data center occupancy rates. We have no way of ensur- ing the data or models we use to deploy capital into existing markets, or to create new markets, has been or will be accurate. Errors or imprecision in these esti- mates, especially those related to customer demand, could cause actual results to differ materially from expected results and could adversely affect our busi- ness, consolidated financial condition, results of opera- tions and cash flows. We may experience difficulties in executing our capital investment strategy to expand our IT infra- structure services, upgrade existing facilities or establish new facilities, products, services or capa- bilities. As part of our strategy, we may continue to expand our IT infrastructure services and may encounter challenges and difficulties in implementing our expansion plans. This could cause us to grow at a slower pace than pro- jected in our capital investment modeling. These chal- lenges and difficulties relate to our ability to: • identify and obtain the use of locations meeting our selection criteria on competitive terms; • estimate costs and control delays; • obtain necessary permits on a timely basis, if at all; • generate sufficient cash flow from operations or through current or additional debt or equity financings to support these expansion plans; • establish key relationships with IT infrastructure pro- viders; • hire, train, retain and manage sufficient operational and technical employees and supporting personnel; • obtain the necessary power density and supply from local utility companies; • avoid labor issues impacting our suppliers, such as a strike; and • identify and obtain contractors that will not default on the agreed upon contract performance. If we encounter greater than anticipated difficulties in implementing our expansion plans, are unable to deploy new IT infrastructure services or do not adequately con- trol expenses associated with the deployment of new IT infrastructure services, it may be necessary to take additional actions, which could divert management’s attention and strain our operational and financial resources. We may not successfully address any or all 9 Internap 2014 Form 10-K Part I Item 1A. Risk Factors of these challenges, and our failure to do so would adversely affect our business, consolidated financial condition, results of operations and cash flows. Our estimation of future data center space needs may be inaccurate, leading to missed sales opportu- nities or additional expenses through unnecessary carrying costs. Adding data center space involves significant capital outlays well ahead of planned usage. Although we believe we can accurately project future space needs in particular markets, these plans require significant esti- mates and assumptions based on available market data. Errors or imprecision in these estimates or the data on which the estimates are based could result in either an oversupply or undersupply of space in a par- ticular market and cause actual results to differ materi- ally from expected results and correspondingly have a material adverse impact on our business, consolidated financial condition, results of operations and cash flows. Pricing pressure may continue to decrease our rev- enue for certain services such as Internet connectiv- ity, data transit and/or data storage services. Pricing for Internet connectivity, data transit and data storage services has declined significantly in recent years and may continue to decline, which would con- tinue to impact our IP services segment. By bundling their services and reducing the overall cost of their ser- vice offerings, certain of our competitors may be able to provide customers with reduced costs in connection with their Internet connectivity, data transit and data storage 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 have 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 ISPs to deliver our services and have agreed with some of these providers to pur- chase minimum amounts of service 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. The market in which we operate is highly competi- tive and has experienced recent consolidation which may continue, and we may lack the financial and other resources, expertise or capability necessary to capture increased market share or maintain our market share. We compete in the IT infrastructure services market, which is rapidly evolving, highly competitive and likely to be characterized by overcapacity, industry consolida- tion and continued pricing pressure. A number of our competitors have recently consolidated and such con- solidation is likely to continue. In addition, our competi- tors may acquire software-application vendors or tech- nology providers, enabling them to more effectively compete with us. We believe that participants in this market must grow rapidly and achieve a significant presence to compete effectively. This consolidation could affect prices and other competitive factors in ways that would impede our ability to compete suc- cessfully in the IT infrastructure market. Further, our business is not as developed as that of many of our competitors. Many of our competitors have substan- tially greater financial, technical and market resources, greater name recognition and more established relation- ships in the industry. Many of our competitors may be able to: • develop and expand their IT infrastructure and service offerings more rapidly; • adapt to new or emerging technologies and changes in customer requirements more quickly; • take advantage of acquisitions and other opportuni- ties more readily; or • devote greater resources to the marketing and sale of their services and adopt more aggressive pricing poli- cies than we can. In addition, IT infrastructure providers may make tech- nological advancements to enhance the quality of their services, which could negatively impact the demand for our IT infrastructure services. We also expect that we will face additional competition as we expand our prod- uct offerings, including competition from technology and telecommunications companies and non- technology companies which are entering the market through leveraging their existing or expanded network services and cloud infrastructure. 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 network or use alternative delivery methods, including the cable televi- sion infrastructure, direct broadcast satellites and wire- less local loops. We may lack financial and other resources, expertise or capability necessary to maintain or capture increased market share. 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 cus- tomers may cause our revenue to decline. In addition to adding new customers, we must sell addi- tional services to existing customers and encourage them to increase their usage levels to increase our rev- enue. If our existing and prospective customers do not perceive our services to be of sufficiently high value and quality, we may not be able to retain our current cus- tomers or attract new ones. Our customers have no obligation to renew their agreements for our services after the expiration of their initial commitment, and these agreements may not be renewed at the same price or level of service, if at all. Due to the significant upfront 10 Internap 2014 Form 10-K Part I Item 1A. Risk Factors costs of implementing IT infrastructure services, if our customers do not renew or cancel their agreements, we may not be able to recover the initial costs associated with bringing additional infrastructure on-line. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including: • their level of satisfaction with our services; • our ability to provide features and functionality demanded by our customers; • the prices of our services compared to our competi- tors; • technological advances that allow customers to meet their needs with fewer infrastructure resources; • mergers and acquisitions affecting our customer base; and • reduction in our customers’ spending levels. If our customers do not renew their agreements with us or if they renew on less favorable terms, our revenue would decline and our business may suffer. Similarly, our customer agreements may provide for minimum commitments that may be significantly below our cus- tomers’ historical usage levels. Consequently, 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 IT infrastructure services and the implementation efforts required by customers to activate them can be substantial. Our IT infrastructure services are complex and require substantial sales efforts and technical consultation to implement. A customer’s decision to outsource some or all of its IT infrastructure typically involves a significant commitment of resources. Some customers may be reluctant to purchase our services due to their inability to accurately forecast future demand, delay in decision- making or inability to obtain necessary internal approv- als 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 fore- casts and materially and adversely affect our revenues and operating results. We may lose customers if they elect to develop or maintain some or all of their IT infrastructure ser- vices internally. Our current and potential customers may decide to develop or maintain their own IT infrastructure rather than outsource to service providers like us. These in-house IT infrastructure services could be perceived to be superior or more cost effective compared to our ser- vices. If we fail to offer IT infrastructure services that compete favorably with in-sourced services or if we fail to differentiate our IT infrastructure services, we may lose customers or fail to attract customers that may consider pursuing this in-sourced approach, and our business, consolidated financial condition and results of operations 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. If this occurs, we could lose cus- tomers 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 pos- sible that competitive dynamics in our market may require us to reduce our prices, which could harm our revenue, gross margin and operating results. If governments modify or increase regulation of the Internet, or goods or services necessary to operate the Internet or our IT infrastructure, our services could become more costly. International bodies and federal, state and local govern- ments have adopted a number of laws and regulations that affect the Internet and are likely to continue to seek to implement additional laws and regulations. In addi- tion, federal and state agencies have adopted or are actively considering regulation of various aspects of the Internet and/or IP services, including taxation of trans- actions, regulation of broadband providers and ISPs, enhanced data privacy and retention legislation and various energy regulations, as well as law enforcement surveillance and anti-terrorism initiatives targeting instant messaging applications, for example. Addition- ally, potential laws and regulations not specifically directed at the Internet, but targeted at goods or ser- vices necessary to operate the Internet, could have a negative impact on us. These factors may impact the delivery of our services by driving up the cost of power, which is a significant cost of operating our data centers and other service points. We face the risk that the Federal Communications Com- mission (“FCC”) may regulate broadband Internet access services or that Congress or one or more states will approve legislation significantly affecting our Inter- net customers, and thus, our business. Beginning in 2010, the FCC adopted Open Internet rules which were vacated by the U.S. Court of Appeals for the DC Circuit in early 2014. Following another FCC rulemaking in 2014, at the time of preparation of this report, the FCC is scheduled to vote on FCC Chairman Wheeler’s pro- posal for new “Open Internet” rules, at the FCC’s Febru- ary 26, 2015 Open Meeting (“Open Meeting”). The rules would include a potentially significant reclassification of broadband Internet access, and potentially, a classifica- tion of edge provider connections to broadband Internet access, both as regulated Title II “telecommunications services” rather than deregulated information services, which broadband has historically been. Title II regulation would subject ISPs to common carrier regulation, 11 Internap 2014 Form 10-K Part I Item 1A. Risk Factors including prohibiting “unjust and unreasonable prac- tices” and discriminatory practices under Sections 201 and 202 of the Communications Act, regulation of con- sumer privacy under Section 222 and other common carrier regulation(s). As “bright line rules” the proposed rules would prohibit (a) blocking, (b) throttling (impairing or degrading lawful Internet traffic on the basis of content, applications or services), and (c) paid prioritization or “fast lanes,” including for ISP affiliates. The rules would allow for rea- sonable network management, which must be tailored to achieve a legitimate network management purpose, not a commercial one. The proposed rules would also enhance the transparency requirements for broadband services and would set a standard of conduct for ISPs. Under the proposed framework, the FCC would not enforce certain Title II provisions by forbearing from imposing, among other things, rate regulation and Uni- versal Service contributions or “any new taxes or fees” on broadband providers, though an FCC Commissioner has issued a public statement in opposition. As such, there is lingering uncertainty about what the final approved rules will be, and whether the rules will make broadband more expensive for end users, which would impact Internap’s customers and Internap’s business. As of the preparation of this report, the comprehensive proposal has not been released, and further details, including possible changes to the Chairman’s proposed rules prior to the February 26 vote, will likely emerge later. Litigation is almost certain, and at least one lead- ing U.S. carrier and a major cable television trade asso- ciation have announced that litigation challenges to the Open Internet rules are likely. While future actions are difficult to predict, the regula- tory reclassification of broadband services as telecom- munications services under Title II should directly ben- efit edge providers, though the as-yet uncertain impact on taxes, fees and other costs for broadband Internet access could negatively impact our customers and, in turn, impact our business. The same is true of any pos- sible congressional rewrite of the Communications Act which results in new regulation of broadband providers as common carriers. Companies like ours, whose busi- ness involves providing enterprise networks for cloud computing and other Internet-based business applica- tions, could have their operations and costs impacted by a top-to-bottom review of broadband access prin- ciples. On the other hand, it remains unclear what impact these new regulations will have on the costs that businesses like ours that pay for broadband access ser- vices will face in the absence of a statutory or regulatory prohibition. Any of these developments could signifi- cantly impact our business. A recently proposed legislative amendment that Con- gress is considering to the Communications Act poses other potential risks. Senate and House Committees held hearings on January 21, 2015 to consider draft majority party legislation that would amend the Com- munications Act to expressly (a) classify broadband as an information service; (b) allow ISPs to offer “special- ized services” or “services other than broadband Inter- net access service that are offered over the same net- work”; and (c) prohibit blocking of lawful content, throttling data and paid prioritization. The proposed leg- islative reforms would apply to both wireless and wireline broadband services. The draft legislation appears to be based on the FCC’s Open Internet rules that were partially overturned by the DC Circuit Court of Appeals in early 2014. If this proposed legislation or similar legislation is enacted which does not treat broadband Internet access or the service interconnect- ing Internet content edge providers with ISPs as a tele- communications service, it could disadvantage our edge provider customers and adversely impact our business. In another pending rulemaking, the FCC is proposing to regulate Internet-based video programming providers as multi-channel video programming distributors (“MVPDs”) as it currently does established cable televi- sion providers and satellite providers. The FCC has ten- tatively concluded that the traditional definition of MVPD requiring ownership of the video transmission path should be expanded to a more flexible definition that would include Internet-based video programmers. As proposed, this new definition would apply to any pro- vider of multiple streams of pre-scheduled program- ming, but not video on demand. There are a host of legal obligations imposed on and rights extended to MVPDs that currently do not apply to IP-based video distribu- tion networks, including closed captioning, EEO and Emergency Alert System requirements. Conversely, there are rights to enter into good faith negotiations for retransmission consent agreements with broadcast net- works that Internet-based video programmers would gain as MVPDs. The FCC has requested comments in March 2015. This proceeding could directly impact the ability to compete for video programming of a number of Internap’s customers, and thereby impact the future use of Internap’s services. In addition, laws relating to the liability of private net- work operators and information carried on or dissemi- nated through their networks are unsettled, both in the U.S. and abroad. The nature of any new laws and regu- lations and the interpretation of applicability to the Inter- net of existing laws governing intellectual property own- ership and infringement, copyright, trademark, trade secret, national security, law enforcement, obscenity, libel, employment, personal privacy, consumer protec- tion and other issues are uncertain and developing. We may become subject to legal claims such as defama- tion, invasion of privacy or copyright infringement in connection with content stored on or distributed through our network. We cannot predict the impact, if any, that future regulation or regulatory changes may have on our business. One of our subsidiaries offers metro connect Ethernet data transmission services to customers colocated at our data centers to enable expanded connectivity. These are regulated telecommunications services, which require our subsidiary to obtain regulatory certifi- cation(s) and maintain an approved tariff in most states in which these services are offered. There are various 12 Internap 2014 Form 10-K Part I Item 1A. Risk Factors regulatory compliance requirements to operate as a telecommunications carrier, such as the filing of tariffs, annual reports and universal service reports, all of which must be satisfied to continue to offer these services, and avoid any enforcement actions by federal or state regulators. We also must ensure that we are in compli- ance with state consumer protection laws in every state in which the subsidiary offers such services. Failure to comply with any of these requirements could negatively impact our business. RISKS RELATED TO OUR BUSINESS We depend on third-party suppliers for key elements of our IT infrastructure services. If we are unable to obtain these elements 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 Inter- net networks, many of which are built and operated by third parties. To provide high performance connectivity services through our network access points, we pur- chase connections from several ISPs. We can offer no assurances that these ISPs will continue to provide ser- vice to us on a cost-effective basis or on competitive terms, if at all, or that these providers will provide us with additional capacity to adequately meet customer demand or to expand our business. Consolidation among ISPs 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 relationships with other ISPs that may emerge or that are significant in geographic areas, such as Asia 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 network infrastructure, including the network access loops between our network access points and our ISP, 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 mea- sures 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 ser- vices, or by charging increased fees. Some of our com- petitors have their own network access loops and local loops and are, therefore, not subject to similar availabil- ity and pricing issues. For data center and hosting facilities, we rely on a num- ber of vendors to provide physical space, convert or build space to our specifications, provide power, inter- nal cabling and wiring, climate control, physical security and system redundancy. We typically obtain physical space through long-term leases. We utilize multiple other vendors to perform leasehold improvements nec- essary to make the physical space available for occu- pancy. The demand for premium data center and host- ing space in several key markets has outpaced supply over recent years and the imbalance is projected to con- tinue over the near term. This has limited our physical space options and increased, and will continue to increase, our costs to add capacity. If we are not able to procure space through renewing our existing leases or entering into new leases, or are not able to contain costs for physical space, or are not able to pass these costs on to our customers, our results will be adversely affected. In addition, we currently purchase infrastructure equip- ment such as servers, routers, switches and storage components from a limited number of vendors. We do not carry significant inventories of the equipment we purchase, and we have no guaranteed supply arrange- ments 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 evolv- ing Internet standards or that interoperate with other products or services we use in our network infrastruc- ture, we may be unable to meet all or a portion of our customer service commitments, which could materially and adversely affect our results. Any failure of our physical IT infrastructure could lead to significant costs and disruptions that could harm our business reputation, consolidated finan- cial condition, results of operations and cash flows. Our business depends on providing customers with highly-reliable service. We must protect our IT infra- structure 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 maintenance 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 service providers upon which our business relies. Problems at one or more of our company-controlled facilities or our partner sites, whether or not within our control, could result in service interruptions or signifi- cant equipment damage. Most of our customers have SLAs that require us to meet minimum performance obligations and to provide service credits to customers 13 Internap 2014 Form 10-K Part I Item 1A. Risk Factors if we do not meet those obligations. If a service interrup- tion impacts a significant portion of our customer base, the amount of service credits we are required to provide could adversely impact our business and financial con- dition. Also, if we experience a service interruption and we fail to provide a service credit under an SLA, we could face claims related to such failures, which could adversely impact our business and financial condition. Because our data centers are critical to our customers’ businesses, service interruptions or significant equip- ment 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 SLAs could reduce the confidence of our customers and could result in lost customers or an inability to attract new customers, which would adversely affect both our ability to gener- ate revenues and our operating results. Furthermore, we are dependent upon ISPs and telecom- munications carriers in the U.S., Europe and Asia- Pacific region, some of whom have experienced signifi- cant system failures and electrical outages in the past. Users of our services may experience difficulties due to system failures unrelated to our systems and services. If, for any reason, these providers fail to provide the required services, our business, consolidated financial condition, results of operations and cash flows could be materially adversely impacted. Our business operations depend on contracts with vendors and suppliers who may not meet their con- tractual obligations. Tracking, monitoring and managing our contracts and vendor relationships is critical to our business opera- tions; however, we have limited control over the ven- dors’ performance of these contracts. Even if these con- tracts 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 spe- cific 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. 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. In addition, we license intellectual property rights from third-party owners. If such owners do not properly maintain or enforce the intellectual property underlying such licenses, our competitive position and business prospects could be harmed. Our licensors may fail to maintain these patents or intellectual property registra- tions, may determine not to pursue litigation against other companies that are infringing these patents or intellectual property registrations or may pursue such litigation less aggressively than we would. Our inability to renew our data center leases, or renew on favorable terms, and potential unknown costs related to asset retirement obligations could negatively impact our financial results. Generally, our company-controlled data center leases provide us with the opportunity to renew the leases at our option for periods typically ranging from five to 10 years. Many of these options however, if renewed, pro- vide that rent for the renewal period will be the fair mar- ket rental rate at the time of renewal. If the fair market rental rates are significantly higher than our current 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. For the leases that do not contain renewal options, or for which the option to renew has been exhausted or passed, we cannot guarantee the lessor will renew the lease, or will do so at a rate that will allow us to maintain profitability on that particular space. While we proactively monitor these leases, and conduct on-going negotiations with lessors, our ability to renegotiate renewals is inherently limited by the original contract language, including option renewal clauses. If we are unable to renew, we may incur substantial costs to move our infrastructure and/or customers and to restore the property to its required condition, there is no guar- antee that our customers will move with us and we may not be able to find appropriate and sufficient space. The occurrence of any of these events could adversely impact our business, financial condition, results of operations and cash flows. These contracts may contain provisions that result in favorable or non-favorable impacts on us depending on actions taken, or not taken. While we would normally pursue all contractual provisions favorable to our busi- ness, 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 In addition, we have capital lease agreements that require us to decommission the physical space for which we have not yet recorded an asset retirement obligation (“ARO”). Due to the uncertainty of specific decommissioning obligations, timing and related costs, an ARO is not reasonably estimable for these properties and we have not recorded a liability at this time for such properties. 14 Internap 2014 Form 10-K Part I Item 1A. Risk Factors A failure in the redundancies in one or more of our NOCs, P-NAPs or computer systems could cause a significant disruption in Internet connectivity which could impact our ability to serve our customers. While we maintain multiple layers of redundancy in our operating facilities, if we experience a problem at one or more of our NOCs, including the failure of redundant systems, we may be unable to provide Internet connec- tivity services to our customers, provide customer ser- vice and support or monitor our network infrastructure or P-NAPs, any of which would seriously harm our busi- ness and operating results. Also, because we are obli- gated to provide continuous Internet availability under our SLAs, we may be required to issue a significant amount of service credits as a result of such interrup- tions in service. These credits could negatively affect our revenues and results of operations. In addition, interruptions in service to our customers could poten- tially harm our customer relations, expose us to poten- tial lawsuits or necessitate additional capital expendi- tures. A significant number of our P-NAPs are located in facili- ties owned and operated by third parties. 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 condition of those par- ties providing occupancy to us could have an adverse impact on the continued occupancy arrangement or the level of service delivered to us under such arrange- ments. Our business could be harmed by prolonged electri- cal power outages or shortages, increased costs of energy or general availability of electrical resources. Our IT infrastructure services are susceptible to regional costs and supply of power, electrical power shortages, planned or unplanned power outages and availability of adequate power resources. Power outages 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 protections 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 includ- ing increased pressure on legislators to pass green leg- islation. As energy costs increase, we may not be able to pass on to our customers 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. We cannot ensure that these third parties will deliver such power in adequate quantities 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 increas- ing amount of power per square foot of space utilized. Inability to increase power capacity to meet increased customer demands would limit our ability to grow our business, which could have a negative impact on our relationships with our customers and our consolidated financial condition, results of operations and cash flows. 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 pub- lic and private networks have occurred. The number and severity of these attacks may increase in the future as network assailants take advantage of outdated soft- ware, security breaches or incompatibility between or among networks. Computer viruses, intrusions and similar disruptive problems could cause us to be liable for damages under agreements with our customers and fines and penalties to governmental or regulatory agen- cies, and our reputation could suffer, thereby resulting in a loss of current customers and deterring potential cus- tomers from working with us. Security problems or other attacks caused by third parties could lead to interrup- tions and delays or to the cessation of service to our customers. Furthermore, inappropriate use of the net- work by third parties could also jeopardize the security of confidential information stored in our computer sys- tems and in those of our customers and could expose us to liability under unsolicited commercial e-mail, or “spam,” regulations. In the past, third parties have occa- sionally 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 computer viruses and alleviate other security problems, or any circumvention of those efforts, may result in increased costs, interruptions, delays or cessa- tion of service 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 available or adequate to cover these claims. The increased use of high-power density equipment 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 electri- cal power may exceed our designed capacity in certain facilities. As electrical power, rather than space, is typi- cally the primary factor limiting capacity in our data cen- ters, 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 materially and adversely affected. 15 Internap 2014 Form 10-K Part I Item 1A. Risk Factors Our business requires the continued development 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 and successfully implement effec- tive and efficient business support policies, processes and internal systems. This is a complicated 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 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 and effects of such changes could negatively impact our operations. Our global operations may not be successful. We have limited experience operating globally and have only recently begun to achieve some success in our global operations. We currently have locations in Amsterdam, Frankfurt, Hong Kong, London, Montreal, Paris, Singapore, Sydney and Toronto. We also partici- pate in a joint venture with NTT-ME Corporation and NTT Holdings, which operates network access points in Tokyo and Osaka, Japan. We may develop or acquire P-NAPs or complementary businesses in additional global markets. The risks associated with expansion of our global business operations include: • providing technical and operational support to cus- tomers and tracking the resolution of customer issues. • challenges in establishing and maintaining relation- ships with global customers, ISPs and local vendors, including data center and local network operators; If the number of customers that we serve or our services portfolio increases, we may need to develop additional business support systems on a schedule sufficient to meet proposed service rollout dates. The failure to con- tinue to develop effective and efficient business support systems, and update or optimize these systems to a level commensurate with the needs of our business and/or our competition, could harm our ability to imple- ment our business plans, maintain competitiveness 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, we may need to increase our workforce. Accordingly, our future success depends on our ability to attract, hire, train, retain and motivate highly skilled management, technical, sales, research and development, 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. We may not be successful in attracting, hiring 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 valu- able company intellectual capital and in paying signifi- cant 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 • challenges in staffing and managing NOCs and P-NAPs across disparate geographic areas; • potential loss of proprietary information due to misap- propriation or laws that may be less protective of our intellectual property rights than the laws in the U.S.; • 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 international currency exchange rates; • costs of customizing P-NAPs for foreign countries and customers; and • compliance with requirements of foreign laws, regula- tions 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 global operations, which may limit our sales growth and materially and adversely affect our business and results of operations. We may acquire other businesses, and these acqui- sitions involve integration and other risks that could harm our business. We may pursue additional acquisitions of complemen- tary businesses, products, services and technologies to expand our geographic footprint, enhance our existing services, expand our service 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 16 Internap 2014 Form 10-K Part I Item 1A. Risk Factors 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, if we fail to address the risks associated with integrating an acquired company or if we do not successfully integrate an acquired company, we would not be able to effec- tively manage our growth through acquisitions which could adversely affect our results. In this regard, our acquisition of iWeb in late 2013 may not provide all of the benefits we anticipate and we may not be successful in our integration of iWeb, either of which could negatively impact our business. RISKS RELATED TO OUR CAPITAL STOCK AND OTHER BUSINESS RISKS We have a history of losses and may not sustain profitability. For the years ended December 31, 2014, 2013 and 2012, we incurred net losses of $39.5 million, $19.8 mil- lion and $4.3 million, respectively. At December 31, 2014, our accumulated deficit was $1.1 billion. Given the competitive and evolving nature of the industry in which we operate, we may not be able to achieve or sustain profitability, and our failure to do so could mate- rially and adversely affect our business, including our ability to raise additional funds. Failure to sustain our revenues will cause our busi- ness and financial results to suffer. We have considerable fixed expenses, and we expect to continue to incur significant expenses, particularly 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. There- fore, we must at least sustain revenues to maintain prof- itability. Numerous factors could affect our ability to sustain rev- enue, either alone or in combination with other factors, including: • failure to sustain sales of our services; • pricing pressures; • significant increases in cost of goods sold or other operating expenses; • failure of our services 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; • customers’ failure to pay on a timely basis or at all or failure to continue to purchase our IT infrastructure services in accordance with their contractual commit- ments; or • network failures and any breach or unauthorized access to our network. 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; • fluctuations in the demand and sales cycle for 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 P-NAPs at favorable prices; loop connections to our • general economic conditions; and • any impairments or restructurings charges that we may incur in the future. 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 capi- tal expenditures such as those associated with the expansion of our data center facilities, the deployment of additional P-NAPs, the terms of our network connec- tivity purchase agreements and the cost of servers, storage and other equipment necessary to deploy host- ing and cloud services. 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 fluc- tuations in revenue. We can offer no assurance that the results of any particular 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 business plan. We may incur additional goodwill and other intan- gible asset impairment charges, restructuring charges or both. The assumptions, inputs and judgments used in per- forming the valuation analysis and assessments of goodwill and other intangible assets are inherently sub- jective and reflect estimates based on known facts and circumstances at the time the valuation is performed. The use of different assumptions, inputs and judgments or changes in circumstances could materially affect the 17 Internap 2014 Form 10-K Part I Item 1A. Risk Factors 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 estima- tion. 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 regard- ing impairment and restructuring charges include prob- abilities 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 will pay for the avail- able space, such estimates are inherently vulnerable to changes due to unforeseen circumstances that could materially and adversely affect our results of operations. Adverse changes in any of these factors could result in an additional impairment and restructuring charges in the future. 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 factors could cause the price of our common stock in the pub- lic market to fluctuate significantly: • actual or anticipated variations in our quarterly and annual results of operations; • changes in market valuations of companies in the industries in which we may compete; • 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. Our stockholders may experience significant dilu- tion, 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, 2014, options to purchase an aggregate of 5.9 million shares of our common stock at a weighted average exercise price of $7.07 were outstanding. Also, the vest- ing of 0.8 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 of stock awards to our executives and employees, in financing transactions or otherwise, could depress the market price of our common stock by increasing the number of shares of common stock or other securities outstanding on an absolute basis or as a result of the timing of additional shares of common stock becoming available on the market. Our existing credit agreement places certain limita- tions on us. Our existing credit agreement requires us to meet cer- tain financial covenants related to maximum total lever- age ratio, minimum consolidated interest coverage ratio and limitation on capital expenditures, as well as nega- tive and reporting covenants. In addition, these cov- enants create liens on a majority our assets. 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 lenders ceasing to make loans or extending credit to us, accelerating or declaring all or any obliga- tions immediately due or taking possession of or liqui- dating 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, or at all, 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. Any failure to meet our debt obligations and other long-term commitments would damage our busi- ness. As of December 31, 2014, our total debt, including capi- tal leases, was $367.1 million. If we use more cash than we generate in the future, our level of indebtedness could adversely affect our future operations by increas- ing our vulnerability to adverse changes in general eco- nomic and industry conditions and by limiting or prohib- iting 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 operat- ing leases and service and purchase contracts totaling 18 Internap 2014 Form 10-K Part I Item 1A. Risk Factors $130.5 million in the future with a minimum of $43.3 mil- lion payable in 2015. 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 ability to use U.S. net operating loss car- ryforwards might be limited. As of December 31, 2014, we had net operating loss carryforwards of $208.8 million for U.S. federal tax pur- poses. These loss carryforwards expire between 2018 and 2034. To the extent these net operating loss car- ryforwards 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 corpora- tion 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. If we fail to adequately protect our intellectual prop- erty, we may lose rights to some of our most valu- able assets. We rely on a combination of patent, trademark, trade secret and other intellectual property law, nondisclosure agreements and other protective measures to protect our proprietary rights. We also utilize unpatented propri- etary 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 the steps we have taken to protect our intellectual prop- erty will be sufficient to prevent misappropriation of our technology, or that our trade secrets will not become known or be independently discovered by competitors. In addition, the laws of many foreign countries do not protect our intellectual property to the same extent as the laws of the U.S. 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 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. Changes to conform to new accounting principles and/or financial regulation may be costly and disrupt our current planning, analysis and reporting pro- cesses. Accounting oversight bodies in the U.S. and internation- ally are actively contemplating and enacting a number of new accounting regulations. To comply with these changes, we may need to incur a significant amount of time and resources to adapt personnel, processes, reporting and systems. The newly issued guidance under generally accepted accounting principles in the U.S. (“GAAP”) provides a single model for revenue aris- ing from contracts with customers and supersedes cur- rent revenue recognition guidance and, while still under our review, could significantly change our results of operations and related disclosures. Likewise, changes proposed to current lease accounting guidance under GAAP would require reclassification of most of our operating leases to capital lease treatment and would significantly change the nature of our balance sheet. In addition, laws relating to public company governance practices, such as the Dodd-Frank Act Wall Street Reform and Consumer Protection Act which is being implemented over time, have modified existing corpo- rate governance practices and potentially increase liability related to stockholder actions, whistleblower claims and governmental enforcement actions. While we have implemented internal practices to proactively review, assess and adapt to constantly changing regulations, we cannot predict with certainty the impact, if any, that future regulation or regulatory changes may have on our business or the potential costs we may incur related to compliance with new laws and regulations. We may face litigation and liability due to claims of infringement of third-party intellectual property rights and due to our customers’ use of our IT infra- structure services. The IT infrastructure services industry is characterized by the existence of a large number of patents and fre- quent litigation based on allegations of patent infringe- ment. From time-to-time, third parties may assert pat- ent, copyright, trademark, trade secret and other intellectual property rights to technologies that are important to our business. Any claims that our IT infra- structure services infringe or may infringe proprietary rights of third parties, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical 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 require us to indemnify our customers for expenses and liabilities 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 suc- cessful, 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. In addition, our customers use our IT infrastructure ser- vices to operate and run certain aspects and functions of their businesses. From time-to-time, third parties may assert that our customers’ businesses, including the business aspects and functions for which they use our 19 Internap 2014 Form 10-K Item 2. PROPERTIES Our principal executive offices are located in Atlanta, Georgia. Our Atlanta headquarters consists of 62,000 square feet under a lease, with renewal options, that expires in 2019. Leased data center facilities in our top markets include Atlanta, Boston, Dallas, Houston, Los Angeles, Mon- treal, New York metro area, Northern California and Seattle. 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 com- mercially reasonable terms as needed. Item 3. LEGAL PROCEEDINGS We are subject to legal proceedings, claims and litiga- tion arising in the ordinary course of business. Although the outcome of these matters is currently not determin- able, 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. Item 4. MINE SAFETY DISCLOSURES Not applicable. Part I Item 1B. Unresolved Staff Comments IT infrastructure services, infringe patent, copyright, trademark, trade secret or other intellectual property or legal rights. Our customers’ businesses may also be subject to regulatory oversight, governmental investiga- tion, data breaches and lawsuits by their customers, competitors or other third parties based on a broad range of legal theories. Such third parties may seek to hold us liable on the basis of contributory or vicarious liability or other legal theories. Any such claims, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical and manage- ment personnel or require us to enter into royalty or licensing agreements, any of which could significantly impact our operating results. If any such claim against us were to be successful, damages could be significant and our ability to compete successfully in our market would be materially impaired. We do not expect to pay dividends on our common stock, and investors would only be able to receive cash in respect of the shares of common stock upon the sale of their shares. We have no intention in the foreseeable future to pay any cash dividends on our common stock, and the cov- enants in our credit agreement limit our ability to pay dividends. Therefore, an investor in our common stock may obtain an economic benefit from the common stock only after an increase in its trading price and only by selling the common stock. Provisions of our charter documents and Delaware law may have anti-takeover effects that could pre- vent a change in control even if the change in control would be beneficial to our stockholders. Provisions of our Certificate of Incorporation and Bylaws, and provisions of Delaware law, could discour- age, 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 coer- cive 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 stockhold- ers to elect directors and take other corporate actions. Item 1B. UNRESOLVED STAFF COMMENTS None. 20 Internap 2014 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, 2014: High Low Fourth Quarter Third Quarter Second Quarter First Quarter $8.35 7.39 7.68 8.50 $6.52 6.27 6.35 6.89 Year Ended December 31, 2013: High Low Fourth Quarter Third Quarter Second Quarter First Quarter $7.75 9.10 9.47 9.60 $6.51 6.66 7.82 6.80 As of February 2, 2015, we had approximately 600 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 divi- dends 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 com- mon 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, 2014 (shares in thousands): Equity Compensation Plan Information Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) Weighted-average exercise price of outstanding options, warrants and rights (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) 5,928 — 5,928 $7.07 — $7.07 4,232 — 4,232 Plan category Equity compensation plans approved by security holders(1) Equity compensation plans not approved by security holders Total (1) Employees consists of: 4,435,420 shares under the 2014 Stock Incentive Plan; 5,566,945 shares under the 2005 Incentive Stock Plan as amended; 35,389 shares under the 2000 Non-Officer Equity Incentive Plan and 122,080 shares under the 1999 Non-Employee Direc- tors’ Stock Option Plan. We may only issue equity under the 2014 Stock Incentive Plan. Each plan listed above contains customary anti- dilution provisions that are applicable in the event of a stock split or certain other changes in our capitalization. We have no publicly announced plans or programs for the repurchase of securities. On May 31, 2014, we issued 80,580 shares of common stock to our non-employee directors under the 2014 Stock Incentive Plan. We relied on the exemption set forth under Section 4(a)(2) of the Securities Act. 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, 2014: Period October 1 to 31, 2014 November 1 to 30, 2014 December 1 to 31, 2014 Total Total Number of Shares Purchased(1) 2,010 967 57,139 60,116 Average Price Paid per Share $6.91 8.04 7.75 $7.73 Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Approximate Dollar Value) of Shares 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. 21 Internap 2014 Form 10-K Part II Item 6. Selected Financial Data ITEM 6. SELECTED FINANCIAL DATA We have derived the selected financial data shown below from our audited consolidated financial state- ments. You should read the following in conjunction with the accompanying consolidated financial statements and related notes contained and “Management’s Dis- cussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K. Year Ended December 31, 2014 2013(1) 2012 2011(2) 2010 (in thousands, except per share data) Consolidated Statements of Operations and Comprehensive Loss Data: Revenues $334,959 $283,342 $273,592 $244,628 $244,164 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 and developed technologies Sales and marketing General and administrative Depreciation and amortization Loss (gain) on disposals of property and equipment, net Exit activities, restructuring and impairments Total operating costs and expenses (Loss) income from operations Non-operating expenses Loss before income taxes and equity in (earnings) of equity-method investment (Benefit) provision for income taxes Equity in (earnings) of equity-method investment, net of taxes Net loss Net loss per share: Basic and diluted 144,946 36,804 5,918 37,845 43,902 75,251 112 4,520 349,298 (14,339) 26,775 (41,114) (1,361) 132,012 29,687 4,967 31,800 42,759 48,181 130,954 26,664 4,718 31,343 38,635 36,147 120,310 21,278 3,500 29,715 33,952 36,926 9 (55) 37 1,414 1,422 2,833 127,423 19,861 3,811 29,232 33,048 30,158 116 1,411 290,829 269,828 248,551 245,060 (7,487) 12,841 (20,328) (285) 3,764 7,849 (4,085) 453 (3,923) 3,866 (7,789) (5,612) (896) 2,170 (3,066) 952 (259) (213) (220) (475) (396) $ (39,494) $ (19,830) $ (4,318) $ (1,702) $ (3,622) $ (0.77) $ (0.39) $ (0.09) $ (0.03) $ (0.07) 22 Internap 2014 Form 10-K Part II Item 6. Selected Financial Data Consolidated Balance Sheets Data: Cash and cash equivalents Total assets Credit facilities, due after one year, and capital lease obligations, less current portion Total stockholders’ equity Other Financial Data: Capital expenditures, net of equipment sale-leaseback transactions Net cash flows provided by operating activities Net cash flows used in investing activities Net cash flows provided by financing activities 2014 2013(1) 2012 2011(2) 2010 December 31, $ 20,084 591,784 $ 35,018 614,241 $ 28,553 400,712 $ 29,772 356,710 $ 59,582 293,142 356,686 150,336 346,800 182,210 136,555 195,605 94,673 192,170 37,889 188,611 Year Ended December 31, 2014 2013 2012 2011 2010 $ 77,408 53,248 (75,727) 7,924 $ 62,798 33,683 (208,086) 180,810 $ 74,947 43,742 (79,697) 34,571 $ 68,542 28,630 (96,265) 37,901 $ 62,184 39,602 (55,184) 1,224 (1) On November 26, 2013, we completed our acquisition of iWeb. We allocated the purchase price to iWeb’s net tangible and intangible assets based on their estimated fair values as of November 26, 2013. We recorded the excess purchase price over the value of the net tangible and identifiable intangible assets as goodwill. (2) On December 30, 2011, we completed our acquisition of Voxel Holdings, Inc. (“Voxel”). We allocated the purchase price to Voxel’s net tangible and intangible assets based on their estimated fair values as of December 30, 2011. We recorded the excess purchase price over the value of the net tangible and identifiable intangible assets as goodwill. In addition, as a result of our purchase price accounting, our net loss was reduced by a $6.1 million deferred tax benefit that offset our existing income tax expense of $0.5 million. 23 Internap 2014 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 on Form 10-K. 2014 FINANCIAL HIGHLIGHTS AND OUTLOOK BUSINESS PERFORMANCE We continued to focus on profitable growth in 2014 through three primary initiatives: enhancing margin through new product offerings and product mix shift; expanding capacity to support growth; and extending our routes to market via online, e-commerce channels. Enhancing Margin We continued our efforts to shift our product mix to the more profitable parts of our business, specifically core data center services, which includes company- controlled colocation, hosting and cloud services, including revenues attributable to iWeb, as well as increasing the average revenue per customer through new product offerings, including hybridized solutions. Shifting our product mix to higher margin core data cen- ter services allows us to more efficiently utilize our company-controlled data center space and increase the revenue per square foot of occupied space. Addition- ally, we believe our ability to increase average revenue per customer is indicative of not only the trend toward companies outsourcing their IT services, but also reflec- tive of our ability to capture a larger proportion of the enterprise customers spend for high performance IT infrastructure services. Total revenue increased 18% to $335.0 million for the year ended December 31, 2014, compared to $283.3 million for the same period in 2013. Core data center services revenue increased 46% to $195.4 million for the year ended December 31, 2014, compared to $134.0 million for the same period in 2013. Core data center services revenue represents 81% of data center services segment revenue and 58% of total revenue for the year ended December 31, 2014, compared to 72% and 47%, respectively, for the same period in 2013. Adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) margin, a non-GAAP per- formance measure, increased 300 basis points to 23.5% for the year ended December 31, 2014, com- pared to 20.5% for the same period in 2013. We calcu- late adjusted EBITDA margin as adjusted EBITDA, defined below in “—Non-GAAP Financial Measure,” as a percentage of revenues. We will continue to focus on enhancing margin in 2015 through product mix shift, hybridized product offerings and other efficiency initia- tives. Expanding Capacity Our services are dependent on premium data center space with sufficient power. We will continue our focus on efficiently utilizing our existing space and power and investing in additional company-controlled space and power to support our growth. During 2014, we spent $77.4 million on capital expenditures to upgrade exist- ing space and power, procure new space and power, procure hardware and software and make other invest- ments to grow our business. At December 31, 2014, we had approximately 284,000 net sellable square feet of data center space with a uti- lization rate of 60%, compared to approximately 292,000 net sellable square feet of data center space with a utilization rate of 60% at December 31, 2013. At December 31, 2014 and 2013, 80% and 79%, respec- tively, of our total net sellable square feet were in company-controlled data centers versus 20% and 21%, respectively, in partner sites. Our services also depend on procurement of bandwidth from our underlying network service providers to meet our current and future needs. During 2014, overall band- width traffic increased approximately 55% compared to 2013, calculated based on an average over the number of months in the respective periods. Extending our Routes to Market Our strategy is to leverage the benefits of multiple routes to market, including online e-commerce, direct sales and channel sales programs. Historically, we have relied largely on a direct enterprise sales route to market. More recently, we have augmented our direct enterprise sales route to market with investment in our channel sales program selling into the same target enterprise cus- tomer base. Additionally, as we see our target custom- ers become increasingly comfortable procuring IT infra- structure services online, we are leveraging our product portfolio through an expansion of our online e-commerce route to market. During 2014, we expanded our online e-commerce route to market and increased sales delivered through this route to roughly 25% of sales from roughly 5% in 2013, primarily through our acquisition of iWeb in December 2013. This route- to-market capability includes extensive inbound/ outbound digital marketing, multi-lingual sales, cam- paign management and customer support skill sets. We believe there is a significant opportunity to leverage our online e-commerce route to market capabilities to sell IT infrastructure services across our global footprint to an increasingly international customer base. We seek to leverage diverse routes to market across a common platform of IT infrastructure services and maximize the opportunity for profitable growth while simultaneously minimizing the risk of incremental capital investment. 24 Internap 2014 Form 10-K Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations NON-GAAP FINANCIAL MEASURES We report our consolidated financial statements in accordance with GAAP. We present the non-GAAP per- formance measures of adjusted EBITDA and adjusted EBITDA margin, discussed above in “—2014 Financial Highlights and Outlook,” to assist us in explaining underlying performance trends in our business, which we believe will enhance investors’ ability to analyze trends in our business and evaluate our performance relative to other companies. We define adjusted EBITDA as (loss) income from operations plus depreciation and amortization, loss (gain) on disposals of property and equipment, exit activities, restructuring and impair- ments, stock-based compensation and acquisition costs. As a non-GAAP financial measure, adjusted EBITDA should not be considered in isolation of, or as a substi- tute for, net loss or other GAAP measures as an indica- tor of operating performance. In addition, adjusted EBITDA should not be considered as an alternative to income from operations or net loss as a measure of operating performance. Our calculation of adjusted EBITDA may differ from others in our industry and is not necessarily comparable with similar titles used by other companies. The following table reconciles adjusted EBITDA to (loss) income from operations as presented in our consolidated statements of operations and comprehensive loss: (Loss) income from operations Depreciation and amortization, including amortization of acquired and developed technologies Loss (gain) on disposals of property and equipment, net Exit activities, restructuring and impairments Stock-based compensation Acquisition costs Adjusted EBITDA Year Ended December 31, 2014 2013 2012 $(14,339) $ (7,487) $ 3,764 81,169 112 4,520 7,182 85 53,148 9 1,414 6,743 4,210 40,865 (55) 1,422 5,858 — $ 78,729 $58,037 $51,854 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 GAAP. The preparation of these finan- cial statements requires management to make esti- mates 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 summarized below. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circum- stances; 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. In addition to our significant accounting policies sum- marized in note 2 to our accompanying consolidated financial statements, we believe the following policies are the most sensitive to judgments and estimates in the preparation of our consolidated financial statements. Revenue Recognition We generate revenues primarily from the sale of data center services, including colocation, hosting and cloud, and IP services. Our revenues typically consist of monthly recurring revenues from contracts with terms of one year or more and we typically recognize the monthly minimum as revenue each month. We record installation fees as deferred revenue and recognize the revenue rat- ably over the estimated customer life, which was approximately six years for 2014 and 2013 and five years for 2012. For multiple-deliverable revenue arrangements we allo- cate arrangement consideration at the inception of an arrangement to all deliverables using the relative selling price method. The hierarchy for determining the selling price of a deliverable includes (a) vendor-specific objec- tive evidence, if available, (b) third-party evidence, if vendor-specific objective evidence is not available and (c) best estimated selling price, if neither vendor- specific nor third-party evidence is available. We determine third-party evidence based on the prices charged by our competitors for a similar deliverable when sold separately. Our determination of best esti- mated selling price involves a weighting of several fac- tors including, but not limited to, pricing practices and market conditions. We analyze the selling prices used in our allocation of arrangement consideration on an annual basis at a minimum. We account for each deliverable within a multiple- deliverable revenue arrangement as a separate unit of accounting if both of the following criteria are met: (a) the delivered item or items have value to the cus- tomer on a standalone basis and (b) for an arrangement that includes a general right of return relative to the 25 Internap 2014 Form 10-K Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations delivered item(s), we consider delivery or performance of the undelivered item(s) probable and substantially in our control. We consider a deliverable to have stand- alone value if we sell this item separately or if the item is sold by another vendor or could be resold by the cus- tomer. Further, our revenue arrangements generally do not include a right of return for delivered services. We combine deliverables not meeting the criteria for being a separate unit of accounting with a deliverable that does meet that criterion. We then determine the appropriate allocation of arrangement consideration and recognition of revenue for the combined unit of accounting. known facts and circumstances at the time we perform the valuation. These estimates and assumptions primar- ily include, but are not limited to, discount rates; termi- nal growth rates; projected revenues and costs; pro- jected EBITDA for expected cash flows; market comparables and capital expenditures forecasts. The use of different 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. 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 reasonably assured. Additionally, we maintain an allowance for doubtful accounts resulting from the inability of our cus- tomers to make required payments on accounts receiv- able. We base the allowance for doubtful accounts upon general customer information, which primarily includes our historical cash collection experience 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 consid- ered past-due. Once we have exhausted all collection efforts, we write the uncollectible balance off against the allowance for doubtful accounts. In addition, we record a reserve amount for potential credits to be issued under our SLAs and other sales adjustments. Goodwill and Other Intangible and Long-lived Assets Our annual assessment of goodwill for impairment, per- formed each year on August 1 absent any impairment indicators or other changes that may cause more fre- quent analysis, includes comparing the fair value of each reporting unit to the carrying value, referred to as “step one.” We estimate fair value using a combination 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 fur- ther testing is necessary. If the carrying value of a reporting unit exceeds its fair value, we perform a sec- ond test, referred to as “step two,” 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. Our assumptions, inputs and judg- ments used in performing the valuation analysis are inherently subjective and reflect estimates based on Other intangible assets have finite lives and we record these assets at cost less accumulated amortization. We record amortization of acquired technologies using the greater of (a) the ratio of current revenues to total and anticipated future revenues for the applicable technol- ogy or (b) the straight-line method over the remaining estimated economic life. We amortize the cost of the acquired technologies over their useful lives of five to eight years and 10 to 30 years for customer relation- ships and trade names. We assess other intangible assets and long-lived assets on a quarterly basis when- ever any events have occurred or circumstances have changed that would indicate impairment could exist. Our assessment is based on estimated future cash flows directly associated with the asset or asset group. If we determine that the carrying value is not recover- able, we may record an impairment charge, reduce the estimated remaining useful life or both. During 2014, 2013 and 2012, we concluded that an impairment indicator existed to cause us to reassess certain property and equipment. Following the reas- sessment, further described in note 5 to our accompa- nying consolidated financial statements, we recorded an impairment charge of $0.5 million, $0.5 million and $0.4 million, respectively, which we include in “Exit activities, restructuring and impairments” on the accompanying consolidated statements of operations and comprehensive loss. Property and Equipment We carry property and equipment at original acquisition cost less accumulated depreciation and amortization. We calculate depreciation and amortization on a straight-line basis over the estimated useful lives of the assets. Estimated useful lives used for network equip- ment are generally five years; furniture, equipment and software are three to seven years; and leasehold improvements are 10 to 25 years or over the lease term, depending on the nature of the improvement. We capi- talize additions and improvements that increase the value or extend the life of an asset. We expense mainte- nance and repairs as incurred. We charge gains or losses from disposals of property and equipment to operations. Exit Activities and Restructuring When circumstances warrant, we may elect to exit cer- tain business activities or change the manner in which we conduct ongoing operations. If we make such a 26 Internap 2014 Form 10-K Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 estima- tion. If circumstances warrant, we will adjust our previ- ous estimates to reflect what we then believe to be a more accurate representation of expected future costs. Because our estimates and assumptions regarding exit activities and 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 operations. 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 less than $0.1 million in additional restructuring charges in the consolidated statements of operations and comprehensive loss during the period in which the change in estimate occurred. We monitor market condi- tions at each period end reporting date and will continue to assess our key assumptions and estimates used in the calculation of our exit activities and restructuring accrual. Income Taxes We recognize the tax benefit from an uncertain tax posi- tion only if it is more likely than not that the tax position will be sustained on examination by the taxing authori- ties, based on the technical merits of the position. We measure the tax benefits recognized in our accompany- ing consolidated financial statements from such a posi- tion based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. We recognize interest and penalties related to uncertain tax positions as part of the provision for income taxes and we accrue such items beginning in the period that such interest and penalties would be applicable under rel- evant tax law until such time that we recognize the related tax benefits. We maintain a valuation allowance to reduce our deferred tax assets to their estimated realizable value. Although we consider the potential for future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allow- ance, if 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 we made such determination. We may recognize deferred tax assets in future periods if and when we estimate them to be realizable and supported by historical trends of profitability and expectations of future profits within each tax jurisdiction. evidence to expect a release of our valuation allowance against our U.S. deferred tax assets currently or within the next 12 months. We reached the same conclusion regarding our foreign jurisdictions, other than the United Kingdom (“U.K.”) and Canada. Accordingly, we con- tinue to maintain the full valuation allowance in the U.S. and all foreign jurisdictions, other than the U.K. and Canada. 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 service period, generally the vesting period of the award. The fair value of restricted stock is the mar- ket value on the date of grant. The fair value of stock options is estimated at the grant date using the Black- Scholes option pricing model with weighted average assumptions for the 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 forfei- ture rate impacts the amount of aggregate compensa- tion. These assumptions 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 out- standing, considering the vesting schedules and our historical exercise patterns. Because our options are not publicly traded, we assume volatility based on the his- torical 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 option term. We have also used historical data to esti- mate option exercises, employee termination and stock option forfeiture rates. Changes in any of these assump- tions could materially impact our results of operations in the period the change is made. Capitalized Software Costs We capitalize software development costs incurred dur- ing the application development stage. Amortization begins once the software is ready for its intended use and is computed based on the straight-line method over the economic life. Judgment is required in determining which software projects are capitalized and the resulting economic life. Recent Accounting Pronouncements Recent accounting pronouncements are summarized in note 2 to the accompanying consolidated financial statements. RESULTS OF OPERATIONS Revenues Based on an analysis of our historic and projected future U.S. pre-tax income, we do not have sufficient positive We generate revenues primarily from the sale of data center services and IP services. 27 Internap 2014 Form 10-K Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 ISPs and com- petitive local exchange providers; • facility and occupancy costs, including power and utilities, for hosting and operating our equipment and hosting our customers’ equipment; • costs incurred for providing additional third party ser- vices to our customers; and • royalties and costs of license fees for operating sys- tems software. If a network access point is not colocated with the loop respective ISP, we may incur additional charges on a recurring basis. Connectivity costs vary depending on customer demands and pricing variables while P-NAP facility costs are generally fixed. Direct costs of network, sales and services do not include compensation, depreciation or amortization. local Direct Costs of Customer Support Direct costs of customer support consist primarily of compensation and other personnel costs for employees engaged in connecting customers to our network, installing customer equipment into P-NAP facilities and servicing customers through our NOCs. In addition, direct costs of customer support include facilities costs associated with the NOCs, including costs related to servicing our data center customers. Direct Costs of Amortization of Acquired and Developed Technologies Direct costs of amortization of acquired and developed technologies are for technologies that are an integral part of the services we sell, which were acquired through business combinations or developed internally. We record amortization using the greater of (a) the ratio of current revenues to total and anticipated future rev- enues for the applicable technology or (b) the straight- line method over the remaining estimated economic life. We amortize the cost over their useful lives of five to eight years. At December 31, 2014, the carrying value of the acquired and developed technologies was $11.8 million and the weighted average remaining life was approximately four years. Sales and Marketing Sales and marketing costs consist of compensation, commissions, bonuses and other costs for personnel engaged in marketing, sales and field service support functions, and advertising, online marketing, tradeshows, direct response programs, facility open houses, 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 adminis- trative personnel, professional fees and other general corporate costs. General and administrative costs also include consultant fees and non-capitalized prototype costs related to the design, development and testing of our proprietary technology, enhancement of our net- work management software and development of inter- nal 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 development costs as incurred. 28 Internap 2014 Form 10-K Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The following table sets forth selected consolidated statements of operations and comprehensive loss data during the periods presented, including comparative information between the periods (dollars in thousands): Year Ended December 31, Increase (decrease) from 2013 to 2014 Increase (decrease) from 2012 to 2013 2014 2013 2012 Amount Percent Amount Percent Revenues: Data center services: Core Partner $195,373 47,250 $133,970 51,177 $113,399 53,887 $61,403 (3,927) 46% $ 20,571 (2,710) (8) Total data center services IP services 242,623 92,336 185,147 98,195 167,286 106,306 57,476 (5,859) Total revenues 334,959 283,342 273,592 51,617 31 (6) 18 17,861 (8,111) 9,750 Operating costs and expenses: Direct costs of network, sales and services, exclusive of depreciation and amortization, shown below: Data center services: Core Partner Total data center services IP services Direct costs of customer support Direct costs of amortization of acquired and developed technologies Sales and marketing General and administrative Depreciation and amortization Loss (gain) on disposal of property and equipment, net Exit activities, restructuring and 70,998 35,161 106,159 38,787 36,804 5,918 37,845 43,902 75,251 55,270 37,294 92,564 39,448 29,687 4,967 31,800 42,759 48,181 51,081 39,523 90,604 40,350 26,664 4,718 31,343 38,635 36,147 15,728 (2,133) 13,595 (661) 7,117 951 6,045 1,143 27,070 112 9 (55) 103 impairments 4,520 1,414 1,422 3,106 Total operating costs and expenses 349,298 290,829 269,828 58,469 28 (6) 15 (2) 24 19 19 3 56 — 220 20 4,189 (2,229) 1,960 (902) 3,023 249 457 4,124 12,034 64 (8) 21,001 18% (5) 11 (8) 4 8 (6) 2 (2) 11 5 1 11 33 116 (1) 8 (Loss) income from operations $ (14,339) $ (7,487) $ 3,764 $ (6,852) (92) $(11,251) (299) Interest expense $ 26,742 $ 11,346 $ 7,566 $15,396 136 $ 3,780 50 (Benefit) provision for income taxes $ (1,361) $ (285) $ 453 $ (1,076) (378)% $ (738) (163)% 29 Internap 2014 Form 10-K Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Segment Information We operate in two business segments: data center services and IP services. Segment results for each of the three years ended December 31, 2014 are summarized as follows (in thousands): Revenues: Data center services IP services Total revenues Direct costs of network, sales and services, exclusive of depreciation and amortization: Data center services IP services Total direct costs of network, sales and services, exclusive of depreciation and amortization Segment profit: Data center services IP services Total segment profit Exit activities, restructuring and impairments Other operating expenses, including direct costs of customer support, depreciation and amortization (Loss) income from operations Non-operating expense Year Ended December 31, 2014 2013 2012 $242,623 92,336 $185,147 98,195 $167,286 106,306 334,959 283,342 273,592 106,159 38,787 92,564 39,448 90,604 40,350 144,946 132,012 130,954 136,464 53,549 190,013 4,520 92,583 58,747 151,330 1,414 76,682 65,956 142,638 1,422 199,832 157,403 137,452 (14,339) 26,775 (7,487) 12,841 3,764 7,849 Loss before income taxes and equity in (earnings) of equity-method investment $ (41,114) $ (20,328) $ (4,085) Segment profit is calculated as segment revenues less direct costs of network, sales and services, exclusive of depreciation and amortization for the segment and does not include direct costs of customer support, direct costs of amortization of acquired technologies or any other depreciation or amortization associated with direct costs. We view direct costs of network, sales and services as generally less-controllable, external costs and we regularly monitor the margin of revenues in excess of these direct costs. We also view the costs of customer support to be an important component of costs of revenues, but believe that the costs of cus- tomer support are more within our control and, to some degree, discretionary in that we can adjust those costs by managing personnel needs. We also have excluded depreciation and amortization from segment profit because it is 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 foregoing reasons, that our presentation of segment profit non- GAAP financial presentation 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. YEARS ENDED DECEMBER 31, 2014 AND 2013 Data Center Services Revenues for data center services increased 31% to $242.6 million for the year ended December 31, 2014, compared to $185.1 million for the same period in 2013. The increase was primarily due to net revenue growth in our core data center services, which includes company- controlled colocation, hosting and cloud services, and $43.2 million of revenue attributable to iWeb. Revenue growth has benefited from higher average revenue per customer and the capturing of a larger proportion of the enterprise customer spend for high performance ser- vices with our hybrid platform of colocation, hosting and cloud services. In addition, the benefit of our hybrid strategy is also reflected in an increase in the revenue per square foot generated from our company-controlled data centers. Direct costs of data center services, exclusive of depre- ciation and amortization, increased 15% to $106.2 mil- lion for the year ended December 31, 2014, compared to $92.6 million for the same period in 2013. The increase in direct costs was primarily due to revenue growth, with an increasing proportion of higher margin core data center services, and $7.8 million of direct costs attributable to iWeb, offset by cost reduction efforts. 30 Internap 2014 Form 10-K Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Direct costs of data center services, exclusive of depre- ciation and amortization, have substantial fixed cost components, primarily rent for operating leases, but also significant demand-based pricing variables, such as utilities attributable to seasonal costs and customers’ changing power requirements. Direct costs of data cen- ter services as a percentage of revenues vary with the mix of usage between company-controlled data centers and partner sites and the utilization of total available space. Since we recognize some of the initial operating costs of company-controlled data centers in advance of revenues or in advance of sites being fully utilized, these sites are less profitable in the early years of operation compared to partner sites and we expect them to be more profitable as occupancy increases. Conversely, costs in partner sites are more demand-based and therefore are more closely associated with the level of utilization. We will continue to focus on increasing revenues from company-controlled facilities as compared to partner sites. We also expect direct costs of data center ser- vices as a percentage of corresponding revenues to decrease as our new and recently-expanded company- controlled data centers continue to contribute to rev- enue and become more fully occupied. This is evi- denced by the improvement in direct costs of data center services as a percentage of corresponding rev- enues of 44% during the year ended December 31, 2014, compared to 50% during the same period in 2013. IP Services Revenues for IP services decreased 6% to $92.3 million for the year ended December 31, 2014, compared to $98.2 million for the same period in 2013. The decrease continues to be driven by a decline in IP pricing for new and renewing customers and the loss of legacy con- tracts, partially offset by an increase in overall traffic. IP traffic increased approximately 11% for the year ended December 31, 2014, compared to the same period in 2013, calculated based on an average over the number of months in the respective periods. Direct costs of IP services, exclusive of depreciation and amortization, decreased 2% to $38.8 million for the year ended December 31, 2014, compared to $39.4 mil- lion for the same period in 2013. This decrease was pri- marily due to renegotiation of vendor contracts and cost reduction efforts. There have been ongoing industry-wide pricing declines over the last several years and this trend continued dur- ing 2014. Technological improvements and excess capacity have been the primary drivers for lower pricing of IP services. The increase in IP traffic resulted from both new and existing customers. Other Operating Costs and Expenses Compensation. Total compensation and benefits, including stock-based compensation, were $81.0 mil- lion and $71.1 million for the years ended December 31, 2014 and 2013, respectively. The increase was primarily due to $12.0 million of expenses attributable to iWeb, partially offset by a $1.3 million decrease in cash-based compensation and a $0.9 million decrease in stock- based compensation. Stock-based compensation, net of amount capitalized, increased to $7.2 million during the year ended Decem- ber 31, 2014 from $6.7 million during the same period in 2013. The increase was primarily due to $1.3 million of expense for grants to certain iWeb employees after the acquisition, offset by a $0.9 million decrease in stock- based compensation unrelated to iWeb. The following table summarizes the amount of stock-based compen- sation, net of estimated forfeitures, included in the accompanying consolidated statements of operations and comprehensive loss (in thousands): Direct costs of customer support Sales and marketing General and administrative 2014 $1,448 1,147 4,587 $7,182 2013 $1,108 1,110 4,525 $6,743 Direct Costs of Customer Support. Direct costs of customer support increased 24% to $36.8 million dur- ing the year ended December 31, 2014 from $29.7 mil- lion during the same period in 2013. The increase was primarily due to $6.6 million of expenses attributable to iWeb. Direct Costs of Amortization of Acquired and Devel- oped Technologies. Direct costs of amortization of acquired and developed technologies increased 19% to $5.9 million during the year ended December 31, 2014 from $5.0 million during the same period in 2013. The increase was primarily due to amortization of acquired intangibles from the iWeb acquisition. Sales and Marketing. Sales and marketing costs increased 19% to $37.8 million during the year ended December 31, 2014 from $31.8 million during the same period in 2013. The increase was primarily due to $5.9 million of expenses related to iWeb and a $0.5 million increase in agent fees. General and Administrative. General and administra- tive costs increased 3% to $43.9 million during the year ended December 31, 2014 from $42.8 million during the same period in 2013. The increase was primarily due to $8.1 million of expenses attributable to iWeb, partially offset by a $3.3 million decrease in outside professional services, a $1.1 million decrease in bad debt expense, a $0.9 million decrease in stock-based compensation unrelated to iWeb, a $0.7 million decrease in cash- based compensation and a $0.5 million decrease in net taxes as a result of passing additional taxes through to our customers. Depreciation and Amortization. Depreciation and amortization increased 56% to $75.3 million during the year ended December 31, 2014 from $48.2 million dur- ing the same period in 2013. The increase was primarily due to the effects of expanding our company-controlled data centers, including increased power capacity and servers, network infrastructure and capitalized software, 31 Internap 2014 Form 10-K Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and $11.6 million of expense attributable to iWeb related to the amortization for the acquired assets at purchase price accounting values. Exit Activities, Restructuring and Impairments. Exit activities and impairments increased 220% to $4.5 mil- lion during the year ended December 31, 2014 from $1.4 million during the same period in 2013. The increase was primarily due to initial exit activity charges related to ceasing use of certain data center space of $3.5 million, as well as plan adjustments in sublease income assumptions for certain properties included in our previously-disclosed plans of $1.1 million. Interest Expense. Interest expense increased 136% to $26.7 million during the year ended December 31, 2014 from $11.3 million during the same period in 2013. The increase was due to increased borrowings and interest rate under our credit agreement. Benefit for Income Taxes. The benefit for income taxes increased 378% to $1.4 million during the year ended December 31, 2014 from $0.3 million during the same period in 2013. The variance was primarily due to an income tax benefit created by the activity of iWeb and the reduction of a prior year uncertain tax position reserve. Our effective income tax rate, as a percentage of pre-tax income, for the years ended December 31, 2014 and 2013, was (3%) and (1%), respectively. The fluctuation in the effective income tax rate was primarily due to a reduction of the prior year uncertain tax position reserve and an income tax benefit created by iWeb for a full 12-month period. YEARS ENDED DECEMBER 31, 2013 AND 2012 Data Center Services Revenues for data center services increased 11% to $185.1 million for the year ended December 31, 2013, compared to $167.3 million for the same period in 2012. The increase was primarily due to net revenue growth in company-controlled colocation, hosting and cloud ser- vices and $3.6 million of revenue attributable to iWeb. Direct costs of data center services, exclusive of depre- ciation and amortization, increased 2% to $92.6 million for the year ended December 31, 2013, compared to $90.6 million for the same period in 2012. The increase in direct costs was primarily due to revenue growth and $1.0 million of direct costs attributable to iWeb, offset by cost reduction efforts. IP Services Revenues for IP services decreased 8% to $98.2 million for the year ended December 31, 2013, compared to $106.3 million for the same period in 2012. The decrease was driven by a decline in IP pricing for new and renewing customers and the loss of legacy con- tracts, partially offset by an increase in overall traffic. IP traffic increased approximately 16% for the year ended December 31, 2013, compared to the same period in 2012, calculated based on an average over the number of months in the respective periods. Direct costs of IP services, exclusive of depreciation and amortization, decreased 2% to $39.4 million for the year ended December 31, 2013, compared to $40.4 mil- lion for the same period in 2012. This decrease was pri- marily due to renegotiation of vendor contracts and cost reduction efforts. Other Operating Costs and Expenses Compensation. Total compensation and benefits, including stock-based compensation, were $71.1 mil- lion and $67.5 million for the years ended December 31, 2013 and 2012, respectively. The variance was primarily due to a $2.5 million increase related to a higher employee headcount and increased salary levels, a $0.9 million increase in stock-based compensation and $1.3 million of expenses attributable to iWeb, partially offset by a $0.9 million decrease in commissions. Stock-based compensation, net of amount capitalized, increased to $6.7 million during the year ended Decem- ber 31, 2013 from $5.9 million during the same period in 2012. The increase was primarily due to the expense associated with option grants valued higher than in pre- vious years. The following table summarizes the amount of stock-based compensation, net of estimated forfei- tures, included in the accompanying consolidated statements of operations and comprehensive loss (in thousands): Direct costs of customer support Sales and marketing General and administrative 2013 $1,108 1,110 4,525 $6,743 2012 $ 936 929 3,993 $5,858 Direct Costs of Customer Support. Direct costs of customer support increased 11% to $29.7 million dur- ing the year ended December 31, 2013 from $26.7 mil- lion during the same period in 2012. The increase was primarily due to a $2.4 million increase in cash-based compensation and payroll taxes and $0.7 million of expenses attributable to iWeb. Direct Costs of Amortization of Acquired and Devel- oped Technologies. Direct costs of amortization of acquired and developed technologies were $5.0 million and $4.7 million during the years ended December 31, 2013 and 2012, respectively. Sales and Marketing. Sales and marketing costs increased 1% to $31.8 million during the year ended December 31, 2013 from $31.3 million during the same period in 2012. The increase was primarily due to $0.7 million of expenses related to iWeb. General and Administrative. General and administra- tive costs increased 11% to $42.8 million during the year ended December 31, 2013 from $38.6 million dur- ing the same period in 2012. The increase was primarily due to a $2.2 million increase in outside professional 32 Internap 2014 Form 10-K Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations services, a $0.9 million increase in bad debt expense, a $0.4 million increase in cash-based compensation costs and payroll taxes, a $0.4 million increase in stock- based compensation and $0.5 million of expenses attributable to iWeb, partially offset by a $0.4 million decrease in bonus compensation accrual and sever- ance. Depreciation and Amortization. Depreciation and amortization was $48.2 million and $36.1 million during the years ended December 31, 2013 and 2012, respec- tively. The increase was primarily due to the effects of expanding our company-controlled data centers, P-NAP infrastructure and capitalized software and $1.0 million of expense attributable to iWeb. Exit Activities, Restructuring and Impairments. For the years ended December 31, 2013 and December 31, 2012, exit activities, restructuring and impairments were $1.4 million. Interest Expense. Interest expense increased to $11.3 million during the year ended December 31, 2013, com- pared to $7.6 million during the same period in 2012. The increase in interest expense was primarily due to new capital lease obligations related to expanding our company-controlled data centers and the increase in our borrowings under our term loan and revolving credit facility. (Benefit) Provision for Income Taxes. The (benefit) provision for income taxes was ($0.3 million) and $0.5 million during the years ended December 31, 2013 and 2012, respectively. The variance was primarily due to income tax benefits created by reducing the prior years’ uncertain tax position reserve and the activity of iWeb. Our effective income tax rate, as a percentage of pre-tax income, for the years ended December 31, 2013 and 2012, was (1%) and 11%, respectively. The fluctuation in the effective income tax rate was attributable to a change in valuation allowance, reduction of uncertain tax position reserve and the income tax benefit created by iWeb for the applicable short period. LIQUIDITY AND CAPITAL RESOURCES Liquidity As of December 31, 2014, we had a deficit in working capital, which represented an excess of current liabili- ties over current assets due to our strategy to minimize interest costs by not accessing additional borrowing capacity under our revolving credit facility. We believe that cash flows from operations, together with our cash and cash equivalents and borrowing capacity under our revolving credit facility, will be sufficient to meet our cash requirements for the next 12 months and for the foreseeable future. If our cash requirements vary mate- rially from what we expect or if we fail to generate suffi- cient cash flows from selling our services, we may require additional financing sooner than anticipated. We can offer no assurance that we will be able to obtain additional financing on commercially favorable terms, or at all, and provisions in our credit agreement limit our ability to incur additional indebtedness. Our anticipated uses of cash include capital expenditures of $70.0 to $80.0 million in 2015, working capital needs and required payments on our credit agreement and other commitments. We have a history of quarterly and annual period net losses. During the year ended December 31, 2014, we had a net loss of $39.5 million. As of December 31, 2014, our accumulated deficit was $1.1 billion. We con- tinue to analyze our business to control our costs, prin- cipally through making process enhancements and renegotiating network contracts for more favorable pric- ing and terms. We may not be able to sustain or increase profitability on a quarterly basis, and our failure to do so may adversely affect our business, including our ability to raise additional funds. We monitor and review our performance and operations in light of global economic conditions, which could impact the ability of our customers to meet their obliga- tions to us, which could delay collection of accounts receivable and increase our provision for doubtful accounts. Capital Resources Credit Agreement. During 2013, we entered into a $350.0 million credit agreement, which provides for a $300.0 million term loan and a $50.0 million revolving credit facility, due November 26, 2018. We summarize the credit agreement in note 11 to the accompanying consolidated financial statements. Concurrently with the effective date and funding of the term loan, we acquired iWeb and paid off our previous credit facility. As of December 31, 2014, the revolving credit facility had an outstanding balance of $10.0 million and we issued $6.3 million in letters of credit, resulting in $33.7 million in borrowing capacity. As of December 31, 2014, the term loan had an outstanding principal amount of $297.0 million, which we repay in $750,000 quarterly installments on the last day of each fiscal quarter, with the remaining unpaid balance due November 26, 2019. As of December 31, 2014, the interest rate on the revolv- ing credit facility was 4.7% and term loan was 6.0%. The credit agreement includes customary representa- tions, warranties, negative and affirmative covenants, including certain financial covenants relating to maxi- mum total leverage ratio, minimum consolidated interest coverage ratio and limitation on capital expenditures. As of December 31 2014, we were in compliance with these covenants. Capital Leases. During 2014, we completed sale- leaseback transactions with third-parties for equipment and a building for cash proceeds of $3.1 million and $1.6 million, respectively. As a result of these transac- tions, we recorded capital lease obligations of $3.4 mil- lion. Also during 2014, we exercised a renewal option of an existing operating lease for company-controlled data center space in Montreal. The lease extension, for accounting purposes, triggered a new lease which expires in 2032, with the new terms resulting in capital 33 Internap 2014 Form 10-K Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations lease treatment. We recorded property of $6.0 million, net of the deferred rent balance on the previous operat- ing lease, and a capital lease obligation of $7.4 million. Our future minimum lease payments on all remaining capital lease obligations at December 31, 2014 were $60.1 million. We summarize our existing capital lease obligations in note 11 to the accompanying consoli- dated financial statements. 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. Service and purchase commit- ments primarily relate to IP, telecommunications and data center services. 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 purchase and service commitments with corresponding revenue growth. The following table summarizes our commitments and other obligations as of December 31, 2014 (in thousands): Term loan, including interest Revolving credit facility, including interest Interest rate swap Capital lease obligations, including interest Exit activities and restructuring Asset retirement obligation Operating lease commitments Service and purchase commitments Payments Due by Period Less than 1 year $20,999 466 765 12,488 2,581 — 24,831 18,420 $80,550 1-3 Years $ 41,450 932 48 22,156 3,095 1,479 44,445 8,216 3-5 Years More than 5 years $321,070 10,427 — 19,414 853 — 21,726 433 $ — — — 37,552 — 3,384 12,352 33 $121,821 $373,923 $53,321 Total $383,519 11,825 813 91,610 6,529 4,863 103,354 27,102 $629,615 CASH FLOWS Operating Activities Year Ended December 31, 2014. Net cash provided by operating activities during the year ended December 31, 2014 was $53.2 million. We generated cash from opera- tions of $52.6 million, while changes in operating assets and liabilities generated cash from operations of $0.6 million. We expect to use cash flows from operating activities to fund a portion of our capital expenditures and other requirements and to meet our other commit- ments and obligations, including outstanding debt. Year Ended December 31, 2013. Net cash provided by operating activities during the year ended December 31, 2013 was $33.7 million. Our net loss, after adjustments for non-cash items, generated cash from operations of $43.1 million, while changes in operating assets and liabilities used cash from operations of $9.4 million. Year Ended December 31, 2012. Net cash provided by operating activities during the year ended December 31, 2012 was $43.7 million. Our net loss, after adjustments for non-cash items, generated cash from operations of $44.4 million, while changes in operating assets and liabilities used cash from operations of $0.7 million. Investing Activities Year Ended December 31, 2014. Net cash used in investing activities during the year ended December 31, 2014 was $75.7 million, primarily due to capital expen- ditures of $77.4 million, net of equipment sale- leaseback proceeds. Capital expenditures related to the continued expansion and upgrade of our company- controlled data centers and network infrastructure. Year Ended December 31, 2013. Net cash used in investing activities during the year ended December 31, 2013 was $208.1 million, primarily due to the iWeb acquisition, net of cash received, of $144.5 million and capital expenditures of $62.8 million. Capital expendi- tures related to the continued expansion and upgrade of our company-controlled data centers and network infra- structure. Year Ended December 31, 2012. Net cash used in investing activities during the year ended December 31, 2012 was $79.7 million, primarily due to capital expen- ditures of $74.9 million. Capital expenditures related to the continued expansion and upgrade of our company- controlled data centers and network infrastructure. In addition, we paid $4.8 million in accrued contingent consideration for technology deliverables related to the Voxel acquisition. Financing Activities Year Ended December 31, 2014. Net cash provided by financing activities during the year ended December 31, 2014 was $7.9 million, primarily due to $10.0 million of proceeds received from the revolving credit facility and a return of deposit collateral of $6.5 million, partially off- set by principal payments of $8.9 million on our credit agreement and capital lease obligations. Year Ended December 31, 2013. Net cash provided by financing activities during the year ended December 31, 2013 was $180.8 million, primarily due to $320.0 million proceeds received on the credit agreement, partially off- set by principal payments of $120.7 million on our prior credit agreement and capital lease obligations and the payment of debt issuance costs of $12.4 million. 34 Internap 2014 Form 10-K Part II Item 7A. Quantitative and Qualitative Disclosures About Market Risk Year Ended December 31, 2012. Net cash provided by financing activities during the year ended December 31, 2012 was $34.6 million, primarily due to $40.4 million proceeds received on our prior credit agreement, par- tially offset by principal payments of $3.3 million each on the credit agreement and capital lease obligations. Off-Balance Sheet Arrangements As of December 31, 2014, 2013 and 2012, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitat- ing off-balance sheet arrangements or other contractu- ally narrow or limited purposes. Other than our operat- ing leases, we do not engage in off-balance sheet financial arrangements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK OTHER INVESTMENTS Prior to 2013, we invested $4.1 million in Internap Japan Co. We account for this investment using the equity method and we have recognized $1.5 million in equity- method losses over the life of the investment, represent- ing our proportionate share of the aggregate joint ven- ture losses and income. The joint venture investment is subject to foreign currency exchange rate risk. INTEREST RATE RISK Our objective in managing interest rate risk is to main- tain favorable long-term fixed rate or a balance of fixed and variable rate debt within reasonable risk param- eters. At December 31, 2014, we had an interest rate swap with a notional amount starting at $150.0 million through December 30, 2016 with an interest rate of 1.5%. We summarize our interest rate swap activity in note 10 to the accompanying consolidated financial statements. As of December 31, 2014, our long-term debt consisted of $297.0 million borrowed under our term loan and $10.0 million borrowed under our revolving credit facil- ity. At December 31, 2014, the interest rate on the term loan and revolving credit facility was 6.0% and 4.7%, respectively. We summarize the credit agreement in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Resources—Credit Agree- ment” and in note 11 to the accompanying consolidated financial statements. We are required to pay a commitment fee at a rate of 0.50% per annum on the average daily unused portion of the revolving credit facility, payable quarterly in arrears. In addition, we are required to pay certain par- ticipation fees and fronting fees in connection with standby letters of credit issued under the revolving credit facility. We estimate that a change in the interest rate of 100 basis points would change our interest expense and payments by $3.1 million per year, assuming we do not increase our amount outstanding. FOREIGN CURRENCY RISK As of December 31, 2014, the majority of our revenue was in U.S. dollars. However, our results of operations and cash flows are subject to fluctuations in foreign cur- rency exchange rates. We also have exposure to foreign currency transaction gains and losses as the result of certain receivables due from our foreign subsidiaries. During the year ended December 30, 2014, we realized foreign currency gains of less than $0.1 million, which we included as non-operating income in “Other, net,” and we recorded unrealized foreign currency translation losses of $0.4 million, which we included in “Other com- prehensive (loss) income,” both in the accompanying consolidated statement of operations and comprehen- sive loss. As we grow our international operations, our exposure to foreign currency risk could become more significant. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our accompanying consolidated financial statements, financial statement schedule and the report of our inde- pendent registered public accounting firm appear in Part IV of this Annual Report on Form 10-K. Our report on internal control 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. 35 Internap 2014 Form 10-K Part II Item 9A. Controls and Procedures ITEM 9A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Based on our management’s evaluation (with the par- ticipation of our Chief Executive Officer and Chief Finan- cial Officer), as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are effective to ensure that infor- mation required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, pro- cessed, summarized and reported within the time peri- ods specified in SEC rules and forms and is accumu- lated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. 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 participa- tion of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control 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, issued in 2013. Based on our evaluation under the framework in “Inter- nal Control—Integrated Framework” issued by COSO, our management concluded that our internal control over financial reporting was effective as of Decem- ber 31, 2014. Our independent registered public accounting firm, PricewaterhouseCoopers LLP, audited our consolidated financial statements included in this Annual Report on Form 10-K and issued an attestation report on our internal control over financial reporting as of December 31, 2014, which is included in the report included under Item 15 of this Annual Report on Form 10-K. 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, 2014 that has materially affected, or that is reasonably likely to materially affect, our internal con- trol over financial reporting. ITEM 9B. OTHER INFORMATION None. 36 Internap 2014 Form 10-K Part III Item 10. Directors, Executive Officers and Corporate Governance 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 annual meeting of stockholders to be held in 2015, which we will file within 120 days after the end of the fis- cal year covered by this Annual Report on Form 10-K. This information is incorporated herein by reference. CODE OF CONDUCT We have adopted a code of conduct that applies to all of our directors, officers and employees. A copy of the code of conduct is available on our website at www.internap.com by clicking on the “Investor Relations—Corporate Governance—Code of Conduct” links. We will furnish copies without charge upon request at the following address: Internap Corporation, Attn: SVP, Legal Services, One Ravinia Drive, Suite 1300, Atlanta, Georgia 30346. If we make any amendments to the code of conduct other than technical, administrative or other non- substantive amendments, or grant any waivers, includ- ing implicit waivers, from the code of conduct, 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 We will include information regarding security owner- ship of certain beneficial owners and management and related stockholder matters in our definitive proxy state- ment for our annual meeting of stockholders to be held in 2015, which we will file within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. This information is incorporated herein by refer- ence. The information under the heading “Equity Compensa- tion Plan Information” in Item 5 of this Annual Report on Form 10-K is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE We will include information regarding certain relation- ships, related transactions and director independence in our definitive proxy statement for our annual meeting of stockholders to be held in 2015, which we will file within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. This information is incor- porated herein by reference. include information regarding executive com- We will pensation in our definitive proxy statement for our annual meeting of stockholders to be held in 2015, which we will file within 120 days after the end of the fis- cal year covered by this Annual Report on Form 10-K. This information is incorporated herein by reference. Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES We will include information regarding principal accoun- tant fees and services in our definitive proxy statement for our annual meeting of stockholders to be held in 2015, which we will file within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. This information is incorporated herein by refer- ence. 37 Internap 2014 Form 10-K Exhibit Number Description Part IV Item 15. Exhibits and Financial Statement Schedules Part IV Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ITEM 15(a)(1). Financial Statements. The following consolidated financial statements are filed herewith: Report of Independent Registered Public Accounting Firm Consolidated Statements of Operations and Comprehensive Loss Consolidated Balance Sheets Consolidated Statements of Stockholders’ Equity 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 finan- cial statement schedule is filed herewith: 2.1 3.1 3.2 3.3 3.4 3.5 Schedule II - Valuation and Qualifying Accounts and Reserves ITEM 15(a)(3). Page S-1 10.1 Exhibits. The following exhibits are filed as part of this report: 10.2 10.3 10.4 10.5 Share Purchase Agreement made as of Octo- ber 30, 2013 between iWeb Group Inc., its stockholders and stockholders’ representative and 8672377 Canada Inc. and Internap Network Services Corporation (incorporated herein by reference to Exhibit 2.1 to the Company’s Cur- rent Report on Form 8-K, filed October 31, 2013).† Certificate of Elimination of the Series B Pre- ferred Stock (incorporated herein by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K, filed March 2, 2010). Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K, filed March 2, 2010). Certificate of Amendment of Restated Certifi- cate of Incorporation of the Company (incorpo- rated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed June 21, 2010). Certificate of Amendment to the Restated Cer- tificate of Incorporation of the Company (incor- porated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed November 25, 2014). Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed November 25, 2014). Internap Network Services Corporation 1999 Non-Employee Directors’ Stock Option Plan (incorporated herein by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K, filed March 13, 2009).+ First Amendment to the Internap Network Ser- vices Corporation 1999 Non-Employee Direc- tors’ Stock Option Plan (incorporated herein by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K, filed March 13, 2009).+ Internap Network Services Corporation 2000 Non-Officer Equity Incentive Plan (incorporated herein by reference to Exhibit 99.1 to the Com- pany’s Registration Statement on Form S-8, File No. 333-37400 dated May 19, 2000).+ 2005 Incentive Stock Plan, as amended (incor- porated herein by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K, filed February 20, 2014).+ Form of Stock Grant Certificate under the Amended and Restated Internap Network Ser- vices Corporation 2005 Incentive Stock Plan (incorporated herein by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K, filed March 2, 2010).+ 38 Internap 2014 Form 10-K Part IV Item 15. Exhibits and Financial Statement Schedules Exhibit Number Description Exhibit Number Description 10.6 10.7 10.8* 10.9* Form of Stock Option Certificate under the Amended and Restated Internap Network Ser- vices Corporation 2005 Incentive Stock Plan (incorporated herein by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K, filed March 2, 2010).+ 2014 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8, filed June 16, 2014).+ Form of Stock Grant Certificate under the 2014 Stock Incentive Plan.+ Form of Stock Option Certificate under the 2014 Stock Incentive Plan.+ 10.10* Form of Stock Grant Certificate (Canada) under the 2014 Stock Incentive Plan.+ 10.11* Form of Stock Option Certificate (Canada) under the 2014 Stock Incentive Plan.+ 10.12 Employment Security Plan dated November 14, 2007 (incorporated herein by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K, filed February 21, 2013).+ 10.13 Form of Indemnity Agreement for directors and officers of the Company (incorporated herein by reference to Exhibit 10.1 to the Company’s Cur- rent Report on Form 8-K, filed May 29, 2009).+ 10.14 Commitment Letter dated October 30, 2013 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed October 31, 2013). 10.15 Credit Agreement dated as of November 26, 2013 among Internap Network Services Corpo- ration, as Borrower; the Guarantors party thereto, as Guarantors; the Lenders party thereto; Jefferies Finance, LLC, as Administra- tive Agent and Collateral Agent; Jefferies Finance LLC and PNC Capital Markets LLC, as Joint Lead Arrangers and Joint Book Managers; PNC Bank National Association, as Syndication Agent; and Jefferies Finance LLC, as Issuing Bank and Swingline Lender (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed November 26, 2013).† 10.16 Security Agreement dated as of November 26, 2013 among Internap Network Services Corpo- ration; the Guarantors party thereto; and Jeffer- ies Finance LLC, as Collateral Agent ((incorpo- rated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed November 26, 2013).† 10.17 Lease Agreement by and between Cousins Properties Incorporated and CO Space Ser- vices, LLC, originally dated January 10, 2000 and as amended through February 26, 2007 (incorporated herein by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K, filed February 24, 2011).†§ 10.18 Joinder Agreement to the Employment Security Plan executed by Steven A. Orchard (incorpo- rated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed May 6, 2010).+ 10.19 Offer Letter between the Company and Eric Cooney, dated January 16, 2009 (incorporated herein by reference to Exhibit 10.1 to the Com- pany’s Current Report on Form 8-K, filed Febru- ary 2, 2009).+ 10.20 Joinder Agreement to the Employment Security Plan executed by Eric Cooney (incorporated herein by reference to Exhibit 10.2 to the Com- pany’s Current Report on Form 8-K, filed Febru- ary 2, 2009).+ 10.21 Employment Security Agreement executed by Kevin M. Dotts (incorporated herein by refer- ence to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed July 26, 2012).+ 10.22 2014 Short Term Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Com- pany’s Current Report on Form 8-K, filed Febru- ary 21, 2014).+ 21.1* List of Subsidiaries. 23.1* Consent of PricewaterhouseCoopers LLP, Inde- pendent Registered Public Accounting Firm. 31.1* Rule 13a-14(a)/15d-14(a) Certification, executed by J. Eric Cooney, President and Chief Executive Officer of the Company. 31.2* Rule 13a-14(a)/15d-14(a) Certification, executed by Kevin M. Dotts, Chief Financial Officer of the Company. 32.1* Section 1350 Certification, executed by J. Eric Cooney, President and Chief Executive Officer of the Company. 32.2* Section 1350 Certification, executed by Kevin M. Dotts, Chief Financial Officer of the Com- pany. 101* Interactive Data File. * Documents filed herewith. + Management contract and compensatory plan and arrange- ment. † Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby undertakes to furnish supplementally copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Com- mission. § Confidential treatment has been requested for this exhibit. The copy filed as an exhibit omits the information subject to the request for confidential treatment. 39 Internap 2014 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 CORPORATION Date: February 19, 2015 By: /s/ Kevin M. Dotts Kevin M. Dotts 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/ Kevin M. Dotts Kevin M. Dotts /s/ Daniel C. Stanzione Title Date President, Chief Executive Officer and Director (Principal Executive Officer) February 19, 2015 Chief Financial Officer (Principal Accounting Officer) February 19, 2015 Daniel C. Stanzione Non-Executive Chairman and Director February 19, 2015 /s/ Charles B. Coe Charles B. Coe /s/ Patricia L. Higgins Patricia L. Higgins /s/ Gary M. Pfeiffer Gary M. Pfeiffer /s/ Michael A. Ruffolo Director Director Director February 19, 2015 February 19, 2015 February 19, 2015 Michael A. Ruffolo Director February 19, 2015 /s/ Debora J. Wilson Debora J. Wilson Director February 19, 2015 F-1 Internap 2014 Form 10-K Internap Corporation Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Statements of Operations and Comprehensive Loss Consolidated Balance Sheets Consolidated Statements of Stockholders’ Equity 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 F-2 Internap 2014 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 Corporation: In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Internap Corporation and its subsidiaries at Decem- ber 31, 2014 and December 31, 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company main- tained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework 2013 issued by the Committee of Sponsor- ing Organizations of the Treadway Commission (COSO). The Company’s management 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 control over financial reporting, included in the Report of Management on Internal Control Over Finan- cial Reporting appearing under item 9A. Our responsi- bility is to express opinions on these financial state- ments, 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 accordance 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 misstate- ment and whether effective internal control over finan- cial reporting was maintained in all material respects. Our audits of the financial statements included examin- ing, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant esti- mates 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 assurance regarding the reliability of financial reporting and the preparation of financial statements for external pur- poses in accordance with generally accepted account- ing principles. A company’s internal control over finan- cial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in rea- sonable detail, accurately and fairly reflect the transac- tions 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 expendi- tures of the company are being made only in accor- dance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial state- ments. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstate- ments. Also, projections of any evaluation of effective- ness to future periods are subject to the risk that con- trols 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, GA February 19, 2015 F-3 Internap 2014 Form 10-K Financial Section Consolidated Statements of Operations and Comprehensive Loss (In thousands, except per share amounts) 2014 2013 2012 Year Ended December 31, Revenues: Data center services Internet protocol (IP) services Total revenues Operating costs and expenses: Direct costs of network, sales and services, exclusive of depreciation and amortization, shown below: Data center services IP services Direct costs of customer support Direct costs of amortization of acquired and developed technologies Sales and marketing General and administrative Depreciation and amortization Loss (gain) on disposal of property and equipment, net Exit activities, restructuring and impairments Total operating costs and expenses (Loss) income from operations Non-operating expenses: Interest expense Loss on extinguishment of debt Other, net Total non-operating expenses Loss before income taxes and equity in (earnings) of equity-method investment (Benefit) provision for income taxes Equity in (earnings) of equity-method investment, net of taxes Net loss Other comprehensive (loss) income: Foreign currency translation adjustment, net of taxes Unrealized loss on interest rate swap Total other comprehensive (loss) income Comprehensive loss Basic and diluted net loss per share $242,623 92,336 334,959 $185,147 98,195 $167,286 106,306 283,342 273,592 106,159 38,787 36,804 5,918 37,845 43,902 75,251 112 4,520 349,298 92,564 39,448 29,687 4,967 31,800 42,759 48,181 9 1,414 90,604 40,350 26,664 4,718 31,343 38,635 36,147 (55) 1,422 290,829 269,828 (14,339) (7,487) 3,764 26,742 — 33 26,775 (41,114) (1,361) (259) (39,494) (431) (36) (467) 11,346 881 614 12,841 (20,328) (285) (213) (19,830) (464) (777) (1,241) 7,566 — 283 7,849 (4,085) 453 (220) (4,318) 84 — 84 $ (39,961) $ (21,071) $ (4,234) $ (0.77) $ (0.39) $ (0.09) Weighted average shares outstanding used in computing basic and diluted net loss per share 51,237 51,135 50,761 The accompanying notes are an integral part of these consolidated financial statements. F-4 Internap 2014 Form 10-K Financial Section Consolidated Balance Sheets (In thousands, except par value amounts) ASSETS Current assets: Cash and cash equivalents Accounts receivable, net of allowance for doubtful accounts of $2,121 and $1,995, respectively Deferred tax asset Prepaid expenses and other assets Total current assets Property and equipment, net Investment in joint venture Intangible assets, net Goodwill Deposits and other assets Deferred tax asset Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable Accrued liabilities Deferred revenues Capital lease obligations Term loan, less discount of $1,463 and $1,387, respectively Exit activities and restructuring liability Other current liabilities Total current liabilities Deferred revenues Capital lease obligations Revolving credit facility Term loan, less discount of $6,543 and $8,006, respectively Exit activities and restructuring liability Deferred rent Deferred tax liability Other long-term liabilities Total liabilities Commitments and contingencies (note 11) Stockholders’ equity: Preferred stock, $0.001 par value; 20,000 shares authorized; no shares issued or outstanding Common stock, $0.001 par value; 120,000 shares authorized; 54,410 and 54,023 shares outstanding, respectively Additional paid-in capital Treasury stock, at cost, 621 and 461 shares, respectively Accumulated deficit Accumulated items of other comprehensive loss Total stockholders’ equity Total liabilities and stockholders’ equity The accompanying notes are an integral part of these consolidated financial statements. December 31, 2014 2013 $ 20,084 $ 35,018 19,606 633 12,276 52,599 342,145 2,622 52,545 130,313 9,923 1,637 23,927 371 22,533 81,849 331,963 2,602 57,699 130,387 7,999 1,742 $ 591,784 $ 614,241 $ 30,589 13,120 7,345 7,366 1,537 1,809 1,590 63,356 3,544 52,686 10,000 287,457 2,701 10,583 7,293 3,828 441,448 $ 29,774 13,549 6,729 5,489 1,613 2,286 2,493 61,933 3,804 49,800 — 288,994 1,877 14,617 8,591 2,415 432,031 — — 54 1,262,402 (4,683) (1,105,514) (1,923) 54 1,253,106 (3,474) (1,066,020) (1,456) 150,336 182,210 $ 591,784 $ 614,241 F-5 Internap 2014 Form 10-K Financial Section Consolidated Statements of Stockholders’ Equity For the Three Years Ended December 31, 2014 (In thousands) Common Stock Shares Par Value Additional Paid-In Capital Treasury Stock Accumulated Deficit Accumulated Items of Comprehensive Loss Total Stockholders’ Equity Balance, December 31, 2011 Net loss Foreign currency translation Stock-based compensation Other activity of stock compensation plans Balance, December 31, 2012 Net loss Foreign currency translation Interest rate swap Stock-based compensation Other activity of stock compensation plans Balance, December 31, 2013 Net loss Foreign currency translation Interest rate swap Stock-based compensation Other activity of stock compensation plans 52,528 $ — — — 931 53,459 — — — — 564 54,023 — — — — 387 1 54 — — — — — 54 — — — — — 53 $1,235,554 $(1,266) $(1,041,872) (4,318) — — — — — — — 6,285 — — — 1,962 (579) — 1,243,801 — — — 7,167 (1,845) — — — — (1,046,190) (19,830) — — — 2,138 (1,629) — 1,253,106 — — — 7,522 (3,474) — — — — (1,066,020) (39,494) — — — $ (299) $ — 84 — — (215) — (464) (777) — — (1,456) — (431) (36) — 192,170 (4,318) 84 6,285 1,384 195,605 (19,830) (464) (777) 7,167 509 182,210 (39,494) (431) (36) 7,522 Balance, December 31, 2014 54,410 $ 54 $1,262,402 $(4,683) $(1,105,514) $ (1,923) $ 150,336 The accompanying notes are an integral part of these consolidated financial statements. 1,774 (1,209) — — 565 F-6 Internap 2014 Form 10-K 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 Impairment of property and equipment Amortization of debt discount and issuance costs Stock-based compensation expense, net of capitalized amount Equity in (earnings) of equity-method investment Provision for doubtful accounts Non-cash portion of loss on extinguishment of debt Non-cash change in capital lease obligations Non-cash change in exit activities and restructuring liability Non-cash change in deferred rent Deferred taxes Other, net Changes in operating assets and liabilities: Accounts receivable Prepaid expenses, deposits and other assets Accounts payable Accrued and other liabilities Deferred revenues Exit activities and restructuring liability Asset retirement obligation Other liabilities Net cash flows provided by operating activities Cash Flows from Investing Activities: Purchases of property and equipment Additions to acquired and developed technology Proceeds from sale-leaseback transactions Payment of accrued contingent consideration Acquisition, net of cash received Net cash flows used in investing activities Cash Flows from Financing Activities: Proceeds from credit agreements Principal payments on credit agreements Payment of debt issuance costs Return (payment) of deposit collateral on credit agreement Payments on capital lease obligations Proceeds from exercise of stock options Tax withholdings related to net share settlements of restricted stock awards Other, net Net cash flows provided by financing activities Effect of exchange rates on cash and cash equivalents Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of period Year Ended December 31, 2014 2013 2012 $(39,494) $ (19,830) $ (4,318) 81,169 537 1,934 7,182 (259) 1,306 — (412) 4,591 (2,577) (1,555) 193 2,923 1,839 529 413 498 (4,245) (1,319) (5) 53,148 520 631 6,743 (213) 1,861 841 99 1,185 (1,907) (67) 84 (5,777) (218) 3,992 (5,062) 1,149 (2,895) — (601) 40,865 438 445 5,858 (220) 932 — 705 1,171 (1,073) 204 (575) (1,428) (671) 413 2,304 862 (2,890) — 720 53,248 33,683 43,742 (77,363) (3,100) 4,662 — 74 (75,727) 10,000 (3,000) — 6,461 (5,921) 1,774 (1,209) (181) 7,924 (379) (14,934) 35,018 (62,798) (801) — — (144,487) (208,086) 320,000 (116,000) (12,415) (6,461) (4,655) 2,138 (1,630) (167) 180,810 58 6,465 28,553 (74,947) — — (4,750) — (79,697) 40,401 (3,250) (543) — (3,303) 2,469 (1,085) (118) 34,571 165 (1,219) 29,772 Cash and cash equivalents at end of period $ 20,084 $ 35,018 $ 28,553 Supplemental disclosure of cash flow information: Cash paid for interest Cash paid for income taxes Non-cash acquisition of property and equipment under capital leases Additions to property and equipment included in accounts payable Capitalized stock-based compensation $ 24,957 157 9,626 8,249 340 $ 11,678 344 9,815 7,884 424 $ 7,646 189 10,079 2,869 427 The accompanying notes are an integral part of these consolidated financial statements. F-7 Internap 2014 Form 10-K Financial Section Notes to Consolidated Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF THE COMPANY AND NATURE OF OPERATIONS Internap Corporation (“we,” “us” or “our”) provides high- performance information technology (“IT”) infrastructure services. We provide services at 52 data centers across North America, Europe and the Asia-Pacific region and through 88 Internet Protocol (“IP”) service points. 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 (“GAAP”). The consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. We have eliminated inter-company trans- actions and balances 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 recogni- tion, doubtful accounts, goodwill and intangible assets, accruals, stock-based compensation, income taxes, restructuring charges, leases, long-term service con- tracts, contingencies and litigation. We base our esti- mates on historical experience 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 maintain our cash and cash institutions and may at equivalents at major financial times exceed federally insured limits. We believe that the risk of loss is minimal. To date, we have not experi- enced any losses related to cash and cash equivalents. Investment in Joint Venture 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 appropriate. As of Decem- ber 31, 2014, Internap Japan Co., Ltd. (“Internap Japan”), a joint venture with NTT-ME Corporation and Nippon Telegraph and Telephone Corporation (“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 accom- panying consolidated balance sheets as a long-term investment and our share of Internap Japan’s income and losses, net of taxes, as a separate caption in our accompanying consolidated statements of operations and comprehensive loss. Fair Value of 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 agreement and vari- able interest rates, the fair value of our debt approxi- mates the carrying value. We measure and report certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents. The major categories of nonfinancial assets and liabilities that we measure at fair value include reporting units measured at fair value in step one of our goodwill impairment test. Financial Instrument Credit Risk instruments that potentially subject us to a Financial concentration of credit risk principally consist of cash, cash equivalents, marketable securities and trade receivables. Given the needs of our business, we may invest our cash and cash equivalents in money market funds. Property and Equipment We carry property and equipment at original acquisition cost less accumulated depreciation and amortization. We calculate depreciation and amortization on a straight-line basis over the estimated useful lives of the assets. Estimated useful lives used for network equip- ment are generally five years; furniture, equipment and software are three to seven years; and leasehold improvements are 10 to 25 years or over the lease term, depending on the nature of the improvement. We capi- talize additions and improvements that increase the value or extend the life of an asset. We expense mainte- nance and repairs as incurred. We charge gains or losses from disposals of property and equipment to operations. F-8 Internap 2014 Form 10-K Financial Section Notes to Consolidated Financial Statements Leases Goodwill and Other Intangible Assets We record leases in which we have substantially all of leases the benefits and risks of ownership as capital 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 asset over its estimated useful life or over the lease term, depending on the nature of the asset. The duration of lease obligations and commitments ranges from three years for equip- ment 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 pay- ments begin under the terms of the lease. We record the difference between the expense in our consolidated statements of operations and comprehensive loss and the amount we pay as deferred rent, which we include in our consolidated balance sheets. Costs of Computer Software Development We capitalize software development costs incurred dur- ing the application development stage. Amortization begins once the software is ready for its intended use and is computed based on the straight-line method over the economic life. Judgment is required in determining which software projects are capitalized and the resulting economic life. We capitalized $6.2 million, $7.5 million and $6.7 million in software costs during the years ended December 31, 2014, 2013 and 2012, respec- tively. As of December 31, 2014 and 2013, the balance of unamortized internal-use software costs was $16.8 million and $22.9 million, respectively. During the years ended December 31, 2014, 2013 and 2012, amortiza- tion expense was $6.7 million, $4.2 million and $3.4 mil- lion, 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 esti- mate 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. We perform our annual goodwill impairment test as of August 1 of each calendar year absent any impairment indicators or other changes that may cause more fre- quent analysis. We also assess on a quarterly basis whether any events have occurred or circumstances have changed that would indicate an impairment could exist. During 2014 and 2013, we did not identify an impairment as a result of our annual impairment test and concluded that no triggering events had occurred. For purposes of valuing our goodwill, we have the following reporting units: IP products, IP services, data center products and data center services. To determine the fair value of our reporting units, we uti- lize the discounted cash flow and market methods. We have consistently utilized both methods in our goodwill impairment tests and weight both results equally. We use both methods because we believe both, in conjunc- tion with each other, provide a reasonable estimate of the fair value of the reporting unit. The discounted cash flow method is specific to our anticipated future results of the reporting unit, while the market method is based on our market sector including our competitors. We determined the assumptions supporting the dis- counted cash flow method, including the discount rate, using our best estimates as of the date of the impair- ment review. We have performed various sensitivity analyses on certain of the assumptions used in the dis- counted cash flow method, such as forecasted rev- enues and discount rate. We used reasonable judgment in developing our estimates and assumptions and there was no impairment indicated in our testing. Our assumptions, inputs and judgments used in per- forming the valuation analysis are inherently subjective and reflect estimates based on known facts and circum- stances at the time we perform the valuation. These estimates and assumptions primarily include, but are not limited to, discount rates; terminal growth rates; pro- jected revenues and costs; earnings before interest, taxes, depreciation and amortization for expected cash flows; market comparables and capital expenditure forecasts. The use of different assumptions, inputs and judgments, or changes in circumstances, could materi- ally affect the results of the valuation. Due to 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. Other intangible assets have finite lives and we record these assets at cost less accumulated amortization. We record amortization of acquired and developed tech- nologies to be sold using the greater of (a) the ratio of current revenues to total and anticipated future rev- enues for the applicable technology or (b) the straight- line method over the remaining estimated economic life, which is five to eight years. We amortize the cost of cus- tomer relationship and trade names over their useful lives of 10 to 30 years. We assess other intangible assets on a quarterly basis whenever any events have occurred or circumstances have changed that would indicate that impairment could exist. Our assessment is F-9 Internap 2014 Form 10-K Financial Section Notes to Consolidated Financial Statements based on estimated future cash flows directly associ- ated 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. We concluded that no impairment indicators existed to cause us to reassess our other intangible assets during the year ended December 31, 2014. Exit Activities and Restructuring When circumstances warrant, we may elect to exit cer- tain business activities or change the manner in which we conduct ongoing operations. If 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 estima- tion. If circumstances warrant, we will adjust our previ- ous estimates to reflect what we then believe to be a more accurate representation of expected future costs. Because our estimates and assumptions regarding exit activities and 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 operations. 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 exit activities and 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 maintain a valuation allowance to reduce our deferred tax assets to their estimated realiz- able value. We may recognize deferred tax assets in future periods if and when we estimate them to be real- izable and supported by historical trends of profitability and future expectations within each tax jurisdiction. We evaluate liabilities for uncertain tax positions and we recognized $0.4 million for associated liabilities during each of the years ended December 31, 2014 and 2013. We recorded nominal interest and penalties arising from the underpayment of income taxes in “(Benefit) provi- sion for income taxes” in our consolidated statements of operations and comprehensive loss. As of Decem- ber 31, 2014 and 2013, we accrued $0 for interest and penalties related to uncertain tax positions. We account for telecommunication, sales and other similar taxes on a net basis in “General and administra- tive” expense in our consolidated statements of opera- tions and comprehensive loss. 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 service period, generally the vesting period of the award. The fair value of restricted stock is the mar- ket value on the date of grant. The fair value of stock options is estimated at the grant date using the Black- Scholes option pricing model with weighted average assumptions for the 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 forfei- ture rate impacts the amount of aggregate compensa- tion. These assumptions 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 out- standing, considering the vesting schedules and our historical exercise patterns. Because our options are not publicly traded, we assume volatility based on the his- torical 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 option term. We have also used historical data to esti- mate option exercises, employee termination and stock option forfeiture rates. Changes in any of these assump- tions could materially impact our results of operations in the period the change is made. 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 ben- efit). We apply the “with and without” approach for utili- zation of tax attributes upon realization of net operating losses in the future. This method allocates stock-based compensation benefits last among other tax benefits recognized. In addition, we apply the “direct only” method of calculating the amount of windfalls or short- falls. Treasury Stock As permitted by our stock-based compensation plans, we acquire shares of treasury stock as payment of statutory minimum payroll taxes due from employees for stock-based compensation. However, we do not reissue shares of treasury stock acquired from employ- ees. Revenue Recognition We generate revenues primarily from the sale of data center services, including colocation, hosting and cloud, and IP services. Our revenues typically consist of monthly recurring revenues from contracts with terms of one year or more. We recognize the monthly minimum as revenue each month provided that we have entered into an enforceable contract, we have delivered the ser- vice to the customer, the fee for the service is fixed or determinable and collection is reasonably assured. We record installation fees as deferred revenue and recog- nize the revenue ratably over the estimated customer life. F-10 Internap 2014 Form 10-K Financial Section Notes to Consolidated Financial Statements For our data center services revenue, we determine colocation revenues by occupied square feet and both allocated and variable-based usage, which includes both physical space for hosting customers’ network and other equipment plus associated services such as power and network connectivity, environmental controls and security. We determine hosting revenues by the number of servers utilized (physical or virtual) and cloud revenues by the amount of processing and storage con- sumed. We recognize IP services revenues on fixed- commitment or usage-based pricing. IP service con- tracts usually have fixed minimum minimum commit- ments based on a certain level of bandwidth usage with additional charges for any usage over a specified limit. 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 use contracts and sales or purchase orders as evi- dence of an arrangement. We test for availability or con- nectivity to verify delivery of our services. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjust- ment. We also enter into multiple-element arrangements, or bundled services. When we enter into such arrange- ments, we account for each element separately over its respective service period provided that we have objec- tive 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 ele- ment, we recognize the total value of the arrangement ratably over the entire service period to the extent that we have begun to provide the services, and we have satisfied other revenue recognition criteria. For multiple-deliverable revenue arrangements we allo- cate arrangement consideration at the inception of an arrangement to all deliverables using the relative selling price method. The hierarchy for determining the selling price of a deliverable includes (a) vendor-specific objec- tive evidence, if available, (b) third-party evidence, if vendor-specific objective evidence is not available and (c) best estimated selling price, if neither vendor- specific nor third-party evidence is available. Vendor-specific objective evidence is generally limited to the price charged when we sell the same or similar service separately. If we seldom sell a service sepa- rately, it is unlikely that we will determine vendor- specific objective evidence for the service. We define vendor-specific objective evidence as an average price of recent standalone transactions that we price within a narrow range that we define. We determine third-party evidence based on the prices charged by our competitors for a similar deliverable when sold separately. It is difficult for us to obtain suffi- cient information on competitor pricing to substantiate third-party evidence and therefore we may not always be able to use this measure. If we are unable to establish selling price using vendor- specific objective evidence or third-party evidence, we use best estimated selling price in our allocation of arrangement consideration. The objective of best esti- mated selling price is to determine the price at which we would transact if we sold the service on a standalone basis. Our determination of best estimated selling price involves a weighting of several factors including, but not limited to, pricing practices and market conditions. We analyze the selling prices used in our allocation of arrangement consideration on an annual basis at a mini- mum. We will analyze selling prices on a more frequent basis if a significant change in our business necessi- tates a more timely analysis or if we experience signifi- cant variances in our selling prices. We account for each deliverable within a multiple- deliverable revenue arrangement as a separate unit of accounting if both of the following criteria are met: (a) the delivered item or items have value to the cus- tomer on a standalone basis and (b) for an arrangement that includes a general right of return for the delivered item(s), we consider delivery or performance of the undelivered item(s) probable and substantially in our control. We consider a deliverable to have standalone value if we sell this item separately or if the item is sold by another vendor or could be resold by the customer. Further, our revenue arrangements generally do not include a right of return relative to delivered services. We combine deliverables not meeting the criteria for being a separate unit of accounting with a deliverable that does meet that criterion. We then determine the appropriate allocation of arrangement consideration and recognition of revenue for the combined unit of accounting. Deferred revenue consists of revenue for services to be delivered in the future and consists primarily of advance billings, which we amortize over the respective service 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 six years for 2014 and 2013 and five years for 2012. We defer and amortize revenues for installation services because the installation service is integral to our primary service offering and does not have value to customers on a stand-alone basis. We also defer and amortize the asso- ciated incremental direct costs. 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 reasonably assured. Additionally, we maintain an allowance for doubtful accounts resulting from the inability of our cus- tomers to make required payments on accounts receiv- able. We base the allowance for doubtful accounts upon general customer information, which primarily includes our historical cash collection experience 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 F-11 Internap 2014 Form 10-K Financial Section Notes to Consolidated Financial Statements payments not made on or before their due date consid- ered past-due. Once we have exhausted all collection efforts, we write the uncollectible balance off against the allowance for doubtful accounts. We routinely perform credit checks for new and existing customers and require deposits or prepayments for customers that we perceive as being a credit risk. In addition, we record a reserve amount for potential credits to be issued under our service level agreements and other sales adjust- ments. Research and Development Costs We include research and development costs, which include product development costs, in general and administrative costs and we expense them as incurred. These costs primarily relate to our development and enhancement of IP routing technology, hosting and cloud technologies and network engineering costs associated with changes to the functionality of our ser- vices. Research and development costs were $2.8 mil- lion, $2.1 million and $2.0 million during the years ended December 31, 2014, 2013 and 2012, respectively. These costs do not include $8.5 million, $7.5 million and $6.7 million of software costs capitalized during the years ended December 31, 2014, 2013 and 2012, respectively. Advertising Costs We expense all advertising costs as incurred. Advertis- ing costs during the years ended December 31, 2014, 2013 and 2012 were $6.5 million, $3.1 million and $2.5 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 exclude all outstand- ing options and unvested restricted stock as such secu- rities are anti-dilutive for all periods presented. Basic and diluted net loss per share is calculated as fol- lows (in thousands, except per share amounts): Year Ended December 31, 2014 2013 2012 $(39,494) $(19,830) $ (4,318) 51,237 51,135 50,761 Net loss and net loss available to common stockholders Weighted average shares outstanding, basic and diluted Net loss per share, basic and diluted $ (0.77) $ (0.39) $ (0.09) Anti-dilutive securities excluded from diluted net loss per share calculation for stock- based compensation plans Segment Information We align our reportable segments with the internal reporting that management uses for making operating decisions and assessing performance. As described in note 12, we operate in two business segments: data center services and IP services. We include the opera- tions of iWeb Technologies Inc. (“iWeb”), acquired in November 2013, in our data center services segment. Recent Accounting Pronouncements In January 2014, we adopted new guidance that requires us to present, on a prospective basis, unrecog- nized tax benefits as a reduction to any related deferred tax assets for net operating losses, similar tax losses or tax credit carryforwards if such settlement is required or expected in the event an uncertain tax position is disal- lowed. Because the guidance impacts presentation only, adoption had no effect on our financial condition or results of operations. In January 2014, we adopted new guidance, to be applied prospectively, regarding the release into net income of the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. Adoption of this standard did not have an impact on our financial condition or results of operations and we do not expect it to have a material impact in the future, absent any material transactions involving derecognition of subsidiaries or groups of assets within a foreign entity. In May 2014, the Financial Accounting Standards Board (“FASB”) issued new guidance which provides a single model for revenue arising from contracts with custom- ers and supersedes current revenue recognition guid- ance. The guidance is effective the first quarter of 2018 and early adoption is not permitted. The guidance per- mits the application of its requirements retrospectively to all prior periods presented or in the year of adoption through a cumulative adjustment. We are currently evaluating the impact that the adoption will have on our consolidated financial statements and related disclo- sures. As we have not completed our evaluation, we cannot make a determination of the impact and have not yet selected a transition method or determined the effect of the standard on our ongoing financial reporting. In August 2014, FASB issued new guidance which requires management to evaluate, in connection with preparing financial statements for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substan- tial doubt about an entity’s ability to continue as a going concern within one year after the date the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable) and provide related disclosures. The guidance is effective for the annual and interim periods ending after December 15, 2016. Early adoption is per- mitted. We expect adoption will not have a material impact on our financial condition or result of operations. 6,696 6,795 5,909 In November 2014, FASB issued new guidance which provides companies with the option to apply pushdown F-12 Internap 2014 Form 10-K Financial Section Notes to Consolidated Financial Statements accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. The election to apply pushdown accounting can be made either in the period in which the change of control occurred or in a subse- quent period. The guidance is effective on Novem- ber 18, 2014. A doption had no effect on our financial condition or results of operations. 3. ACQUISITION iWeb Acquisition On November 26, 2013, we completed the acquisition of iWeb. Headquartered in Montreal, Quebec, Canada, iWeb has four company-controlled data centers sup- porting global hosting, cloud and colocation services. We include the results of iWeb from November 26, 2013 through December 31, 2013 in our data center services segment in the consolidated statements of operations, which consisted of revenue of $3.6 million and loss before income tax of $0.4 million. We acquired all of the outstanding capital stock of iWeb for a total purchase price, net of working capital adjust- ments provided for under the purchase agreement, of $145.7 million. The net cash paid was $144.4 million, which included cash acquired of $1.3 million. We incurred $4.2 million in acquisition costs, which we expensed and included in “General and administrative” in the consolidated statements of operations and com- prehensive loss for the year ended December 31, 2013. We funded the purchase price and acquisition costs through a $350.0 million credit agreement, which we entered into contemporaneously with the acquisition, further described in note 11. Purchase Price Allocation We allocated the aggregate purchase price for iWeb to the net tangible and intangible assets based on their fair value as of November 26, 2013. We based the allocation of the purchase price on a valuation for property and equipment, intangible assets and deferred revenue and the carrying value for the remaining assets and liabili- ties, as the carrying value approximates fair value. The fair value of iWeb’s property and equipment was esti- mated using the market approach, using comparable market prices; the income approach, using present value of future income or cash flow; or the cost approach, using the replacement cost of assets, depending on the nature of the assets being valued. The fair value of identifiable intangible assets were mea- sured at fair value primarily using various “income approaches,” which required a forecast of expected future cash flows, either for the use of a relief-from roy- alty method or a multi-period excess earnings method. We recorded the excess of the purchase price over the net tangible and intangible assets as goodwill. Factors that contributed to the recognition of goodwill included expected synergies and the trained workforce. We expect that none of the goodwill will be deductible for tax purposes. Our purchase price allocation was as fol- lows (in thousands): Current assets, including cash acquired of $1.3 million Property and equipment Goodwill Intangible assets Other long-term assets Current liabilities Deferred revenue Capital lease obligations Other long-term liabilities Net deferred income tax liability, long-term $ 4,284 52,497 70,708 40,925 689 (7,119) (3,740) (1,301) (2,981) (8,249) $145,713 The intangible assets acquired were as follows (in thou- sands): Customer relationships Trade name Beneficial leasehold interest Internally developed software Total intangible assets Weighted Average Useful Life 15 years 30 years 14 years 5 years Fair Value $22,200 15,100 858 2,767 $40,925 Unaudited Supplemental Financial Information Our unaudited pro forma results presented below, including iWeb, for the year ended December 31, 2013 and 2012 are presented as if the acquisition had been completed on January 1, 2012. We calculated these amounts by adjusting the historical results of iWeb to reflect the additional interest, depreciation and amorti- zation expenses that would have been recorded assum- ing the fair value adjustments to intangible assets had been applied from January 1, 2012, with the conse- quential tax effects. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of 2012. (in thousands) Unaudited pro forma revenue Unaudited pro forma net loss Year Ended December 31, 2013 2012 $323,000 (32,000) $315,000 (19,000) F-13 Internap 2014 Form 10-K Financial Section Notes to Consolidated Financial Statements 4. FAIR VALUE MEASUREMENTS We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are: • Level 1: Quoted prices in active markets for identical assets or liabilities; • Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for simi- lar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and • Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Assets and liabilities measured at fair value on a recurring basis are summarized as follows (in thousands): December 31, 2014: Interest rate swap (note 10) Asset retirement obligations(1) (note 11) December 31, 2013: Money market funds(2) Interest rate swap (note 10) Asset retirement obligations(1) (note 11) Level 1 Level 2 Level 3 Total $ — — 5,006 — — $813 — — 777 — $ — 2,471 $ 813 2,471 — — 2,357 5,006 777 2,357 (1) We calculate the fair value of asset retirement obligations by discounting the estimated amount using the current Treasury bill rate adjusted for our credit non-performance. (2) Included in “Cash and cash equivalents” in the consolidated balance sheets as of December 31, 2013. Unrealized gains and losses on money market funds were nominal due to the short-term nature of the investments. The following table provides a summary of changes in our Level 3 asset retirement obligations (in thousands): Balance, January 1 Accrued estimated obligation, less fair value adjustment Subsequent revision of estimated obligation Accretion(1) Payments Gain on settlement(2) Balance, December 31 December 31, 2014 2013 $ 2,357 1,338 (68) 244 (1,319) (81) $ 2,471 $ — 3,820 (1,519) 56 — — $ 2,357 (1) Included in data center services “Direct costs of network, sales and services” in the accompanying consolidated statements of opera- tions and comprehensive loss. (2) Included in “Other, net” in the accompanying consolidated statements of operations and comprehensive loss. The fair value of our Level 3 debt liabilities, estimated using discount cash flow analysis based on incremental bor- rowing rates for similar types of borrowing arrangements, is as follows (in thousands): Term loan Revolving credit facility December 31, 2014 2013 Carrying Amount $297,000 10,000 Fair Value 313,000 9,900 Carrying Amount $300,000 — Fair Value 293,000 — Financial Section Notes to Consolidated Financial Statements 5. PROPERTY AND EQUIPMENT 6. INVESTMENT IN JOINT VENTURE F-14 Internap 2014 Form 10-K Property and equipment consisted of the following (in thousands): Network equipment Network equipment under capital lease Furniture and equipment Software Leasehold improvements Land Buildings Buildings under capital lease Property and equipment, gross Less: accumulated depreciation and amortization ($25,209 and $17,786 related to capital leases at December 31, 2014 and 2013, respectively) We have previously invested $4.1 million for a 51% ownership interest in Internap Japan, a joint venture with NTT-ME Corporation and NTT Holdings. Given the minority interest protections in favor of our joint venture partners, we do not assert control over the joint ven- ture’s operational and financial policies and practices required to account for the joint venture as a subsidiary whose assets, liabilities, revenue and expense would be consolidated. We are, however, able to assert signifi- cant influence over the joint venture and, therefore, account for our joint venture investment using the equity-method of accounting. Our investment activity in the joint venture is summa- rized below (in thousands): December 31, 2014 2013 $ 194,441 $ 189,763 8,023 19,811 41,595 380,376 254 696 64,323 6,346 19,194 51,763 319,119 630 1,395 56,440 709,519 644,650 Year Ended December 31, 2014 2013 $2,602 259 $3,000 213 (239) (611) (367,374) (312,687) $ 342,145 $ 331,963 Investment balance, January 1 Proportional share of net income Unrealized foreign currency translation loss, net During 2014 and 2013, we determined that we would not use certain items and recorded an impairment charge, primarily in our data center services segment, of $0.5 million to leasehold improvements and $0.5 million to developed software, respectively. We include the impairment charge in “Exit activities, restructuring and impairments” in the consolidated statements of opera- tions and comprehensive loss for the years ended December 31, 2014 and 2013. Depreciation and amortization of property and equip- ment consisted of the following (in thousands): Direct costs of network, sales and services Other depreciation and amortization Subtotal Amortization of acquired and developed technologies Total depreciation and amortization Year ended December 31, 2014 2013 2012 $70,579 $44,799 $33,019 4,672 3,382 3,128 75,251 48,181 36,147 5,918 4,967 4,718 $81,169 $53,148 $40,865 We retired $17.9 million of assets with accumulated depreciation of $17.4 million during the year ended December 31, 2014, $8.1 million of assets with accumu- lated depreciation of $8.1 million during the year ended December 31, 2013 and $8.5 million of assets with accumulated depreciation of $8.5 million during the year ended December 31, 2012. We capitalized an immate- rial amount of interest for each of the three years ended December 31, 2014. Investment balance, December 31 $2,622 $2,602 7. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill During the years ended December 31, 2014 and 2013, we did not identify an impairment as a result of our annual impairment test. In addition, we considered the likelihood of triggering events that might cause us to reassess goodwill on an interim basis and concluded that none had occurred subsequent to our August 1, 2014 valuation date. The carrying amount of goodwill for each of the two years ended December 31, 2014 is as follows (in thou- sands): Balance, December 31, 2013: Goodwill Accumulated impairment losses Data Center Services IP Services Total $90,923 $ 152,087 $ 243,010 — (112,623) (112,623) Net 90,923 39,464 130,387 iWeb acquisition – working capital adjustment Balance, December 31, 2014: Goodwill Accumulated impairment losses (74) — (74) 90,849 152,087 242,936 — (112,623) (112,623) Net $90,849 39,464 130,313 F-15 Internap 2014 Form 10-K Financial Section Notes to Consolidated Financial Statements Other Intangible Assets During the years ended December 31, 2014 and 2013, we concluded that no impairment indicators existed to cause us to reassess our other intangible assets. The components of our amortizing intangible assets, including capitalized software, are as follows (in thousands): Acquired and developed technology Customer relationships and trade names Beneficial lease interest December 31, 2014 December 31, 2013 Gross Carrying Amount $ 52,512 69,548 — $122,060 Accumulated Amortization $(40,718) (28,797) — Gross Carrying Amount $ 47,723 69,548 858 $(69,515) $118,129 Accumulated Amortization $(34,474) (25,950) (6) $(60,430) Amortization expense for intangible assets during the years ended December 31, 2014, 2013 and 2012 was $9.1 million, $5.9 million and $5.5 million, respectively. As of December 31, 2014, remaining amortization expense is as follows (in thousands): 8. ACCRUED LIABILITIES Accrued liabilities consist of the following (in thou- sands): 2015 2016 2017 2018 2019 Thereafter $ 5,968 5,606 4,855 4,677 4,003 27,436 $52,545 Compensation and benefits payable Property, sales, and other taxes Customer credit balances Other December 31, 2014 2013 $ 7,239 1,512 1,815 2,554 $ 8,100 1,619 1,147 2,683 $13,120 $13,549 9. EXIT ACTIVITIES AND RESTRUCTURING In prior years, we incurred costs related to certain exited facilities. In addition, during the year ended December 31, 2014, we recorded initial exit activity charges related to ceasing use of certain data center space, with payments expected through 2019. In addition, we recorded plan adjustments in sublease income assumptions for certain properties included in our previously-disclosed 2007 restructuring plan, with payments expected through 2016. We included these initial exit activity charges and subsequent plan adjustments in “Exit activities, restructuring and impairments” in the accompanying statements of operations and comprehensive loss for the year ended Decem- ber 31, 2014. The following table displays the transactions and balances for exit activities and restructuring charges, substantially related to our data center services segment, during the years ended December 31, 2014 and 2013 (in thousands): Real estate obligations: 2014 exit activities 2011 - 2013 exit activities 2007 restructuring 2001 restructuring Real estate obligations: 2011 - 2013 exit activities 2007 restructuring 2001 restructuring Balance December 31, 2013 Initial Charges Plan Adjustments Cash Payments Balance December 31, 2014 $ — 67 3,296 800 $4,163 $3,499 — — — $3,499 $ 17 21 1,055 — $1,093 $(1,506) (81) (2,026) (632) $(4,245) Balance December 31, 2012 Initial Charges Plan Adjustments Cash Payments $ 146 4,245 1,482 $5,873 $81 — — $81 $ 2 1,043 59 $1,104 $ (162) (1,992) (741) $(2,895) $2,010 7 2,325 168 $4,510 Balance December 31, 2013 $ 67 3,296 800 $4,163 F-16 Internap 2014 Form 10-K Financial Section Notes to Consolidated Financial Statements 10. INTEREST RATE SWAPS During December 2013, we entered into and currently hold an interest rate swap to add stability to interest expense and to manage exposure to interest rate move- ments in conjunction with the issuance of our new credit agreement. Our interest rate swap, which was desig- nated and qualified as a cash flow hedge, involves the receipt of variable rate amounts from a counterparty in exchange for us making fixed-rate, over 1.5%, pay- ments over the life of the agreement without exchange of the underlying notional amount. The cash flow hedge, effective December 20, 2013, had a notional amount starting at $150.0 million through December 31, 2016. We recorded the interest rate derivative in the consoli- dated balance sheets at fair value. During December 31, 2014 and 2013, the fair value of the interest rate swap was $0.8 million and is included in “Other current liabili- ties and “Other long-term liabilities,” respectively, in the accompanying consolidated balance sheets. During December 31, 2014 and 2013, the effective portion of the change in fair value of our interest rate swaps, des- ignated and qualified as a cash flow hedge, is recorded in “Accumulated items of other comprehensive loss” in the accompanying consolidated balance sheets. We will subsequently reclassify such value into earnings in the period that the hedged transaction affects earnings. We recognize the ineffective portion of the change in fair value of the derivative directly in earnings; however, we did not recognize any hedge ineffectiveness during the years ended December 31, 2014 and 2013. We will reclassify amounts reported in “Accumulated items of other comprehensive loss” related to our inter- est rate swaps to “Interest expense” in our accompany- ing consolidated statements of operations and compre- hensive loss as we accrue interest payments on our variable-rate debt. Through December 31, 2014, we estimated that we will reclassify an additional $0.8 mil- lion as an increase to interest expense since the hedge interest rate currently exceeds the variable interest rate on our debt. The activity of our interest rate swaps is summarized as follows (in thousands): Losses recorded as the effective portion of the change in fair value Interest payments reclassified as an increase to interest expense Year Ended December 31, 2014 2013 36 806 777 497 11. COMMITMENTS, CONTINGENCIES AND LITIGATION Credit Agreement During 2013, we entered into a $350.0 million credit agreement (the “credit agreement”), which provides for a senior secured first lien term loan facility of $300.0 mil- lion (“term loan”) and a second secured first lien revolv- ing credit facility of $50.0 million (“revolving credit facil- ity”). Concurrently with the effective date and funding of the term loan, we acquired iWeb and paid off our previ- ous credit facility, which resulted in a loss on extinguish- ment of debt of $0.9 million. In addition, we recorded a debt discount of $9.5 million related to costs incurred for the credit agreement. As of December 31, 2014, the balance on the revolving credit facility, due November 26, 2018, was $10.0 mil- lion. Subsequent to December 31, 2014, we drew an additional $10.0 million on the revolving credit facility. The term loan had an outstanding principal amount of $297.0 million, which we repay in $750,000 quarterly installments on the last day of each fiscal quarter, with the remaining unpaid balance due November 26, 2019. Borrowings under the credit agreement bear interest at a rate per annum equal to an applicable margin plus, at our option, a base rate or an adjusted LIBOR rate. The applicable margin for loans under the revolving credit facility is 3.50% for loans bearing interest calculated using the base rate (“Base Rate Loans”) and 4.50% for loans bearing interest calculated using the adjusted LIBOR rate (“Adjusted LIBOR Loans”). The applicable margin for loans under the term loan is 4.00% for Base Rate Loans and 5.00% for Adjusted LIBOR Rate loans. The base rate is equal to the highest of (a) the adjusted U.S. Prime Lending Rate as published in the Wall Street Journal, (b) with respect to Term Loans issued on the Closing Date, 2.00%, (c) the federal funds effective rate from time to time, plus 0.50%, and (d) the adjusted LIBOR rate, as defined below, for a one-month interest period, plus 1.00%. The adjusted LIBOR rate is equal to the rate per annum (adjusted for statutory reserve requirements for Eurocurrency liabilities) at which Euro- dollar deposits are offered in the interbank Eurodollar market for the applicable interest period (one, two, three or six months), as quoted on Reuters screen LIBOR (or any successor page or service). The financing commit- ments of the Lenders extending the revolving credit facility are subject to various conditions, as set forth in the credit agreement. The credit agreement includes financial covenants relat- ing to maximum total leverage ratio, minimum consoli- dated interest coverage ratio and limitation on capital expenditures. As of December 31, 2014, we were in compliance with these financial covenants. Our obligations are secured pursuant to a security agreement, under which we granted a security interest in substantially all of our assets, including the capital stock of our domestic subsidiaries and 65% of the capi- tal stock of our foreign subsidiaries. F-17 Internap 2014 Form 10-K Financial Section Notes to Consolidated Financial Statements A summary of our credit agreement as of December 31, 2014 and December 31, 2013 is as follows (dollars in thousands): Credit limit: Revolving credit facility Term loan Outstanding balance on revolving December 31, 2014 2013 $ 50,000 300,000 $ 50,000 300,000 credit facility 10,000 — Outstanding principal balance on the term loan, less unamortized discount of $8.0 million and $9.4 million, respectively Letters of credit issued with proceeds from revolving credit facility Letters of credit issued with cash Borrowing capacity Interest rate-term loan Interest rate-revolving credit facility 288,994 290,608 6,329 — 33,671 6.0% 4.7% — 6,400 50,000 6.0% 4.7% Maturities of the term loan are as follows: 2015 2016 2017 2018 2019 $ 3,000 3,000 3,000 3,000 285,000 $297,000 Asset Retirement Obligations During 2014 and 2013, we recorded asset retirement obligations (“ARO”) related to future estimated removal costs of leasehold improvements for certain data center leased properties. We were able to reasonably estimate the liabilities in order to record the ARO and the corre- sponding asset retirement cost in our data center ser- vices segment at its fair value. We calculated the fair value by discounting the estimated amount to present value using the applicable Treasury bill rate adjusted for our credit non-performance risk. As of December 31, 2014 and 2013, the balance of the present value ARO was $0 and $1.4 million, which we included in “Other current liabilities,” respectively, and $2.5 million and $1.0 million, which we included in “Other long-term liabilities,” respectively, in the consolidated balance sheets. We included all asset retirement costs in “Prop- erty and equipment, net” in the consolidated balance sheets as of December 31, 2014 and 2013, and depre- ciated those costs using the straight-line method over the remaining term of the related lease. We have other capital lease agreements that require us to decommission physical space for which we have not yet recorded an ARO. Due to the uncertainty of specific decommissioning obligations, timing and related costs, we cannot reasonably estimate an ARO for these prop- erties and we have not recorded a liability at this time for such properties. Capital Leases We record capital lease obligations and leased property and equipment at the lesser of the present value of future lease payments based upon the terms of the related lease or the fair value of the assets held under capital leases. As of December 31, 2014, our capital leases had expiration dates ranging from 2015 to 2039. Sale-leaseback transactions. During 2014, we com- pleted sale-leaseback transactions for equipment and a building with third-parties for a total of $4.7 million of cash proceeds. We recognized a deferred gain of $0.8 million on these transactions, which we will amortize over the life of the related lease, of which $0.1 million is included in “Current other liabilities” and $0.7 million is included in “Other long-term liabilities” in the accompa- nying consolidated balance sheet. Also, as a result of lease obliga- these transactions, we recorded capital tions of $3.4 million. Other capital lease transactions. During 2014, we exer- cised a renewal option of an existing operating lease for company-controlled data center space in Montreal. The lease extension, for accounting purposes, triggered a new lease which expires in 2032, with the new terms resulting in capital lease treatment. We recorded prop- erty of $6.0 million, net of the deferred rent balance on the previous operating lease, and a capital lease obliga- tion of $7.4 million. In addition, we fully amortized the related intangible asset from the previous operating lease, beneficial lease interest, with a net book value of $0.8 million. Future minimum capital lease payments and the present value of the minimum lease payments for all capital leases as of December 31, 2014, are as follows (in thou- sands): 2015 2016 2017 2018 2019 Thereafter Remaining capital lease payments Less: amounts representing imputed interest Present value of minimum lease payments Less: current portion $ 12,488 11,435 10,721 10,251 9,163 37,552 91,610 (31,558) 60,052 (7,366) $ 52,686 Operating Leases We have entered into leases for data center, private net- work access points (“P-NAPs”) and office space that are classified as operating leases. Initial lease terms range from three 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 Financial Section Notes to Consolidated Financial Statements of credit. Future minimum lease payments on non- cancelable operating leases having terms in excess of one year were as follows at December 31, 2014 (in thou- sands): 2015 2016 2017 2018 2019 Thereafter $ 24,831 24,920 19,525 12,988 8,738 12,352 $103,354 Rent expense was $21.3 million, $23.8 million and $24.7 million during the years ended December 31, 2014, 2013 and 2012, respectively. Other Commitments We have entered into commitments primarily related to IP, telecommunications and data center services. Future minimum payments under these service commitments having terms in excess of one year were as follows at December 31, 2014 (in thousands): 2015 2016 2017 2018 2019 Thereafter Litigation $18,420 6,322 1,894 224 209 33 $27,102 We are subject to legal proceedings, claims and litiga- tion arising in the ordinary course of business. Although the outcome of these matters is currently not determin- able, 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. 12. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION Operating Segment Information We operate in two business segments: data center ser- vices and IP services. The data center services segment includes colocation, hosting and cloud services. Colocation involves providing physical space within data centers and associated services such as power, interconnection, environmental controls and security while allowing our customers to deploy and manage their servers, storage and other equipment in our secure F-18 Internap 2014 Form 10-K data centers. Hosting and cloud services involve the provision and maintenance of hardware, operating sys- tem software, management and monitoring software, data center infrastructure and interconnection, while allowing our customers to own and manage their soft- ware applications and content. Our IP services segment includes our patented Performance IP™ service, CDN services and IP routing and hardware and software plat- form. Segment profit is calculated as segment revenues less direct costs of network, sales and services, exclusive of depreciation and amortization for the segment and does not include direct costs of customer support, direct costs of amortization of acquired technologies or any other depreciation or amortization associated with direct costs. Year Ended December 31, 2014 2013 2012 Revenues: Data center services IP services $242,623 $185,147 $167,286 106,306 98,195 92,336 Total revenues 334,959 283,342 273,592 Direct costs of network, sales and services, exclusive of depreciation and amortization: Data center services IP services Total direct costs of network, sales and services, exclusive of depreciation and amortization Segment profit: Data center services IP services 106,159 38,787 92,564 39,448 90,604 40,350 144,946 132,012 130,954 136,464 53,549 92,583 58,747 76,682 65,956 Total segment profit 190,013 151,330 142,638 Exit activities, restructuring and impairments 4,520 1,414 1,422 Other operating expenses, including direct costs of customer support, depreciation and amortization (Loss) income from operations Non-operating expenses Loss before income taxes and equity in (earnings) of equity-method investment 199,832 157,403 137,452 (14,339) 26,775 (7,487) 12,841 3,764 7,849 $ (41,114) $ (20,328) $ (4,085) F-19 Internap 2014 Form 10-K Financial Section Notes to Consolidated Financial Statements Total assets by segment are as follows (in thousands): December 31, 2014 2013 2012 Data center services IP services $474,460 117,324 $470,736 143,505 $233,727 166,985 $591,784 $614,241 $400,712 We present goodwill by segment in note 7, and as dis- cussed in that note, we did not record an impairment charge during the years ended December 31, 2014 and 2013. Geographic Information Revenues are allocated to countries based on location of services. Revenues, by country with revenues over 10% of total revenues, are as follows (in thousands): Revenues: United States Canada Other countries Year Ended December 31, 2014 2013 2012 $258,770 47,479 28,710 $257,591 4,303 21,448 $252,058 690 20,844 $334,959 $283,342 $273,592 Net property and equipment, by country with assets over 10% of total property and equipment, is as follows (in thousands): United States Canada Other countries December 31, 2014 2013 $278,065 60,320 3,760 $276,400 52,209 3,354 $342,145 $331,963 13. STOCK-BASED COMPENSATION PLANS We have granted employees options to purchase shares of our common stock and issued shares of common stock subject to vesting. We measure stock-based compensation cost at the grant date based on the cal- culated fair value of the option or award. We recognize the expense over the employees’ requisite service 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 forfeiture rate impacts the amount of aggregate com- pensation. These assumptions are subjective and gen- erally require significant analysis and judgment to develop. The following table summarizes the amount of stock- based compensation, net of estimated forfeitures, included in the consolidated statements of operations and comprehensive loss (in thousands): Direct costs of customer support Sales and marketing General and administrative Year Ended December 31, 2014 2013 2012 $1,448 1,147 4,587 $1,108 1,110 4,525 $ 936 929 3,993 $7,182 $6,743 $5,858 We have not recognized any tax benefits associated with stock-based compensation due to our tax net operating losses. During the three years ended Decem- ber 31, 2014, 2013 and 2012, we capitalized $0.3 mil- lion, $0.4 million and $0.4 million, respectively, of stock- based compensation. 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, 2014, 2013 and 2012, were expected terms of 4.6, 4.4 and 4.4 years, respectively; historical volatilities of 47%, 66% and 78%, respec- tively; risk free interest rates of 1.4%, 0.7% and 0.7%, respectively and no dividend yield. The weighted aver- age estimated fair value per share of our stock options at grant date was $3.13, $4.46 and $4.51 during the years ended December 31, 2014, 2013 and 2012, respectively. The expected term represents the weighted average period of time that the stock options are expected to be outstanding, giving consideration to the vesting schedules and our historical exercise pat- terns. 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 esti- mate stock option exercises, employee terminations and forfeiture rates. Under our 2014 Stock Incentive Plan (the “2014 Plan”), we may issue stock options, stock appreciation rights, restricted stock and restricted stock units to eligible employees and directors. Our historical practice has been to grant only stock options and restricted stock. The compensation committee of our board of directors administers the 2014 Plan. As of December 31, 2014, 4.2 million shares of stock were available for issuance. For all stock-based compensation plans, the exercise price for each stock option may not be less than the fair market value of a share of our common stock on the grant date. Stock options generally have a maximum term of 10 years from the grant date. Stock options become exercisable as determined at the grant date by the compensation committee of our board of directors. Stock options generally vest 25% after one year and monthly or quarterly over the following three years. Con- ditions, if any, under which stock will be issued under stock grants or cash or stock will be paid under restricted stock units 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. All awards under the F-20 Internap 2014 Form 10-K Financial Section Notes to Consolidated Financial Statements 2014 Plan are subject to minimum vesting requirements unless otherwise determined by the compensation committee: a minimum one-year vesting period for time-based stock option and stock appreciation rights and a minimum three-year vesting period for time- based stock grants, except as described below for non- employee directors. If awards are performance-based, then performance must be measured over a period of at least one year. The 2014 Plan limits the number of shares that may be granted as full value awards (that is, grants other than in the form of stock options or stock appreciation rights) to 50% of the total number of shares available for issuance. In general, when awards granted under the 2014 Plan expire or are canceled without having been fully exercised, the shares reserved for those awards will be returned to the share reserve and be available for future awards. However, shares of common stock that are delivered by the grantee or with- held by us as payment of the exercise price in connec- tion with the exercise of an option or payment of the tax withholding obligation in connection with any award will not be returned to the share reserve. We have reserved sufficient common stock to satisfy stock option exer- cises with newly issued stock. However, we may also use treasury stock to satisfy stock option exercises. During 2014, 2013 and 2012, the value of the equity grants received by non-employee directors was $96,000, $94,000 and $77,000, respectively, in the form of restricted stock that vests on the date of our annual meeting of stockholders in the year following grant. Stock option activity during the year ended Decem- ber 31, 2014 under all of our stock-based compensation plans was as follows (shares in thousands): Balance, December 31, 2013 Granted Exercised Forfeitures and post-vesting cancellations Balance, December 31, 2014 Exercisable, December 31, 2014 Weighted Average Exercise Price $7.05 7.78 5.80 8.31 7.07 6.51 Shares 5,802 1,521 (306) (1,089) 5,928 3,673 Fully vested and exercisable stock options and stock options expected to vest as of December 31, 2014 are further summarized as follows (shares in thousands): Total shares Weighted-average exercise price Aggregate intrinsic value Weighted-average remaining contractual term (in years) Fully Vested and Exercisable 3,673 $ 6.51 $7,150 Expected to Vest 5,504 7.00 7,479 5.6 6.6 The total intrinsic value of stock options exercised was $0.6 million, $1.2 million and $1.2 million during the years ended December 31, 2014, 2013 and 2012, respectively. None of our stock options or the underly- ing shares is subject to any right to repurchase by us. Restricted stock activity during the year ended Decem- ber 31, 2014 was as follows (shares in thousands): Unvested balance, December 31, 2013 Granted Vested Forfeited Weighted- Average Grant Date Fair Value $6.08 7.54 5.70 7.13 Shares 992 471 (464) (230) Unvested balance, December 31, 2014 769 6.89 The total fair value of restricted stock vested during the years ended December 31, 2014, 2013 and 2012 was $3.5 million, $4.7 million and $3.7 million, respectively. At December 31, 2014, the total intrinsic value of all unvested restricted stock was $6.1 million. Total unrecognized compensation costs related to unvested stock-based compensation as of Decem- ber 31, 2014 is as follows (dollars in thousands): Unrecognized compensation Weighted-average remaining recognition period (in years) Stock Options Restricted Stock Total $6,050 $2,767 $8,817 2.6 1.7 2.3 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 discre- tionary and were $0.8 million, $0.8 million and $0.7 mil- lion during the years ended December 31, 2014, 2013 and 2012, respectively. F-21 Internap 2014 Form 10-K Financial Section Notes to Consolidated Financial Statements 15. INCOME TAXES The loss from continuing operations before income taxes and equity in (earnings) of equity-method invest- ment is as follows (in thousands): Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant portions of deferred taxes related to the following (in thousands): United States Foreign Loss from continuing operations before income taxes and equity in (earnings) of equity- method investment Year Ended December 31, 2014 2013 2012 $(32,684) $(17,066) $(3,838) (247) (8,430) (3,262) $(41,114) $(20,328) $(4,085) The current and deferred income tax (benefit) provision is as follows (in thousands): Current deferred income tax assets (liabilities): Provision for doubtful accounts Accrued compensation Other accrued expenses Deferred revenue Restructuring liability Other Current deferred income tax assets Less: valuation allowance Year Ended December 31, Net current deferred income tax 2014 2013 2012 assets (liabilities) Long-term deferred income tax assets (liabilities): Property and equipment Goodwill Intangible assets Deferred revenue, less current portion Restructuring liability, less current portion Deferred rent Stock-based compensation U.S. net operating loss carryforwards Foreign net operating loss carryforwards, less current portion Tax credit carryforwards Other Long-term deferred income tax assets Less: valuation allowance Net long-term deferred income tax Current: Federal State Foreign Deferred: Federal State Foreign $ — $(420) $ — 165 — 127 121 122 12 248 (286) 165 — — (1,609) (1,609) — 25 (24) 1 — — 288 288 Net income tax (benefit) provision $(1,361) $(285) $453 A reconciliation of the effect of applying the federal statutory rate and the effective income tax rate on our income tax (benefit) provision is as follows: Federal income tax at statutory rates Foreign income tax State income tax Other permanent differences Statutory tax rate change Compensation Capital loss expiration Acquisition costs Change in valuation allowance Effective tax rate Year Ended December 31, 2014 2013 2012 (34)% (34)% (34)% — — (4) (4) 2 3 — 1 4 5 — 11 — 6 29 11 — (2) 3 4 9 — — 31 (3)% (1)% 11% December 31, 2014 2013 $ 2,998 $ 1,673 4 844 687 208 2,937 1,812 6 967 869 195 6,414 (5,781) 6,786 (6,415) 633 371 45,719 3,388 (20,090) 40,255 3,856 (17,329) 1,225 927 1,026 4,119 4,667 713 5,533 3,398 69,457 63,730 10,052 3,246 1,771 8,220 2,782 1,219 124,580 (130,236) 113,304 (120,153) (liabilities) assets (5,656) (6,849) Net deferred tax (liabilities) assets $ (5,023) $ (6,478) As of December 31, 2014, we had U.S. net operating loss carryforwards for federal tax purposes of $208.8 million that will expire in 2018 through 2034. Of the total U.S. net operating loss carryforwards, $26.0 million of net operating losses related to the deduction of stock- based compensation that will be tax-effected and the F-22 Internap 2014 Form 10-K Financial Section Notes to Consolidated Financial Statements benefit credited to additional paid-in capital when real- ized. In addition, we have alternative minimum tax and research and development tax credit carryforwards of approximately $1.0 million. Alternative minimum tax credits have an indefinite carryforward period while our research and development credits will begin to expire in 2026. Finally, we have foreign net operating loss car- ryforwards of $41.6 million that will begin to expire in 2015. We intend to reinvest future earnings indefinitely within each country. Accordingly, we have not recorded deferred taxes for the difference between our financial and tax basis investment in foreign entities. Based on negative cumulative earnings from foreign operations, we estimate that we will not incur incremental tax costs in the hypothetical instance of a repatriation and thus no deferred asset or liability would be recorded in our con- solidated financial statements. We determined that through December 31, 2014, no fur- ther ownership changes have occurred since 2001 pur- suant to Section 382 of the Internal Revenue Code (“Section 382”). Therefore, as of December 31, 2014, no additional material limitations existed on the U.S. net operating losses related to Section 382. However, if we experience subsequent changes in stock ownership as defined by Section 382, we may have additional limita- tions 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 financial reporting purposes compared to income tax purposes. Network equipment and leasehold improvements comprise the majority of the income tax basis differences. These assets are deductible over a shorter life for financial reporting than for income tax purposes. As we retire assets in the future, the income tax basis differences will reverse and become deductible for income taxes. We periodically evaluate the recoverability of the deferred tax assets and the appropriateness of the valu- ation allowance. As of December 31, 2014, we estab- lished a valuation allowance of $131.2 million against the U.S. deferred tax asset and $4.8 million against the foreign deferred tax asset 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. Changes in our deferred tax asset valuation allowance are summarized as follows (in thousands): Balance, January 1, Increase in deferred tax assets Year Ended December 31, 2014 2013 2012 $126,568 $124,433 $123,414 9,449 2,135 1,019 Balance, December 31, $136,017 $126,568 $124,433 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 examination based upon the technical merits of the position. 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): Unrecognized tax benefits balance, January 1, Addition for tax positions taken in current year Addition for tax positions taken in a prior year Deduction for tax positions taken in a prior year Unrecognized tax benefits balance, December 31, Year Ended December 31, 2014 2013 2012 $408 $ 341 $283 — — — — 408 (341) 58 — — $408 $ 408 $341 During 2013, we recorded $0.4 million of additional unrecognized tax benefits through purchase accounting from the iWeb acquisition related to participation inter- est deducted in a prior year. No uncertain tax positions were recorded during 2014. We classify interest and penalties arising from the underpayment of income taxes in the consolidated statements of operations and comprehensive loss as a component of “(Benefit) provision for income taxes.” As of December 31, 2014, 2013 and 2012, we had an accrual of $0, $0 and $48,000, respectively, for interest and penalties related to uncertain tax positions. Our federal income tax returns remain open to examina- tion for the tax years 2011 through 2013; however, tax authorities have the right to adjust the net operating loss carryovers for years prior to 2011. Returns filed in other jurisdictions are subject to examination for years prior to 2011. F-23 Internap 2014 Form 10-K Financial Section Notes to Consolidated Financial Statements 16. UNAUDITED QUARTERLY RESULTS The following table sets forth selected unaudited quarterly data during the years ended December 31, 2014 and 2013. The quarterly operating results below are not necessarily indicative of those in future periods (in thousands, except for share data). 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 Exit activities, restructuring and impairments Net loss Basic and diluted net loss per share 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 Exit activities, restructuring and impairments Net loss Basic and diluted net loss per share 2014 Quarter Ended March 31 June 30 September 30 December 31 $81,961 $84,068 $84,667 $84,263 35,760 8,927 1,461 1,384 (10,675) (0.21) 36,562 9,553 1,551 1,561 (11,185) (0.22) 37,148 9,114 1,524 56 (9,377) (0.18) 35,475 9,211 1,383 1,518 (8,257) (0.16) 2013 Quarter Ended March 31 June 30 September 30 December 31 $69,699 $69,983 $69,572 $74,087 32,870 7,151 1,179 248 (1,643) (0.03) 32,653 7,372 1,190 683 (3,702) (0.07) 32,795 7,528 1,273 274 (4,035) (0.08) 33,693 7,635 1,324 209 (10,450) (0.21) S-1 Internap 2014 Form 10-K Financial Section Internap Corporation Financial Statement Schedule INTERNAP CORPORATION FINANCIAL STATEMENT SCHEDULE SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS) Year ended December 31, 2012: Allowance for doubtful accounts Year ended December 31, 2013: Allowance for doubtful accounts Year ended December 31, 2014: Allowance for doubtful accounts Balance at Beginning of Fiscal Period Charges to Costs and Expense Balance at End of Fiscal Period Deductions $1,668 $ 932 $ (791)(1) $1,809 1,809 1,995 1,861 1,469 (1,675)(1) (1,343)(1) 1,995 2,121 (1) Deductions in the allowance for doubtful accounts represent write-offs of uncollectible accounts net of recoveries. STOCK PERFORMANCE GRAPH The following graph compares the cumulative annual total stockholder return for the five-year period ended December 31, 2014, to that of the (a) NASDAQ Market Index, a broad market index and (b) Morningstar Group Index-Software-Application, an index of approximately 552 industry peer companies. The table assumes that $100 was invested on December 31, 2009 and that all dividends were reinvested. Our fiscal year ends on December 31. The stock price performance in 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 of 1934, as amended (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 MORNINGSTAR GROUP INDEX Comparison of 5 Year Cumulative Total Return Assumes Initial Investment of $100 December 2014 250.00 200.00 150.00 100.00 50.00 0.00 2009 2010 2011 2012 2013 2014 Internap Corporation NASDAQ Market Index Morningstar Group Index Internap Corporation NASDAQ Market Index Morningstar Group Index As of December 31 2009 2010 2011 2012 2013 2014 100.00 100.00 100.00 129.36 118.02 125.23 126.38 117.04 120.08 147.45 137.47 152.13 160.00 192.62 196.62 169.36 221.02 198.46 Exhibit 21.1 Internap Corporation List of Subsidiaries Internap 2014 Form 10-K INTERNAP CORPORATION LIST OF SUBSIDIARIES Name of Entity Voxel Holdings, Inc. Voxel Dot Net, Inc. Ubersmith, Inc. Internap Connectivity LLC Internap Network Services U.K. Limited Internap Network Services B.V. Internap Technologies (Bermuda) Limited Internap Technologies B.V. Internap Network Services (HK) Limited Internap Network Services (Singapore) Pte Limited Internap Network Services (Australia) Co. Pty. Ltd. Internap Network Services Canada iWeb Technologies Inc. iWeb Intellectual Property Inc. iWeb Peering Corporation Internap Japan Co., Ltd.* * Not wholly-owned. Jurisdiction Delaware Delaware Delaware Delaware United Kingdom Netherlands Bermuda Netherlands Hong Kong Singapore Australia Canada Quebec, Canada Quebec, Canada Delaware Japan Exhibit 23.1 Consent of Independent Registered Public Accounting Firm Internap 2014 Form 10-K CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Forms S-3 (Nos. 333-70870, 333-47288, 333-108573, 333-111878, 333-111880 and 333-118234) and on Forms S-8 (Nos. 333-89369, 333- 37400, 333-40430, 333-42974, 333-43996, 333-111543, 333-117068, 333-127989, 333-137314, 333-141245, 333- 153766, 333-175885 and 333-196775) of Internap Corporation of our report dated February 19, 2015 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. Atlanta, Georgia February 19, 2015 /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Exhibit 31.1 Certification Internap 2014 Form 10-K CERTIFICATION I, J. Eric Cooney, certify that: 1. 2. 3. 4. I have reviewed this Annual Report on Form 10-K of Internap Corporation (the “registrant”); 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; 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; 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, includ- ing 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 internal 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, pro- cess, 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: February 19, 2015 /s/ J. Eric Cooney J. Eric Cooney President and Chief Executive Officer Exhibit 31.2 Certification CERTIFICATION I, Kevin M. Dotts, certify that: Internap 2014 Form 10-K 1. 2. 3. 4. I have reviewed this Annual Report on Form 10-K of Internap Corporation (the “registrant”); 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; 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; 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, includ- ing 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 internal 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, pro- cess, 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: February 19, 2015 /s/ Kevin M. Dotts Kevin M. Dotts Chief Financial Officer Exhibit 32.1 Statement Required by 18 U.S.C. Section 1350 Internap 2014 Form 10-K 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 Corporation (the “Company”) for the year ended December 31, 2014, 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: February 19, 2015 /s/ J. Eric Cooney J. Eric Cooney President and Chief Executive Officer 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 Corporation (the “Company”) for the year ended December 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Kevin M. Dotts, Chief Financial 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: February 19, 2015 /s/ Kevin M. Dotts Kevin M. Dotts Chief Financial Officer TOPPAN VITE NEW YORK JOB: TVNY / t1500676-10k / 00a-letter 747 Third Avenue, New York NY 10017 Tel: (212) 596-7747 Page: 1 / 1 E-mail: cs@toppanlf.com (SYSTEM) Proof Date: 03/30/15 @ 16:46 p.m. TOPPAN VITE NEW YORK JOB: TVNY / t1500676-10k / 13-bcv 747 Third Avenue, New York NY 10017 Tel: (212) 596-7747 Page: 1 / 1 E-mail: cs@toppanlf.com (SYSTEM) Proof Date: 03/30/15 @ 16:46 p.m. -------------------- -------------------- Dear Fellow Internap Stockholders, During 2014, Internap advanced our mission to power the world’s most innovative and high-performance Internet applications. Successful execution with both organic and inorganic initiatives, including new product introductions and the integration of the iWeb business, allowed Internap to help our customers transform their Internet infrastructure into a competitive advantage. We continue to see our unique combination of hybrid, high-performance Internet infrastructure services, as well as our award-winning, fully-redundant network operations centers provide a basis for long-term competitive differentiation. We believe our 2014 results affirm both the strategic direction we have chosen for the Company, as well as demonstrate strong operational execution across the business. We expanded our e-commerce route to market in 2014 to represent approximately 25% of sales, up from roughly 5% in 2013, primarily through the successful integration of the iWeb acquisition which was closed in December 2013. This route-to-market capability requires extensive digital market- ing, multi-lingual inside sales, campaign management and customer support skill sets. We believe there is a significant opportunity to further leverage our e-commerce route to market capabilities to sell IT infrastructure services to an enterprise customer base increasingly comfortable with on-line purchases. Going forward, we will continue to lever- age diverse routes to market across a common platform of IT infrastructure services to maximize the opportunity for profitable growth while simultaneously minimizing the risk of incremental capital investment. New product launches with a performance based dif- ferentiation are a key component of our growth strategy. The launch of our OpenStack-powered, next-generation AgileCLOUD in four global locations, including the New York metro area, Dallas, Amsterdam and Montreal, Canada, illustrates this commitment to product expansion. Internap’s AgileCLOUD provides a faster and more scalable public cloud for customers’ performance-sensitive applications. In addition to broad reach, AgileCLOUD offers high- performance features like dedicated CPU options, all-SSD ephemeral and persistent storage, OpenStack API support and easy access to the OpenStack-native Horizon cloud management portal. Also in 2014, we enhanced our high performance value proposition with the introduction of our patented next- generation Managed Internet Route Optimizer™, MIRO, which is designed to deliver on our promise of providing consistent “performance without compromise.” MIRO optimizes network traffic for applications and content run- ning on our cloud, hosting and colocation services. Internap was founded on the MIRO technology, which evaluates network performance across the global Internet and routes traffic to the best performing network at any point in time. While the classic version of MIRO consistently outperformed individual carrier networks and has been the gold standard for IP transit, this next-generation MIRO decidedly improves upon prior performance while also add- ing an inherently scalable architecture to enable the new generation of real-time data intensive applications our customers are developing. We also successfully completed the data center migration in our New York metro market, further improving Company profitability. In financial terms, 2014 was highlighted by record levels of annual revenue, segment profit, adjusted EBITDA and adjusted EBITDA margin. Our strategy to deliver high- performance hybridized Internet infrastructure service offer- ings and generate a higher proportion of revenue from company-controlled colocation, hosting and cloud services is successfully producing revenue growth and significantly expanding margins. Revenue increased 18% to $335.0 mil- lion, underpinned by both organic growth and the acquisi- tion of the iWeb business. Segment profit increased 26% to $190.0 million, while segment profit margin expanded 330 basis points to 56.7%. Importantly, while we have made solid progress in driving revenue and segment profit growth, we have also been disciplined in managing our cash operat- ing expenses and maintaining our focus on operational excellence. As a result, adjusted EBITDA increased 36% to $78.7 million and adjusted EBITDA margin expanded 300 basis points to 23.5%. In addition to tight operational controls and the positive operating leverage we are building in the business model, there are three primary drivers of our margin expansion. First, as a result of the strategy we put in place several years ago, we are delivering margin expansion from the favorable mix shift towards selling more company- controlled colocation, hosting and cloud services. As the revenue from these services increases in proportion relative to the other sources of revenue in the business, we would expect our margins to increase. Second, we continue to benefit from the product mix shift associated with hosting and cloud growth surpassing the company-controlled colocation growth rates. Additionally, hosting and cloud tend to have higher segment margins than our company- controlled colocation. Third, we are able to derive higher incremental margins as we increase utilization rates within our company-controlled data centers. From a company- wide perspective, we believe we have significant available capacity across our company-controlled data center footprint, which provides an attractive selling point for our colocation and hosting services. Internap’s solid financial position provides us with capital flexibility. We ended the year with $20.1 million in cash and cash equivalents and $33.7 million in borrowing capacity on our revolving credit facility. Over the past several years the majority of our non-maintenance capital expenditures have been geared toward expansion capital to build new company controlled data centers. Going forward, we expect the mix to shift towards success-based capital expenditures supporting the growth in our hosting and cloud businesses. We have a disciplined approach to capital allocation and believe we have significant opportunity to generate substantial returns on capital in the coming years. Looking into 2015 and beyond, we feel the market increas- ingly coming to us in terms of our strategy to deliver high- performance hybridized Internet infrastructure service offerings. We will continue to leverage our company- controlled data center capacity and expect to fill this capac- ity with our full portfolio of colocation, hosting and cloud offerings. We will continue to focus on launching new performance-differentiated service offerings and leverage the benefits of multiple routes to market in support of long- term profitable growth for our shareholders. We thank you, or stockholders, for your support and for sharing our vision of Internap’s future. Sincerely, J. Eric Cooney President and Chief Executive Officer April 2, 2015 Adjusted EBITDA and segment profit are non-GAAP measures. Segment profit is segment revenues less direct costs of network, sales and services, exclusive of depreciation and amortization, as presented in the notes to our consolidated financial statements. A reconciliation of adjusted EBITDA to GAAP loss from operations can be found in the attachment to our fourth quarter and full-year 2014 earnings press release, which is available on our website and furnished to the Securities and Exchange Commission. This letter contains forward-looking statements that are based on management’s current beliefs, expectations, plans and intentions. These statements are subject to risks and uncertainties. For a more complete discussion of the risks and uncertainties associated with these statements, please see the information under “Forward-Looking State- ments” and “Risk Factors” in our Annual Report on Form 10-K, which accompanies this letter. MANAGEMENT EXECUTIVE OFFICERS J. Eric Cooney President and Chief Executive Officer Kevin M. Dotts Chief Financial Officer Steven A. Orchard Senior Vice President and General Manager, Data Center and Network Services Satish Hemachandran Senior Vice President and General Manager, Cloud and Hosting 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 Patricia L. Higgins Former President and Chief Executive Officer, Switch & Data Facilities Company Gary M. Pfeiffer Former Senior Vice President and Chief Financial Officer, The DuPont Company Michael A. Ruffolo Former President and Chief Executive Officer, Crossbeam Systems Debora J. Wilson Former President and Chief Executive Officer, The Weather Channel CORPORATE HEADQUARTERS Internap Corporation One Ravinia Drive, Suite 1300 Atlanta, Georgia 30346 877.843.7627 FINANCIAL AND OTHER COMPANY INFORMATION The Form 10-K for the year ended December 31, 2014, 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 available in the Investor Relations section of Internap’s website at www.internap.com. For a printed copy of our Form 10-K without charge, please contact: Internap Corporation Attn: Investor Relations One Ravinia Drive, Suite 1300 Atlanta, Georgia 30346 877.843.7627 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 1075 Peachtree Street NE, Suite 2600 Atlanta, Georgia 30309 678.419.1000 MARKET INFORMATION Internap’s common stock is traded on the NASDAQ Stock Market under the symbol “INAP”. ANNUAL REPORT 2014ANNUAL REPORT 2014PERFORMANCE WITHOUT COMPROMISEOne Ravinia Drive • Suite 1300 • Atlanta, Georgia 30346877.843.7627internap.com

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