x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
o
|
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
DELAWARE
|
91-2145721
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(I.R.S.
Employer
Identification
No.)
|
Large
accelerated filer
|
o |
Accelerated
filer
|
x |
Non-accelerated
filer
|
o |
Smaller
reporting company
|
o |
Pages
|
||
3
|
||
PART
I. FINANCIAL INFORMATION
|
||
4
|
||
4
|
||
5
|
||
6
|
||
7
|
||
8
|
||
19
|
||
31
|
||
31
|
||
PART
II. OTHER INFORMATION
|
||
33
|
||
33
|
||
33
|
||
34
|
||
SIGNATURES
|
Three Months Ended
September
30,
|
Nine
Months Ended
September 30,
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Revenues:
|
||||||||||||||||
Internet
protocol (IP) services
|
$
|
31,660
|
$
|
30,217
|
$
|
93,179
|
$
|
89,273
|
||||||||
Data
center services
|
28,738
|
21,888
|
80,434
|
59,842
|
||||||||||||
Content
delivery network (CDN) services
|
5,001
|
5,618
|
16,164
|
12,892
|
||||||||||||
Other
|
—
|
2,703
|
—
|
10,447
|
||||||||||||
Total
revenues
|
65,399
|
60,426
|
189,777
|
172,454
|
||||||||||||
Operating
costs and expenses:
|
||||||||||||||||
Direct
costs of network, sales and services, exclusive of depreciation and
amortization shown below:
|
||||||||||||||||
IP
services
|
11,347
|
10,752
|
34,038
|
31,665
|
||||||||||||
Data
center services
|
22,061
|
14,523
|
60,213
|
42,922
|
||||||||||||
CDN
services
|
1,996
|
1,860
|
6,000
|
4,481
|
||||||||||||
Other
|
—
|
2,137
|
—
|
8,449
|
||||||||||||
Direct
costs of amortization of acquired technologies
|
3,049
|
1,228
|
5,507
|
2,936
|
||||||||||||
Direct
costs of customer support
|
3,950
|
4,495
|
12,518
|
12,212
|
||||||||||||
Product
development
|
2,072
|
1,733
|
6,416
|
4,735
|
||||||||||||
Sales
and marketing
|
7,394
|
8,691
|
23,934
|
23,222
|
||||||||||||
General
and administrative
|
7,508
|
7,605
|
23,333
|
23,146
|
||||||||||||
Provision
for doubtful accounts
|
1,133
|
423
|
4,830
|
1,049
|
||||||||||||
Goodwill
impairment
|
99,700
|
—
|
99,700
|
—
|
||||||||||||
Restructuring
and impairments
|
715
|
—
|
715
|
11,349
|
||||||||||||
Acquired
in-process research and development
|
—
|
—
|
—
|
450
|
||||||||||||
Depreciation
and amortization
|
6,146
|
5,903
|
17,226
|
16,727
|
||||||||||||
Gain
on disposals of property and equipment
|
—
|
—
|
(16
|
)
|
(5
|
)
|
||||||||||
Total
operating costs and expenses
|
167,071
|
59,350
|
294,414
|
183,338
|
||||||||||||
(Loss)
income from operations
|
(101,672
|
)
|
1,076
|
(104,637
|
)
|
(10,884
|
)
|
|||||||||
Non-operating
(income) expense:
|
||||||||||||||||
Interest
income
|
(444
|
)
|
(616
|
)
|
(1,652
|
)
|
(1,981
|
)
|
||||||||
Interest
expense
|
341
|
245
|
831
|
736
|
||||||||||||
Write-off
of investment
|
—
|
—
|
—
|
1,178
|
||||||||||||
Other,
net
|
(6
|
)
|
(15
|
)
|
97
|
(34
|
)
|
|||||||||
Total
non-operating income
|
(109
|
)
|
(386
|
)
|
(724
|
)
|
(101
|
)
|
||||||||
(Loss)
income before income taxes and equity in earnings of equity method
investment
|
(101,563
|
)
|
1,462
|
(103,913
|
)
|
(10,783
|
)
|
|||||||||
(Benefit)
provision for income taxes
|
(65
|
)
|
121
|
232
|
277
|
|||||||||||
Equity
in earnings of equity-method investment, net of taxes
|
(93
|
)
|
(42
|
)
|
(242
|
)
|
(66
|
)
|
||||||||
Net
(loss) income
|
$
|
(101,405
|
)
|
$
|
1,383
|
$
|
(103,903
|
)
|
$
|
(10,994
|
)
|
|||||
Net
(loss) income per share:
|
||||||||||||||||
Basic
|
$
|
(2.06
|
)
|
$
|
0.03
|
$
|
(2.11
|
)
|
$
|
(0.24
|
)
|
|||||
Diluted
|
$
|
(2.06
|
)
|
$
|
0.03
|
$
|
(2.11
|
)
|
$
|
(0.24
|
)
|
|||||
Weighted
average shares used in per share calculations:
|
||||||||||||||||
Basic
|
49,294
|
48,761
|
49,204
|
46,238
|
||||||||||||
Diluted
|
49,294
|
49,709
|
49,204
|
46,238
|
September
30,
2008
|
December
31,
2007
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$
|
51,586
|
$
|
52,030
|
||||
Short-term
investments in marketable securities
|
12,825
|
19,569
|
||||||
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
|
Nine
Months Ended
September
30,
|
||||||||
2008
|
2007
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
loss
|
$
|
(103,903
|
)
|
$
|
(10,994
|
)
|
||
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||||||
Goodwill
and other intangible asset impairments
|
102,336
|
2,454
|
||||||
Write-off
of investment
|
—
|
1,178
|
||||||
Acquired
in-process research and development
|
—
|
450
|
||||||
Depreciation
and amortization
|
20,883
|
19,663
|
||||||
Gain
on disposals of property and equipment
|
(16
|
)
|
(5
|
)
|
||||
Provision
for doubtful accounts
|
4,829
|
1,049
|
||||||
Equity
in earnings of equity-method investment, net of taxes
|
(242
|
)
|
(66
|
)
|
||||
Non-cash
changes in deferred rent
|
2,443
|
(955
|
)
|
|||||
Stock-based
compensation expense
|
6,371
|
6,638
|
||||||
Deferred
income taxes
|
271
|
—
|
||||||
Other,
net
|
(209
|
)
|
127
|
|||||
Changes
in operating assets and liabilities, excluding effects of
acquisition:
|
||||||||
Accounts
receivable
|
(1,037
|
)
|
(10,377
|
)
|
||||
Inventory
|
(143
|
)
|
107
|
|||||
Prepaid
expenses, deposits and other assets
|
(1,489
|
)
|
(772
|
)
|
||||
Accounts
payable
|
2,987
|
1,850
|
||||||
Accrued and
other liabilities
|
(481
|
)
|
(1,889
|
)
|
||||
Deferred
revenues
|
(511
|
)
|
1,224
|
|||||
Accrued
restructuring
|
(1,498
|
)
|
5,973
|
|||||
Net
cash provided by operating activities
|
30,591
|
15,655
|
||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchases
of property and equipment
|
(34,063
|
)
|
(22,474
|
)
|
||||
Purchases
of investments in marketable securities
|
(19,925
|
)
|
(33,675
|
)
|
||||
Maturities
of investments in marketable securities
|
19,452
|
24,161
|
||||||
Change
in restricted cash, excluding effects of acquisition
|
4,120
|
(3,710
|
)
|
|||||
Cash
received from acquisition, net of costs incurred for the
transaction
|
—
|
3,203
|
||||||
Proceeds
from disposal of property and equipment
|
—
|
5
|
||||||
Net
cash used in investing activities
|
(30,416
|
)
|
(32,490
|
)
|
||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Proceeds
from notes payable, net of discount
|
—
|
19,742
|
||||||
Principal
payments on notes payable
|
—
|
(11,318
|
)
|
|||||
Payments
on capital lease obligations
|
(601
|
)
|
(1,419
|
)
|
||||
Stock
compensation plans
|
78
|
7,686
|
||||||
Debt
issuance costs
|
(16
|
)
|
(69
|
)
|
||||
Other,
net
|
(80
|
)
|
(59
|
)
|
||||
Net
cash (used in) provided by financing activities
|
(619
|
)
|
14,563
|
|||||
Net
(decrease) in cash and cash equivalents
|
(444
|
)
|
(2,272
|
)
|
||||
Cash
and cash equivalents at beginning of period
|
52,030
|
45,591
|
||||||
Cash
and cash equivalents at end of period
|
$
|
51,586
|
$
|
43,319
|
||||
SUPPLEMENTAL
DISCLOSURE OF NON-CASH INFORMATION:
|
||||||||
Common
stock issued and stock options assumed for acquisition of
VitalStream
|
$
|
—
|
$
|
208,293
|
Common Stock
|
||||||||||||||||||||||||||||
Accumulated
|
||||||||||||||||||||||||||||
Additional
|
Other
|
Total
|
||||||||||||||||||||||||||
Par
|
Paid-In
|
Accumulated
|
Comprehensive
|
Treasury
|
Stockholders'
|
|||||||||||||||||||||||
Shares
|
Value
|
Capital
|
Deficit
|
Income
|
Stock
|
Equity
|
||||||||||||||||||||||
NINE MONTHS ENDED
SEPTEMBER 30,
2008:
|
||||||||||||||||||||||||||||
Balance,
December 31,
2007
|
49,759
|
$
|
50
|
$
|
1,208,191
|
$
|
(862,010
|
)
|
$
|
402
|
$
|
—
|
$
|
346,633
|
||||||||||||||
Net
loss
|
—
|
—
|
—
|
(103,903
|
)
|
—
|
—
|
(103,903
|
)
|
|||||||||||||||||||
Change
in unrealized gains and losses on investments, net of
taxes
|
—
|
—
|
—
|
—
|
(677
|
)
|
—
|
(677
|
)
|
|||||||||||||||||||
Foreign
currency translation adjustment
|
—
|
—
|
—
|
—
|
(471
|
)
|
—
|
(471
|
)
|
|||||||||||||||||||
Total
comprehensive loss*
|
(105,051
|
)
|
||||||||||||||||||||||||||
Stock
compensation plans activity and stock based compensation
expense
|
454
|
—
|
6,494
|
—
|
—
|
(339
|
)
|
6,155
|
||||||||||||||||||||
Balance,
September 30,
2008
|
50,213
|
$
|
50
|
$
|
1,214,685
|
$
|
(965,913
|
)
|
$
|
(746
|
)
|
$
|
(339
|
)
|
$
|
247,737
|
||||||||||||
NINE MONTHS ENDED
SEPTEMBER 30,
2007:
|
||||||||||||||||||||||||||||
Balance,
December 31,
2006
|
35,873
|
$
|
36
|
$
|
982,624
|
$
|
(856,455
|
)
|
$
|
320
|
$
|
—
|
$
|
126,525
|
||||||||||||||
Net
loss
|
—
|
—
|
—
|
(10,994
|
)
|
—
|
—
|
(10,994
|
)
|
|||||||||||||||||||
Change
in unrealized gains and losses on investments, net of
taxes
|
—
|
—
|
—
|
—
|
322
|
—
|
322
|
|||||||||||||||||||||
Foreign
currency translation adjustment
|
—
|
—
|
—
|
—
|
90
|
—
|
90
|
|||||||||||||||||||||
Total
comprehensive loss*
|
(10,582
|
)
|
||||||||||||||||||||||||||
Stock
issued in connection with VitalStream acquisition
|
12,206
|
12
|
208,281
|
—
|
—
|
—
|
208,293
|
|||||||||||||||||||||
Stock
compensation plans activity and stock-based compensation
expense
|
1,548
|
2
|
14,327
|
—
|
—
|
—
|
14,329
|
|||||||||||||||||||||
Balance,
September 30,
2007
|
49,627
|
$
|
50
|
$
|
1,205,232
|
$
|
(867,449
|
)
|
$
|
732
|
$
|
—
|
$
|
338,565
|
1.
|
Nature
of Operations and Basis of
Presentation
|
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
|
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
|
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
of
depreciation and amortization, included below
|
10,752
|
14,523
|
1,860
|
2,137
|
29,272
|
||||||||||||||||
Segment
profit
|
$
|
19,465
|
$
|
7,365
|
$
|
3,758
|
$
|
566
|
31,154
|
||||||||||||
Other
operating expenses, including depreciation
and
amortization
|
30,078
|
||||||||||||||||||||
Income
from operations
|
1,076
|
||||||||||||||||||||
Non-operating
income
|
386
|
||||||||||||||||||||
Income
before income taxes and equity in earnings of
equity-method
investment
|
$
|
1,462
|
|||||||||||||||||||
Nine Months Ended September 30,
2008:
|
|||||||||||||||||||||
Revenues
|
$
|
93,179
|
$
|
80,434
|
$
|
16,164
|
$
|
—
|
$
|
189,777
|
|||||||||||
Direct
costs of network, sales and services, exclusive
of
depreciation and amortization, included below
|
34,038
|
60,213
|
6,000
|
—
|
100,251
|
||||||||||||||||
Segment
profit
|
$
|
59,141
|
$
|
20,221
|
$
|
10,164
|
$
|
—
|
89,526
|
||||||||||||
Other
operating expenses, including depreciation
and
amortization
|
194,163
|
||||||||||||||||||||
Loss
from operations
|
(104,637
|
)
|
|||||||||||||||||||
Non-operating
income
|
724
|
||||||||||||||||||||
Loss
before income taxes and equity in earnings of
equity-method
investment
|
$
|
(103,913
|
)
|
||||||||||||||||||
Nine Months Ended September 30,
2007:
|
|||||||||||||||||||||
Revenues
|
$
|
89,273
|
$
|
59,842
|
$
|
12,892
|
$
|
10,447
|
$
|
172,454
|
|||||||||||
Direct
costs of network, sales and services, exclusive of
depreciation
and amortization, included below
|
31,665
|
42,922
|
4,481
|
8,449
|
87,517
|
||||||||||||||||
Segment
profit
|
$
|
57,608
|
$
|
16,920
|
$
|
8,411
|
$
|
1,998
|
84,937
|
||||||||||||
Other
operating expenses, including depreciation
and
amortization
|
95,821
|
||||||||||||||||||||
Loss
from operations
|
(10,884
|
)
|
|||||||||||||||||||
Non-operating
income
|
101
|
||||||||||||||||||||
Loss
before income taxes and equity in earnings of
equity-method
investment
|
$
|
(10,783
|
)
|
||||||||||||||||||
IP
Services
|
Data
Center
Services
|
CDN
Services
|
Other
|
Total
|
|||||||||||||||||
September 30,
2008:
|
|||||||||||||||||||||
Goodwill
|
$
|
36,314
|
$
|
—
|
$
|
54,663
|
$
|
—
|
$
|
90,997
|
|||||||||||
Total assets
|
152,331
|
62,920
|
115,254
|
—
|
330,505
|
||||||||||||||||
December,
31, 2007:
|
|||||||||||||||||||||
Goodwill
|
36,314
|
—
|
154,363
|
—
|
190,677
|
||||||||||||||||
Total assets
|
148,697
|
64,498
|
211,469
|
2,346
|
427,010
|
4.
|
Goodwill
And Other Intangible Assets
|
IP
Services
|
Data
Center
Services
|
CDN
Services
|
Total
|
|||||||||||||
Balance,
January 1, 2007
|
$
|
36,314
|
$
|
—
|
$
|
—
|
$
|
36,314
|
||||||||
Goodwill
acquired
|
—
|
—
|
154,653
|
154,653
|
||||||||||||
Adjustments
to pre-acquisition assets and liabilities
|
—
|
—
|
133
|
133
|
||||||||||||
Utilization
of a portion of net operating losses
|
—
|
—
|
(423
|
)
|
(423
|
)
|
||||||||||
Balance,
December 31, 2007
|
36,314
|
—
|
154,363
|
190,677
|
||||||||||||
Balance,
January 1, 2008
|
36,314
|
—
|
154,363
|
190,677
|
||||||||||||
Impairment
|
—
|
—
|
(99,700
|
)
|
(99,700
|
)
|
||||||||||
Balance,
September 30, 2008
|
$
|
36,314
|
$
|
—
|
$
|
54,663
|
$
|
90,977
|
||||||||
|
●
|
Income Approach: To
determine fair value, we discounted the expected cash flows of the CDN
services reporting unit. Expected cash flows were calculated using a
compounded annual revenue growth rate of approximately 20%, forecasting
existing cost structures and considering capital reinvestment
requirements. We used a discount rate of 20%, representing the
estimated weighted average cost of capital, which reflects the overall
level of inherent risk involved in our CDN services operations and the
rate of return an outside investor would expect to earn. To estimate cash
flows beyond the final year of our model, we used a terminal value and
incorporated the present value of the resulting terminal value into our
estimate of fair value.
|
|
●
|
Market-Based Approach:
To corroborate the results of the income approach described above, we
estimated the fair value of our CDN services reporting unit using several
market-based approaches, including the enterprise value that we derive
based on our stock price. We also used the guideline company method, which
focuses on comparing our risk profile and growth prospects, to select
reasonably similar/guideline publicly traded companies. Using the
guideline company method, we selected revenue and EBITDA multiples below
the median for our comparable
companies.
|
|
●
|
an
impairment charge of $1.9 million in developed advertising technology due
to a strategic change in market
focus,
|
|
●
|
an
impairment charge of $0.8 million in trade names as a result of
discontinuing the use of the VitalStream trade name,
and
|
|
●
|
a
change in estimate that results in an acceleration of amortization expense
of our customer relationships intangible asset over a shorter estimated
useful life of four remaining years instead of an original estimated
useful life of nine years due to customer churn, or attrition, being
higher than expected as of the acquisition
date.
|
September
30, 2008
|
December
31, 2007
|
|||||||||||||||
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
|||||||||||||
Technology
based
|
$ | 40,060 | $ | (12,175 | ) | $ | 41,911 | $ | (8,518 | ) | ||||||
Contract
based
|
24,232 | (16,518 | ) | 25,018 | (15,403 | ) | ||||||||||
$ | 64,292 | $ | (28,693 | ) | $ | 66,929 | $ | (23,921 | ) |
5.
|
Restructuring
and Impairments
|
December
31,
2007
Restructuring
Liability
|
Cash
Payments
|
Non-Cash
Plan Adjustments
|
September
30,
2008
Restructuring
Liability
|
||||||||||||||
Activity
for 2007 restructuring charge:
|
|||||||||||||||||
Real
estate obligations
|
$
|
6,312
|
$
|
(654
|
)
|
$
|
111
|
$
|
5,769
|
||||||||
Employee
separations
|
406
|
(260
|
)
|
(146
|
)
|
—
|
|||||||||||
Total
2007 restructuring activity
|
6,718
|
(914
|
)
|
(35
|
)
|
5,769
|
|||||||||||
Activity
for 2001 restructuring charge:
|
|||||||||||||||||
Real
estate obligations
|
3,375
|
(514
|
)
|
(35
|
)
|
2,826
|
|||||||||||
Total
|
$
|
10,093
|
$
|
(1,428
|
)
|
$
|
(70
|
)
|
$
|
8,595
|
6.
|
Stock-Based
Compensation
|
7.
|
Income
Taxes
|
8.
|
Net
(Loss) Income Per Share
|
Three
Months Ended
September
30,
|
Nine Months Ended
September
30,
|
||||||||||||||||
2008
|
2007
|
2008
|
2007
|
||||||||||||||
Net
(loss) income
|
$
|
(101,405
|
)
|
$
|
1,383
|
$
|
(103,903
|
)
|
$
|
(10,994
|
)
|
||||||
Weighted
average shares outstanding, basic
|
49,294
|
48,761
|
49,204
|
46,238
|
|||||||||||||
Effect
of dilutive securities:
|
|||||||||||||||||
Stock
compensation plans
|
—
|
936
|
—
|
—
|
|||||||||||||
Warrants
to purchase common stock*
|
—
|
12
|
—
|
—
|
|||||||||||||
|
|
|
|||||||||||||||
Weighed
average shares outstanding, diluted
|
49,294
|
49,709
|
49,204
|
46,238
|
|||||||||||||
Net
(loss) income per share, basic
|
$
|
(2.06
|
)
|
$
|
0.03
|
$
|
(2.11
|
)
|
$
|
(0.24
|
)
|
||||||
Net
(loss) income per share, diluted
|
$
|
(2.06
|
)
|
$
|
0.03
|
$
|
(2.11
|
)
|
$
|
(0.24
|
)
|
||||||
Anti-dilutive
securities not included in diluted net loss per share
calculation:
|
|||||||||||||||||
Stock
compensation plans
|
3,847
|
2,001
|
3,847
|
3,972
|
|||||||||||||
Warrants
to purchase common stock*
|
—
|
—
|
—
|
34
|
|||||||||||||
Total
anti-dilutive securities
|
3,847
|
2,001
|
3,847
|
4,006
|
9.
|
Investments
|
●
|
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 similar 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.
|
Level
1
|
Level
2
|
Level
3
|
Total
|
||||||||||||||
Money
market funds and other
|
$
|
47,209
|
$
|
—
|
$
|
—
|
$
|
47,209
|
|||||||||
Corporate
debt securities
|
—
|
6,894
|
—
|
6,894
|
|||||||||||||
Commercial
paper
|
—
|
7,166
|
—
|
7,166
|
|||||||||||||
Auction
rate securities
|
—
|
—
|
6,553
|
6,553
|
|||||||||||||
Total
|
$
|
47,209
|
$
|
14,060
|
$
|
6,553
|
$
|
67,822
|
Auction
Rate
Securities
|
|||||
Balance,
December 31, 2007
|
$
|
7,150
|
|||
Unrealized
loss included in other comprehensive income for the three months ended
March 31, 2008
|
(330
|
)
|
|||
Balance,
March 31, 2008
|
6,820
|
||||
Unrealized
loss included in other comprehensive income for the three months ended
June 30, 2008
|
(93
|
)
|
|||
Balance,
June 30, 2008
|
6,727
|
||||
Unrealized
loss included in other comprehensive income for the three months ended
September 30, 2008
|
(174
|
)
|
|||
Balance,
September 30, 2008
|
$
|
6,553
|
10.
|
Amendment
to Credit Agreement
|
●
|
converting
the Company’s outstanding term loan balance of $20.0 million as of
September 30, 2008 into a loan under the revolving line of credit facility
under the credit agreement;
|
●
|
terminating
the term loan facility under the credit
agreement;
|
●
|
increasing
the total “Revolving Credit Commitment” from $5.0 million to $35.0
million;
|
●
|
increasing
the “Letter of Credit Sublimit” in the credit agreement from $5.0 million
to $7.0 million;
|
●
|
providing
the Company and Bank of America with an option to enter into a lease
financing agreement not to exceed $10.0 million;
and
|
●
|
modification
of certain covenants and
definitions.
|
11.
|
Contingencies
and Litigation
|
12.
|
Recent
Accounting Pronouncements
|
●
|
costs
for connecting to and accessing Internet network service providers, or
ISPs, and competitive local exchange providers;
|
|
●
|
facility
and occupancy costs for housing and operating our and our customers’
network equipment;
|
|
●
|
costs
of license fees for operating systems software;
|
|
●
|
costs
incurred for providing additional third party services to our customers;
and
|
|
●
|
costs
of FCP solutions
sold.
|
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Revenues:
|
||||||||||||||||
Internet
protocol (IP) services
|
48.4
|
%
|
50.0
|
%
|
49.1
|
%
|
51.8
|
%
|
||||||||
Data
center services
|
43.9
|
36.2
|
42.4
|
34.7
|
||||||||||||
Content
delivery network (CDN) services
|
7.7
|
9.3
|
8.5
|
7.5
|
||||||||||||
Other
|
—
|
4.5
|
—
|
6.0
|
||||||||||||
Total
revenues
|
100.0
|
100.0
|
100.0
|
100.0
|
||||||||||||
Operating
costs and expenses:
|
||||||||||||||||
Direct
costs of network, sales and services, exclusive of depreciation and
amortization shown below:
|
||||||||||||||||
IP
services
|
17.4
|
17.8
|
17.9
|
18.4
|
||||||||||||
Data
center services
|
33.7
|
24.0
|
31.7
|
24.9
|
||||||||||||
CDN
services
|
3.1
|
3.1
|
3.2
|
2.6
|
||||||||||||
Other
|
—
|
3.5
|
—
|
4.9
|
||||||||||||
Direct
costs of amortization of acquired technologies
|
4.7
|
2.0
|
2.9
|
1.7
|
||||||||||||
Direct
costs of customer support
|
6.0
|
7.4
|
6.6
|
7.1
|
||||||||||||
Product
development
|
3.2
|
2.9
|
3.4
|
2.7
|
||||||||||||
Sales
and marketing
|
11.3
|
14.4
|
12.6
|
13.5
|
||||||||||||
General
and administrative
|
11.5
|
12.6
|
12.3
|
13.4
|
||||||||||||
Provision
for doubtful accounts
|
1.7
|
0.7
|
2.5
|
0.6
|
||||||||||||
Goodwill
impairment
|
152.4
|
—
|
52.5
|
—
|
||||||||||||
Restructuring
and impairments
|
1.1
|
—
|
0.4
|
6.6
|
||||||||||||
Acquired
in-process research and development
|
—
|
—
|
—
|
0.2
|
||||||||||||
Depreciation
and amortization
|
9.4
|
9.8
|
9.1
|
9.7
|
||||||||||||
Total
operating costs and expenses
|
255.5
|
98.2
|
155.1
|
106.3
|
||||||||||||
(Loss)
income from operations
|
(155.5
|
)%
|
1.8
|
%
|
(55.1
|
)%
|
(6.3
|
)%
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
||||||||||||||||
2008
|
2007
|
2008
|
2007
|
||||||||||||||
Direct
costs of customer support
|
$
|
277
|
$
|
561
|
$
|
1,089
|
$
|
1,392
|
|||||||||
Product
development
|
135
|
232
|
544
|
653
|
|||||||||||||
Sales
and marketing
|
448
|
314
|
1,396
|
1,604
|
|||||||||||||
General
and administrative
|
1,062
|
1,116
|
3,342
|
2,989
|
|||||||||||||
$
|
1,922
|
$
|
2,223
|
$
|
6,371
|
$
|
6,638
|
|
●
|
Income Approach: To
determine fair value, we discounted the expected cash flows of the CDN
services reporting unit. Expected cash flows were calculated using a
compounded annual revenue growth rate of approximately 20%, forecasting
existing cost structures and considering capital reinvestment
requirements. We used a discount rate of 20%, representing the
estimated weighted average cost of capital, which reflects the overall
level of inherent risk involved in our CDN services operations and the
rate of return an outside investor would expect to earn. To estimate cash
flows beyond the final year of our model, we used a terminal value and
incorporated the present value of the resulting terminal value into our
estimate of fair value.
|
|
●
|
Market-Based Approach:
To corroborate the results of the income approach described above, we
estimated the fair value of our CDN services reporting unit using several
market-based approaches, including the enterprise value that we derive
based on our stock price. We also used the guideline company method, which
focuses on comparing our risk profile and growth prospects, to select
reasonably similar/guideline publicly traded companies. Using the
guideline company method, we selected revenue and EBITDA multiples below
the median for our comparable
companies.
|
|
●
|
an
impairment charge of $1.9 million in developed advertising technology due
to a strategic change in market
focus,
|
|
●
|
an
impairment charge of $0.8 million in trade names as a result of
discontinuing the use of the VitalStream trade name,
and
|
|
●
|
a
change in estimate that results in an acceleration of amortization expense
of our customer relationships intangible asset over a shorter estimated
useful life of four remaining years instead of an original estimated
useful life of nine years due to customer churn, or attrition, being
higher than expected as of the acquisition
date.
|
●
|
projected
interest income over the next five years,
|
|
●
|
market
risk adjusted discount rate, based on the London Inter-Bank Offered Rate,
or LIBOR, swap rate adjusted for expected yield premium to compensate for
the illiquidity resulting from failing auctions for such securities,
and
|
|
●
|
default
or credit risk adjustments to the discount rate, based on the auction rate
securities in our portfolio were all AAA/Aaa rated by nationally
recognized rating agencies, collateralized by student loans and repayment
of the underlying obligations substantially guaranteed by either a U.S.
federal or municipal government
institution.
|
●
|
converting
the Company’s outstanding term loan balance of $20.0 million as of
September 30, 2008 into a loan under the revolving line of credit facility
under the credit agreement;
|
●
|
terminating
the term loan facility under the credit
agreement;
|
●
|
increasing
the total “Revolving Credit Commitment” from $5.0 million to $35.0
million;
|
●
|
increasing
the “Letter of Credit Sublimit” in the credit agreement from $5.0 million
to $7.0 million;
|
●
|
providing
the Company and Bank of America with an option to enter into a lease
financing agreement not to exceed $10.0 million;
and
|
●
|
modification
of certain covenants and
definitions.
|
●
|
A single,
common logging system, or portal, for customers to record all disputes,
disconnects and requests for credits,
|
|
●
|
A weekly
review of a customer request log with appropriate designated management
and approval pursuant to the schedule of authorization,
and
|
|
●
|
A review
by the appropriate designated finance management personnel of the
accounting estimates developed from the relevant, sufficient, and reliable
data collected above.
|
|
(d)
|
Maximum
|
|||||||||||||||||||
Number
(or
|
|||||||||||||||||||||
Approximate
|
|||||||||||||||||||||
(c)
|
Total
Number of
|
Dollar
Value) of
|
|||||||||||||||||||
Shares
(or Units)
|
Shares
(or Units)
|
||||||||||||||||||||
Purchased
as Part
|
That
May Yet Be
|
||||||||||||||||||||
(a)
|
Total
Number of
|
(b)
|
Average
Price
|
of
Publicly
|
Purchased
Under
|
||||||||||||||||
Shares
(or Units)
|
Paid
per Share
|
Announced
Plans
|
the
Plans or
|
||||||||||||||||||
Period
|
Purchased*
|
(or
Unit)
|
or
Programs
|
Programs
|
|||||||||||||||||
July
1 to 31, 2008
|
304
|
$
|
4.87
|
—
|
—
|
||||||||||||||||
August
1 to 31, 2008
|
5,545
|
3.28
|
—
|
—
|
|||||||||||||||||
September
1 to 30, 2008
|
14,666
|
3.55
|
—
|
—
|
|||||||||||||||||
Total
|
20,515
|
$
|
3.50
|
—
|
—
|
|
* These
shares were surrendered to the Company to satisfy tax withholding
obligations in connection with the vesting of restricted shares of
Internap common stock issued to
employees.
|
Exhibit
Number
|
Description
|
|
10.1
|
Amendment No. 2 dated September
30, 2008 to Credit Agreement, dated as of September 14, 2007, by and among
Internap Network Services Corporation, as the Borrower, Bank of America,
N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the
other Lenders party thereto. †
|
|
31.1*
|
Rule
13a-14(a)/15d-14(a) Certification, executed by James P. DeBlasio,
President, Chief Executive Officer and Director of the
Company.
|
|
31.2*
|
Rule
13a-14(a)/15d-14(a) Certification, executed by George E. Kilguss, III,
Vice President and Chief Financial Officer of the
Company.
|
|
32.1*
|
Section
1350 Certification, executed by James P. DeBlasio, President, Chief
Executive Officer and Director of the Company.
|
|
32.2*
|
Section
1350 Certification, executed by George E. Kilguss, III, Vice President and
Chief Financial Officer of the
Company.
|
INTERNAP
NETWORK SERVICES CORPORATION
(Registrant)
|
|||
By:
|
/s/
George E. Kilguss, III
|
||
George
E. Kilguss, III
|
|||
Vice
President and Chief Financial Officer
|
|||
(Principal
Financial and Accounting Officer)
|
|||
Date:
November 10,
2008
|