TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from
to
Commission
File Number: 000-27265
INTERNAP
NETWORK SERVICES CORPORATION
(Exact
Name of Registrant as Specified in Its Charter)
DELAWARE
91-2145721
(State
or Other Jurisdiction of
Incorporation
or Organization)
(I.R.S.
Employer
Identification
No.)
250
Williams Street
Atlanta,
Georgia 30303
(Address
of Principal Executive Offices, Including Zip Code)
(404)
302-9700
(Registrant’s
Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x
No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
(Check
one):
Large
accelerated filer
o
Accelerated
filer
x
Non-accelerated
filer
o
Smaller
reporting company
o
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No x
As of
October 31, 2008, 50,211,175 shares of the registrant’s outstanding common
stock, $0.001 par value per share, were outstanding.
This
Quarterly Report on Form 10-Q contains “forward-looking statements” within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements include statements regarding industry trends, our
future financial position and performance, business strategy, revenues and
expenses in future periods, projected levels of growth, and other matters that
do not relate strictly to historical facts. These statements are often
identified by the use of words such as “may,” “will,” “seeks,” “anticipates,”
“believes,” “estimates,” “expects,” “projects,” “forecasts,” “plans,” “intends,”
“continue,” “could,” “should,” or similar expressions or variations. These
statements are based on the beliefs and expectations of our management team
based on information currently available. Such forward-looking statements are
not guarantees 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 differences include, but are not limited
to, those set forth in this quarterly report under “Item 1A. Risk
Factors.” We undertake no obligation to update any forward-looking
statements as a result of new information, future events or
otherwise.
As used
herein, except as otherwise indicated by context, references to “we,” “us,”
“our,” or the “Company” refer to Internap Network Services
Corporation.
Accounts
receivable, net of allowance of $8,384 and $5,470,
respectively
32,474
36,429
Inventory
447
304
Prepaid
expenses and other assets
9,534
8,464
Deferred
tax asset, current portion
44
479
Total
current assets
106,910
117,275
Property
and equipment, net of accumulated depreciation of $179,771 and $165,543,
respectively
83,421
65,491
Investments
7,938
1,138
Intangible
assets, net of accumulated amortization of $28,694 and $23,921,
respectively
35,599
43,008
Goodwill
90,977
190,677
Restricted
cash
—
4,120
Deposits
and other assets
2,880
2,287
Deferred
tax asset, non-current
2,780
3,014
Total
assets
$
330,505
$
427,010
LIABILITIES
AND STOCKHOLDERS' EQUITY
Current
liabilities:
Notes
payable, current portion
$
—
$
2,413
Accounts
payable
22,611
19,624
Accrued
liabilities
10,072
10,159
Deferred
revenues, current portion
4,156
4,807
Capital
lease obligations, current portion
635
805
Restructuring
liability, current portion
1,853
2,396
Other
current liabilities
114
108
Total
current liabilities
39,441
40,312
Notes
payable, less current portion
20,000
17,354
Deferred
revenues, less current portion
2,252
2,275
Capital
lease obligations, less current portion
86
452
Restructuring
liability, less current portion
6,742
7,697
Deferred
rent
13,454
11,011
Deferred
tax liability
—
398
Other
long-term liabilities
793
878
Total
liabilities
82,768
80,377
Commitments
and contingencies
Stockholders'
equity:
Preferred
stock, $0.001 par value, 20,000 shares authorized, none issued or
outstanding
—
—
Common
stock, $0.001 par value; 60,000 shares authorized; 50,213 and 49,759
shares outstanding at September 30, 2008 and December 31, 2007,
respectively
50
50
Additional
paid-in capital
1,214,685
1,208,191
Accumulated
deficit
(965,913
)
(862,010
)
Accumulated
other comprehensive income
(746
)
402
Treasury
stock, at cost, 71 shares at September 30, 2008
(339
)
—
Total
stockholders' equity
247,737
346,633
Total
liabilities and stockholders' equity
$
330,505
$
427,010
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
UNAUDITED
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Nature
of Operations and Basis of
Presentation
Internap
Network Services Corporation (“Internap,” “we,” “us,” “our,” or the “Company”)
delivers high performance and reliable Internet solutions through a suite of
network optimization and delivery products and services. These solutions,
combined with progressive and proactive technical support, enable companies to
confidently migrate business-critical applications, including audio and video
streaming, to the Internet. Our suite of products and services support a broad
range of Internet applications. We serve both domestic and international
customers in the financial services, healthcare, technology, retail, travel,
media/entertainment, and other markets. Our product and service offerings are
complemented by Internet Protocol, or IP, access solutions such as data center
services, content delivery networks, or CDN, and managed security. We deliver
services through our 58 service points across North America, Europe and the
Asia-Pacific region. Our Private Network Access Points, or P-NAPs, feature
multiple direct high-speed connections to major Internet networks
including AT&T Inc., Sprint Nextel Corporation, Verizon Communications
Inc., Savvis, Inc., Global Crossing Limited, and Level 3 Communications, Inc. We
operate and manage the Company in three business segments: IP services, data
center services and CDN services.
Our
unaudited condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission,
or SEC, and include all the accounts of the Company and its wholly owned
subsidiaries. Certain information and note disclosures, normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States, have been condensed or omitted pursuant to such
rules and regulations. The unaudited condensed consolidated financial statements
reflect all adjustments, which consist of normal recurring adjustments,
necessary for a fair statement of our financial position as of September 30,
2008 and our operating results, cash flows, and changes in stockholders’ equity
for the interim periods presented. The balance sheet at December 31, 2007 has
been derived from our audited financial statements as of that date. These
financial statements and the related notes should be read in conjunction with
our financial statements and notes thereto contained in our Annual Report on
Form 10-K/A for the year ended December 31, 2007 filed with the
SEC.
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities and revenues and
expenses in the financial statements. Examples of estimates subject to possible
revision based upon the outcome of future events include, among others, the
provision for doubtful accounts, network cost accruals, income taxes, sales, use
and other taxes, recoverability of long-lived assets and goodwill, depreciation
of property and equipment, the valuation of investments, restructuring
allowances and stock-based compensation. Actual results could differ from those
estimates.
The
results of operations for the three and nine months ended September 30, 2008 are
not necessarily indicative of the results that may be expected for any future
periods or for the year ending December 31, 2008.
Reclassifications
and revisions
Beginning
in 2008, we classified all revenues and direct costs of network, sales and
services previously reported in other, non-segmented results, except for third
party CDN services, in the most closely related business segments to provide a
more accurate view of the results of operations of the business
segments. Financial information for 2007 has also been reclassified
to conform to the current period presentation. None of the
reclassifications had any effect on previously reported total revenues, total
direct costs of network, sales and services, exclusive of depreciation and
amortization, or net (loss) income.
Also, as
discussed in our Annual Report on Form 10-K/A for the year ended December 31,
2007 filed with the SEC, we revised our quarterly statements of operations for
the three and nine months ended September 30, 2007 to appropriately record $0.5
million for sales adjustments, which reduced net accounts receivable and
revenues. The effect of this revision had no impact on our net cash
flows.
- 8
-
INTERNAP
NETWORK SERVICES CORPORATION
UNAUDITED
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(continued)
The
effect of these reclassifications on revenues and direct costs of network, sales
and services is shown below (in thousands):
IP
Services
Data
Center
Services
CDN
Services
Other
Total
Three
Months Ended September 30, 2007:
Revenues:
Previously
reported
$
30,071
$
21,711
$
6,057
$
3,041
$
60,880
Reclassification
and revision of sales credits and billing
adjustments
(240
)
(87
)
(481
)
354
(454
)
Reclassification
of termination fees and professional and
resellerproducts
and services
386
264
42
(692
)
—
Revised
$
30,217
$
21,888
$
5,618
$
2,703
$
60,426
Direct
costs of network, sales and services, exclusive of
depreciation
and amortization:
Previously
reported
$
10,722
$
14,523
$
1,860
$
2,167
$
29,272
Reclassification
of professional and reseller products
and
services
30
—
—
(30
)
—
Revised
$
10,752
$
14,523
$
1,860
$
2,137
$
29,272
Nine
Months Ended September 30, 2007:
Revenues:
Previously
reported
$
88,453
$
59,941
$
13,344
$
11,170
$
172,908
Reclassification
and revision of sales credits and
billing
adjustments
(674
)
(507
)
(494
)
1,221
(454
)
Reclassification
of termination fees and professional
and
reseller products and services
1,494
408
42
(1,944
)
—
Revised
$
89,273
$
59,842
$
12,892
$
10,447
$
172,454
Direct
costs of network, sales and services, exclusive of
depreciation
and amortization:
Previously
reported
$
31,461
$
42,922
$
4,481
$
8,653
$
87,517
Reclassification
of professional and reseller products
and
services
204
—
—
(204
)
—
Revised
$
31,665
$
42,922
$
4,481
$
8,449
$
87,517
2.
Business
Combination
On
February 20, 2007, we completed the acquisition of VitalStream Holdings, Inc.,
or VitalStream, for approximately $214.0 million, whereby VitalStream became a
wholly owned subsidiary of Internap. VitalStream provided products and services
for storing and delivering digital media to large audiences over the Internet
and advertisement insertion and related advertising services to companies that
stream digital media over the Internet. We accounted for the transaction using
the purchase method of accounting in accordance with Statement of Financial
Accounting Standard, or SFAS, No. 141, “Business Combinations.” Our results
of operations include the activities of VitalStream from February 21,
2007.
- 9
-
INTERNAP
NETWORK SERVICES CORPORATION
UNAUDITED
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(continued)
The
following unaudited pro forma consolidated financial information reflects our
results of operations for the nine months ended September 30, 2007 as if the
acquisition of VitalStream had occurred at the beginning of the period. Pro
forma net loss and net loss per share for the nine months ended September 30,
2007 include non-recurring charges for asset impairments and restructuring of
$11.4 million and acquired in-process research and development of $0.5 million.
These pro forma results are not necessarily indicative of what our operating
results would have been had the acquisition actually taken place at the
beginning of the period (in thousands, except per share amounts):
Nine
Months Ended September 30, 2007:
Pro forma
revenues
$
174,782
Pro forma net
loss
(18,258
)
Pro forma net loss per share,
basic and diluted
(0.33
)
3.
Segments
The
following tables show operating results for our reportable business segments,
along with reconciliations from segment profit to (loss) income before income
taxes and equity in earnings of equity-method investment. Segment
information for the three months ended September 30, 2008 and 2007 is as
follows:
IP
Services
Data
Center
Services
CDN
Services
Other
Total
Three Months Ended September
30, 2008:
Revenues
$
31,660
$
28,738
$
5,001
$
—
$
65,399
Direct
costs of network, sales and services, exclusive
of
depreciation and amortization, included below
11,347
22,061
1,996
—
35,404
Segment
profit
$
20,313
$
6,677
$
3,005
$
—
29,995
Other
operating expenses, including depreciation
and
amortization
131,667
Loss
from operations
(101,672
)
Non-operating
income
109
Loss
before income taxes and equity in earnings of
equity-method
investment
$
(101,563
)
Three Months Ended September
30, 2007:
Revenues
$
30,217
$
21,888
$
5,618
$
2,703
$
60,426
Direct
costs of network, sales and services, exclusive
