Prepared by MERRILL CORPORATION

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QLXz3O2hHAQK4zfh0y8zBxhsIlPYQes0/hoyvPLK5LbTZZmev/ynDXOstjyPVw7H NMh/2RUEim3On06RFTfT6g== 0000912057-01-539610.txt : 20020410 0000912057-01-539610.hdr.sgml : 20020410 ACCESSION NUMBER: 0000912057-01-539610 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNAP NETWORK SERVICES CORP CENTRAL INDEX KEY: 0001056386 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 911896926 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27265 FILM NUMBER: 1788145 BUSINESS ADDRESS: STREET 1: 601 UNION STREET SUITE 1000 CITY: SEATTLE STATE: WA ZIP: 98101 BUSINESS PHONE: 2064418800 MAIL ADDRESS: STREET 1: 601 UNION STREET SUITE 1000 CITY: SEATTLE STATE: WA ZIP: 98101 FORMER COMPANY: FORMER CONFORMED NAME: INTERNAP NETWORK SERVICES CORP/WA DATE OF NAME CHANGE: 19990721 10-Q 1 a2060433z10-q.htm FORM 10-Q Prepared by MERRILL CORPORATION
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)

/x/	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2001

/ /	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
(State or Other Jurisdiction of
Incorporation or Organization)

91-2145721
(IRS Employer Identification No.)

601 Union Street, Suite 1000
Seattle, Washington 98101
(Address of Principal Executive Offices and Zip Code)

(206) 441-8800
(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 the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date: 151,250,592 shares of common stock, $0.001 par value, outstanding as of November 9, 2001.

INTERNAP NETWORK SERVICES CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001

TABLE OF CONTENTS

			Page
PART I.	FINANCIAL INFORMATION		3
	Item 1.	Financial Statements (unaudited)	3
		Condensed Consolidated Balance Sheets September 30, 2001 and December 31, 2000	3
		Condensed Consolidated Statements of Operations Three- and nine-month periods ended September 30, 2001 and 2000	4
		Condensed Consolidated Statements of Cash Flows Nine-month periods ended September 30, 2001 and 2000	5
		Condensed Consolidated Statement of Stockholders' Equity and Comprehensive Loss Nine-month period ended September 30, 2001	6
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
PART II.	OTHER INFORMATION		34
	Item 2.	Changes in Securities and Use of Proceeds	34
	Item 4.	Submission of Matters to a Vote of Security Holders	35
	Item 6.	Exhibits and Reports on Form 8-K	36
	Signatures		37

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTERNAP NETWORK SERVICES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)

			September 30, 2001			December 31, 2000
ASSETS
Current assets:
	Cash and cash equivalents		$	106,796		$	102,160
	Short-term investments			8,351			51,805
	Accounts receivable, net of allowance of $1,296 and $1,370, respectively			15,351			20,291
	Prepaid expenses and other assets			2,150			3,303

		Total current assets		132,648			177,559
Property and equipment, net of accumulated depreciation of $60,375 and $27,363 respectively				157,202			152,153
Restricted cash				8,515			8,515
Investments				3,417			29,090
Note receivable, net of allowance of $6,000 and $0, respectively				—			6,000
Goodwill and other intangible assets, net of accumulated amortization of $26,450 and $54,334, respectively				41,884			268,959
Deposits and other assets				3,930			7,834

		Total assets	$	347,596		$	650,110

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	17,537		$	26,846
	Accrued liabilities			11,910			18,483
	Deferred revenue			2,883			3,491
	Notes payable, current portion			2,132			2,320
	Line of credit			10,000			10,000
	Capital lease obligations, current portion			27,360			18,132
	Restructuring liability, current portion			33,109			—

		Total current liabilities		104,931			79,272
Deferred revenue				9,941			11,239
Notes payable, less current portion				1,458			2,989
Capital lease obligations, less current portion				19,942			24,657
Restructuring liability, less current portion				30,674			—

		Total liabilities		166,946			118,157

Commitments and contingencies
Series A convertible preferred stock, $0.001 par value, 3,500 shares designated; 3,171 and 0 issued and outstanding, respectively, with a liquidation preference of $101,487 and $0, respectively				86,314			—

Stockholders' equity:
	Common stock, $0.001 par value, 600,000 and 500,000 shares authorized, respectively; 151,113 and 148,779 shares issued and outstanding, respectively			151			149
	Additional paid in capital			794,367			786,034
	Deferred stock compensation			(5,456	)		(11,715	)
	Accumulated deficit			(694,782	)		(244,915	)
	Accumulated items of other comprehensive income			56			2,400

		Total stockholders' equity		94,336			531,953

		Total liabilities and stockholders' equity	$	347,596		$	650,110

The accompanying notes are an integral part of these condensed consolidated financial statements.

INTERNAP NETWORK SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share amounts)

			Three-month periods ended September 30,						Nine-month periods ended September 30,
			2001			2000			2001			2000
Revenues			$	29,163		$	20,220		$	86,888		$	42,758

Costs and expenses:
Direct cost of network				24,637			17,041			74,439			39,567
	Customer support			4,789			5,675			17,502			13,546
	Product development			2,760			4,033			9,960			7,437
	Sales and marketing			7,496			8,881			31,615			24,149
	General and administrative			9,820			10,515			37,326			20,000
	Depreciation and amortization			13,468			4,954			36,133			11,025
	Amortization of goodwill and other intangible assets			5,658			26,183			32,458			28,340
	Amortization of deferred stock compensation			814			2,625			3,132			8,249
	Restructuring costs			67,211			—			71,553			—
	Impairment of goodwill and other intangible assets			—			—			195,986			—
	In-process research and development			—			18,000			—			18,000

		Total operating costs and expenses		136,653			97,907			510,104			170,313

Loss from operations				(107,490	)		(77,687	)		(423,216	)		(127,555	)

Other income (expense):
Interest income (expense), net				(861	)		2,875			(909	)		9,323
Loss on investments				(6,428	)		—			(25,742	)		—

Total other income (expense)				(7,289	)		2,875			(26,651	)		9,323

Net loss			$	(114,779	)	$	(74,812	)	$	(449,867	)	$	(118,232	)

Basic and diluted net loss per share			$	(0.76	)	$	(0.51	)	$	(3.00	)	$	(0.85	)

Weighted average shares used in computing basic and diluted net loss per share				150,541			146,794			150,009			139,315

The accompanying notes are an integral part of these condensed consolidated financial statements.

INTERNAP NETWORK SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

				Nine-month periods ended September 30,
				2001			2000
CASH FLOWS FROM OPERATING ACTIVITIES
	Net loss			$	(449,867	)	$	(118,232	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization			68,591			39,375
		Impairment of goodwill and other intangible assets			195,986			—
		Provision for doubtful accounts			3,686			622
		Provision for note receivable			6,000			—
		Non-cash compensation and warrant expense			3,154			8,534
		Loss on disposal of property and equipment			341			—
		Loss on sale of investment securities			14,490			—
		Loss on equity method investment			592			—
		Loss on write-down of investment security			4,824			—
		Acquired in-process research and development			—			18,000
		Changes in operating assets and liabilities:
			Accounts receivable		1,254			(10,655	)
			Investment income receivable		932			(1,724	)
			Prepaid expenses, deposits and other assets		5,057			(4,186	)
			Accounts payable		(1,515	)		(2,819	)
			Accrued restructuring charge		63,783			—
			Deferred revenue		(1,906	)		4,140
			Accrued liabilities		(7,942	)		(958	)

		Net cash used in operating activities			(92,540	)		(67,903	)

CASH FLOWS FROM INVESTING ACTIVITIES
	Purchases of property and equipment				(29,792	)		(37,589	)
	Proceeds from disposal of property and equipment				397			167
	Investment in subsidiaries, net of cash acquired				—			(7,329	)
	Repayment of full recourse notes assumed for outstanding common stock				—			642
	Restriction of cash				—			(10,355	)
	Purchase of investments				(8,855	)		(160,377	)
	Redemption of investments				54,800			63,838

		Net cash provided by (used in) investing activities			16,550			(151,003	)

CASH FLOWS FROM FINANCING ACTIVITIES
	Net proceeds from Series A convertible preferred stock offering				95,635			—
	Principal payments on notes payable				(1,719	)		(909	)
	Payments on capital lease obligations				(15,409	)		(6,561	)
	Proceeds from equipment leaseback financing				—			717
	Proceeds from issuance of and exercise of warrants to purchase capital stock, net of issuance costs				—			444
	Proceeds from exercise of stock options				374			4,728
	Proceeds from issuance of common stock				1,745			145,207

		Net cash provided by financing activities			80,626			143,626

	Net increase (decrease) in cash and cash equivalents				4,636			(75,280	)
	Cash and cash equivalents at beginning of period				102,160			155,184

	Cash and cash equivalents at end of period			$	106,796		$	79,904

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
	Cash paid for interest, net of amounts capitalized			$	4,471		$	1,840

	Purchase of property and equipment financed with capital leases			$	19,922		$	23,444

	Change in accounts payable attributable to purchases of property and equipment			$	(7,794	)	$	2,074

	Acquisition liabilities assumed and accrued acquisition costs			$	1,356		$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

INTERNAP NETWORK SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE LOSS

NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2001

(Unaudited, in thousands)

													Accumulated Items of Other Comprehensive Income (Loss)
	Common Stock
	Common Stock			Additional Paid-In Capital			Deferred Stock Compensation			Accumulated Deficit						Total Stockholders' Equity			Comprehensive Loss
	Shares	Par Value		Additional Paid-In Capital			Deferred Stock Compensation			Accumulated Deficit						Total Stockholders' Equity			Comprehensive Loss
Balances, December 31, 2000	148,779	$	149	$	786,034		$	(11,715	)	$	(244,915	)	$	2,400		$	531,953			—
Amortization of deferred stock compensation	—		—		(1,893	)		5,025			—			—			3,132			—
Reversal of deferred stock compensation for terminated employees	—		—		(1,234	)		1,234			—			—			—			—
Exercise of employee stock options	1,043		1		373			—			—			—			374			—
Issuance of warrant to purchase 35,000 shares of common stock to a non-employee	—		—		22			—			—			—			22			—
Issuance of warrants in conjunction with Series A convertible preferred stock offering	—		—		9,321			—			—			—			9,321			—
Issuance of employee stock purchase plan shares	1,291		1		1,744			—			—			—			1,745			—
Net loss	—		—		—			—			(449,867	)		—			(449,867	)	$	(449,867	)
Unrealized loss on investments	—		—		—			—			—			(16,834	)		(16,834	)		(16,834	)
Realized loss on investments	—		—		—			—			—			14,490			14,490			14,490

Comprehensive loss	—		—		—			—			—			—			—		$	452,211

Balances, September 30, 2001	151,113	$	151	$	794,367		$	(5,456	)	$	(694,782	)	$	56		$	94,336

The accompanying notes are an integral part of these condensed consolidated financial statements.

INTERNAP NETWORK SERVICES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation:

The unaudited condensed consolidated financial statements have been prepared by Internap Network Services Corporation pursuant to the rules and regulations of the Securities and Exchange Commission and include all the accounts of Internap Network Services Corporation and its wholly owned subsidiaries. Certain information and footnote 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. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our financial position as of September 30, 2001, our operating results for the three- and nine-month periods ended September 30, 2001 and 2000, our cash flows for the nine-month periods ended September 30, 2001 and 2000 and changes in our stockholders' equity for the nine-month period ended September 30, 2001. The balance sheet at December 31, 2000 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 filed with the Securities and Exchange Commission.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States 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, recoverability of long-lived assets, depreciation of property and equipment, restructuring allowances, amortization of deferred stock compensation and the allowance for doubtful accounts. Actual results could differ from those estimates.

Certain prior year balances have been reclassified to conform to current year presentation. These reclassifications have not impacted net loss or cash flows.

The results of operations for the three- and nine-month periods ended September 30, 2001 are not necessarily indicative of the results that may be expected for the future periods.

We recognize revenues when persuasive evidence of an arrangement exists, the service has been provided, the fees for the service rendered are fixed or determinable and collectibility is probable. Customers are billed for services on the first day of each month either on a usage or a flat-rate basis. The usage based billing relates to the month prior to the month in which the billing occurs, whereas certain flat rate billings relate to the month in which the billing occurs. Revenues associated with billings for installation of customer network equipment are amortized over the estimated duration of the customer relationship taking into account cancellations and renewals in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 101 as the installation service is integral to the Company's primary service offering. Deferred revenues consist of revenues for services to be delivered in the future, which are amortized over the respective service period and billings for initial installation of customer network equipment.

2. Delaware Incorporation

On September 17, 2001, Internap changed the state of its incorporation from Washington to Delaware with the approval of its stockholders. We accomplished the reincorporation by merging Internap Network Services Corporation with and into our newly formed, wholly owned Delaware subsidiary, Internap Delaware, Inc. Upon consummation of the merger, shareholders of Internap

Network Services Corporation became stockholders of Internap Delaware, Inc. Shortly after completion of the merger, Internap Delaware's name was changed to Internap Network Services Corporation.

As part of the reincorporation, we increased the number of authorized shares of our common stock from 500,000,000 shares to 600,000,000 shares and the number of our preferred stock from 10,000,000 shares to 200,000,000 shares. We designated 3,500,000 of the 200,000,000 authorized shares of preferred stock as "Series A Preferred Stock." We also changed the par values of our common stock and preferred stock from no par to $0.001 per share. The impact of the change in par value of our common stock has been retroactively reflected on our balance sheets and statement of stockholders' equity for all periods presented.

3. Impairment and Restructuring Costs

First quarter, 2001 impairment and restructuring charges:

On June 20, 2000, we completed the acquisition of CO Space, which was accounted for under the purchase method of accounting. The purchase price was allocated to net tangible assets and identifiable intangible assets and goodwill. During the first quarter of 2001, our stock price declined to a historical low, and we began experiencing larger than expected customer attrition. As a result of these events, we revised our financial projections including reductions in budgeted costs relating to the completion of a series of executed but undeveloped leases acquired from CO Space. Subsequently, on February 28, 2001, management and the board of directors approved a restructuring plan that included ceasing development of the executed but undeveloped leases and the termination of core collocation development personnel.

Consequently, on February 28,2001, pursuant to the guidance provided by Financial Accounting Standards Board No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), management completed a cash flow analysis of the collocation assets, including the assets acquired from CO Space. The cash flow analysis showed that the estimated cash flows were less than the carrying value of the collocation assets. Accordingly, pursuant to SFAS 121, management estimated the fair value of the collocation assets to be $79.5 million based upon a discounted future cash flow analysis. As estimated fair value of the collocation assets was less than their recorded amounts, we recorded an impairment charge of approximately $196.0 million as follows (in millions).

Asset Impaired	Book Value		Accumulated Amortization		Net Book Value Impaired
Goodwill	$	229.2	$	53.1	$	176.1
Assembled workforce		2.0		0.5		1.5
Trade name and trademarks		2.8		0.6		2.2
Completed real estate leases		19.3		4.5		14.8
Customer relationships		1.8		0.4		1.4

Total	$	255.1	$	59.1	$	196.0

In addition to the impairment cost, pursuant to the guidance provided by Emerging Issues Task Force Issue No. 94-3 "Liability Recognition for Certain Employee Termination and Other Costs to Exit

an Activity (Including Certain Costs Incurred in Restructurings)," we recorded related restructuring costs totaling $4.3 million primarily attributable to estimated costs for severance for the termination of 65 employees and contractors, anticipated losses related to subleasing the undeveloped leases, and other associated costs. As of September 30, 2001, all of these costs have been paid and the related restructuring liability reduced.

Third quarter, 2001 restructuring charges:

Based upon continued economic downturn, during the third quarter of 2001 management further reduced our revenue projections. As a result, we determined it would be necessary to modify our cost structure to match revenues and, on September 4, 2001, management approved a restructuring plan that reflected decisions to further reduce headcount and to exit certain real estate leases and network ports. Consequently, in accordance with Emerging Issues Task Force Issue No. 94-3, we recorded related estimated charges totaling $67.3 million. The restructuring charges are summarized as follows as of September 30, 2001 (in millions):

		Real estate obligations			Severance costs			Network infrastructure			Other		Total
Restructuring items relating to:
	Direct cost of network	$	44.4		$	—		$	5.1		$	—	$	49.5
	General and administrative		12.9			0.6			—			2.0		15.5
	Sales and marketing		1.2			0.3			—			—		1.5
	Customer support		—			0.5			—			—		0.5
	Product development		—			0.3			—			—		0.3

Total restructuring costs recorded during the three months ended September 30, 2001:			58.5			1.7			5.1			2.0		67.3
Reductions to the liability:			(1.7	)		(1.6	)		(0.2	)		—		(3.5	)

Liability as of September 30, 2001:		$	56.8		$	0.1		$	4.9		$	2.0	$	63.8

The restructuring plan requires us to abandon certain real estate leases for properties which are not in use and, based on the restructuring plan, will not be utilized by us in the future. Accordingly, we recorded restructuring costs of $58.5 million, which are estimates of losses in excess of sublease revenues or termination fees to be incurred on these real estate obligations over the remaining lease terms. Severance costs relate to the termination of 130 employees all of whom were terminated in the third quarter of 2001. The changes to our network infrastructure require that we decommission certain network ports we do not currently use and will not use in the future per the restructuring plan. These costs associated with real estate leases and network ports have been accrued as components of the restructuring charge because they represent amounts to be incurred under contractual obligations in existence at the time the restructuring plan was initiated that will continue in the future with no economic benefit, or penalties to be incurred to cancel the related contractual obligations. We estimate that the recording of the restructuring charge will result in future recurring expense reductions of approximately $3.0 million per quarter through 2005.

our real estate brokers with respect to the health of the sublease market. During the process of formulating the restructuring plan in the third quarter of 2001, after further discussions with our real estate brokers, it became apparent that the sublease market had deteriorated to a greater degree than originally estimated in the first quarter of 2001. Accordingly, we increased the estimate for these lease obligations by $15.3 million. These estimates are subject to further revision based on the availability of new information, including actual subleases.

4. Private Placement of Equity Securities

On September 14, 2001, we completed a $101.5 million private placement of units at a per unit price of $1.60 per unit and issued an aggregate of 63,429,976 units, with each unit consisting of ¹/20 of a share of Series A convertible preferred stock and a warrant to purchase ¹/4 of a share of common stock, resulting in the issuance of 3,171,499 shares of Series A convertible preferred stock and 17,113,606 warrants to purchase equivalent shares of common stock at an exercise price of $1.48256 per share, which are exercisable for a period of five years. The aggregate amount of common stock issuable upon conversion of the Series A convertible preferred stock and the exercise of the warrants is 85,568,119 shares at September 30, 2001.

Holders of Series A convertible preferred stock shall be entitled to the number of votes equal to the number of shares of common stock into which the shares of Series A convertible preferred stock could be converted. Each share of Series A convertible preferred stock is initially convertible into 21.58428 shares of common stock subject to adjustments for certain dilutive events. Each share of Series A convertible preferred stock may be converted at any time at the option of the holder. Shares of Series A convertible preferred stock automatically convert to common stock on the earlier of September 14, 2004, a date more than six months after issuance on which the common stock has traded in excess of $8.00 for a period of 45 consecutive trading days or upon the affirmative vote of 60% of the outstanding shares of Series A convertible preferred stock.

Upon the liquidation, dissolution, merger or event in which existing stockholders own less than 50% of the post-event voting power holders of Series A convertible preferred stock are entitled to be paid out of existing assets an amount equal to $32.00 per share prior to distributions to holders of common stock. Upon completion of distribution to holders of Series A convertible preferred stock, remaining assets will be distributed ratably between holders of Series A convertible preferred stock and holders of common stock until holders of Series A convertible preferred stock have received an amount equal to three times the original issue price.

We received net proceeds of $95,635,000 from the issuance of the Series A convertible preferred stock and allocated $86,314,000 to the Series A convertible preferred stock and $9,321,000 to the warrants to purchase shares of common stock based upon their relative fair values on the date of issuance (September 14, 2001) pursuant to Accounting Principles Board Opinion No. 14 "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants." The fair value used to allocate proceeds to the Series A convertible preferred stock was based upon an independent valuation that among other considerations was based upon the closing price of the common stock on the date of closing, on an as converted basis, and liquidation preferences. The fair value used to allocate proceeds to the warrants to purchase common stock was based on an independent valuation using the Black Scholes model and the following assumptions: exercise price $1.48256; no dividends; term of 5 years; risk free rate of 3.92%; and volatility of 80%.

5. Net Loss Per Share

Basic and diluted net loss per share has been computed using the weighted average number of shares of common stock outstanding during the period, less the weighted average number of unvested shares of common stock issued that are subject to repurchase. We have excluded all convertible preferred stock, warrants, outstanding options to purchase common stock and shares subject to repurchase from the calculation of diluted net loss per share, as such securities are antidilutive for all periods presented. Basic and diluted net loss per share for the three- and nine-month periods ended September 30, 2001 and 2000 are calculated as follows (in thousands, except per share amounts):

		Three-month periods ended September 30,						Nine-month periods ended September 30,
		2001			2000			2001			2000
		(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net loss		$	(114,779	)	$	(74,812	)	$	(449,867	)	$	(118,232	)

Basic and diluted:
Weighted-average shares of common stock outstanding used in computing basic and diluted net loss per share			150,541			146,794			150,009			139,315

Basic and diluted net loss per share		$	(0.76	)	$	(0.51	)	$	(3.00	)	$	(0.85	)

Antidilutive securities not included in diluted net loss per share calculation:
	Convertible preferred stock		68,455			—			68,455			—
	Options to purchase common stock		14,918			23,657			14,918			23,657
	Warrants to purchase common		18,795			1,626			18,795			1,626
	Unvested shares of common stock subject to repurchase		—			125			—			125

			102,168			25,408			102,168			25,408

6. Investments

On April 10, 2001 we announced the formation of a joint venture with NTT-ME Corporation of Japan. The formation of the joint venture involved our cash investment of $2.83 million to acquire 51% of the common stock of the newly formed entity, Internap Japan. We are unable to assert a level of influence on the joint venture's operational and financial policies and practices required to account for the joint venture as a subsidiary whose assets, liabilities, revenues and expenses would be consolidated (due to certain minority interest protections afforded to our joint venture partner, NTT-ME Corporation). We are, however, able to assert sufficient influence to account for our investment in the joint venture as an equity-method investment under Accounting Principles Board Opinion No. 18 "The Equity Method of Accounting for Investments in Common Stock" and consistent with EITF 96-16 "Investor's accounting for an investee when the investor has a majority of the voting interest but the minority shareholder or shareholders have certain approval or veto rights." During the nine-month-period ended September 30, 2001, we recognized our proportional share of Internap Japan's losses totaling $592,000, resulting in a net investment balance of $2.24 million. Our investment in Internap

Japan is reflected as a component of long-term investments and losses are reflected as a component of loss on investments.

Pursuant to an investment agreement among Internap, Ledcor Limited Partnership, Worldwide Fiber Holdings Ltd. and 360networks, Inc. ("360networks"), on April 17, 2000, we purchased 374,182 shares of 360networks Class A Non-Voting Stock at $5.00 per share and, on April 26, 2000, we purchased 1,122,545 shares of 360networks Class A Subordinate Voting Stock at $13.23 per share. The total cash investment was $16.7 million. During the nine-month period ended September 30, 2001, we liquidated our entire investment in 360networks for cash proceeds of $2.2 million and recognized a loss on investment totaling $14.5 million.

We account for investments without readily determinable fair values at cost. Realized gains and losses and declines in value of securities judged to be other than temporary are included in other income (expense). On February 22, 2000, pursuant to an investment agreement, we purchased 588,236 shares of Aventail Corporation ("Aventail") Series D preferred stock at $10.20 per share for a total cash investment of $6.0 million. Because Aventail is a privately held enterprise for which no active market for its securities exists, the investment is recorded as a cost basis investment. During the nine-month period ended September 30, 2001, we concluded based on available information, specifically Aventail's most recent round of financing, that our investment in Aventail had experienced a decline in value that was other than temporary. As a result during June 2001, we recognized a $4.8 million loss on investment when we reduced its recorded basis to $1.2 million, which remains its estimated value as of September 30, 2001.

Investments consisted of the following (in thousands):

December 31, 2000

	Cost Basis		Unrealized Gain		Unrealized Loss			Recorded Value
U.S. Government, Government Agency and Corporate Debt Securities	$	55,773	$	41	$	(2	)	$	55,812
Equity Securities		16,722		2,900		(539	)		19,083
Cost Basis Investments		6,000		—		—			6,000

	$	78,495	$	2,941	$	(541	)	$	80,895

September 30, 2001

	Cost Basis		Unrealized Gain		Unrealized Loss		Recorded Value
U.S. Government, Government Agency and Corporate Debt Securities	$	8,295	$	56	$	—	$	8,351
Equity Securities		—		—		—		—
Equity Method Investment		2,237		—		—		2,237
Cost Basis Investments		1,180		—		—		1,180

	$	11,712	$	56	$	—	$	11,768

7. Note Receivable

On August 10, 2000, we lent a private network company $6.0 million in exchange for a convertible promissory note, which bears interest at the prime rate plus 3%. The note initially matured on May 9, 2001. In two separate amendments executed in December and February 2001, we agreed to modify the note to eliminate the conversion feature and to extend the note's maturity through the earlier of May 2004 or upon the completion of a transaction in which there is a change in control of borrower or in which the borrower sells substantially all its assets.

During the period ended September 30, 2001, we performed an analysis of the collection risk associated with this note receivable. The results of our analysis indicated that there was substantial doubt that the borrower would be able to repay the $6.0 million obligation to us at the time of maturity. Therefore, we have recorded a provision of $6.0 million as an allowance against our note receivable. The impact of the provision is reflected as a component of loss on investments. The $6.0 million loan is currently outstanding and is recorded at the current outstanding balance as a note receivable offset in full by a $6.0 million allowance for doubtful collection.

8. Stock-Based Compensation Plans

On May 4, 2001 (the "Cancellation Date"), we allowed employees to cancel certain outstanding stock option grants to purchase 8.9 million shares of common stock. We have agreed to grant to these same employees options to purchase 8.9 million shares of common stock (the "New Options") to be granted six months plus one day after the Cancellation Date, or November 5, 2001 (the "Grant Date"), provided, however, that the exercise price of the New Options will be the fair value of our common stock on the Grant Date, the related employees also cancel all options granted six months prior to the Cancellation Date, the related employees do not receive any additional grants of options prior to the Grant Date, and the related employees are common law employees of Internap on the Grant Date. Internap accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair value of Internap's stock at the date of grant over the exercise price to be paid to acquire the stock. Therefore, we will not recognize compensation expense related to the grant of the New Options.

During the first six months of 2001, we terminated the employment of individuals for whom we had recognized deferred stock compensation and had recognized related expense on unvested options using an accelerated amortization method. Accordingly, during the nine-month period ended September 30, 2001, we reduced our deferred stock compensation, which would have been amortized to future expense, by $1.2 million. and we reduced our amortization to expense of deferred stock compensation by $1.9 million to record the benefit of previously recognized expense on unvested options.

9. Property and Equipment

Property and equipment consists of the following (in thousands):

	September 30, 2001			December 31, 2000
	(unaudited)
Network equipment	$	37,916		$	32,777
Network equipment under capital lease		61,533			52,637
Furniture, equipment and software		33,830			24,066
Furniture, equipment and software under capital lease		5,190			4,414
Leasehold improvements		79,108			65,622

		217,577			179,516
Less: Accumulated depreciation and amortization ($30,822 and $12,069 related to capital leases at September 30, 2001 and December 31, 2000, respectively)		(60,375	)		(27,363	)

Property and equipment, net	$	157,202		$	152,153

Comprehensive Loss

For the nine-month period ended September 30, 2001 and 2000, comprehensive loss was $452.2 million and $105.6 million, respectively. The difference between net loss and comprehensive loss of $2.3 million and $12.6 million for the periods ended September 30, 2001 and 2000, respectively, is due to net unrealized gains and losses on available-for-sale securities.

11. Contingencies

On or about July 3, 2001, a lawsuit was filed against us, certain of our officers and directors, and certain firms that participated as underwriters during our initial public offering of common stock on or about September 29, 1999. The suit alleges that the prospectus and registration statement issued in connection with the offering misrepresented the commissions and other consideration paid to the underwriters in connection therewith, in violation of the federal securities laws. The lawsuit was filed on behalf of a purported plaintiff class consisting of persons who acquired shares of our common stock between September 29, 1999 through December 6, 2000. We believe the allegations are without merit and plan to vigorously defend against the litigation.

12. Recent Accounting Pronouncements

We adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of SFAS No. 133" and SFAS No. 138, "Accounting for Derivative Instruments and Certain Hedging Activities," effective January 1, 2001. These pronouncements establish accounting and reporting standards for derivative instruments and hedging activities which, among other things, require that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those derivatives at fair value. Our adoption of SFAS No. 133 has not materially impacted our financial position, results of operations or cash flows.

During June 2001 the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 141 "Business Combinations" (SFAS No.141), which is effective for all business combinations initiated after July 1, 2001. SFAS No. 141, supersedes APB Opinion No. 16, Business Combinations, and FASB Statement No. 38, Accounting for Pre-acquisition Contingencies of Purchased Enterprises and requires that all business combinations be accounted for using the purchase method of accounting. Further, SFAS No. 141 requires certain intangibles to be recognized as assets apart from goodwill if they meet certain criteria and also requires expanded disclosures regarding the primary reasons for consummation of the combination and the allocation of the purchase price paid to the assets acquired and liabilities assumed by major balance sheet caption. We are currently in the process of assessing the impact of this statement on our financial position, results of operations and cash flows.

During June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets" (SFAS No. 142), which is effective for fiscal years beginning after December 15, 2001. SFAS No. 142 supercedes APB Opinion No. 17, Intangible Assets, and addresses financial accounting and reporting for intangible assets acquired individually or with a group of other assets and the accounting and reporting for goodwill and other intangible assets subsequent to their acquisition. Under the model set forth in SFAS No. 142, goodwill is no longer amortized to earnings, but instead is subject to periodic testing for impairment. We are currently in the process of assessing the impact of this statement on our financial position, results of operations and cash flows.

During June of 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 143 "Accounting for Asset Retirement Obligations" (SFAS No. 143), which is effective for fiscal years beginning after June 15, 2001. SFAS No. 143 requires that obligations associated with the retirement of a tangible long-lived asset to be recorded as a liability when those obligations are incurred, with the amount of the liability initially measured at fair value. Upon initially recognizing a liability for an asset retirement obligation, an entity must capitalize the cost by recognizing an increase in the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement, results of operations and cash flows. We are currently in the process of assessing the impact of this statement on our financial position, results of operations and cash flows.

During August of 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144), which is effective for fiscal years beginning after December 15, 2001. SFAS No. 144 develops one accounting model, based on the model in SFAS No. 121, for long-lived assets that are to be disposed of by sale, as well as addresses the principal implementation issues. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. That requirement eliminates APB 30's requirement that discontinued operations be measured at net realizable value or that entities include under "discontinued operations" in the financial statements amounts for operating losses that have not yet occurred. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. We are currently in the process of assessing the impact of this statement on our financial position, results of operations and cash flows.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words "believes," "anticipates," "estimates," "expects" and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us described below and elsewhere in this Quarterly Report, and in other documents we file with the Securities and Exchange Commission.

OVERVIEW

Internap is a leading provider of high performance Internet connectivity services targeted at businesses seeking to maximize the performance of mission-critical Internet-based applications. Customers connected to one of our service points have their data optimally routed to and from destinations on the Internet using our overlay network, which analyzes the traffic situation on the multiplicity of networks that comprise the Internet and delivers mission-critical information and communications faster and more reliably. Use of our overlay network results in lower instances of data loss and greater quality of service than services offered by conventional Internet connectivity providers. As of September 30, 2001, we provided our high performance Internet connectivity services to 894 customers.

We offer our high performance Internet connectivity services at dedicated line speeds of 1.5 Megabits per second, or Mbps, to 1,000 Mbps to customers desiring a superior level of Internet performance. We provide our high performance connectivity services through the deployment of service points, which are highly redundant network infrastructure facilities coupled with our patented routing technology. Service points maintain high speed, dedicated connections to major global Internet networks, commonly referred to as backbones, such as AT&T, Cable & Wireless USA, Genuity, Global Crossing Telecommunications, Intermedia, Qwest Communications International, Sprint Internet Services, UUNET Technologies and Verio (an NTT Communications Corporation). As of September 30, 2001, we operated 36 service points in the Amsterdam, Atlanta (two service points), Boston (two service points), Chicago (two service points), Dallas (three service points), Denver, Fremont, CA, Houston (two service points), London, Los Angeles (three service points), Miami, New York (three service points), Orange County, Philadelphia (two service points), San Diego (two service points), San Francisco, San Jose (two service points), Santa Clara, Seattle (three service points) and Washington, D.C. (two service points) metropolitan areas. We also operate an additional service point in Tokyo through our joint venture with NTT-ME Corporation of Japan.

We believe our service points provide a superior quality of service over the public Internet enabling our customers to realize the full potential of their existing Internet-based applications, such as e-commerce and on line trading. In addition, we believe our service points will enable our customers to take advantage of new services, such as using the Internet to conduct video conferencing, make telephone calls or send facsimiles, create private networks, distribute multimedia documents and send and receive audio and video feeds.

Impairment and Restructuring Costs

First quarter, 2001 impairment and restructuring charges:

revised our financial projections including reductions in budgeted costs relating to the completion of a series of executed but undeveloped leases acquired from CO Space. Subsequently, on February 28, 2001, management and the board of directors approved a restructuring plan that included ceasing development of the executed but undeveloped leases and the termination of core collocation development personnel.

Consequently, on February 28, 2001, pursuant to the guidance provided by Financial Accounting Standards Board No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), management completed a cash flow analysis of the collocation assets, including the assets acquired from CO Space. The cash flow analysis showed that the estimated cash flows were less than the carrying value of the collocation assets. Accordingly, pursuant to SFAS 121, management estimated the fair value of the collocation assets to be $79.5 million based upon a discounted future cash flow analysis. As estimated fair value of the collocation assets was less than their recorded amounts, we recorded an impairment charge of approximately $196.0 million as follows (in millions).

Asset Impaired		Book Value		Accumulated Amortization		Net Book Value Impaired
Goodwill		$	229.2	$	53.1	$	176.1
Assembled workforce			2.0		0.5		1.5
Trade name and trademarks			2.8		0.6		2.2
Completed real estate leases			19.3		4.5		14.8
Customer relationships			1.8		0.4		1.4

	Total	$	255.1	$	59.1	$	196.0

In addition to the impairment cost, pursuant to the guidance provided by Emerging Issues Task Force Issue No. 94-3 "Liability Recognition for Certain Employee Termination an Other Costs to Exit an Activity (Including Certain Costs Incurred in Restructurings)," we recorded related restructuring costs totaling $4.3 million primarily attributable to estimated costs for severance for the termination of 65 employees and contractors, anticipated losses related to subleasing the undeveloped leases, and other associated costs. As of September 30, 2001, all of these costs have been paid and the related restructuring liability reduced.

Third quarter, 2001 restructuring charges:

related estimated charges totaling $67.3 million. The restructuring charges are summarized as follows as of September 30, 2001 (in millions):

		Real estate obligations			Severance costs			Network infrastructure			Other		Total
Restructuring items relating to:
	Direct cost of network	$	44.4		$	—		$	5.1		$	—	$	49.5
	General and administrative		12.9			0.6			—			2.0		15.5
	Sales and marketing		1.2			0.3			—			—		1.5
	Customer support		—			0.5			—			—		0.5
	Product development		—			0.3			—			—		0.3

Total restructuring costs recorded during the three months ended September 30, 2001:			58.5			1.7			5.1			2.0		67.3
Reductions to the liability:			(1.7	)		(1.6	)		(0.2	)		—		(3.5	)

Liability as of September 30, 2001:		$	56.8		$	0.1		$	4.9		$	2.0	$	63.8

The restructuring plan requires us to abandon certain real estate leases for properties which are not in use and, based on the restructuring plan, will not be utilized by us in the future. Accordingly, we recorded restructuring costs of $58.5 million which are estimates of losses in excess of sublease revenues or termination fees to be incurred on these real estate obligations over the remaining lease terms. Severance costs relate to the termination of 130 employees all of whom were terminated in the third quarter of 2001. The changes to our network infrastructure require that we decommission certain network ports we do not currently use and will not use in the future, per the restructuring plan. These costs associated with real estate leases and network ports have been accrued as components of the restructuring charge because they represent amounts to be incurred under contractual obligations in existence at the time the restructuring plan was initiated that will continue in the future with no economic benefit, or penalties to be incurred to cancel the related contractual obligations. We estimate that the recording of the restructuring charge will result in future recurring expense reductions of approximately $3.0 million per quarter through 2005.

The third quarter, 2001 restructuring charge includes increases in estimates for certain lease obligations initially recorded in the first quarter, 2001 restructuring charge and, therefore, constitutes a change in accounting estimate. The original estimate was based on economic forecasts and input from our real estate brokers with respect to the health of the sublease market. During the process of formulating the restructuring plan in the third quarter of 2001, after further discussions with our real estate brokers, it became apparent that the sublease market had deteriorated to a greater degree than originally estimated in the first quarter of 2001. Accordingly, we increased the estimate for these lease obligations by $15.3 million. These estimates are subject to further revision based on the availability of new information, including actual subleases.

Deferred Stock Compensation

During the first six months of 2001, we terminated the employment of individuals for whom we had recognized deferred stock compensation and had recognized related expense on unvested options using an accelerated amortization method. Accordingly, during the nine-month period ended September 30, 2001, we reduced our deferred stock compensation, which would have been amortized to future expense, by $1.2 million, and we reduced our amortization to expense of deferred stock compensation by $1.9 million to record the benefit of previously recognized expense on unvested options.

Results Of Operations

The following table sets forth, as a percentage of total revenues, selected statement of operations data for the periods indicated:

			Three-month periods ended September 30,				Nine-month periods ended September 30,
			2001		2000		2001		2000
Revenues			100%		100%		100%		100%
Costs and expenses:
	Direct cost of network		85%		84%		86%		93%
	Customer support		16%		28%		20%		32%
	Product development		9%		20%		11%		17%
	Sales and marketing		26%		44%		36%		56%
	General and administrative		34%		52%		43%		47%
	Depreciation and amortization		46%		25%		42%		26%
	Amortization of goodwill and other intangible assets		19%		129%		37%		66%
	Amortization of deferred stock compensation		3%		13%		4%		19%
	Restructuring costs		231%		0%		82%		0%
	Impairment of goodwill and other intangible assets		0%		0%		226%		0%
	In-process research and development		0%		89%		0%		42%

		Total operating costs and expenses	469%		484%		587%		398%

Loss from operations			(369%	)	(384%	)	(487%	)	(298%	)

Other income (expense):
	Interest income (expense), net		(3%	)	14%		(1%	)	22%
	Loss on investments		(22%	)	0%		(30%	)	0%

		Total other income (expense)	(25%	)	14%		(31%	)	22%

		Net loss	(394%	)	(370%	)	(518%	)	(276%	)

Nine-month Periods Ended September 30, 2001 and 2000

Net Loss. Net loss for the nine-month period ended September 30, 2001 was $449.9 million, or $3.00 share, as compared to $118.2 million, or $0.85 per share, for the same period during the preceding year. The increase in net loss was primarily due to restructuring and impairment costs totaling $267.5 million representing 81% of the increase. Excluding these costs, net loss for the nine-month period ending September 30, 2001 was $182.4 million, or $1.22 per share.

Revenues. Revenues increased 103% from $42.8 million for the nine-month period ended September 30, 2000 to $86.9 million for the nine-month period ended September 30, 2001. The increase of $44.1 million was attributable to increased sales at our existing service points, the deployment of service points from September 30, 2000 through September 30, 2001 and revenues from collocation services related to our acquisition of CO Space during June 2000.

Direct cost of network. Direct cost of network increased 88% from $39.6 million for the nine-month period ended September 30, 2000 to $74.4 million for the nine-month period ended September 30, 2001. This increase of $34.8 million was primarily due to increased connectivity costs related to added and increased usage of connections to Internet backbone and local exchange providers at each service point, comprising 48% of the increase, and the increased rent and facility costs reflecting a full period of operations during 2001 compared to a partial period of operations due to deployment during 2000, comprising 41% of the increase.

Customer support. Customer support expenses increased 30% from $13.5 million for the nine-month period ended September 30, 2000 to $17.5 million for the nine-month period ended September 30, 2001. This increase of $4.0 million was primarily due to increased compensation and benefits and facility costs that increased $4.4 million and $1.4 million, respectively, offset by savings of $1.8 million in consulting and travel costs.

Product Development. Product development costs increased 35% from $7.4 million for the nine-month period ended September 30, 2000 to $10.0 million for the nine-month period ended September 30, 2001. This increase of $2.6 million was due to increased compensation costs, representing 60% of the increase and increased facility costs, representing 35% of the increase.

Sales and Marketing. Sales and marketing costs increased 31% from $24.1 million for the nine-month period ended September 30, 2000 to $31.6 million for the nine-month period ended September 30, 2001. This increase of $7.5 million was primarily due to advertising costs, comprising 69% of the increase, and, to a lesser extent, increased compensation costs comprising 17% of the increase.

General and Administrative. General and administrative costs increase 87% from $20.0 million for the nine-month period ended September 30, 2000 to $37.3 million for the nine-month period ended September 30, 2001. This increase of $17.3 million was primarily due to increased facility costs, representing 29% of the increase, increased compensation costs, representing 22% of the increase, increased bad debt expense, representing 17% of the increase, and increased taxes, licenses and fees, representing 16% of the increase.

Depreciation and amortization. Depreciation and amortization decreased 228% from $11.0 million for the nine-month period ended September 30, 2000 to $36.1 million for the nine-month period ended September 30, 2001. This increase was primarily due to depreciation of property and equipment acquired for deployment of 17 service points during 2000.

Other Income (Expense). Other income (expense), net, decreased from $9.3 million of other income for the nine-month period ended September 30, 2000 to ($26.7) million of other expense for the nine-month period ended September 30, 2001. This decrease was primarily due to losses incurred on investments in 360Networks and Aventail totaling $19.3 million, a provision for our note receivable of $6.0 million and increased interest expense associated with increased capital leases and a decline in interest income stemming from decreasing investment and interest earning asset balances.

Three-month Periods Ended September 30, 2001 and 2000

Net Loss. Net loss for the three-month period ended September 30, 2001 was $114.8 million, or $0.76 per share, as compared to $74.8 million, or $0.51 per share, for the same period in the preceding year. The increase in net loss was primarily due the $67.2 million restructuring charge taken during the third quarter of 2001.

Revenues. Revenues increased 45% from $20.2 million for the three-month period ended September 30, 2000 to $29.2 million for the three-month period ended September 30, 2001. The increase in revenue of $9.0 million was attributable to increased sales at our existing service points and the deployment of service points from September 30, 2000 through September 30, 2001.

Direct cost of network. Direct cost of network increased 45% from $17.0 million for the three-month period ended September 30, 2000 to $24.6 million for the three-month period ended September 30, 2001. This increase of $7.6 million was primarily due to the increased rent and facility costs, comprising 61% of the increase, and increased connectivity costs related to added and increased usage of connections to Internet backbone and local exchange providers at each service point, comprising 21% of the increase.

Customer support. Customer support expenses decreased 16% from $5.7 million for the three-month period ended September 30, 2000 to $4.8 million for the three-month period ended September 30,2001. This decrease of $0.9 million was primarily due to decreased compensation costs, representing 52% of the decrease, and reduced travel costs, representing 39% of the decrease.

Product Development. Product development costs decreased 32% from $4.0 million for the three-month period ended September 30, 2000 to $2.8 million for the three-month period ended September 30, 2001. This decrease of $1.2 million was due to decreased compensation costs, representing 65% of the decrease and decreased consulting costs, representing 30% of the decrease.

Sales and Marketing. Sales and marketing costs decreased 16% from $8.9 million for the three-month period ended September 30, 2000 to $7.5 million for the three-month period ended September 30, 2001. This decrease of $1.4 million was primarily due to decreased compensation costs, representing 71% of the decrease.

General and Administrative. General and administrative costs decreased 7% from $10.5 million for the three-month period ended September 30, 2000 to $9.8 million for the three-month period ended September 30, 2001. This decrease of $0.7 million was primarily due to decreased compensation costs, representing 116% of the decrease, offset by increased facility costs, representing 16% of the decrease.

Depreciation and amortization. Depreciation and amortization increased 170% from $5.0 million for the three-month period ended September 30, 2000 to $13.5 million for the three-month period ended September 30, 2001. This increase was primarily due to depreciation of property and equipment acquired to deploy service points between September 30, 2000 and September 30, 2001.

Other Income (Expense). Other income (expense), net, decreased from $2.9 million of other income for the three-month period ended September 30, 2000 to ($7.3) million of other expense for the three-month period ended September 30, 2001. This decrease was primarily due to a provision taken on our note receivable of $6.0 million and increased interest expense associated with increased capital leases and a decline in interest income stemming from decreasing investment and interest earning asset balances.

Liquidity and Capital Resources

At September 30, 2001, we had cash, cash equivalents and short-term investments of $115.2 million and a revolving line of credit and equipment financing arrangements allowing us to borrow up to $105.0 million. Interest rates under these facilities range from 3% to 22%, and these facilities expire at various dates through 2004. These financial arrangements contain financial covenants including covenants to maintain certain liquidity ratios and minimum net worth. We were in compliance with all such financial covenants as of September 30, 2001. In addition, these financing arrangements also include subjective covenants that allow the financial institutions to reduce the available credit based on general credit worthiness.

Net cash used in operations was $92.5 million and $67.9 million during the nine-month periods ended September 30, 2001 and 2000, respectively. Net cash used in operations during nine-month period ended September 30, 2001 was primarily due to funding of net operating losses, in addition to decreases in operating liability balances, offset by non-cash restructuring, impairment, and other charges and decreases in operating asset balances. Net cash used in operations during nine-month period ended September 30, 2000 was primarily due to funding of net operating losses, in addition to increases in operating asset balances and decreases in accounts payable offset by non-cash depreciation and other charges and an increase in deferred revenue balances.

Net cash provided by (used in) investing activities was $16.6 million and ($151.0) million during the nine-month periods ended September 30, 2001 and 2000, respectively. Net cash provided by investing activities during the nine-month period ended September 30, 2001 reflects the net redemption of investment securities offset by cash used for the purchase of property and equipment. Net cash used in investing activities during the nine-month period ended September 30, 2000, reflects the investment of cash proceeds from the issuance of common stock, the restriction of certain cash balances and cash purchases of property and equipment. Purchases of property and equipment related to service point deployments were primarily financed by capital leases (such purchases are excluded from the net cash used in investing activities in the statement of cash flows), and totaled $19.9 million and $23.4 million during the nine-month periods ended September 30, 2001 and 2000, respectively.

Net cash provided by financing activities was $80.6 million and $143.6 million during the nine-month periods ended September 30, 2001 and 2000, respectively. Net cash provided by financing activities during the nine-month period ended September 30, 2001 primarily reflects the proceeds from the Series A preferred stock offering offset by cash payments made on notes payable and capital lease

obligations while cash provided by financing activities during the nine-month period ended September 30, 2000 primarily reflects the proceeds from sales of our common stock.

We expect to spend significant additional capital to support ongoing operations, capital requirements related to expected increased sales and, to a lesser extent, product development and the development of our internal systems and software. We expect to continue to expend significant amounts of capital on property and equipment related to the expansion of facility infrastructure, computer equipment and for research and development laboratory and test equipment to support on-going research and development operations.

We estimate that we will reduce $33.1 million of our restructuring liability over the next twelve months, of which approximately $24.8 million will be uses of cash and cash equivalents and the remainder will be non-cash reductions. The remaining $30.7 million of the liability will be reduced through approximately equal cash payments through the first quarter of 2005.

During the next 12 months, we expect to meet our cash requirements with existing cash, cash equivalents, short-term investments, and cash flow from sales of our services. However, our capital requirements depend on several factors, including the rate of market acceptance of our services, the ability to expand our customer base, the rate of deployment of additional service points and other factors. If our capital requirements vary materially from those currently planned, or if we fail to generate sufficient cash flow from the sales of our services, we may require additional financing sooner than anticipated or we may have to delay or abandon some or all of our development and expansion plans or otherwise forego market opportunities if capital is not available to us on satisfactory terms if and when it is needed. We intend to invest cash in excess of current operating requirements in short-term, interest-bearing, investment-grade securities.

Recent Accounting Pronouncements

acquired individually or with a group of other assets and the accounting and reporting for goodwill and other intangible assets subsequent to their acquisition. Under the model set forth in SFAS No. 142, goodwill is no longer amortized to earnings, but instead is subject to periodic testing for impairment. We are currently in the process of assessing the impact of this statement on our financial position, results of operations and cash flows.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We maintain investment portfolio holdings of various issuers, types, and maturities, the majority of which are commercial paper and government securities. These securities are generally classified as available for sale and, consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income. We also have a $1.2 million equity investment in Aventail, an early stage, privately held company. This strategic investment is inherently risky, in part because the market for the products or services being offered or developed by Aventail has not been proven and may never materialize. Because of risk associated with this investment, we could lose our entire initial investment in Aventail. Furthermore we have invested $2.8 million in a Japan based joint venture with NTT-ME Corporation, Internap Japan. This investment is accounted for using the equity-method and is subject to foreign currency exchange rate risk. In addition, the market for services being offered by Internap Japan has not been proven and may never materialize.

The remaining portion of our investment portfolio, with a fair value of $8.4 million as of September 30, 2001, is invested in commercial paper, government securities and corporate indebtedness that could experience an adverse decline in fair value should an increase in interest rates occur. In addition, declines in interest rates could have an adverse impact on interest earnings for our investment portfolio. We do not currently hedge against these interest rate exposures.

PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(b): The issuance of the Series A preferred stock and the common stock warrants will have dilutive effects that could depress the market price of our common stock and dilute the voting power of existing stockholders. The issue and sale of the units will substantially increase the number of shares of common stock we may issue below the market price of the common stock as of the closing of the Series A financing. If all the shares of Series A preferred stock are converted and if all warrants are fully exercised, the Series A preferred stockholders would hold on a pro forma basis approximately 36.1% of our outstanding common stock as of November 9, 2001, excluding their current holdings and assuming a unit purchase price of $1.60 and no adjustments to the conversion price or exercise price. Adjustments to or resets of the conversion price of the Series A preferred stock or the exercise prices of the warrants would further dilute the ownership interests and voting power of existing stockholders. In addition, the issuance of common stock upon the conversion of the Series A preferred stock and upon the exercise of the warrants could have a depressive effect on the market price of the common stock by increasing the number of shares of common stock outstanding.

The Series A preferred stockholders, as a group, will control a significant portion of our outstanding capital stock and, as such, will have significant voting power with respect to our shares. As a result and in light of some of the Series A preferred stockholders' combined ownership of a substantial amount of outstanding shares of our common stock, the Series A preferred stockholders may be able to affect the outcome of all matters brought before the stockholders, including a vote for the election of directors and the approval of mergers and other business combination transactions.

The Series A preferred stockholders will have rights that are senior to holders of common stock. The Series A preferred stockholders will have a claim against our assets senior to any claim that the holders of our common stock would have in the event of a liquidation, dissolution or winding up. As a result of this preference, the Series A preferred stockholders will have rights that are senior to the common stock in many respects.

(c): On September 14, 2001, we completed a $101.5 million private placement of units to institutional and individual investors at an original issue price of $1.60 per unit and issued an aggregate of 63,429,976 units, with each unit consisting of ¹/20 of a share of Series A preferred stock and a warrant to purchase ¹/4 of a share of common stock, resulting in the issuance of 3,171,499 shares of Series A convertible preferred stock and 17,113,606 warrants to purchase equivalent shares of common stock at an exercise price of $1.48256 per share for a period of five years. The aggregate amount of common stock issuable upon conversion of the Series A preferred stock and the exercise of the warrants is 85,568,119 shares at September 30, 2001.

In connection with the private placement, we entered into a financial advisory and placement agent agreement with J.P. Morgan H&Q. Because all of the investors were accredited, as defined under the Securities Act of 1933, as amended (the "Act"), the private placement was completed pursuant to an exemption provided by Rule 506 of Regulation D of the Act.

The Series A preferred stockholders shall be entitled to the number of votes equal to the number of shares of common stock into which the shares of Series A preferred stock could be converted. Each share of Series A preferred stock is initially convertible into 21.58428 shares of common stock subject to adjustments for certain dilutive events. Each share of Series A preferred stock may be converted at any time at the option of the holder. Shares of Series A preferred stock automatically convert to common stock on the earlier of September 14, 2004,

a date six months or later after issuance on which the common stock has traded in excess of $8.00 (¹/4 the original Series A preferred purchase price) for a period of 45 consecutive trading days or upon the affirmative vote of 60% of the outstanding shares of Series A preferred stock.

As of September 30, 2001, we had used the estimated aggregate net proceeds from the Series A financing of $95.6 million as follows:

Construction of plant, building and facilities:	$	—
Purchase and installation of machinery and equipment:	$	—
Purchases of real estate:	$	—
Acquisition of other businesses:	$	—
Repayment of indebtedness:	$	—
Working capital:	$	—
Temporary investments (interest bearing treasury securities and corporate paper):	$	95.6	million

The foregoing amounts represent our best estimate of our use of proceeds for the period indicated. No portion of payments of any commissions, finders fees, expenses paid to or for underwriting or other offering expenses were made to our directors or officers or their associates, holders of 10% or more of any class of our equity securities or to our affiliates.

(d): Our follow-on public offering of common stock was effected through a registration statement on Form S-1 (File No. 333-95503) that was declared effective by the Commission on April 6, 2000. As of September 30, 2001, we had used the estimated aggregate net proceeds of $142.9 million from our follow-on public offering as follows:

Construction of plant, building and facilities:	$	7.4	million
Purchase and installation of machinery and equipment:	$	22.4	million
Purchases of real estate:	$	—
Acquisition of other businesses:	$	—
Repayment of indebtedness:	$	17.1	million
Working capital:	$	85.0	million
Temporary investments (interest bearing treasury securities and corporate paper):	$	11.0	million

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At our annual meeting of stockholders on September 13, 2001, our stockholders approved a change in our state of incorporation from Washington to Delaware, the issuance and sale of $101.5 aggregate purchase price of units, with each unit consisting of ¹/20 of a share of our Series A preferred stock and a warrant to purchase ¹/4 of a share of our common stock and ratified the selection of PricewaterhouseCoopers LLP as our independent accountants for each of the fiscal years ending 2001 and 2002. 78,709,574 stockholders voted in favor of approving a change in our state of incorporation from Washington to Delaware. 14,354,830 stockholders voted against the reincorporation, and there were 101,152 abstentions and broker non-votes. 92,499,935 stockholders voted in favor of approving the private placement of the units. 528,805 stockholders voted against the private placement, and there were 154,005 abstentions and

broker non-votes. 114,736,736,397 stockholders voted in favor of approving the ratification of PricewaterhouseCoopers LLP as our independent accountants. 7,850,397 stockholders voted against the ratification, and there were 133,510 abstentions and broker non-votes. 117,045,270 stockholders voted to elect Fredric W. Harman as a director to serve until the 2004 annual meeting, and 5,697,120 stockholders withheld their votes on that matter. 117,442,121 stockholders voted to elect Kevin L. Ober as a director to serve until the 2004 annual meeting, and 5,697,120 stockholders withheld their votes on that matter.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a): Exhibits:

Exhibit Number		Description
*2.1		Agreement and Plan of Merger, dated July 20, 2001, between the Registrant and Internap Network Services Corporation (Washington).
*3.1		Certificate of Incorporation of the Registrant.
*3.2		Bylaws of the Registrant.
10.1		Employment Agreement, dated July 25,2001, between the Registrant and Eugene Eidenberg.
10.2		Employment Agreement, dated July 25, 2001, between the Registrant and Anthony Naughtin.
*10.3		Unit Purchase Agreement, dated July 20, 2001, among the Registrant and the purchasing parties thereto.
*10.4		Escrow Agreement, dated July 20, 2001, among the Registrant, Chase Manhattan Trust Company, National Association, and the purchasing parties thereto.

(b): Reports on Form 8-K:

On September 18, 2001 we filed a report on Form 8-K announcing the completion of our $101 million private placement of units and our reincorporation to Delaware.

On August 10, 2001 we filed an amended report on Form 8-K/A to our previous report on Form 8-K filed on July 21, 2001 announcing our entering into of a definitive agreement for a $101 million private placement of units and the appointment of Eugene Eidenberg as our Chief Executive Officer.

On July 6, 2001 we filed a report on Form 8-K announcing a lawsuit filed against us, certain of our officers and directors, and certain of the firms that participated as underwriters in our initial public offering.

*: Incorporated by reference to the Registrant's definitive proxy statement on schedule 14A filed with the Securities and Exchange Commission on August 30, 2001.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 14th day of November, 2001.

		INTERNAP NETWORK SERVICES CORPORATION (Registrant)

		By:		/s/ PAUL E. MCBRIDE Paul E. McBride Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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INTERNAP NETWORK SERVICES CORPORATION FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNAP NETWORK SERVICES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited, in thousands)
INTERNAP NETWORK SERVICES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, in thousands, except per share amounts)
INTERNAP NETWORK SERVICES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands)
INTERNAP NETWORK SERVICES CORPORATION CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2001 (Unaudited, in thousands)
INTERNAP NETWORK SERVICES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EX-10.1 3 a2060433zex-10_1.htm EXHIBIT 10.1 Prepared by MERRILL CORPORATION
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EMPLOYMENT AGREEMENT

This Employment Agreement (the "Agreement") is entered into as of July 25, 2001 (the "Effective Date"), by and between Internap Network Services Corporation (the "Company"), and Eugene Eidenberg ("Executive") (collectively the "Parties").

1. Position and Duties. Executive shall serve as the Chief Executive Officer for the Company, with such duties, authorities and responsibilities as are commensurate with such position. Executive shall report to the Board of Directors, and shall work from the Company's office in Seattle, Washington. In addition, Executive shall continue to serve as Chairman of the Board of Directors until his successor is duly qualified and elected.

2. Base Salary. Executive shall receive a base salary of $29,066.66 per month, ($348,800 annualized), less standard payroll tax withholdings and deductions ("Base Salary"). Executive's Base Salary shall be paid semi-monthly in accordance with the Company's standard payroll practices.

3. Paid Time Off and Benefits. Executive will be eligible for all standard Company benefits provided to employees generally. Executive will accrue ten (10) days of paid time off after every six (6) months of employment.

4. Term and Nature of Employment. Executive shall be employed for a twelve (12) month term, which will renew automatically in successive three month terms, unless the Company notifies Executive of its intent not to renew the term thirty (30) days in advance of the expiration of the term. Notwithstanding, Executive's employment with the Company shall be at-will. Both Executive and the Company shall have the right to terminate the employment relationship at any time, with or without cause, and with or without advance notice. Upon any termination of the employment relationship, the Company will no longer be obligated to provide payments, salary, or benefits to Executive, except as provided in this Agreement.

Executive shall devote his entire working time, attention, abilities and efforts to the Company's business and affairs, faithfully and diligently serve the Company's interests, and refrain from engaging in any business or employment activity, except those which do not interfere with Executive's normal activities on the Company's behalf and are not with business entities which compete directly with the Company. Executive's precise services may be extended or curtailed, from time to time, at the direction of the Company, and Executive shall assume and perform such further reasonable responsibilities and duties as may be assigned to him from time to time by the Company.

5. Stock Option Grants. Subject to approval by the Company's Board of Directors and the terms of the Company's 1999 Equity Incentive Plan (the "Option Plan"), Executive shall be granted a nonstatutory stock option to purchase a total of one million (1,000,000) shares of the Company's common stock at a per share exercise price equal to the fair market value of the common stock on the date of grant (the "Option"). The Option shall be exercisable for three (3) years following Executive's termination of Continuous Service (as defined in the Option Plan) for any reason. The Option shall vest, subject to Executive's continuing service with the Company, as follows:

(a) Award One: 250,000 option shares will vest on the date of grant;

(b) Award Two: 250,000 option shares will vest on the date six months from the date of grant;

(c) Award Three: 300,000 option shares will vest on the second anniversary of the date of grant or earlier as described below:

(i): 150,000 option shares will vest upon the Company meeting or exceeding the Company's financial plan for July 1, 2001 through December 31, 2001 (the "Financial Plan") as follows:

(A) 75,000 option shares will vest upon the Company meeting or exceeding the projected revenue target in the Financial Plan;

(B) 75,000 option shares will vest upon the Company's meeting or exceeding the projected EBITDA target in the Financial Plan;

(ii): 150,000 option shares will vest upon the Company hiring additional executives satisfactory to the Company's Board of Directors. Whether or not an executive is "hired" for purposes of this provision will be determined by the Company's Board of Directors in its sole discretion;

(d) Award Four: 200,000 option shares will vest on the second anniversary of the date of grant or earlier as described below:

(i): 100,000 option shares will vest each time the Company exceeds the Financial Plan's projected revenue target by five percent (5%), up to a maximum of 200,000 option shares vesting upon such achievement; and/or
(ii): 100,000 option shares will vest each time the Company exceeds the Financial Plan's projected EBITDA target by five percent (5%), up to a maximum of 200,000 option shares vesting upon such achievement.

(e) Acceleration. Subject to the terms of the Option Plan, upon the effective date of a Change in Control (as defined in the Option Plan), each of Awards Three and Four (described in Sections 5(c) and (d) above) shall vest on a pro-rated basis based on Executive's percentage achievement or reasonably expected percentage achievement of the performance milestones described in Sections 5(c) and (d) above.

6. Reimbursement for Housing Costs. The Company will reimburse Executive up to four thousand one hundred dollars ($4,100) per month for the rental of an apartment or other housing accommodations in the greater Seattle, Washington metropolitan area, as long as Executive provides employment services to the Company as Chief Executive Officer hereunder.

7. Parachute Payments. If any cash compensation payment, employee benefits or acceleration of vesting of stock options or other stock awards Executive would receive in connection with the termination of Executive's employment ("Payment") would (i) constitute a "parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then such Payment shall be reduced to the Reduced Amount. The "Reduced Amount" shall be either (x) the largest portion of the Payment that would result in no portion of the Payment being subject to the Excise Tax or (y) the largest portion, up to and including the total, of the Payment, whichever amount, after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginal rate), results in Executive's receipt, on an after-tax basis, of the greater amount of the Payment notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. If a reduction in payments or benefits constituting "parachute payments" is necessary so that the Payment equals the Reduced Amount, reduction shall occur in the following order unless the Executive elects in writing a different order (provided, however, that such election shall be subject to Company approval if made on or after the effective date of Executive's termination of employment): reduction of cash payments; reduction of

employee benefits; and cancellation of accelerated vesting of stock awards. In the event that acceleration of vesting of stock award compensation is to be reduced, such acceleration of vesting shall be cancelled in the reverse order of the date of grant of the Executive's stock awards unless the Executive elects in writing a different order for cancellation.

The accounting firm engaged by the Company for general audit purposes as of the day prior to the effective date of the Executive's termination of employment shall perform the foregoing calculations. If the accounting firm so engaged by the Company is serving as accountant or auditor for the individual, entity or group effecting a change in ownership or effective control of the Company, the Company shall appoint a nationally recognized accounting firm to make the determinations required hereunder. The Company shall bear all expenses with respect to the determinations by such accounting firm required to be made hereunder.

The accounting firm engaged to make the determinations hereunder shall provide its calculations, together with detailed supporting documentation, to the Company and Executive within fifteen (15) calendar days after the date on which Executive's right to a Payment arises (if requested at that time by the Company or Executive) or at such other time as requested by the Company or Executive. If the accounting firm determines that no Excise Tax is payable with respect to a Payment, either before or after the application of the Reduced Amount, it shall furnish the Company and Executive with an opinion reasonably acceptable to Executive that no Excise Tax will be imposed with respect to such Payment. Any good faith determination of the accounting firm made hereunder shall be final, binding and conclusive upon the Company and Executive.

8. Confidentiality and Nondisclosure. Executive agrees that information not generally known to the public to which he will be exposed as a result of his being employed by the Company is confidential information that belongs to the Company. This includes information developed by Executive, alone or with others, or entrusted to the Company by its customers or others. The Company's confidential information includes, without limitation, information relating to the Company's trade secrets, research and development, inventions, know-how, software, procedures, accounting, marketing, sales, creative and marketing strategies, employee salaries and compensation, and the identities of customers and active prospects to the extent not publicly disclosed (collectively, "Confidential Information"). Executive will hold the Company's Confidential Information in strict confidence, and not disclose or use it except as authorized by the Company and for the Company's benefit.

Executive further acknowledges and agrees that in order to enable the Company to perform services for its customers or clients, such customers or clients may furnish to the Company certain Confidential Information, that the goodwill afforded to the Company depends upon the Company and its employees preserving the confidentiality of such information, and that such information shall be treated as Confidential Information of the Company for all purposes under this Agreement.

9. Proprietary Rights and Inventions. For purposes of this Agreement, the term "Proprietary Rights" shall mean all trade secret, patent, copyright, mask work and other intellectual property rights throughout the world. For purposes of this Agreement, the term "Inventions" shall mean all trade secrets, inventions, mask works, ideas, processes, formulas, source and object codes, data, programs, other works of authorship, know-how, improvements, discoveries, developments, designs and techniques.

(a) Prior Inventions. Executive acknowledges that he or she has set forth on Exhibit A (Disclosure of Prior Inventions) attached hereto a complete list of all Inventions that Executive has, alone or jointly with others, conceived, developed or reduced to practice or caused to be conceived, developed or reduced to practice prior to the commencement of Executive's employment with the Company that Executive considers to be his or her property or the property of third parties and that Executive wishes to have excluded from the scope of this Agreement (collectively referred to as "Prior Inventions"). If disclosure of any such Prior Invention would

cause Executive to violate any prior confidentiality agreement, Executive understands that he or she is not to list such Prior Inventions in Exhibit A but is only to disclose a cursory name for each such invention, a listing of the party(ies) to whom it belongs and the fact that full disclosure as to such inventions has not been made for that reason. A space is provided on Exhibit A for such purpose. If no such disclosure is attached, Executive represents that there are no Prior Inventions. If, in the course of Executive's employment with the Company, Executive incorporates a Prior Invention into a Company product, process or machine, the Company is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with rights to sublicense through multiple tiers of sublicensees) to make, have made, modify, use and sell such Prior Invention. Notwithstanding the foregoing, Executive agrees that he or she has and will not incorporate, or permit to be incorporated, Prior Inventions in any Company Inventions (defined below) without the Company's prior written consent.

(b) Assignment of Inventions. Subject to Section 9(d) below, and except for those Inventions which Executive can prove qualify fully under the provisions of California Labor Code 2870 (as set forth in Exhibit B), Executive hereby assigns and agrees to assign in the future (when any such Inventions or Proprietary Rights are first reduced to practice or first fixed in a tangible medium, as applicable) to the Company all of Executive's right, title and interest in and to any and all Inventions (and all Proprietary Rights with respect thereto) whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by Executive, either alone or jointly with others, at any time during Executive's employment with the Company. Inventions assigned to the Company, or to a third party as directed by the Company pursuant to this Section 9, are hereinafter referred to as "Company Inventions."

(c) Obligation to Keep Company Informed. Executive agrees that during the period of his or her employment and for one (1) year after the termination of his or her employment with the Company, Executive shall promptly and fully disclose in writing to the Company all Inventions authored, conceived or reduced to practice by Executive, either alone or jointly with others. In addition, Executive agrees to promptly disclose to the Company all patent applications filed by Executive or on his or her behalf within a year after the termination of his or her employment. At the time of each disclosure, Executive will advise the Company in writing of any Inventions that Executive believes fully qualify for protection under the provision of a Specific Inventions Law, and Executive will at that time provide to the Company in writing all evidence necessary to substantiate that belief. The Company will keep in confidence and will not use for any purpose or disclose to third parties without Executive's consent any confidential information disclosed in writing to the Company pursuant to this Agreement relating to Inventions that qualify fully for protection under a Specific Inventions Law. Executive agrees to preserve the confidentiality of any Invention that does not fully qualify for protection under a Specific Inventions Law.

(d) Government or Third Party. Executive agrees to assign all Executive's right, title and interest in and to any particular Company Invention to a third party, including without limitation the United States, as directed by the Company.

(e) Works for Hire. Executive acknowledges that all original works of authorship which are or were made by Executive (solely or jointly with others) within the scope of his or her employment and which are protectable by copyright are "works made for hire," pursuant to United States Copyright Act (17 U.S.C., Section 101).

(f) Enforcement of Proprietary Rights. Executive agrees to assist the Company in every proper way and to execute those documents and take such acts as are reasonably requested by the Company to obtain, sustain and from time to time enforce United States and foreign Proprietary Rights relating to Company Inventions in any and all countries. Executive's obligation to assist the

Company with respect to Proprietary Rights relating to such Company Inventions in any and all countries shall continue beyond the termination of Executive's employment at mutually agreeable times, but the Company shall compensate Executive at a reasonable rate after Executive's termination for the time actually spent by Executive at the Company's request on such assistance.

In the event the Company is unable for any reason, after reasonable effort, to secure Executive's signature on any document needed in connection with the actions specified in the preceding paragraph, Executive hereby irrevocably designates and appoints the Company and its duly authorized officers and agents as his or her agent and attorney in fact, which appointment is coupled with an interest, to act for and in Executive's behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by Executive. Executive hereby waives and quitclaims to the Company any and all claims, of any nature whatsoever, which Executive now or may hereafter have for infringement of any Proprietary Rights assigned hereunder to the Company.

10. Noncompetition. Executive recognizes and agrees that the Company has many substantial, legitimate business interests that can be protected only by his agreement not to compete with the Company under certain circumstances. These interests include, without limitation, the Company's contacts and relationships with its clients and active prospects, the Company's reputation and goodwill in the industry, and the Company's rights in its Confidential Information. Therefore, Executive agrees that during the term of his employment with the Company and for a period of one (1) year after his employment ends for any reason whatsoever, Executive shall not, without the Company's permission, voluntarily or involuntarily, directly or indirectly, on his own behalf or on the behalf of another, approach, solicit, accept, receive or do work in the areas of (i) managed high performance Internet connectivity, (ii) hosting or collocation services, (iii) virtual private network services, or (iv) content distribution network services for (x) any account that is a customer of the Company or its parent or subsidiaries unless Executive is providing substantially different services to any such customer from the services Executive provided to the Company or (y) any competitor of the Company or its parent or subsidiaries.

Executive also agrees that during the term of his employment with the Company and for a period of one (1) year after his employment ends for any reason whatsoever, Executive shall not directly or indirectly employ or seek to employ any person employed by the Company nor directly or indirectly solicit or induce any such person to leave the Company.

11. Injunctive Relief. Executive acknowledges that the breach or threatened breach of Section 10 would cause irreparable injury to the Company that could not be adequately compensated by money damages. The Company may obtain a restraining order and/or injunction prohibiting Executive's breach or threatened breach of Section 10, in addition to any other legal or equitable remedies that may be available. Executive agrees that the above noncompetition provision, including its duration, scope and geographic extent, is fair and reasonably necessary to protect the Company's client relationships, goodwill, Confidential Information and other protectable interests.

12. Indemnification. Concurrently with executing this Agreement the Company and Executive will enter into an Indemnification Agreement in the form attached hereto as Exhibit C.

13. Company Policies and Procedures. As an employee of the Company, Executive will be expected to abide by all of the Company's policies and procedures. The general employment policies and procedures of the Company shall also govern Executive's employment relationship with the Company, except that when the terms of this Agreement differ from or are in conflict with the Company's general employment policies or procedures, this Agreement shall control.

14. Possession. Executive agree that upon request by the Company, and in any event upon termination of employment for any reason, Executive shall turn over to the Company all documents, notes, papers, data, files, office supplies or other material or work product in his possession or under Executive's control which was created pursuant to, is connected with or derived from his services to the Company, or which is related in any manner to the Company's business activities or research and development efforts, whether or not such material is currently in his possession.

15. Agreement to Arbitrate. Except as excluded in Section 15(b) below, the Company and Executive hereby consent to the resolution by arbitration of all claims or controversies ("Claims") in any way arising out of, relating to or associated with Executive's employment with, or termination from, the Company that the Company may have against Executive or that Executive may have against the Company, its officers, directors, employees or agents.

(a) Included Claims. The Claims covered by this agreement to arbitrate include, but are not limited to, claims for wages or other compensation due; claims for breach of any contract or covenant, express or implied; tort claims, common law or statutory claims for discrimination, including but not limited to discrimination based on race, sex, religion, national origin, age, marital status, sexual orientation, disability or medical condition; claims for benefits; and claims for violation of any federal, state or other governmental constitution, statute, ordinance or regulation. Except as provided in Sections 11 and 15(c)(vii) of this Agreement, both the Company and Executive agree that neither party shall initiate or prosecute any lawsuit which relates in any way to any Claim covered by this Agreement or the formation, interpretation or enforceability of this Agreement. Any issue or dispute concerning the formation, interpretation or enforceability of the Agreement shall be subject to arbitration, and the arbitrator will have the authority to decide any such issue or dispute.

(b) Excluded Claims. This agreement to arbitrate does not apply to claims (i) for workers' compensation benefits or compensation; (ii) for unemployment compensation benefits; (iii) by the Company for injunctive and/or other equitable relief for unfair competition and/or the use and/or unauthorized disclosure of trade secrets or confidential information in violation of this Agreement; (iv) based upon an employee pension or benefit plan which contains an arbitration or other nonjudicial dispute resolution procedure, in which case the provisions of the plan shall apply; or (v) where applicable law specifically forbids the use of arbitration as a final and binding remedy.

(c) Arbitration Procedures.

(i): AAA Rules. Subject to the provisions and limitations described in this arbitration agreement, any arbitration required by this Agreement shall be conducted in Washington by a single arbitrator in accordance with the rules of the American Arbitration Association as then in effect, unless the parties mutually agree otherwise.
(ii): Motions to Dismiss and/or for Summary Judgment. The arbitrator shall have authority to hear and rule on a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the Federal Rules of Civil Procedure.
(iii): Applicable Law. This agreement to arbitrate is to be construed in accordance with Washington law. The arbitrator shall apply the substantive law of the state in which the claim arose, or federal law, or both, as applicable to the claim(s) asserted. The Federal Rules of Evidence shall apply.
(iv): Decision Final. The decision of the arbitrator on any such issue or dispute, as well as on any Claim submitted to arbitration as provided in this agreement to arbitrate, shall be final and binding upon the parties, and may be entered in any court having jurisdiction thereof. The parties shall be precluded from bringing or raising in court

or another forum any dispute that was, or could have been, brought or raised pursuant to this agreement to arbitrate.

(v): Written Decision. The award shall be in writing and, upon the request of either party, the arbitrator shall issue a written decision that will set forth the essential findings and conclusions on which his or her award is based.
(vi): Fees and Costs. The arbitrator shall be empowered to award attorneys' fees and expenses to the prevailing party if authorized by applicable law. The Company shall bear the costs of the arbitration, except that the Executive shall pay a filing fee equal to one-half of the AAA filing fee or $150, whichever is less.
(vii): Enforcement. Either party may bring an action in any court of competent jurisdiction to compel arbitration under this Agreement and to enforce an arbitration award.

(d) Severability. If any provision of this agreement to arbitrate is adjudged to be void or otherwise unenforceable, in whole or in part, such adjudication shall not affect the validity of the remainder of the arbitration agreement.

(e) VOLUNTARY AGREEMENT TO ARBITRATE. EXECUTIVE ACKNOWLEDGES THAT HE HAS CAREFULLY READ THIS AGREEMENT TO ARBITRATE, THAT HE UNDERSTANDS ITS TERMS, THAT ALL UNDERSTANDINGS BETWEEN EXECUTIVE AND THE COMPANY RELATING TO THE SUBJECTS COVERED IN THIS AGREEMENT TO ARBITRATE ARE CONTAINED IN IT, AND THAT HE HAS ENTERED INTO THIS AGREEMENT TO ARBITRATE VOLUNTARILY AND NOT IN RELIANCE ON ANY PROMISES OR REPRESENTATIONS BY THE COMPANY OTHER THAN THOSE CONTAINED IN THIS AGREEMENT ITSELF.

EXECUTIVE FURTHER ACKNOWLEDGES THAT HE HAD A REASONABLE PERIOD OF TIME TO REVIEW AND CONSIDER THIS AGREEMENT TO ARBITRATE BEFORE SIGNING IT AND THAT HE HAD AN OPPORTUNITY TO DISCUSS THIS AGREEMENT WITH HIS PERSONAL LEGAL COUNSEL AND HAS USED THAT OPPORTUNITY TO THE EXTENT HE WISHES TO DO SO.

16. Attorneys' Fees. The Company agrees to reimburse Executive for attorneys' fees incurred by him in the review of this Agreement, up to a maximum reimbursed amount of seven thousand five hundred dollars ($7,500).

17. General Provisions

(a) This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive, the Company and their respective successors, assigns, heirs, executors, administrators, except that Executive may not assign any of his or her duties hereunder and Executive may not assign any of his or her rights hereunder without the written consent of the Company, which shall not be withheld unreasonably.

(b) This Agreement, together with its exhibits, constitutes the complete, final and exclusive embodiment of the entire agreement between the Parties with regard to the subject matter hereof. It is entered into without reliance on any promise or representation, written or oral, other than those expressly contained herein, and it supersedes any other such promises or representations. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the Parties hereto or their respective successors and legal representatives.

(c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. Any invalid or unenforceable provision shall be modified so as to be rendered valid and enforceable in a manner consistent with the intent of the Parties insofar as possible.

(d) A failure of Executive or the Company to insist upon strict compliance with any provision of this Agreement or the failure to assert any right Executive or the Company may have hereunder shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.

(e) In any lawsuit arising out of or relating to this Agreement or Executive's employment, including without limitation arising from any alleged tort or statutory violation, the prevailing party shall recover its reasonable costs and attorneys' fees, including on appeal.

(f) From and after the Effective Date, this Agreement shall supersede any other employment, severance, change of control or other agreement, whether oral or written, between the Parties with respect to the subject matter hereof.

(g) This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

IN WITNESS WHEREOF, the Parties have executed this Agreement effected as of the day and year first above written.


/s/ EUGENE EIDENBERG Eugene Eidenberg

INTERNAP NETWORK SERVICES CORPORATION

By:		/s/ MICHAEL VENT Michael Vent Chief Operating Officer

Exhibit A—Disclosure of Prior Inventions
Exhibit B—Limited Exclusion Notification
Exhibit C—Indemnification Agreement

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EMPLOYMENT AGREEMENT
EX-10.2 4 a2060433zex-10_2.htm EXHIBIT 10.2 Prepared by MERRILL CORPORATION
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EMPLOYMENT AGREEMENT

This Employment Agreement (the "Agreement") is entered into as of July 25, 2001 (the "Effective Date"), by and between Internap Network Services Corporation (the "Company"), and Anthony C. Naughtin ("Executive") (collectively the "Parties").

RECITALS

WHEREAS, Executive has been employed by Company as Chief Executive Officer, and Executive and the Company now wish to redefine their employment relationship on the terms stated herein;

NOW, THEREFORE, in consideration of the premises and mutual promises herein contained, and other consideration, the receipt and sufficiency of which is hereby acknowledged, it is agreed as follows:

AGREEMENT

1. Transition Date. The parties agree that effective as of July 25, 2001 (the "Transition Date"), Executive will resign from his position as Chief Executive Officer of the Company, and from all other corporate offices he then holds with the Company and any of its subsidiaries, other than as described in this Agreement.

2. Transition Assignment and Period. Executive will provide services to the Company as an employee member of the Company's Board of Directors for one (1) year from the Transition Date (the "Transition Period"), on which date Executive's employment with the Company will terminate (the "Separation Date"). Executive agrees to provide services to the Company at the direction of the Chairman of the Company's Board of Directors, and that he will have no authority on behalf of the Company except pursuant to such directions.

3. Compensation. During the Transition Period, Executive shall receive a base salary of two hundred ninety-seven thousand five hundred dollars ($297,500), less deductions and withholdings (the "Base Salary"), for the first six (6) months of the Transition Period, and fifty percent (50%) of the Base Salary thereafter until the Separation Date. Executive will be eligible to receive seven-twelfths (⁷/12) of his discretionary 2001 bonus, which will be paid out solely at the discretion of the Company's Board of Directors. Executive will not be eligible to receive any other bonus payments during or with respect to the Transition Period; provided, however, that it is agreed that nothing in this Agreement will affect the receipt by Executive of his year 2000 bonus, as determined in the sole discretion of the Company's Board of Directors.

4. Vacation Eligibility. Executive will accrue vacation and holiday pay during the Transition Period at the same rate as prior to the Transition Date for the first six (6) months of the Transition Period, and at fifty percent (50%) of his accrual rate thereafter until the Separation Date.

5. Benefits. Executive will be eligible for standard Company benefits to the extent permitted by and in accordance with the terms of the Company plans governing those benefits. From and after such time as the Company determines that Executive is no longer eligible for coverage as an employee under the Company's health insurance plan, Executive will be eligible for continued group health insurance benefits at his own expense to the extent provided by the federal COBRA law or any other applicable law. Should Executive elect COBRA coverage at any time prior to the Separation Date, as part of this Agreement the Company will pay Executive's COBRA premiums through that date.

6. Stock Options. Executive's stock options will continue to vest according to the terms of his stock option agreements, and the applicable stock option plan, until the Separation Date. Executive will then have until the close of market ninety (90) days after the Separation Date to exercise any option shares that are vested as of the Separation Date. The Company makes no representations or warranties regarding the tax status or treatment of Executive's stock options after the Transition Date, and Executive is hereby advised to consult an independent professional in this regard.

7. T1 Line. Executive currently has a T1 line installed in his house that the Company provides to him free of charge. Executive will continue to have this T1 line through the Separation Date, after

which time he has the option of canceling the T1 line or compensating the Company for it at the then-prevailing market rate.

8. Other Compensation or Benefits. Executive will not receive from the Company any additional compensation (including but not limited to salary, bonuses or stock option grants), severance or benefits after the Transition Date, except as expressly provided in this Agreement.

9. Company Policies and Procedures. As an employee of the Company, Executive will be expected to abide by all of the Company's policies and procedures during the Transition Period. The general employment policies and procedures of the Company shall also govern Executive's employment relationship with the Company, except that when the terms of this Agreement differ from or are in conflict with the Company's general employment policies or procedures, this Agreement shall control.

10. Termination. During the Transition Period, Executive's employment will remain at will. Either Executive or the Company may terminate the employment relationship at any time and for any reason, with or without Cause (defined below) or advance notice. In the event that Executive's employment is terminated without Cause, Executive shall receive salary continuation until the Separation Date in the manner provided in paragraph 3, above. In the event that Executive resigns from his employment or Executive's employment is terminated for any reason other than by the Company without Cause, the payments and benefits provided in this Agreement will immediately cease upon such event.

11. Cause. For the purposes of this Agreement, Cause shall mean any of the following: (i) theft, dishonesty, or falsification of the Company's documents or records; (ii) participation in a fraud or act of dishonesty against the Company; (iii) any action taken in bad faith which has a detrimental effect on the Company's reputation or business; (iv) failure or inability to perform any reasonable assigned duties during the Transition Period that is not remedied within forty-five (45) days of the Company's written notice of such failure or inability; (v) material breach of this Agreement that is not remedied within forty-five (45) days of the Company's written notice of such breach, (vi) any violation of the Company's written policies constituting gross misconduct that adversely and demonstrably affects the Company's business or reputation, (vii) any intentional violation by Executive of the his Employee Confidentiality, Non-Raiding and Non-Competition Agreement that is not remedied within fourteen (14) days of written notice of such breach from the Company; or (viii) conviction (including any plea of guilty or nolo contendere) of any felony or crime involving dishonesty. Executive's physical or mental disability or death shall not constitute Cause hereunder.

12. Employee Confidentiality, Non-Raiding and Non-Competition Agreement. Executive hereby acknowledges his continuing obligations under the Employee Confidentiality, Non-Raiding and Non-Competition Agreement (Exhibit A hereto) at all times hereafter, including but not limited to all times during and after the Transition Period. Among other obligations in said agreement, Executive agrees not to use or disclose, at any time, any confidential or proprietary information of the Company without prior written authorization from a duly authorized representative of the Company.

13. Confidentiality. The provisions of this Agreement will be held in strictest confidence by Executive and the Company and will not be publicized or disclosed in any manner whatsoever; provided, however, that: (a) Executive may disclose this Agreement to his immediate family and any lender that requests that he provide information about his income; (b) the parties may disclose this Agreement in confidence to their respective attorneys, accountants, auditors, tax preparers, and financial advisors; (c) the Company may disclose this Agreement to its investors or potential investors and as necessary to fulfill standard or legally required corporate reporting or disclosure requirements; and (d) the parties may disclose this Agreement insofar as such disclosure may be necessary to enforce its terms or as otherwise required by law. In particular, and without limitation, Executive will not disclose the provisions of this Agreement to any current or former Company employee or any other Company personnel.

14. Public Statements. Notwithstanding the provisions of paragraph 13 above, and subject to the restrictions of paragraph 18 below, the Company may issue a statement or make other public comment on Executive's transition employment, at its sole discretion. Executive agrees to refrain from making

any statement to any press or media representative, or other third party, regarding his transition employment arrangement, or any other matter pertaining to the Company's business affairs, absent written authorization from the Chairman of the Board.

15. Indemnification. That certain Indemnification Agreement by and between the Company and Executive dated July 22, 1999, (the "Indemnification Agreement") will be unaffected by this Agreement. A copy of the Indemnification Agreement is attached hereto as Exhibit B.

16. Expense Reimbursements. Pursuant to its regular business practice, the Company will reimburse Executive for reasonable business expenses incurred during the Transition Period, provided that such expenses are routinely reimbursed for senior executives of the Company and Executive complies with standard Company requirements relating to expense reimbursement, including but not limited to requirements regarding verification of expenses. Within ten (10) business days after the Separation Date Executive will submit his final documented expense reimbursement statement reflecting all business expenses he has incurred through the Separation Date, if any, for which he seeks reimbursement. The Company will reimburse Executive for these expenses pursuant to its regular business practice.

17. Return of Company Property. On the Separation Date Executive agrees to return to the Company all Company documents (and all copies thereof) and other Company property that he has had in his possession at any time, including, but not limited to, Company files, notes, drawings, records, business plans and forecasts, financial information, specifications, training materials, computer-recorded information, tangible property including, but not limited to, computers, credit cards, entry cards, identification badges and keys; and any materials of any kind that contain or embody any proprietary or confidential information of the Company (and all reproductions thereof).

18. Nondisparagement. Both Executive and the Company (by its officers and directors) agree not to disparage the other party, and the other party's officers, directors, employees, shareholders, affiliates and agents, in any manner likely to be harmful to them or their business, business reputation or personal reputation; provided, however, that both Executive and the Company shall respond accurately and fully to any question, inquiry or request for information when required by legal process.

19. Dispute Resolution. To ensure rapid and economical resolution of any and all disputes that may arise in connection with this Agreement, Executive and the Company agree that any and all disputes, claims, and causes of action, in law or equity, arising from or relating to this Agreement or its enforcement, performance, breach, or interpretation, will be resolved solely and exclusively by final, binding, and confidential arbitration, by a single arbitrator, in Seattle, Washington, and conducted by Judicial Arbitration & Mediation Services, Inc. ("JAMS") under its then-existing employment rules and procedures. Nothing in this section, however, is intended to prevent either party from obtaining injunctive relief in court to prevent irreparable harm pending the conclusion of any such arbitration. The Company shall not terminate any compensation or benefits provided hereunder pending the outcome of such arbitration; provided, however, that in the event the Company prevails in such arbitration on any claim resulting in the termination of such compensation and/or benefits, Executive will be liable to the Company for an amount equal to the compensation and value of benefits Executive received hereunder from the earliest date of the conduct giving rise to said claim(s) until the date of the arbitration award.

20. Entire Agreement. This Agreement, including all exhibits, Executive's stock option agreements, and the stock option plan applicable to Executive's stock option agreements, constitute the complete, final and exclusive embodiment of the entire agreement between the Parties with regard to the subject matters hereof. It supersedes and merges any and all agreements entered into by and between the Parties. It is entered into without reliance on any promise or representation, written or oral, other than those expressly contained herein. It may not be modified except in a writing signed by Executive and the Chairman of the Board of the Company. Each party has carefully read this Agreement, has been afforded the opportunity to be advised of its meaning and consequences by his or its respective attorneys, and signed the same of his or its own free will.

21. Successors and Assigns. This Agreement will bind the heirs, personal representatives, successors, assigns, executors and administrators of each party, and will inure to the benefit of each party, its heirs, successors and assigns.

22. Applicable Law. This Agreement will be deemed to have been entered into and will be construed and enforced in accordance with the laws of the State of Washington as applied to contracts made and to be performed entirely within Washington, without regard to conflicts of laws.

23. Severability. If a court of competent jurisdiction determines that any term or provision of this Agreement is invalid or unenforceable, in whole or in part, then the remaining terms and provisions hereof will be unimpaired. The court or arbitrator will then have the authority to modify or replace the invalid or unenforceable term or provision with a valid and enforceable term or provision that most accurately represents the parties' intention with respect to the invalid or unenforceable term or provision.

24. Counterparts. This Agreement may be executed in two counterparts, each of which will be deemed an original, all of which together constitutes one and the same instrument.

25. Construction. This Agreement will be deemed drafted by both parties, and shall not be construed against either party as the drafter of the document.

In Witness Whereof, the Parties have executed this Agreement effected as of the day and year first above written.


/s/ ANTHONY NAUGHTIN ANTHONY NAUGHTIN


INTERNAP NETWORK SERVICES CORPORATION


By:		/s/ EUGENE EIDENBERG Eugene Eidenberg Chief Executive Officer

EXHIBIT A Employee Confidentiality, Non-Raiding and Non-Competition Agreement
EXHIBIT B Indemnification Agreement

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EMPLOYMENT AGREEMENT
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