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Internap Network Services 10-Q 2009
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 o
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 preceding 12 months (or
for such shorter period that the registrant was required to submit and post such
files). Yes o No o
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.
INTERNAP
NETWORK SERVICES CORPORATION
FORM
10-Q
FOR
THE QUARTER ENDED JUNE 30, 2009
TABLE
OF CONTENTS
i
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, or
the Exchange Act. Forward-looking statements include statements regarding
industry trends, our future financial position and performance, business
strategy, revenues and expenses in future periods, projected levels of growth
and other matters that do not relate strictly to historical facts. These
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 Form 10-Q
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. 1
INTERNAP
NETWORK SERVICES CORPORATION
(In
thousands, except per share amounts)
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements. 2
INTERNAP
NETWORK SERVICES CORPORATION
(In
thousands, except per share amounts)
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements. 3
INTERNAP
NETWORK SERVICES CORPORATION
(In
thousands)
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements. 4
INTERNAP
NETWORK SERVICES CORPORATION
STOCKHOLDERS’
EQUITY AND COMPREHENSIVE LOSS
(In
thousands)
*Total
comprehensive loss was $(60,428) and $(3,412) for the three months ended June
30, 2009 and 2008, respectively.
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements. 5
INTERNAP
NETWORK SERVICES CORPORATION
Internap
Network Services Corporation (“we,” “us” or “our”) delivers services through our
71 service points across North America, Europe, the Asia-Pacific region and
India. Our Private Network Access Points, or P-NAPs, feature multiple direct
high-speed connections to major Internet backbones, also referred to as network
service providers or NSP’s, including AT&T Inc.; Sprint Nextel
Corporation; Verizon Communications Inc.; Global Crossing Limited; and Level 3
Communications, Inc. As described in note 2, we operate in two business
segments: IP services and data center services. These segments reflect a change
from our historical segments, which also included content delivery network, or
CDN, services as a separate segment.
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 of our accounts and those of our 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, or U.S. GAAP, 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 June
30, 2009 and our operating results, cash flows and changes in stockholders’
equity for the interim periods presented. The balance sheet at December 31, 2008
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 for the year ended December 31, 2008 filed with the SEC.
The
preparation of financial statements in accordance with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
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 six months ended June 30, 2009 are not
necessarily indicative of the results that may be expected for any future
periods or for the year ending December 31, 2009 or subsequent
years.
We
operate in two business segments: IP services and data center services. IP
services represent our IP transit activities and include our high-performance
Internet connectivity, CDN services and flow control platform, or FCP, products.
Data center services primarily include physical space for hosting customers’
network and other equipment plus associated services such as redundant power and
network connectivity, environmental controls and security.
During
the three months ended June 30, 2009, we changed how we view and manage our
business. We now segregate our CDN services segment and consolidate these
financials with our IP services segment, except for the managed server
portion of CDN services, which we now consolidate with our data center
services segment. The change from our historical segments reflects management’s
views of the business and is better aligned with our operational and
organizational structure. The primary components of our CDN services have been
substantially integrated
with our IP services in the IP services segment. This includes integration of
our CDN points of presence, or POPs, into our P-NAPs along with aggregating
engineering and operations teams and internal financial reporting. In
addition, a single manager will be directly accountable to our chief executive
officer for the integrated IP services. Historically, CDN services also included
managed servers, or hosting and maintaining network equipment on behalf of
customers. Since the CDN managed server activity is a hosting activity, it is
more similar to our data center services and therefore we have included this
activity in our data center services segment. We have reclassified financial
information for 2008 to conform to the current period presentation.
6
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NETWORK SERVICES CORPORATION
UNAUDITED
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
following table shows operating results for our business segments, along with
reconciliations from segment gross profit to loss before income taxes and equity
in earnings of equity-method investment:
Other
operating expenses included product development costs of $1.5 million and $2.1
million for the three months ended June 30, 2009 and 2008, respectively, and
$3.4 million and $4.3 million for the six months ended June 30, 2009 and 2008,
respectively.
7
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NETWORK SERVICES CORPORATION
UNAUDITED
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Segment
gross profit is segment revenues less direct costs of network, sales and
services, exclusive of depreciation and amortization and does not include direct
costs of customer support, direct costs of acquired technologies or any other
depreciation or amortization associated with direct costs.
The
following table presents selected segment financial information as of June 30,
2009 and December 31, 2008, related to goodwill and total assets:
We
completed an assessment of goodwill for impairment following our decision to
consolidate our business segments and reallocate the remaining goodwill (after
our June 1, 2009 impairment charge) of the former CDN services segment to the IP
services and the data center services segments. As further discussed in note 3,
this assessment resulted in aggregate impairment charges of $51.5 million for
goodwill and $4.1 million for acquired developed CDN advertising
technology.
Goodwill
We
test goodwill for impairment at least annually as of August 1 of each calendar
year. As discussed in note 2, during the three months ended June 30, 2009,
we changed how we view and manage our business. We now segregate our CDN
services segment and consolidate these financials within our IP services
segment, except for the managed server portion of CDN services, which we now
consolidate within our data center services segment. The decision to
consolidate segments required acceleration of our 2009 annual impairment test of
goodwill. Our assessment of goodwill for impairment includes comparing the fair
value of our reporting units to the net book value. 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 net book
value, goodwill is not impaired and no further testing is necessary. If the
net book value of a reporting unit exceeds its fair value, we perform a second
test to measure the amount of impairment to goodwill, if any. To measure
the amount of any impairment, we determine the implied fair value of goodwill in
the same manner as if the affected reporting unit were being acquired in a
business combination. Specifically, we allocate the fair value of the affected
reporting unit to all of the assets and liabilities of that unit, including any
unrecognized intangible assets, in a hypothetical calculation that would yield
the implied fair value of goodwill. If the implied fair value of goodwill is
less than the goodwill recorded on our balance sheet, we record an impairment
charge for the difference.
As
a result of our recently-completed assessment based on a measurement date of
June 1, 2009, we recorded an aggregate goodwill impairment charge of $51.5
million. This included, in part, $45.8 million to adjust goodwill in our
former CDN services segment to $8.8 million and $3.5 million to adjust goodwill
in our IP services segment to $32.8 million before the allocation of former CDN
services goodwill. The $3.5 million impairment charge in IP services related to
our FCP products. Subsequently, the remaining CDN services goodwill of $8.8
million was allocated on a relative fair value basis with $6.6 million allocated
to IP services and $2.2 million allocated to data center services. The
allocation of goodwill to the data center services segment effectively caused a
second triggering event based on a comparison of the fair value of the
newly-combined segment to its carrying value and we recorded an additional $2.2
million impairment charge related to CDN managed servers, now included with data
center services.
We
present the aggregate goodwill impairment charge in “Goodwill impairment
and restructuring” in the accompanying statements of operations for the three
and six months ended June 30, 2009. The goodwill impairment in our former CDN
services segment is primarily due to declines in CDN services revenues and
operating results compared to our expectations and declining multiples of
comparable companies. These declines in CDN services revenues and operating
results are primarily attributable to continued pricing pressures, which were
partially offset by traffic increases. This is combined with higher costs of
sales related to traffic mix, as well as a weakened economy and steady customer
churn. This has led to a renewed emphasis on and dedication of our internal
resources within our IP services to strengthen our services offering in the
video segment of the market and leverage our entire IP backbone and cost
structure. Similarly, the goodwill impairment in our IP services segment is
due to declines in our FCP products revenues and operating results. The declines
in FCP are primarily attributable to lower sales associated with a reduced
marketing effort as we reevaluate our equipment sales strategy for
FCP.
8
INTERNAP
NETWORK SERVICES CORPORATION
UNAUDITED
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
changes in the carrying amount of goodwill for the year ended December 31, 2008
and six months ended June 30, 2009 in accordance with our current segments are
as follows:
The
assumptions, inputs and judgments used in performing the valuation analysis are
inherently subjective and reflect estimates based on known facts and
circumstances at the time we perform the valuation. These estimates and
assumptions primarily include, but are not limited to, the discount rate,
terminal growth rate, earnings before interest, taxes, depreciation and
amortization, or EBITDA, 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. The following is a description of the valuation
methodologies we used to derive the fair value of the former CDN services
segment:
We
will continue to perform our annual impairment testing as of August 1 each year
absent any impairment indicators or other changes that may cause more frequent
analysis.
Other
Intangible Assets
In
conjunction with reorganizing our business segments and the associated review of
our long-term financial outlook, we also performed an analysis of the potential
impairment and re-assessed the remaining asset lives of other identifiable
intangible assets. The analysis and re-assessment of other identifiable
intangible assets resulted in:
9
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NETWORK SERVICES CORPORATION
UNAUDITED
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
impairment charge of $4.1 million for acquired developed CDN advertising
technology is included in the caption “Direct costs of amortization of acquired
technologies” in the accompanying statements of operations. The change in
estimates of remaining lives for certain of our intangible assets related to
acquired CDN customer relationships, trade names and non-compete agreements
resulted in an increase to our net loss of $0.5 million. The impairment charges
and changes in estimated remaining lives of CDN intangible assets did not impact
our cash balances or result in violation of any covenants of our debt
instruments. These adjustments increased our net loss approximately $0.01 per
basic and diluted share for both the three and six months ended June 30, 2009.
We do not believe that our remaining intangible assets are
impaired.
The
components of our amortizing intangible assets are as follows (in
thousands):
On
March 31, 2009, we announced a restructuring plan to reduce our workforce by 45
employees, representing 10% of our total workforce. The reductions were
primarily in back-office staff functions and included the elimination of certain
senior management positions. We recorded $0.9 million of non-recurring severance
payments during the six months ended June 30, 2009. Substantially all of these
charges consisted of cash expenditures.
During
the three months ended June 30, 2009, we also incurred additional costs related
to the restructuring plan announced in March 2009. The restructuring charge
included an additional $0.1 million related to two leased facilities. Due to the
short terms remaining on these leases, we do not expect to earn any sublease
income in future periods. We expect to complete payments related to this
restructuring plan in the next 12 months.
During
the three months ended June 30, 2009, we reviewed and made adjustments in
sublease income assumptions for certain properties included in our 2007 and 2001
restructuring plans. The adjustments resulted from extending the period during
which we do not anticipate receiving sublease income from these properties due
to our belief that it will take additional time to find sublease tenants and an
increase in availability of space in each of these markets. The related analyses
were based on discounted cash flows using the same credit-adjusted risk-free
rate that we used to measure the initial restructuring liability for leases that
were part of the 2007 restructuring plan and undiscounted cash flows for leases
that were part of the 2001 restructuring plan. The new assumptions resulted in
an increase to our restructuring accrual of $2.1 million, which we recorded as
an addition to restructuring expense and an increase to the related
liability.
We report all of these
charges and adjustments to the restructuring liability in "Goodwill impairment
and restructuring" in the accompanying statements of operations. The following
table displays the activity and balances for the restructuring activity for the
three months ended June 30, 2009 (in thousands):
10
INTERNAP
NETWORK SERVICES CORPORATION
UNAUDITED
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During
the three and six months ended June 30, 2009, we granted 0.2 million and 1.9
million stock options, respectively, and 0.1 million and 0.8 million shares of
unvested restricted common stock, respectively. During the six months ended June
30, 2009, these grants included 1.1 million stock options and 0.4 million shares
of unvested restricted common stock granted in conjunction with annual
performance evaluations. The unvested restricted common stock included
reissuance of 0.2 million shares of treasury stock, having a cost of $0.6
million. We acquired the shares of treasury stock from time-to-time as payment
of taxes due from employees for stock-based compensation, including $0.1 million
for both the three months ended June 30, 2009 and 2008, and $0.3 million for
both the six months ended June 30, 2009 and 2008. Total stock-based compensation
was $1.3 million and $2.1 million for the three months ended June 30, 2009 and
2008, respectively, and $3.4 million and $4.4 million for the six months ended
June 30, 2009 and 2008, respectively. Stock-based compensation for the six
months ended June 30, 2009 also included $0.8 million of expense associated with
the resignation of our former President and Chief Executive Officer, which
resulted in a modification of his stock options and restricted common stock, as
discussed below. We use the Black-Scholes option valuation model to determine
our equity-classified stock-based compensation expense.
On
March 16, 2009, J. Eric Cooney became our President and Chief Executive
Officer and a member of our board of directors following the resignation of
James P. DeBlasio. Mr. Cooney’s employment letter provides for (1) an annual
base salary of $0.6 million, (2) a cash signing bonus of $0.3 million (under
certain circumstances, Mr. Cooney will be obligated to reimburse us for one half
of the signing bonus if his employment terminates prior to March 1, 2011), (3)
an option to purchase 0.6 million shares of our common stock at a purchase price
of $2.24, the closing price on the day of commencement of work, 25% of which
will vest on the first anniversary of the grant date and the remainder to vest
in 36 equal monthly installments thereafter, (4) a new hire grant of 0.3 million
shares of restricted stock, which will vest in four equal annual installments,
(5) a grant of 0.2 million shares of restricted stock on each of the first
anniversary and the second anniversary of his commencement of work, both such
grants to vest in four equal annual installments, (6) an annual incentive bonus
based upon criteria established by our board of directors, with a target level
of 100% of base salary and a maximum level of 200% of base salary and (7)
customary benefits including vacation. The fair value of Mr. Cooney’s
stock-based compensation awards is $2.4 million, including the shares
that may be issued on the first and second anniversaries of his
commencement of work. We record all executive transition costs with general and
administrative costs and expenses in the accompanying statements of
operations.
Pursuant
to the terms of a separation agreement with Mr. DeBlasio, he received (1) a cash
payment of $0.9 million, one half of which we paid in March 2009 with the
remainder recorded as a liability in the accompanying financial statements to be
paid in September 2009, (2) full vesting of all equity awards previously granted
to him, which had an incremental value of $0.8 million and (3) if he so
elects, continued health, dental and vision insurance coverage under our group
health plan until September 16, 2010. Mr. DeBlasio has until March 16, 2010 to
exercise any stock options that were vested as of March 16, 2009.
11
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NETWORK SERVICES CORPORATION
UNAUDITED
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At
the end of each interim reporting period, we estimate the effective income tax
rate we expect to apply for the full year. We use the effective income tax
rate determined to provide for income taxes on a year-to-date basis. We
reflect the tax effect of any tax law changes and certain other discrete events
in the period in which they occur.
Our
overall effective income tax rate, as a percentage of pre-tax ordinary income,
for the six months ended June 30, 2009 and 2008 was (1%) and (13%),
respectively. The fluctuation in the effective income tax rate is attributable
to the permanent tax items, including goodwill and acquired developed CDN
advertising technology impairment recorded during the three months ended June
30, 2009, along with changes in our valuation allowance, state and United
Kingdom income tax expense.
The
annual effective tax rate for 2009 could change due to a number of factors
including, but not limited to, our geographic profit mix between the United
States, the United Kingdom and other foreign jurisdictions, new tax laws, new
interpretations of existing tax law and rulings by and settlements with taxing
authorities.
We
continue to maintain a valuation allowance against our deferred tax assets of
$130.1 million. The total deferred tax assets primarily consist of net operating
loss carryforwards. We may recognize deferred tax assets in the United States in
future periods when we estimate them to be realizable. Based on an analysis of
our projected future pre-tax income in the United States, we do not have
sufficient positive evidence for the release of our valuation allowance against
our deferred tax assets in the United States within the next 12 months;
therefore, we continue to maintain the full valuation allowance in the United
States and all foreign jurisdictions, other than the United
Kingdom.
For
the six months ended June 30, 2009, there were no new material uncertain tax
positions. Also, we do not expect the total amount of unrecognized tax benefits
to significantly increase or decrease within the next 12
months.
We
compute basic net loss per share using the weighted average number of shares of
common stock outstanding during the period. We have excluded all outstanding
options and warrants to purchase common stock as such securities are
anti-dilutive for all periods presented.
On
January 1, 2009, we adopted Financial Accounting Standards Board, or FASB,
Staff Position, or FSP, EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities. EITF 03-6-1 addresses whether instruments
granted in share-based payment awards are participating securities prior to
vesting, and therefore, need to be included in the earnings allocation when
computing earnings per share under the two-class method. In accordance with EITF
03-6-1, unvested share-based payment awards that contain non-forfeitable rights
to dividends or dividend equivalents (whether paid or unpaid) are participating
securities and must be included in the computation of earnings per share
pursuant to the two-class method. Upon adoption, we adjusted all prior-period
earnings per share data presented retrospectively. The adoption of EITF 03-6-1
did not have any impact on our basic or diluted net loss per share for the three
or six months ended June 30, 2009 or 2008.
12
INTERNAP
NETWORK SERVICES CORPORATION
UNAUDITED
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Basic
and diluted net loss per share for the three and six months ended June 30, 2009,
and 2008 are calculated as follows (in thousands, except per share
amounts):
1 All remaining
warrants to purchase common stock expired August 22, 2008.
Effective
January 1, 2008, we adopted SFAS No. 157, Fair
Value Measurements, as it relates to financial assets and liabilities
measured on a recurring basis. This new standard addresses how companies should
measure fair value when they are required to use a fair value measure for
recognition or disclosure purposes under U.S. GAAP. Effective January 1, 2009,
we adopted SFAS No. 157 for nonfinancial assets and liabilities that we
recognize or disclose at fair value in the financial statements on a
nonrecurring basis in accordance with the deferral provisions of FASB Staff
Position FAS 157-2, Effective
date of FASB Statement No. 157. The major categories of nonfinancial
assets and liabilities that we measure at fair value include reporting units
measured at fair value in the first step of a goodwill impairment test. Our
adoption in 2009 for measuring nonfinancial assets and liabilities did not have
a material impact on our financial statements.
SFAS
No. 157 describes a fair value hierarchy based on three levels of inputs, of
which the first two are considered observable and the last unobservable, that
may be used to measure fair value. The fair value hierarchy is summarized as
follows:
We
have also adopted SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities, for
rights, or the ARS Rights, from one of our investment providers to sell at par
value our auction rate securities originally purchased from the investment
provider at anytime during a two-year period beginning June 30, 2010. SFAS No.
159 permits companies to choose to measure, on an instrument-by-instrument
basis, many financial instruments and certain other assets and liabilities at
fair value that are not currently required to be measured at fair
value.
The
following table represents the fair value hierarchy for our financial assets
(cash equivalents and investments in marketable securities) measured at fair
value on a recurring basis as of June 30, 2009 (in thousands):
1 Included
in "Cash and cash equivalents" in the accompanying balance sheets as of June 30,
2009 in addition to $28,506 of cash.
2 Included
in "Investments and other related assets" in the accompanying balance sheets as
of June 30, 2009 in addition to $1,539 of equity method investment.
13
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NETWORK SERVICES CORPORATION
UNAUDITED
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Level
3 assets consist of auction rate securities whose underlying assets are
state-issued student and educational loans that are substantially backed by the
federal government and the ARS Rights. Auction rate securities are variable rate
bonds tied to short-term interest rates with maturities on the face of the
securities in excess of 90 days and have interest rate resets through a modified
Dutch auction, at predetermined short-term intervals, usually every seven, 28 or
35 days. Auction rate securities generally trade at par value and are
callable at par value on any interest payment date at the option of the
issuer. Interest received during a given period is based upon the interest
rate determined through the auction process. Although these securities are
issued and rated as long-term bonds, they have historically been priced and
traded as short-term instruments because of the liquidity provided through the
interest rate resets.
While
we continue to earn and accrue interest on our auction rate securities at
contractual rates, these investments are not currently trading and therefore do
not currently have a readily determinable market value. Accordingly, the
estimated fair value of auction rate securities no longer approximates par
value. Given that observable auction rate securities market information was not
available to determine the fair value of our auction rate securities, we
estimated the fair value of the auction rate securities based on a wide array of
market evidence related to each security’s collateral, ratings and insurance to
assess default risk, credit spread risk and downgrade risk that we believe
market participants would use in pricing the securities in a current
transaction. These assumptions could change significantly over time based on
market conditions.
Due
to the uncertainty as to when the auction rate securities markets will improve,
we are carrying our auction rate securities as non-current investments as of
June 30, 2009. Also, in conjunction with our acceptance of the ARS Rights in
November 2008, we changed the investment classification of our auction rate
securities to trading from available for sale. As a result, changes in fair
value are now included in earnings in “Non-operating (income) expense” in the
accompanying statements of operations.
The
following table summarizes changes in fair value of our Level 3 financial
assets for the six months ended June 30, 2009 (in thousands):
The
following tables represent the fair value for our nonfinancial assets measured
at fair value on a nonrecurring basis as of June 30, 2009 (in
thousands):
We
wrote down goodwill and other intangible assets with carrying amounts of $91.0
million and $31.1 million, respectively, to their fair values of $39.5
million and $27.0 million (before addition of amortization expense of $1.0
million), respectively, resulting in an aggregate impairment charge of $55.6
million, which we included in the net loss for the three and six months ended
June 30, 2009. We further discuss the impairments of goodwill and other
intangible assets in note 3.
14
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NETWORK SERVICES CORPORATION
UNAUDITED
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Market
risk associated with our variable rate revolving line of credit and fixed rate
other liabilities relates to the potential negative impact to future earnings
and reduction in fair value, respectively, from an increase in interest rates.
The following table presents information about our debt and other liabilities at
June 30, 2009 and December 31, 2008 (in thousands):
We
estimate the fair values of our revolving line of credit and other liabilities
based on current market rates of interest.
We
currently, and from time-to-time, are involved in litigation incidental to the
conduct of our business. Although we cannot ascertain the amount of liability
that may result from these matters, we do not currently believe that, in
the aggregate, such matters will result in liabilities material to our
consolidated financial condition, results of operations or cash
flows.
As
discussed in note 8, we adopted SFAS No. 157, Fair
Value Measurements, for nonfinancial assets and liabilities that we
recognize or disclose at fair value in the financial statements on a
nonrecurring basis effective January 1, 2009. The major categories of
nonfinancial assets and liabilities that we measure at fair value, for which we
have not applied the provisions of SFAS No. 157, include reporting units
measured at fair value in the first step of a goodwill impairment test. Adoption
of this pronouncement for nonfinancial assets and liabilities did not have a
material impact on our financial position, results of operations or cash
flows.
We
adopted SFAS No. 141 (revised 2007), Business
Combinations, effective January 1, 2009. This pronouncement replaces SFAS
No. 141, Business
Combinations, and establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any noncontrolling interest in the
acquiree and the goodwill acquired or a gain from a bargain purchase. This
pronouncement also determines disclosure requirements to enable the evaluation
of the nature and financial effects of the business combination and applies
prospectively to business combinations completed on or after January 1, 2009.
Adoption of this pronouncement did not have a material impact on our financial
position, results of operations or cash flows, although it could have a
material impact on any business combinations entered into in 2009 or future
periods.
We
adopted SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements, effective January 1,
2009. This pronouncement amends Accounting Research Bulletin 51, Consolidated
Financial Statements, and requires all entities to report noncontrolling
(minority) interests in subsidiaries within equity in the consolidated
financial statements, but separate from the parent stockholders’ equity. This
pronouncement also requires any acquisitions or dispositions of noncontrolling
interests that do not result in a change of control to be accounted for as
equity transactions. Further, this pronouncement requires that a parent
recognize a gain or loss in net income when a subsidiary is deconsolidated.
Adoption of this pronouncement did not have a material impact on our financial
position, results of operations or cash flows.
We
adopted FSP FAS 142-3, Determination
of the Useful Life of Intangible Assets, effective January 1, 2009. This
pronouncement amends the factors that we should consider in developing renewal
or extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill
and Other Intangible Assets. Adoption of this pronouncement did not have
a material impact on our financial position, results of operations or cash
flows.
As
discussed in note 7, we adopted EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities, effective January 1, 2009. This pronouncement
provides that unvested share-based payment awards that contain nonforfeitable
rights to dividends are participating securities and must be included in the
computation of earnings per share pursuant to the two class method. The
retrospective adoption of this pronouncement did not have an impact on net loss
per share for the three or six months ended June 30, 2008.
We
adopted EITF Issue no. 08-6, Equity
Method Investment Accounting Considerations, effective January 1, 2009,
which clarifies the accounting for certain transactions and impairment
considerations involving equity method investments. Adoption of this EITF did
not have a material impact on our financial position, results of
operations or cash flows.
We
adopted FSP No. 141(R)-1, Accounting
for Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies, effective January 1, 2009. This pronouncement amends
and clarifies SFAS No. 141R to address application issues on the initial
recognition and measurement, subsequent measurement and accounting and
disclosure of assets and liabilities arising from contingencies in a business
combination. Adoption of this pronouncement did not have a material impact on
our financial position, results of operations or cash flows, although it
could have a material impact on any business combinations entered into in 2009
or future periods.
15
INTERNAP
NETWORK SERVICES CORPORATION
UNAUDITED
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
We
adopted FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of
Financial Instrument, which amended both SFAS No. 107, Disclosures
About Fair Value of Financial Instruments, and APB Opinion No. 28,
Interim
Financial Reporting, effective April 1, 2009, which require that
disclosures concerning the fair value of financial instruments be presented in
interim as well as in annual financial statements. In addition, we adopted FSP
No. FAS 157-4 Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, effective
April 1, 2009, which amended SFAS No. 157, Fair Value Measurements, to provide
additional guidance for determining the fair value of a financial asset or
financial liability when the volume and level of activity for such asset or
liability have decreased significantly. FSP No. FAS 157-4 also provided
guidance for determining whether a transaction is an orderly one. Further, we
adopted FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary
Impairments, effective April 1, 2009, which revised and expanded the
guidance concerning the recognition and measurement of other-than-temporary
impairments of debt securities classified as available for sale or held to
maturity. In addition, it required enhanced disclosures concerning such
impairment for both debt and equity securities. Adoption of these pronouncements
did not have a material impact on our financial position, results of operations
or cash flows.
We
adopted SFAS No. 165, Subsequent
Events, effective April 1, 2009. This pronouncement establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. Although there is new terminology, the standard is based on the
same principles as those that currently exist in the auditing standards. We have
evaluated subsequent events in accordance with the pronouncement through the
filing of this Quarterly Report on Form 10-Q on August 5,
2009.
In
June 2009, the FASB issued SFAS No. 168, The
FASB Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles. SFAS No. 168 establishes the FASB
Accounting Standards Codification, or the Codification, as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative U.S. GAAP
for SEC registrants. All guidance contained in the Codification carries an equal
level of authority. SFAS No. 168 is effective for financial statements issued
for interim and annual periods ending after September 15, 2009. The
Codification will supersede all existing non-SEC accounting and reporting
standards. All other non-grandfathered, non-SEC accounting literature not
included in the Codification will become non-authoritative. Following SFAS No.
168, the FASB will not issue new standards in the form of Statements, FASB Staff
Positions or Emerging Issues Task Force Abstracts. Instead, it will issue
Accounting Standards Updates. The FASB will not consider Accounting Standards
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