<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 13, 1998
REGISTRATION NO. 333-40789
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
VERISIGN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7371 94-3221585
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
---------------
1390 SHOREBIRD WAY
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 961-7500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
DANA L. EVAN
CHIEF FINANCIAL OFFICER
VERISIGN, INC.
1390 SHOREBIRD WAY
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 961-7500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
<TABLE>
<S> <C> <C>
LAIRD H. SIMONS III, ESQ. TIMOTHY TOMLINSON, ESQ. ROBERT P. LATTA, ESQ.
JEFFREY R. VETTER, ESQ. TOMLINSON ZISKO MOROSOLI & MASER LLP CHRIS F. FENNELL, ESQ.
MICHAEL J. MCADAM, ESQ. 200 PAGE MILL ROAD CHRIS E. MONTEGUT, ESQ.
FENWICK & WEST LLP SECOND FLOOR WILSON SONSINI GOODRICH & ROSATI,
TWO PALO ALTO SQUARE PALO ALTO, CALIFORNIA 94306 PROFESSIONAL CORPORATION
PALO ALTO, CALIFORNIA 94306 (650) 325-8666 650 PAGE MILL ROAD
(650) 494-0600 PALO ALTO, CALIFORNIA 94304-1050
(650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] ________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued January 13, 1998
3,000,000 Shares
[LOGO OF VERISIGN]
COMMON STOCK
-----------
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE
COMPANY. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE
COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL
PUBLIC OFFERING PRICE WILL BE BETWEEN $9 AND $11 PER SHARE. SEE
"UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE. THE SHARES OF COMMON
STOCK OFFERED HEREBY HAVE BEEN APPROVED FOR QUOTATION ON THE NASDAQ
NATIONAL MARKET UNDER THE SYMBOL "VRSN" SUBJECT TO OFFICIAL NOTICE OF
ISSUANCE.
-----------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON
PAGE 5 HEREOF.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
-------- -------------- -----------
<S> <C> <C> <C>
Per Share.................... $ $ $
Total(3)..................... $ $ $
</TABLE>
- -----
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at
$1,000,000.
(3) The Company has granted the Underwriters an option, exercisable within
30 days of the date hereof, to purchase up to an aggregate of 450,000
additional Shares at the price to public less underwriting discounts and
commissions for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total price to public,
underwriting discounts and commissions and proceeds to Company will be
$ , $ and $ , respectively. See "Underwriters."
-----------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for the
Underwriters. It is expected that delivery of the Shares will be made on or
about , 1998, at the office of Morgan Stanley & Co. Incorporated, New
York, N.Y., against payment therefor in immediately available funds.
-----------
MORGAN STANLEY DEAN WITTER
HAMBRECHT & QUIST
WESSELS, ARNOLD & HENDERSON
, 1998
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY
PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
----------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
---- ----
<S> <C> <S> <C>
Prospectus Summary.................. 3 Business......................... 30
The Company......................... 4 Management....................... 50
Risk Factors........................ 5 Certain Transactions............. 60
Use of Proceeds..................... 18 Principal Stockholders........... 64
Dividend Policy..................... 18 Description of Capital Stock..... 66
Capitalization...................... 19 Shares Eligible for Future Sale.. 69
Dilution............................ 20 Underwriters..................... 71
Selected Consolidated Financial Legal Matters.................... 72
Data............................... 21 Experts.......................... 72
Management's Discussion and Analysis Additional Information........... 73
of Financial Condition and Results Index to Consolidated Financial
of Operations...................... 22 Statements...................... F-1
</TABLE>
----------------
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by an independent public
accounting firm and quarterly reports containing unaudited consolidated
financial data for the first three quarters of each year.
----------------
VeriSign(TM) is a trademark exclusively licensed to the Company and Channel
Signing Digital IDSM, Digital IDSM, Digital ID CenterSM, EDI Server IDSM,
Financial Server IDSM, Global Server IDSM, NetSureSM, Secure Server IDSM,
Software Developer Digital IDSM, Universal Digital IDSM, VeriSign OnSiteSM,
VeriSign SETSM, VeriSign V-CommerceSM and WorldTrustSM are service marks of
the Company. This Prospectus also includes trademarks of companies other than
the Company.
----------------
Unless the context otherwise requires, the terms "VeriSign" and the
"Company" refer to VeriSign, Inc., a Delaware corporation, and its majority-
owned subsidiary, VeriSign Japan K.K. ("VeriSign Japan"). Except as otherwise
noted herein, information in this Prospectus (i) assumes no exercise of the
Underwriters' over-allotment option, (ii) gives effect to the conversion of
all outstanding shares of Preferred Stock of the Company into shares of Common
Stock of the Company, which will occur upon the closing of this offering,
(iii) gives effect to the increase in the authorized shares of Common Stock to
50,000,000 shares to be effected in January 1998 and (iv) gives effect to the
filing, upon the closing of this offering, of a Restated Certificate of
Incorporation, authorizing 5,000,000 shares of undesignated Preferred Stock.
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
2
<PAGE>
[ARTWORK]
DESCRIPTION OF ARTWORK
[VeriSign Logo]
HEADER: The leader in digital certificate solutions and infrastructure for
enabling trusted and secure electronic commerce and communications.
LEFT DIAGRAM: Schematic drawing of the Internet; contains cloud with the word
"Internet" inside, with drawings of various buildings and computer screen
prints. Contains the following text:
- --VeriSign issues and manages millions of digital certificates for a wide
variety of market and customer segments through its Digital ID Centers.
- --Digital certificates function as electronic credentials in the digital
world--verifying identity, authority, or privileges of the owner during
electronic communications and commerce transactions.
- --Employees access corporate information securely.
- --Global trading partners will be able to exchange data securely.
- --Software developers distribute applications
- --Companies exchange secure e-mail
- --Individuals shop at virtual store fronts.
- --Individuals conduct home banking transactions.
- --Web sites provide secure communication channels to customers
- --Individuals exchange secure e-mails
- --Government agencies communicate securely.
Bottom of left side contains box with the following bullet points:
- --Universal Digital IDs for Web site access and secure e-mail
- --Server Digital IDs for Web site authentication
- --Software Developer Digital IDs for application distribution
- --Channel Signal Digital IDs for "push" channel authentication
- --VeriSign OnSite for turnkey intranet and extranet solutions
- --VeriSign V-Commerce for integrated E-Commerce solutions
- --VeriSign SET services for card associations, banks and processors
- --Value-added transactional services and consulting
RIGHT DIAGRAM: Cut-away picture of large building representing the VeriSign
Digital ID Center, showing various computer and networking equipment within the
building.
Heading: The VeriSign Digital ID Center.
Contains the following text:
- --Distributed WorldTrust software architecture
- --Highly reliable and scaleable operations infrastructure
- --Comprehensive call center and Web-based support services
- --Redundant high-speed servers and high-bandwidth Internet connectivity
- --24 hour network monitoring and security
- --Stringent hiring and management practices for all "trusted" employees
- --Highly specialized construction, power and disaster recovery provisioning
The following text appears beneath the diagram:
- --VeriSign's Digital ID Centers are designed to provide the highest levels of
availability, security and scaleability to meet the needs of customers for high
volume digital certificate issuance and management.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and notes thereto
appearing elsewhere in this Prospectus.
THE COMPANY
VeriSign is the leading provider of digital certificate solutions and
infrastructure needed by companies, government agencies, trading partners and
individuals to conduct trusted and secure communications and commerce over the
Internet and over intranets and extranets using the Internet Protocol
(collectively, "IP networks"). The Company has established strategic
relationships with industry leaders, including AT&T, British Telecommunications
plc, Cisco, Microsoft, Netscape, Network Associates (formerly McAfee
Associates), RSA, Security Dynamics, VeriFone and VISA, to enable widespread
deployment of the Company's digital certificate technology and products and to
assure their interoperability among a wide variety of applications. The
Company's digital certificates, called Digital IDs, are enabled in millions of
copies of Microsoft and Netscape Web browsers, tens of thousands of copies of
popular Web servers and a variety of other software applications. The Company
believes that it has issued more digital certificates than any other company,
having issued over 2.0 million of its Digital IDs for individuals and over
40,000 of its Digital IDs for Web sites. In addition to providing Digital IDs
for individuals and Web sites, the Company provides turn-key and custom
solutions needed by organizations, such as Dow Jones, NationsBank,
NOVUS/Discover and VISA, to conduct trusted and secure communications and
commerce over IP networks. The Company markets its products and services
worldwide through multiple distribution channels, including the Internet,
direct sales, telesales, VARs, systems integrators and OEMs, and intends to
continue to expand these distribution channels.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered....................... 3,000,000 shares
Common Stock to be outstanding after the
offering.................................. 20,151,244 shares(1)
Use of proceeds............................ For general corporate purposes,
including capital expenditures
and working capital. See "Use of
Proceeds."
Nasdaq National Market symbol.............. VRSN
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 12, 1995 YEAR ENDED
(INCEPTION) TO DECEMBER 31,
DECEMBER 31, -----------------
1995 1996 1997
-------------- -------- -------
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.................................... $ 382 $ 1,351 $ 9,382
Total costs and expenses.................... 2,524 12,365 31,264
Operating loss.............................. (2,142) (11,014) (21,882)
Net loss.................................... (1,994) (10,243) (19,195)
Pro forma basic and diluted net loss per
share(2)................................... $ (.74) $ (1.13)
Shares used in per share computations(2).... 13,836 17,018
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments....... $11,894 $38,794
Total assets............................................ 24,406 51,306
Stockholders' equity.................................... 12,469 39,369
</TABLE>
- --------
(1) Based on the number of shares outstanding as of December 31, 1997. Excludes
(i) 2,516,818 shares of Common Stock issuable upon the exercise of options
then outstanding, with a weighted average exercise price of $2.95 per
share, and (ii) a maximum of 3,061,682 shares reserved for issuance under
the Company's stock plans. Also excludes 17,500 shares of Common Stock
subject to a warrant that would be issued in the event that the Company
borrows funds under an equipment loan agreement and 15,000 shares of Common
Stock that would be issued to a service provider if certain milestones are
met. See "Capitalization," "Management--Director Compensation," "--Employee
Benefit Plans" and Note 6 of Notes to Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in per share
computations.
(3) As adjusted to reflect the sale of the 3,000,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $10.00 per
share and after deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by the Company. See "Use of
Proceeds" and "Capitalization."
3
<PAGE>
THE COMPANY
VeriSign is the leading provider of digital certificate solutions and
infrastructure needed by companies, government agencies, trading partners and
individuals to conduct trusted and secure communications and commerce over IP
networks. A digital certificate functions as an electronic credential in the
digital world, identifying the certificate owner, authenticating the
certificate owner's membership in a given organization or community or
establishing the certificate owner's authority to engage in a given
transaction, thereby creating a framework for trusted interaction over IP
networks. The Company has established strategic relationships with industry
leaders, including AT&T, British Telecommunications plc ("BT"), Cisco,
Microsoft, Netscape, Network Associates (formerly McAfee Associates, Inc.)
("McAfee Associates"), RSA Data Security Inc. ("RSA"), Security Dynamics
Technologies, Inc. ("Security Dynamics"), VeriFone, Inc. ("VeriFone") and Visa
International Service Association ("VISA"), to enable widespread deployment of
the Company's digital certificate technology and products and to assure their
interoperability among a wide variety of applications. The Company's digital
certificates, called Digital IDs, are enabled in millions of copies of
Microsoft and Netscape Web browsers, tens of thousands of copies of popular
Web servers and a variety of other software applications. The Company believes
that it has issued more digital certificates than any other company, having
issued over 2.0 million of its Digital IDs for individuals and over 40,000 of
its Digital IDs for Web sites. In addition to providing Digital IDs for
individuals and Web sites, the Company also provides turn-key and custom
solutions needed by organizations, such as Dow Jones, NationsBank,
NOVUS/Discover and VISA, to conduct trusted and secure communications and
commerce over IP networks.
IP networks are revolutionizing communications and commerce because of their
global reach, accessibility, use of open standards and ability to enable real-
time interaction. The use of IP networks is beginning to extend beyond
informal messaging, general information browsing and the exchange of non-
sensitive data to a number of more valuable and sensitive activities including
business-to-business transactions and electronic data interchange ("EDI"),
online retail purchases and payments, Web-based access to account and benefits
information and secure messaging for both personal and business use.
International Data Corporation ("IDC") estimates that global Internet commerce
revenues will grow from approximately $10.6 billion in 1997 to approximately
$223.1 billion in 2001. However, despite the convenience and the compelling
economic incentives for the use of IP networks, they cannot reach their full
potential as a platform for global communications and commerce until the
current lack of trust and security associated with the use of these networks
is resolved. Digital certificates are emerging as the leading technology for
establishing a framework for trusted and secure communications and commerce
over IP networks, with many Internet security protocols dictating the use of
digital certificates. Just as an individual may have many forms of credit
cards and IDs, he or she may require multiple digital certificates, each
corresponding to a unique digital relationship between the individual and an
organization. Thus, there is the potential need over time for hundreds of
millions of digital certificates to be issued and managed.
The Company has invested significant resources to develop a highly reliable
and secure operations infrastructure, a modular software architecture and a
comprehensive set of security and trust practices to enable trusted and secure
communications and commerce over IP networks using digital certificates. The
Company's Digital ID Centers in Mountain View, California and Kawasaki, Japan
are designed to provide the high levels of availability, security and
scaleability required to meet the needs of customers for high volume digital
certificate issuance and management. The Company's modular WorldTrust software
architecture, which serves as the foundation for the Company's products and
services, automates many aspects of digital certificate issuance and lifecycle
management and provides the scaleability necessary to deploy millions of
digital certificates for distinct communities ranging from individual
corporations to the entire population of Internet users. The Company also has
been instrumental in defining comprehensive trust practices and procedures,
which the Company believes has been important in establishing its reputation
as the leading provider of digital certificate solutions.
The Company's objective is to enhance its position as the leading provider
of digital certificate solutions and infrastructure needed to conduct trusted
and secure communications and commerce over IP networks. The Company's
strategy to achieve this objective includes leveraging its leadership position
to drive market penetration, leveraging and expanding strategic relationships
with industry leaders, maintaining leadership in technology, infrastructure
and practices and continuing to build the VeriSign brand. The Company markets
its products and services worldwide through multiple distribution channels,
including the Internet, direct sales, telesales, value-added resellers
("VARs"), systems integrators and original equipment manufacturers ("OEMs"),
and intends to continue to expand these distribution channels.
The Company was incorporated in Delaware in April 1995. The Company's
executive offices are located at 1390 Shorebird Way, Mountain View, California
94043, its telephone number at this location is (650) 961-7500 and its Web
site is located at http://www.verisign.com. Information contained in the
Company's Web site is not part of this Prospectus.
4
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered hereby. This Prospectus contains forward-
looking statements that involve risks and uncertainties. The Company's actual
results may differ materially from the results discussed in such forward-
looking statements. Factors that may cause such a difference include, but are
not limited to, those discussed below, in the sections entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and elsewhere in this Prospectus.
Limited Operating History; History of Losses and Anticipation of Future
Losses. The Company was incorporated in April 1995 and began introducing its
products and services in June 1995. Accordingly, the Company has only a
limited operating history on which to base an evaluation of its business and
prospects. The Company's prospects must be considered in light of the risks
and uncertainties encountered by companies in the early stages of development,
particularly companies in new and rapidly evolving markets. The Company's
success will depend on many factors, including, but not limited to, the
following: the rate and timing of the growth and use of IP networks for
communications and commerce and the extent to which digital certificates are
used for such communications and commerce; the demand for the Company's
products and services; the levels of competition; the perceived security of
communications and commerce over IP networks, and of the Company's
infrastructure, products and services in particular; and the Company's
continued ability to maintain its current, and enter into additional,
strategic relationships. To address these risks the Company must, among other
things: attract and retain qualified personnel; respond to competitive
developments; successfully introduce new products and services; successfully
introduce enhancements to its existing products and services to address new
technologies and standards; and successfully market its digital certificates
and its enterprise and electronic commerce solutions. There can be no
assurance that the Company will succeed in addressing any or all of these
risks, and the failure to do so would have a material adverse effect on the
Company's business, operating results and financial condition. In addition,
the Company has experienced substantial net losses in each fiscal period since
its inception and, as of December 31, 1997, had an accumulated deficit of
$31.4 million. Such net losses and accumulated deficit resulted from the
Company's lack of substantial revenues and the significant costs incurred in
the development and sale of the Company's products and services and in the
establishment and deployment of the Company's operations infrastructure and
practices. The Company's limited operating history, the emerging nature of its
market and the factors described under "--Adoption of IP Networks" and "--
Potential Fluctuations in Quarterly Operating Results; Unpredictability of
Future Revenues," among other factors, make prediction of the Company's future
operating results difficult. In addition, the Company intends to increase its
expenditures in all areas in order to execute its business plan. As a result,
the Company expects to incur substantial additional losses for the foreseeable
future. Furthermore, to the extent the Company's majority-owned subsidiary,
VeriSign Japan, is unable to continue to fund its operations with investments
from minority shareholders, the Company may be required to fund the operations
of VeriSign Japan, which could have a material adverse effect on the Company's
business, operating results and financial condition. Although the Company has
experienced revenue growth in recent periods, there can be no assurance that
such growth rates are sustainable and, therefore, they should not be
considered indicative of future operating results. There can also be no
assurance that the Company will ever achieve significant revenues or
profitability or, if significant revenues and profitability are achieved, that
they could be sustained. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Strategy."
Adoption of IP Networks. In order for the Company to be successful, IP
networks must be adopted as a means of trusted and secure communications and
commerce to a sufficient extent and within an adequate time frame. Because
trusted and secure communications and commerce over IP networks is new and
evolving, it is difficult to predict with any assurance the size of this
market and its growth rate, if any. To date, many businesses and consumers
have been deterred from utilizing IP networks for a number of reasons,
including, but not limited to, potentially inadequate development of network
infrastructure, security concerns, inconsistent quality of service, lack of
availability of cost-effective, high-speed service, limited numbers of local
access points for corporate users, inability to integrate business
applications on IP networks, the need to interoperate with multiple
5
<PAGE>
and frequently incompatible products, inadequate protection of the
confidentiality of stored data and information moving across IP networks and a
lack of tools to simplify access to and use of IP networks. The adoption of IP
networks for trusted and secure communications and commerce, particularly by
individuals and entities that historically have relied upon traditional means
of communications and commerce, will require a broad acceptance of new methods
of conducting business and exchanging information. Companies and government
agencies that already have invested substantial resources in other methods of
conducting business may be reluctant to adopt a new strategy that may limit or
compete with their existing efforts. Furthermore, individuals with established
patterns of purchasing goods and services and effecting payments may be
reluctant to alter those patterns.
The use of IP networks for trusted and secure communications and commerce
may not increase or may increase more slowly than expected because the
infrastructure required to support widespread trusted and secure
communications and commerce on such networks may not develop. For example, the
Internet has experienced, and may continue to experience, significant growth
in its number of users and amount of traffic. There can be no assurance that
the Internet infrastructure will continue to support the demands placed on it
by this continued growth or that the performance or reliability of the
Internet will not be adversely affected by this continued growth. In addition,
IP networks could lose their viability due to delays in the development or
adoption of new standards and protocols to handle increased levels of activity
or due to increased governmental regulation. Changes in, or insufficient
availability of, communications services to support IP networks could result
in slower response times and also adversely affect usage of IP networks. If
the market for trusted and secure communications and commerce over IP networks
fails to develop or develops more slowly than expected, or if the Internet
infrastructure does not adequately support any continued growth, the Company's
business, operating results and financial condition would be materially
adversely affected. See "--Industry Regulation" and "Business--Industry
Background" and "--Customers and Markets."
No Assurance of Market Acceptance for Digital Certificates and the Company's
Products and Services. The Company's products and services are targeted at the
market for trusted and secure communications and commerce over IP networks, a
market that is at an early stage of development and is rapidly evolving.
Accordingly, demand for and market acceptance of digital certificate solutions
are subject to a high level of uncertainty. There can be no assurance that
digital certificates will gain market acceptance as a necessary element of
trusted and secure communications and commerce over IP networks. In addition,
there can be no assurance that the market for the Company's products and
services will develop in a timely manner, or at all, or that demand for the
Company's products and services will emerge or be sustainable. The factors
that may affect the level of market acceptance of digital certificates and,
consequently, the Company's products and services, include the following:
market acceptance of products and services based upon authentication
technologies other than those used by the Company; public perception of the
security of digital certificates and of the inherent security levels of IP
networks; the ability of the Internet infrastructure to accommodate increased
levels of usage; and the enactment of government regulations affecting
communications and commerce over IP networks. Even if digital certificates
achieve market acceptance, there can be no assurance that the Company's
products and services will adequately address the market's requirements. If
digital certificates do not achieve market acceptance in a timely manner and
sustain such acceptance, or if the Company's products and services in
particular do not achieve or sustain market acceptance, the Company's
business, operating results and financial condition would be materially
adversely affected. See "Business--Industry Background" and "--Customers and
Markets."
Potential Fluctuations in Quarterly Operating Results; Unpredictability of
Future Revenues. The Company's operating results have varied on a quarterly
basis during its short operating history and may fluctuate significantly in
the future as a result of a variety of factors, many of which are outside the
Company's control. Factors that may affect the Company's quarterly operating
results include the following: market acceptance of digital certificates;
market acceptance of its products and services, particularly VeriSign OnSite,
VeriSign V-Commerce and VeriSign SET; the long sales and implementation cycles
for and potentially large order sizes of certain of the Company's products and
services; the timing and execution of individual contracts; the timing of
releases of new versions of Internet browsers or other third-party software
products in which the Company's public root keys are embedded; customer
renewal rates for the Company's products and services; the Company's
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success in marketing other products and services to its existing customer base
and to new customers; development of the Company's direct and indirect
distribution channels; market acceptance of the Company's or competitors' new
products and services; the amount and timing of expenditures relating to
expansion of the Company's operations; price competition or pricing changes;
general economic conditions and economic conditions specific to the Internet,
intranet and extranet industries. Any one of these factors could cause the
Company's revenues and operating results to vary significantly in the future.
In addition, the Company will need to expand its operations and attract,
integrate, retain and motivate a substantial number of sales and marketing and
research and development personnel. The timing of such expansion and the rate
at which new personnel become productive could cause material fluctuations in
the Company's quarterly results of operations. See "Business--Industry
Background" and "--Strategy."
The Company's limited operating history and the emerging nature of its
market make prediction of future revenues difficult. The Company's expense
levels are based, in part, on its expectations regarding future revenues, and
to a large extent such expenses are fixed, particularly in the short term.
There can be no assurance that the Company will be able to predict its future
revenues accurately and the Company may be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall. Accordingly,
any significant shortfall of revenues in relation to the Company's
expectations could cause significant declines in the Company's quarterly
operating results.
Due to all of the foregoing factors, the Company's quarterly revenues and
operating results are difficult to forecast. The Company believes that period-
to-period comparisons of its operating results will not necessarily be
meaningful and should not be relied upon as an indication of future
performance. Also, it is likely that the Company's operating results will fall
below the expectations of the Company, securities analysts or investors in
some future quarter. In such event, the market price of the Company's Common
Stock could be materially and adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
System Interruption and Security Breaches. The Company's success is largely
dependent on the uninterrupted operation of its Digital ID Centers and its
other computer and communications systems, which is dependent on the Company's
ability to protect such systems from loss, damage or interruption caused by
fire, earthquake, power loss, telecommunications failure or other events
beyond the Company's control. Most of the Company's systems are located at,
and most of its customer information is stored in, its facilities in Mountain
View, California and Kawasaki, Japan, areas susceptible to earthquakes.
Although the Company believes that its existing and planned precautions are
adequate to prevent any significant loss of information or system outage,
there can be no assurance that unanticipated problems will not cause such loss
or failure. Any damage or failure that causes interruptions in the Company's
Digital ID Centers and its other computer and communications systems could
have a material adverse effect on the Company's business, operating results
and financial condition. In addition, the ability of the Company to issue
digital certificates is also dependent on the efficient operation of the
Internet connections from customers to its Digital ID Centers. Such
connections, in turn, are dependent upon efficient operation of Web browsers,
Internet Service Providers ("ISPs") and Internet backbone service providers,
all of which have had periodic operational problems or experienced outages in
the past. Any such problems or outages could adversely affect customer
satisfaction with the Company's products and services, which could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company's success also depends in large part upon the
scaleability of its systems, which have not been tested at high volumes. As
such, it is possible that a substantial increase in demand for the Company's
products and services could cause interruptions in the Company's systems that
could adversely affect the Company's ability to deliver its products and
services. Any such interruptions could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company retains confidential customer information in its Digital ID
Centers. It is critical to the Company's business strategy that the Company's
facilities and infrastructure remain secure and that such facilities and
infrastructure are perceived by the marketplace to be secure. Despite the
implementation of security measures, the Company's infrastructure may be
vulnerable to physical break-ins, computer viruses, attacks by
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hackers or similar disruptive problems, and it is possible that in the future
the Company may have to expend additional financial and other resources to
further address such problems. Any physical or electronic break-ins or other
security breaches or compromises of the private root keys stored at the
Company's Digital ID Centers may jeopardize the security of information stored
on the Company's premises or stored in and transmitted through the computer
systems and networks of the businesses and individuals utilizing the Company's
products or services, which could result in significant liability to the
Company and could deter existing and potential customers from using the
Company's products and services. Such an occurrence could result in adverse
publicity and therefore adversely affect the market's perception of the
security of communications and commerce over IP networks as well as of the
security or reliability of the Company's products and services, which would
have a material adverse effect on the Company's business, operating results
and financial condition. See "Business--The VeriSign Solution," "--Strategy,"
"--Infrastructure," "--Security and Trust Practices" and "--Facilities."
Competition. The Company's digital certificate solutions are targeted at the
new and rapidly evolving market for trusted and secure communications and
commerce over IP networks. Although the competitive environment in this market
has yet to develop fully, the Company anticipates that it will be intensely
competitive, subject to rapid change and significantly affected by new product
and service introductions and other market activities of industry
participants.
The Company's primary competitors are Entrust Technologies, Inc.
("Entrust"), GTE CyberTrust Solutions Incorporated ("GTE/CyberTrust") and
International Business Machines Corporation ("IBM"). The Company also
experiences competition from a number of smaller companies that provide
digital certificate solutions. The Company expects that competition from
established and emerging companies in the financial and telecommunications
industries will increase in the near term, and that the Company's primary
long-term competitors may not yet have entered the market. Netscape has
introduced software products that enable the issuance and management of
digital certificates, and the Company believes that other companies could
introduce such products. There can be no assurance that additional companies
will not offer digital certificate solutions that are competitive with those
of the Company. Increased competition could result in pricing pressures,
reduced margins or the failure of the Company's products and services to
achieve or maintain market acceptance, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition.
Several of the Company's current and potential competitors have longer
operating histories and significantly greater financial, technical, marketing
and other resources than the Company and therefore may be able to respond more
quickly than the Company to new or changing opportunities, technologies,
standards and customer requirements. Many of these competitors also have
broader and more established distribution channels that may be used to deliver
competing products or services directly to customers through bundling or other
means. If such competitors were to bundle with their products competing
products or services for their customers, the demand for the Company's
products and services might be substantially reduced and the ability of the
Company to distribute its products successfully and the utilization of its
services would be substantially diminished. In addition, browser companies
that embed the Company's root keys or otherwise feature the Company as a
provider of digital certificate solutions in their Web browsers or on their
Web sites could also promote competitors of the Company or charge the Company
substantial fees for such promotions in the future. New technologies and the
expansion of existing technologies may increase the competitive pressures on
the Company. There can be no assurance that competing technologies developed
by others or the emergence of new industry standards will not adversely affect
the Company's competitive position or render its products or technologies
noncompetitive or obsolete. In addition, the market for digital certificates
is nascent and is characterized by announcements of collaborative
relationships involving competitors of the Company. The existence or
announcement of such relationships could adversely affect the Company's
ability to attract and retain customers. As a result of the foregoing and
other factors, there can be no assurance that the Company will compete
effectively with current or future competitors or that competitive pressures
faced by the Company will not have a material adverse effect on the Company's
business, operating results and financial condition.
In connection with the Company's first round of financing, RSA contributed
certain technology to the Company and entered into a noncompetition agreement
with the Company pursuant to which RSA agreed that it
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would not compete with the Company's certificate authority business for a
period of five years. This noncompetition agreement will expire in April 2000.
The Company believes that, because RSA (which is now a wholly-owned subsidiary
of Security Dynamics) has already developed expertise in the area of
cryptography, its barriers to entry would be lower than those that would be
encountered by other potential competitors of the Company should it choose to
enter any of the Company's markets. If RSA were to enter into the digital
certificate market, the Company's business, operating results and financial
condition could be materially adversely affected. See "Business--Competition."
Rapid Technological Change; New Product and Services
Introductions. Substantially all of the Company's limited revenues to date
have been derived from the sale of digital certificate products and related
services. These products and services are expected to account for
substantially all of the Company's revenues for the foreseeable future. The
emerging market for digital certificate products and related services is
characterized by rapid technological developments, frequent new product
introductions and evolving industry standards. The emerging nature of this
market and its rapid evolution will require that the Company continually
improve the performance, features and reliability of its products and
services, particularly in response to competitive offerings, and that it
introduce new products and services or enhancements to existing products and
services as quickly as possible and prior to its competitors. The success of
new product introductions is dependent on several factors, including proper
new product definition, timely completion and introduction of new products,
differentiation of new products from those of the Company's competitors and
market acceptance of the Company's new products and services. There can be no
assurance that the Company will be successful in developing and marketing new
products and services that respond to competitive and technological
developments and changing customer needs. The failure of the Company to
develop and introduce new products and services successfully on a timely basis
and to achieve market acceptance for such products and services could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, the widespread adoption of new Internet,
networking or telecommunication technologies or standards or other
technological changes could require substantial expenditures by the Company to
modify or adapt its products and services. To the extent that a method other
than digital certificates is adopted to enable trusted and secure
communications and commerce over IP networks, sales of the Company's existing
and planned products and services will be adversely affected and the Company's
products and services could be rendered unmarketable or obsolete, which would
have a material adverse effect on the Company's business, operating results
and financial condition. The Company believes there is a time-limited
opportunity to achieve market share, and there can be no assurance that the
Company will be successful in achieving widespread acceptance of its products
and services or in achieving market share before competitors offer products
and services with features similar to the Company's current offerings. Any
such failure by the Company could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Products and Services" and "--Research and Development."
Management of Growth and Expansion. The Company is currently experiencing a
period of significant expansion. The Company's historical growth has placed,
and such growth and any further growth is likely to continue to place, a
significant strain on the Company's managerial, operational, financial and
other resources. The Company has grown from 26 employees at December 31, 1995
to 185 employees at December 31, 1997. In addition, the Company has opened
additional sales offices and has significantly expanded its operations during
this time period. The Company's future success will depend, in part, upon the
ability of its senior management to manage growth effectively, which will
require the Company to implement additional management information systems, to
develop further its operating, administrative, financial and accounting
systems and controls and to maintain close coordination among its engineering,
accounting, finance, marketing, sales and operations organizations. Any
failure to implement or improve systems or controls or to manage any future
growth and expansion effectively could have a material adverse effect on the
Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Dependence on Key Personnel. The Company's future success will be highly
dependent on the performance of its senior management team and other key
employees, many of whom have worked together for only a short
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period of time. For example, the Company has only recently hired its Vice
President of Worldwide Sales. The Company's success will also depend on its
ability to attract, integrate, motivate and retain additional highly skilled
technical and sales and marketing personnel. There is intense competition for
senior management and technical and sales and marketing personnel in the areas
of the Company's activities. In addition, the Company's stringent hiring
practices for all operations personnel and executive management and for
certain engineering personnel, which consist of background checks into
prospective employees' criminal and financial histories, further limit the
number of qualified persons for such positions. See "Business--Security and
Trust Practices." The Company has no employment agreements with any of its key
executives. In addition, the Company does not maintain key person life
insurance for any of its officers or key employees other than Stratton D.
Sclavos, its President and Chief Executive Officer. The loss of the services
of any of the Company's senior management team or other key employees or the
failure of the Company to attract, integrate, motivate and retain additional
key employees could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business--Employees" and
"Management."
Need to Establish and Maintain Strategic Relationships. A significant
business strategy of the Company is to enter into strategic or other similar
collaborative relationships in order to offer products and services to a
larger customer base than could be reached through direct sales and marketing
efforts. The Company will need to enter into additional strategic
relationships to execute its business plan. There can be no assurance that the
Company will be able to enter into additional, or maintain its existing,
strategic relationships on commercially reasonable terms, if at all. If the
Company were unable to enter into additional strategic relationships or
maintain its existing strategic relationships, it would be required to devote
substantially more resources to the distribution, sale and marketing of its
products and services than it would otherwise plan to do. Furthermore, as a
result of the Company's emphasis on these relationships, the Company's success
will depend both on the ultimate success of the other parties to such
relationships, particularly in the use and promotion of IP networks for
trusted and secure communications and commerce, and on the ability of these
parties to market the Company's products and services successfully. Failure of
one or more of the Company's strategic relationships to result in the
development and maintenance of a market for the Company's products and
services could have a material adverse effect on the Company's business,
operating results and financial condition.
In addition, the Company's existing strategic relationships do not, and any
future strategic relationships may not, afford the Company any exclusive
marketing or distribution rights. There can be no assurance that the other
parties to such relationships view their relationships with the Company as
significant for their own businesses or that they will not reduce their
commitment to the Company at any time in the future. In addition, there can be
no assurance that such parties will not pursue alternative technologies or
develop alternative products and services in addition to or in lieu of the
Company's products and services either on their own or in collaboration with
others, including the Company's competitors. Any future inability of the
Company to maintain its strategic relationships or to enter into additional
strategic relationships could have a material adverse effect on the Company's
business, operating results and financial condition. See "Business--Strategy,"
"--Strategic Relationships" and "--Marketing, Sales and Distribution."
Risk of Defects. Products as complex as those offered or developed by the
Company frequently contain undetected defects or failures that may be detected
at any point in the product's life. There can be no assurance that, despite
testing by the Company and potential customers, defects or errors will not
occur in existing or new products, which could result in loss of or delay in
revenues, loss of market share, failure to achieve market acceptance,
diversion of development resources, injury to the Company's reputation,
increased insurance costs or increased service and warranty costs, any of
which could have a material adverse effect on the Company's business,
operating results and financial condition. Furthermore, the Company often
renders implementation, customization, consulting and other technical services
in connection with the implementation of the Company's enterprise and
electronic commerce solutions and its digital certificate service and product
development agreements. The performance of these services typically involves
working with sophisticated software, computing and networking systems. The
Company's failure or inability to meet customer expectations or project
milestones in a timely manner could also result in loss of or delay in
revenues, loss of market share, failure to achieve market acceptance, injury
to reputation and increased costs. Because customers rely on the Company's
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digital certificate solutions for critical security applications, any
significant defects or errors in the Company's products or services, or in the
products of third parties that embed the Company's products, might discourage
such third parties or other customers from utilizing the Company's products
and services or result in tort or warranty claims, which could have a material
adverse effect on the Company's business, operating results and financial
condition. Although the Company attempts to reduce the risk of losses
resulting from such claims through warranty disclaimers and liability
limitation clauses in its sales agreements, there can be no assurance that
such contractual provisions would be enforceable in every instance or at all.
Furthermore, although the Company maintains errors and omissions insurance,
there can be no assurance that such insurance coverage will adequately cover
the Company for such claims or that such other measures will be effective in
limiting the Company's liability. If a court refused to enforce the liability-
limiting provisions of the Company's contracts for any reason, or if
liabilities arose that were not contractually limited or adequately covered by
insurance, the Company's business, operating results and financial condition
could be materially and adversely affected. See "Business--Products and
Services" and "--Research and Development."
Potentially Lengthy Sales and Implementation Cycles for Certain Products and
Services. A key element of the Company's strategy is to market certain of its
products and services directly to large companies and government agencies.
Based on its sales experience to date, the Company expects that the sale and
implementation of its enterprise and electronic commerce solutions to such
entities will typically involve a lengthy education process and a significant
technical evaluation and commitment of capital and other resources. The sale
and implementation of the Company's enterprise and electronic commerce
solutions will be subject to the risk of delays associated with customers'
internal budget and other procedures for approving large capital expenditures,
deploying new technologies within their networks and testing and accepting new
technologies that affect key operations. For these and other reasons, the
sales and implementation cycles associated with certain of the Company's
products and services are expected to be lengthy, potentially lasting from
three to 12 months, and are expected to be subject to a number of significant
risks that are beyond the Company's control. Because of the anticipated
lengthy sales and implementation cycle and the potentially large size of such
orders, if orders forecasted for a specific customer for a particular quarter
are not realized or revenues are not otherwise recognized in that quarter, the
Company's operating results for that quarter could be materially adversely
affected. See "--Potential Fluctuations in Quarterly Operating Results;
Unpredictability of Future Revenues" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Risks Relating to Cryptography Technology. The Company's digital certificate
products and related services are dependent on the use of public key
cryptography technology, which depends in part on the application of certain
mathematical principles known as "factoring." The security afforded by public
key cryptography technology is predicated on the assumption that the factoring
of the composite of large prime numbers is difficult. Should an easy factoring
method be developed, then the security afforded by encryption products
utilizing public key cryptography technology would be reduced or eliminated.
Furthermore, any significant advance in techniques for attacking cryptographic
systems could also render some or all of the Company's existing products and
services obsolete or unmarketable. There can be no assurance that such
developments will not occur. Moreover, even if no breakthroughs in factoring
or other methods of attacking cryptographic systems are made, factoring
problems can theoretically be solved by computer systems significantly faster
and more powerful than those presently available. If such improved techniques
for attacking cryptographic systems are ever developed, the Company would
likely have to reissue digital certificates to some or all of its customers,
which could adversely affect market perception of the reliability of the
Company's products and services or otherwise have a material adverse effect on
the Company's business, operating results and financial condition. In the past
there have been public announcements of the successful decoding of certain
cryptographic messages. The publicity around any breaches could adversely
affect the public perception as to the safety of the public key cryptography
technology included in the Company's digital certificates. Such adverse public
perception could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business--Industry Background"
and "--Products and Services."
Risks Associated with International Operations. Revenues of VeriSign Japan
and revenues from other international customers accounted for approximately
13% of the Company's revenues in 1997. A key component
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of the Company's strategy is to expand its international operations and its
international sales and marketing activities. Expansion into these markets has
required and will continue to require significant management attention and
resources and may require the Company to localize its products and services
for a particular market and to enter into international distribution and
operating relationships. The Company has limited experience in localizing its
products and in developing international distribution or operating
relationships. There can be no assurance that the Company will be successful
in expanding its product and service offerings into international markets. In
addition to the uncertainty regarding the Company's ability to generate
revenues from foreign operations and expand its international presence, there
are certain risks inherent in doing business on an international basis,
including, among others, regulatory requirements, legal uncertainty regarding
liability, export and import restrictions, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, longer payment
cycles, problems in collecting accounts receivable, political instability,
seasonal reductions in business activity and potentially adverse tax
consequences, any of which could adversely affect the success of the Company's
international operations. All of the Company's international revenues from
sources other than VeriSign Japan are denominated in U.S. dollars. To the
extent the Company expands its international operations and has additional
portions of its international revenues denominated in foreign currencies, the
Company could become subject to increased risks relating to foreign currency
exchange rate fluctuations. There can be no assurance that one or more of the
factors discussed above will not have a material adverse effect on the
Company's future international operations and, consequently, on the Company's
business, operating results and financial condition. See "--Industry
Regulation," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Strategy" and "--Marketing, Sales and
Distribution."
Uncertain Maintenance and Strengthening of the VeriSign Brand. The Company
believes that maintaining and strengthening the VeriSign brand is critical to
achieving widespread acceptance of its digital certificates and related
products and services and that the importance of brand recognition will
increase as competition in the market for digital certificates and related
products and services increases. Promoting and positioning the VeriSign brand
will depend largely on the success of the Company's marketing efforts and the
ability of the Company to provide, on an uninterrupted basis, high quality,
secure, trustworthy and cost effective digital certificate solutions. The
Company will also be dependent on the success of its strategic relationships
in order to promote its brand and increase brand awareness. See "--Need to
Establish and Maintain Strategic Relationships." If current or potential
customers do not perceive the Company's products and services as secure or
trustworthy, the Company will be unsuccessful in maintaining and strengthening
its brand. Furthermore, in order to promote the VeriSign brand in response to
competitive pressures, the Company may find it necessary to increase its
marketing budget or otherwise increase its financial commitment to creating
and maintaining brand loyalty among customers. If the Company fails to promote
and maintain its brand or incurs excessive expenses in an attempt to promote
and maintain its brand, or if the Company's existing or future strategic
relationships fail to promote the Company's brand or increase brand awareness,
the Company's business, operating results and financial condition could be
materially adversely affected. See "Business--Strategy" and "--Marketing,
Sales and Distribution."
Dependence on Authentication Information. The Company relies upon
information provided by third-party sources to authenticate the identity of
customers requesting certain of the Company's digital certificates. This
information is presently only available from a limited number of sources and
the Company currently procures such information from single sources. The
Company's reliance on these single sources involves certain risks and
uncertainties, including the possibility of delayed or discontinued
availability. Any such delay or unavailability, coupled with any inability of
the Company to develop alternative sources quickly and cost-effectively, could
materially impair the Company's ability to deliver certain of its digital
certificates on a timely basis and result in the cancellation of orders,
increased costs and injury to reputation, which could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company's reliance on third-party information sources for authentication
has also limited the distribution of certain of its digital certificates
outside of the United States, where access to such sources has been
unavailable or limited. Additionally, accurate authentication of the identity
of the individuals and entities to which the Company issues its digital
certificates is necessary for such digital certificates to provide security.
Therefore, the inaccuracy of authentication information
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on which the Company relies, including information the Company receives from
third parties, could result in material injury to the Company's reputation and
tort or warranty claims from customers relying upon the Company's digital
certificates, which could have a material adverse effect on the Company's
business, operating results and financial condition. See "--Risk of Defects"
and "Business--Products and Services."
Industry Regulation. Exports of software products utilizing encryption
technology are generally restricted by the U.S. and various foreign
governments. All cryptographic products require export licenses from certain
U.S. government agencies. Although the Company has obtained approval to export
its Global Server ID product and none of the Company's other products and
services is currently subject to export controls under U.S. law, there can be
no assurance that the list of products and countries for which export approval
is required, and the regulatory policies with respect thereto, will not be
revised from time to time to include digital certificate products and related
services, or that the Company will be able to obtain necessary regulatory
approvals for the export of future products. The inability of the Company to
obtain required approvals under these regulations could adversely affect the
ability of the Company to make international sales. Furthermore, competitors
of the Company may also seek to obtain approvals to export products that could
increase the amount of competition faced by the Company. There are currently
no federal laws or regulations that specifically control certification
authorities, but a limited number of states have enacted legislation or
regulations with respect to certification authorities. If the market for
digital certificates grows, the United States, state or foreign governments
may choose to enact further regulations governing digital certificate
authorities or other providers of digital certificate products and related
services. Such regulations or the costs of complying with such regulations
could have a material adverse effect on the Company's business, operating
results and financial condition.
Many companies conducting commercial transactions over IP networks do not
collect sales or other similar taxes with respect to shipments of goods into
other states or foreign countries or with respect to other transactions
conducted between parties in different states or countries. It is possible
that states or foreign countries may seek to impose sales taxes on out of
state companies that engage in commerce over IP networks. In the event that
states or foreign countries succeed in imposing sales or other taxes on
Internet commerce, the growth of the use of IP networks for commerce could
slow substantially, which could have a material adverse effect on the
Company's business, operating results and financial condition.
Due to the increasing popularity of the Internet and other IP networks, it
is possible that laws and regulations may be enacted covering issues such as
user privacy, pricing, content and quality of products and services. For
example, the Telecommunications Act of 1996 prohibits the transmission over
the Internet of certain types of information and content. The increased
attention focused upon these issues as a result of the adoption of other laws
or regulations may reduce the rate of growth of the Internet or the use of
other IP networks, which in turn could result in decreased demand for the
Company's products and services or could otherwise have a material adverse
effect on the Company's business, operating results and financial condition.
See "Business--Industry Background."
Intellectual Property; Potential Litigation. The Company relies primarily on
a combination of copyrights, trademarks, trade secret laws, restrictions on
disclosure and other methods to protect its intellectual property and trade
secrets. The Company also enters into confidentiality agreements with its
employees and consultants, and generally controls access to and distribution
of its documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use the Company's intellectual property or trade secrets without
authorization. In addition, there can be no assurance that others will not
independently develop substantially equivalent intellectual property. There
can be no assurance that the precautions taken by the Company will prevent
misappropriation or infringement of its technology. A failure by the Company
to protect its intellectual property in a meaningful manner could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, litigation may be necessary in the future to
enforce the Company's intellectual property rights, to protect the Company's
trade secrets or to determine the validity and scope of the proprietary rights
of others. Such litigation could result in substantial costs and diversion of
management and technical resources, either of which could have a material
adverse effect on the Company's business, operating results and financial
condition.
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The Company also relies on certain licensed third-party technology, such as
public key cryptography technology licensed from RSA and other technology that
is used in the Company's products to perform key functions. There can be no
assurance that these third-party technology licenses will continue to be
available to the Company on commercially reasonable terms or at all, and the
loss of any of these technologies could have a material adverse effect on the
Company's business, operating results and financial condition. Moreover, in
the Company's current license agreements, the licensor has agreed to defend,
indemnify and hold the Company harmless with respect to any claim by a third
party that the licensed software infringes any patent or other proprietary
right. Although these licenses are fully paid, there can be no assurance that
the outcome of any litigation between the licensor and a third party or
between the Company and a third party will not lead to royalty obligations of
the Company for which the Company is not indemnified or for which such
indemnification is insufficient, or that the Company will be able to obtain
any additional license on commercially reasonable terms or at all. In the
future, the Company may seek to license additional technology to incorporate
in its products and services. There can be no assurance that any third-party
technology licenses that the Company may be required to obtain in the future
will be available to the Company on commercially reasonable terms or at all.
The loss of or inability to obtain or maintain any of these technology
licenses could result in delays in introduction of the Company's products or
services until equivalent technology, if available, is identified, licensed
and integrated, which could have a material adverse effect on the Company's
business, operating results and financial condition.
From time to time, the Company has received, and may receive in the future,
notice of claims of infringement of other parties' proprietary rights. In
September 1995, the Company applied to the United States Patent and Trademark
Office to register the VeriSign name as a trademark. VeriFone, Inc.
("VeriFone") challenged the validity of the Company's application in August
1996 and, in September 1996, commenced a civil action in federal district
court alleging trademark infringement and unfair competition. The parties
settled this litigation on November 21, 1997, entered into a licensing
arrangement and are currently negotiating an OEM agreement. The Company also
issued an aggregate of 250,000 shares of Common Stock to VeriFone in
connection with the foregoing transactions. There can be no assurance that
infringement or other claims will not be asserted or prosecuted against the
Company in the future or that any past or future assertions or prosecutions
will not materially adversely affect the Company's business, operating results
and financial condition. Any such claims, with or without merit, could be
time-consuming, result in costly litigation and diversion of technical and
management personnel, cause product shipment delays or require the Company to
develop non-infringing technology or enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company, or at all. In the event of a
successful claim of product infringement against the Company and the failure
or inability of the Company to develop non-infringing technology or license
the infringed or similar technology on a timely basis, the Company's business,
operating results and financial condition could be materially adversely
affected. See "Business--Intellectual Property."
Year 2000 Compliance. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, many companies'
software and computer systems may need to be upgraded or replaced in order to
comply with such "Year 2000" requirements. Although the Company believes that
its products and systems are Year 2000 compliant, the Company utilizes third-
party equipment and software that may not be Year 2000 compliant. Failure of
such third-party equipment or software to operate properly with regard to the
year 2000 and thereafter could require the Company to incur unanticipated
expenses to remedy any problems, which could have a material adverse effect on
the Company's business, operating results and financial condition.
Furthermore, the purchasing patterns of customers or potential customers may
be affected by Year 2000 issues as companies expend significant resources to
correct their current systems for Year 2000 compliance. These expenditures may
result in reduced funds available to implement the infrastructure needed to
conduct trusted and secure communications and commerce over IP networks or to
purchase products and services such as those offered by the Company, which
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Business--Industry Background."
14
<PAGE>
Future Capital Needs; Uncertainty of Additional Funding. The Company may
require additional capital to finance its growth and marketing and research
and development projects beyond the next 12 months. The Company's capital
requirements will depend on many factors including, but not limited to, demand
for the Company's products and services and the extent to which such products
achieve market acceptance and the timing of such market acceptance, the timing
of and extent to which the Company invests in new technology, the expenses of
sales and marketing and new product development, the extent to which
competitors are successful in developing their own products and services and
increasing their own market share and brand awareness, the success of the
Company's strategic relationships, the costs involved in maintaining and
enforcing intellectual property rights, the level and timing of revenues,
available borrowings under line of credit arrangements, the degree and timing
of growth of IP networks for trusted and secure communications and commerce,
and other factors. To the extent that resources are insufficient to fund the
Company's activities, the Company may need to raise additional funds through
public or private financing, strategic relationships or other arrangements.
There can be no assurance that such additional funding, if needed, will be
available on terms attractive to the Company, or at all. Strategic
relationships, if necessary to raise additional funds, may require the Company
to relinquish rights to certain of its technologies or products. The failure
of the Company to raise capital when needed could have a material adverse
effect on the Company's business, operating results and financial condition.
If additional funds are raised through the issuance of equity securities, the
percentage ownership of the Company by its then-current stockholders would be
reduced. Furthermore, such equity securities might have rights, preferences or
privileges senior to those of the Company's Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
Certain Anti-Takeover Provisions. Upon completion of this offering, the
Company's Board of Directors will have the authority to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock, while providing flexibility in connection with
possible financings, acquisitions or other corporate purposes, may have the
effect of delaying, deferring or preventing a change in control of the
Company, may discourage bids for the Company's Common Stock at a premium over
the market price of the Common Stock and may adversely affect the market price
of, and the voting and other rights of the holders of, the Common Stock. The
Company has no current plans to issue shares of Preferred Stock. In addition,
certain provisions of the Company's Amended and Restated Bylaws will have the
effect of delaying, deferring or preventing a change of control of the
Company. These provisions will provide, among other things, that the Board of
Directors is divided into three classes to serve staggered three-year terms,
that stockholders may not take actions by written consent and that the ability
of stockholders to call special meetings will be restricted. In addition, the
Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which will prohibit the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. The Company's indemnity agreements provide and the
Company's Amended and Restated Certificate of Incorporation and Amended and
Restated Bylaws will provide that the Company will indemnify officers and
directors against losses that they may incur in investigations and legal
proceedings resulting from their services to the Company, which may be broad
enough to include services in connection with takeover defense measures. Such
provisions may have the effect of preventing changes in the management of the
Company. See "Description of Capital Stock."
Shares Eligible for Future Sale. Sales of a substantial number of shares of
Common Stock in the public market following this offering could adversely
affect the market price of the Company's Common Stock. The number of shares of
Common Stock available for sale in the public market is limited by
restrictions under the Securities Act of 1933, as amended (the "Securities
Act"), and lock-up agreements executed by each of the security holders of the
Company under which such security holders have agreed not to sell or otherwise
dispose of any of their shares for a period of 180 days after the date of this
Prospectus without the prior written consent
15
<PAGE>
of Morgan Stanley & Co. Incorporated. Morgan Stanley & Co. Incorporated may,
however, in its sole discretion and at any time without notice, release all or
any portion of the shares subject to lock-up agreements. In addition to the
3,000,000 shares of Common Stock offered hereby (assuming no exercise of the
Underwriters' over-allotment option), there will be 17,151,244 shares of
Common Stock outstanding as of the date of this Prospectus, all of which are
"restricted" shares under the Securities Act. On the date of this Prospectus,
no shares other than the 3,000,000 shares offered hereby will be eligible for
sale. Upon the expiration of lock-up agreements 180 days after the date of
this Prospectus, an additional 16,801,244 shares will become eligible for sale
in the public market, subject in the case of all but 2,661,052 shares to the
volume limitations and other conditions of Rule 144 adopted under the
Securities Act ("Rule 144"). The remaining 350,000 shares will become eligible
for sale in November 1998, subject to the volume limitations and other
conditions of Rule 144. In addition, the Company intends to file a
registration statement on Form S-8 with the Securities and Exchange Commission
shortly after this offering covering (i) the 2,625,000 shares of Common Stock
reserved for issuance under the Company's Equity Incentive Plan, Purchase Plan
and Directors Plan, (ii) an additional number of shares of Common Stock to be
reserved for issuance under the Equity Incentive Plan equal to the number of
shares reserved for future issuance under the 1995 Stock Option Plan and 1997
Stock Option Plan as of the date of this Prospectus (436,682 as of December
31, 1997), and (iii) the shares subject to outstanding options granted under
the Company's 1995 Stock Option Plan and 1997 Stock Option Plan as of the date
of this Prospectus (2,516,818 as of December 31, 1997). The holders of
approximately 15,069,339 shares of Common Stock are also entitled to certain
rights with respect to registration of such shares of Common Stock for offer
or sale to the public. If such holders, by exercising their registration
rights, cause a large number of shares to be registered and sold in the public
market, such sales could have a material adverse effect on the market price
for the Company's Common Stock. See "Management--Director Compensation," "--
Employee Benefit Plans," "Description of Capital Stock--Registration Rights"
and "Shares Eligible for Future Sale."
Acquisitions. The Company from time to time may acquire or invest in
businesses, technologies and product lines that are complementary to the
Company's business. Although the Company currently has no understandings,
commitments or agreements with respect to any acquisitions, any such
acquisitions would be accompanied by the risks commonly encountered in such
transactions, including, among others, the difficulty of assimilating the
operations and personnel of the acquired businesses, the potential disruption
of the Company's ongoing business, the diversion of the Company's management
from the day-to-day operations of the Company, the inability of the Company to
incorporate acquired technologies successfully into the Company's products and
services, the additional expense associated with amortization of acquired
intangible assets, the potential impairment of the Company's relationships
with its employees, customers and strategic partners, the inability of the
Company to retain key technical and managerial personnel of the acquired
business and the inability of the Company to maintain uniform standards,
controls, procedures and policies. Because of these and other factors, any
such acquisitions, if consummated, could have a material adverse affect on the
Company's business, operating results and financial condition. See "Use of
Proceeds."
No Prior Trading Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Common Stock of the Company
and there can be no assurance that an active trading market will develop or be
sustained upon completion of this offering. The initial public offering price,
which will be established by negotiations between the Company and the
representatives of the Underwriters based upon a number of factors, may not be
indicative of prices that will prevail in the trading market. See
"Underwriters" for a discussion of the factors to be considered in determining
the initial public offering price. The stock market from time to time has
experienced significant price and volume fluctuations. In addition, the market
prices of securities of other technology companies, particularly Internet-
related companies, have been highly volatile. Factors such as fluctuations in
the Company's operating results, announcements of technological innovations or
new products or services by the Company or its competitors, analysts' reports
and projections, regulatory actions and general market conditions may have a
significant effect on the market price of the Company's Common Stock. See
"Underwriters."
16
<PAGE>
Control by Existing Stockholders. Upon completion of this offering, the
present executive officers, directors and 5% stockholders of the Company and
their affiliates will beneficially own approximately 49.6% of the Company's
outstanding Common Stock (48.6% if the Underwriters' over-allotment option is
exercised in full). As a result, these stockholders would be able to
significantly influence the management and affairs of the Company and all
matters requiring stockholder approval, including the election of directors
and approval of significant corporate transactions such as a merger,
consolidation or sale of substantially all of the Company's assets. Such
concentration of ownership might have the effect of delaying or preventing a
change in control of the Company and might affect the market price of the
Company's Common Stock and the voting and other rights of the Company's other
stockholders. See "Principal Stockholders."
Immediate and Substantial Dilution. Investors participating in this offering
will incur immediate, substantial dilution in the amount of $8.05 per share
(based on an assumed initial public offering price of $10.00 per share). To
the extent that outstanding options to purchase the Company's Common Stock are
exercised, there will be further dilution. See "Dilution."
Unspecified Use of Proceeds. The Company plans to use substantially all of
the net proceeds from this offering for general corporate purposes, including
working capital and capital expenditures. The Company may also use a portion
of the net proceeds from this offering to acquire or invest in businesses,
technologies and product lines that are complementary to the Company's
business. The Company has no present plans or commitments and is not currently
engaged in any negotiations with respect to such transactions. As a result,
the Company will have significant discretion as to the use of the net proceeds
from this offering. Pending such uses, the Company intends to invest the net
proceeds from this offering in short-term, interest-bearing, investment-grade
securities. See "Use of Proceeds."
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$26.9 million (approximately $31.1 million if the Underwriters' over-allotment
option is exercised in full), at an assumed initial public offering price of
$10.00 per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company. The
primary purposes of this offering are to obtain additional equity capital,
create a public market for the Company's Common Stock and facilitate future
access by the Company to the public equity markets.
The Company intends to use approximately $5.0 million of the net proceeds of
this offering to fund its capital expenditures for 1998 and to utilize the
remainder of the net proceeds of this offering primarily for general corporate
purposes, including working capital. The Company may also use a portion of the
net proceeds from this offering to acquire or invest in businesses,
technologies and product lines that are complementary to the Company's
business. The Company has no present plans or commitments and is not currently
engaged in any negotiations with respect to such transactions. As a result,
the Company will have significant discretion as to the use of the net proceeds
from this offering. Pending such uses, the Company intends to invest the net
proceeds from this offering in short-term, interest-bearing, investment-grade
securities. See "Risk Factors--Acquisitions" and "--Unspecified Use of
Proceeds."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock or other securities and does not anticipate paying any cash dividends in
the foreseeable future. In addition, the terms of the Company's equipment line
of credit agreement prohibit the payment of dividends on its capital stock.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
December 31, 1997, (ii) on a pro forma basis giving effect to the conversion
of all outstanding shares of Preferred Stock into shares of Common Stock upon
the closing of this offering and (iii) on a pro forma as adjusted basis to
reflect the receipt by the Company of the estimated net proceeds from the sale
of the 3,000,000 shares of Common Stock offered by the Company hereby at an
assumed initial public offering price of $10.00 per share and after deducting
estimated underwriting discounts and commissions and estimated offering
expenses payable by the Company.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Stockholders' equity:
Convertible Preferred Stock, $.001 par value;
actual--10,282,883 shares authorized,
10,031,006 shares issued and outstanding; pro
forma and pro forma as adjusted--5,000,000
shares authorized, no shares issued and
outstanding ................................. $ 10 $ -- $ --
Common Stock, $.001 par value; actual--
21,592,117 shares authorized, 7,120,238
shares issued and outstanding; pro forma--
50,000,000 shares authorized, 17,151,244
shares issued and outstanding; pro forma as
adjusted--20,151,244 shares issued and
outstanding(1)............................... 7 17 20
Additional paid-in capital.................... 44,908 44,908 71,805
Notes receivable from stockholders............ (644) (644) (644)
Deferred compensation......................... (380) (380) (380)
Accumulated deficit........................... (31,432) (31,432) (31,432)
-------- -------- -------
Total stockholders' equity................... 12,469 12,469 39,369
-------- -------- -------
Total capitalization....................... $ 12,469 $ 12,469 $39,369
======== ======== =======
</TABLE>
- --------
(1) Excludes (i) 2,102,518 shares of Common Stock issuable upon the exercise
of options outstanding as of December 31, 1997 under the Company's 1995
Stock Option Plan (the "1995 Stock Option Plan"), with a weighted average
exercise price of $2.17 per share, and 50,982 shares of Common Stock
reserved for issuance thereunder, (ii) 414,300 shares of Common Stock
issuable upon the exercise of options outstanding as of December 31, 1997
under the Company's 1997 Stock Option Plan (the "1997 Stock Option Plan"),
with a weighted average exercise price of $6.91, and 385,700 shares of
Common Stock reserved for issuance thereunder, (iii) 2,000,000 additional
shares of Common Stock reserved for issuance under the Company's 1998
Equity Incentive Plan (the "Equity Incentive Plan"), (iv) 500,000 shares
of Common Stock reserved for issuance under the Company's 1998 Employee
Stock Purchase Plan (the "Purchase Plan"), (v) 125,000 shares of Common
Stock reserved for issuance under the Company's 1998 Directors Stock
Option Plan (the "Directors Plan"), (vi) 15,000 shares of Common Stock
that would be issued to a service provider if certain milestones are met
and (vii) 17,500 shares of Common Stock subject to a warrant that would be
issued in the event that the Company borrows funds under an equipment loan
agreement. See "Management--Director Compensation," "--Employee Benefit
Plans," "Description of Capital Stock" and Note 6 of Notes to Consolidated
Financial Statements.
19
<PAGE>
DILUTION
The pro forma net tangible book value of the Company's Common Stock as of
December 31, 1997 was $12.4 million, or $0.72 per share. Pro forma net
tangible book value per share is equal to the Company's total tangible assets
less its total liabilities, divided by the pro forma shares of Common Stock
outstanding as of December 31, 1997. After giving effect to the issuance and
sale of the 3,000,000 shares of Common Stock offered by the Company hereby (at
an assumed initial public offering price of $10.00 per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company), the Company's as adjusted net
tangible book value as of December 31, 1997 would have been $39.3 million, or
$1.95 per share. This represents an immediate increase in pro forma net
tangible book value of $1.23 per share to existing stockholders and an
immediate dilution of $8.05 per share to new public investors. The following
table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $10.00
Pro forma net tangible book value per share at December 31,
1997....................................................... $0.72
Increase in pro forma net tangible book value per share
attributable to new public investors....................... 1.23
-----
As adjusted net tangible book value per share after offering.. 1.95
------
Dilution per share to new public investors.................... $ 8.05
======
</TABLE>
The following table summarizes on a pro forma basis, as of December 31,
1997, the difference between the existing stockholders and the purchasers of
shares of Common Stock in this offering (at an assumed initial public offering
price of $10.00 per share and before deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company) with respect to the number of shares of Common Stock purchased from
the Company, the total cash consideration paid and the average price paid per
share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)...... 17,151,244 85.1% $38,885,000 56.4% $ 2.27
New public investors.......... 3,000,000 14.9 30,000,000 43.6 10.00
---------- ----- ----------- -----
Total....................... 20,151,244 100.0% $68,885,000 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Reflects the conversion of the Preferred Stock upon the closing of this
offering.
The foregoing discussion and tables assume no exercise of any stock options
outstanding as of December 31, 1997, no exercise of a warrant to purchase
17,500 shares of Common Stock that would be issued in the event that the
Company borrows funds under an equipment loan agreement, and no issuance of
15,000 shares of Common Stock that would be issued to a service provider if
certain milestones are met. As of December 31, 1997, there were options
outstanding to purchase a total of 2,516,818 shares of Common Stock with a
weighted average exercise price of $2.95 per share. To the extent that any of
these options or the warrant are exercised, there will be further dilution to
new public investors. See "Capitalization," "Management--Director
Compensation," "--Employee Benefit Plans" and Note 6 of Notes to Consolidated
Financial Statements.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this Prospectus. The selected
consolidated statement of operations data presented below for the period from
April 12, 1995 (inception) to December 31, 1995 and for each of the years in
the two-year period ended December 31, 1997, and the selected consolidated
balance sheet data as of December 31, 1996 and 1997, are derived from
consolidated financial statements of the Company that have been audited by
KPMG Peat Marwick LLP, independent auditors, and are included elsewhere in
this Prospectus. The selected consolidated balance sheet data as of December
31, 1995 are derived from consolidated financial statements of the Company
that have been audited by KPMG Peat Marwick LLP, independent auditors, but
that are not included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 12, 1995 YEAR ENDED
(INCEPTION) TO DECEMBER 31,
DECEMBER 31, ------------------
1995 1996 1997
-------------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues .................................. $ 382 $ 1,351 $ 9,382
Costs and expenses:
Cost of revenues.......................... 412 2,791 7,833
Sales and marketing....................... 790 4,876 10,839
Research and development.................. 642 2,058 5,188
General and administrative................ 680 2,640 4,604
Nonrecurring charges...................... -- -- 2,800
------- -------- --------
Total costs and expenses................ 2,524 12,365 31,264
------- -------- --------
Operating loss.......................... (2,142) (11,014) (21,882)
Other income (expense)..................... 148 (67) 1,149
------- -------- --------
Loss before minority interest........... (1,994) (11,081) (20,733)
Minority interest in net loss of subsidi-
ary....................................... -- (838) (1,538)
------- -------- --------
Net loss................................ $(1,994) $(10,243) $(19,195)
======= ======== ========
Pro forma basic and diluted net loss per
share(1).................................. $ (.74) $ (1.13)
======== ========
Shares used in per share computations (1).. 13,836 17,018
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments...... $ 2,687 $29,983 $11,894
Working capital........................................ 2,284 24,823 5,227
Total assets........................................... 4,052 36,503 24,406
Long-term obligations.................................. -- -- --
Stockholders' equity................................... 3,376 28,555 12,469
</TABLE>
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the determination of the number of shares used in per share
computations.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and notes thereto appearing elsewhere in this Prospectus.
The following discussion contains forward-looking statements. The Company's
actual results may differ significantly from those projected in the forward-
looking statements. Factors that might cause future results to differ
materially from those projected in the forward-looking statements include, but
are not limited to, those discussed in "Risk Factors" and elsewhere in this
Prospectus.
OVERVIEW
VeriSign is the leading provider of digital certificate solutions and
infrastructure needed by companies, government agencies, trading partners and
individuals to conduct trusted and secure communications and commerce over IP
networks. The Company's Digital IDs are enabled in millions of copies of
Microsoft and Netscape Web browsers, tens of thousands of copies of popular
Web servers and a variety of other software applications. The Company believes
that it has issued more digital certificates than any other company, having
issued over 2.0 million of its Digital IDs for individuals and over 40,000 of
its Digital IDs to organizations, primarily businesses, for their Web sites.
Because the Company has issued most of its Digital IDs for individuals on a
trial or promotional basis, a significant majority of the Company's revenues
to date have been derived from businesses.
The Company was incorporated in April 1995 and introduced its first product,
the Secure Server ID for Netscape Commerce Servers, in June 1995. In October
1995, the Company introduced additional Server Digital IDs for the Web server
products of Microsoft, IBM, Open Market and other vendors. In May 1996, the
Company began providing online enrollment and issuance of client Digital IDs
for Netscape Navigator through its Digital ID Center and began shipping
another form of Digital ID known as a Software Developer Digital ID for
Microsoft's Authenticode program. The Company began issuing Digital IDs for
Microsoft's Internet Explorer through the Company's Digital ID Center in
August 1996. During 1997, the Company introduced its Universal Digital IDs and
three new types of server digital certificate products--its Global Server ID,
Financial Server ID and EDI Server ID.
In April 1996, the Company entered the enterprise and electronic commerce
markets by introducing custom SET digital certificate solutions targeted at
certified banks, payment processors and major card brands. During 1997, the
Company introduced VeriSign OnSite and VeriSign V-Commerce, which are
enterprise and electronic commerce digital certificate solutions that are
targeted at mid-sized to large companies, managed intranets and extranets,
payment card industry service providers and Web sites with large customer or
user bases. During 1997, the Company began providing technology and products
for digital certificate management to OEMs.
Historically, the Company has derived substantially all of its revenues from
the sale of Digital IDs and from fees for services rendered in connection with
the Company's digital certificate solutions and digital certificate service
and product development agreements. Sales of Digital IDs and fees for services
each resulted in approximately one-half of the Company's revenues in 1997. The
purchase of a Digital ID allows the customer to use the Digital ID for a
limited period of time, generally 12 months. After this period, the Digital ID
must be renewed for continued usage by the customer. Renewal fees are
typically lower than the fees charged for the initial Digital ID. Revenues
from the sale or renewal of Digital IDs are deferred and recognized ratably
over the life of the digital certificate. Revenues from the Company's
enterprise and electronic commerce solutions consist of fees for the issuance
of digital certificates, which are recognized ratably over the term of the
particular license agreement relating to the enterprise or electronic commerce
solution, and fees for set-up services, which are recognized upon completion
of the service. Revenues from other services are recognized using the
percentage-of-completion method for fixed-fee development arrangements, on a
time-and-materials basis for consulting and training services or ratably over
the term of the agreement for support and maintenance services. Deferred
revenues increased from $46,000 at December 31, 1995 to $1.9 million at
December 31, 1996 and to $4.8 million at December 31, 1997. In the future, the
Company anticipates that it may receive additional revenues from sales
22
<PAGE>
of software products and value-added services, licensing and royalty fees from
licenses of digital certificates and related technology and maintenance, and
fees for customer support services.
The Company markets its products and services worldwide through multiple
distribution channels, including the Internet, direct sales, telesales, VARs,
systems integrators and OEMs. Although a significant portion of its revenues
to date has been generated through sales from the Company's Web site, the
Company intends to increase its direct sales force, both domestically and
internationally, and intends to continue to expand its other distribution
channels.
In February 1996, the Company formed VeriSign Japan to provide digital
certificate solutions to the Japanese market. In connection with the formation
of this subsidiary, the Company licensed certain technology and contributed
other assets to VeriSign Japan. Subsequent to its formation, additional
investors purchased minority interests in VeriSign Japan, and, as of December
31, 1997, the Company owned 50.5% of the outstanding capital stock of VeriSign
Japan. Accordingly, the Company's consolidated financial statements include
the accounts of the Company and this subsidiary and the Company's consolidated
statements of operations reflect the elimination of the minority shareholders'
share of the net losses of the subsidiary. Historically, VeriSign Japan has
funded its net losses with investments from its shareholders. However, to the
extent VeriSign Japan is unable to continue to fund its operations principally
from investments by shareholders, the Company may be required to fund the
operations of this subsidiary, which could have a material adverse effect on
the Company's business, operating results and financial condition. See
"Business--VeriSign Japan."
The Company has experienced substantial net losses in each fiscal period
since its inception and, as of December 31, 1997, had an accumulated deficit
of $31.4 million. Such net losses and accumulated deficit resulted from the
Company's lack of substantial revenues and the significant costs incurred in
the development and sale of the Company's products and services and in the
establishment and deployment of the Company's operations infrastructure and
practices. The Company intends to increase its expenditures in all areas in
order to execute its business plan. As a result, the Company expects to incur
substantial additional losses for the foreseeable future. Although the Company
has experienced revenue growth in recent periods, there can be no assurance
that such growth rates are sustainable and, therefore, they should not be
considered indicative of future operating results. There can be no assurance
that the Company will ever achieve significant revenues or profitability or,
if significant revenues and profitability are achieved, that they could be
sustained. See "Risk Factors--Limited Operating History; History of Losses and
Anticipation of Future Losses."
RESULTS OF OPERATIONS
REVENUES
The Company's revenues increased from $382,000 for the period from April 12,
1995 (inception) to December 31, 1995 (the "Inception Period") to $1.4 million
for 1996 and to $9.4 million for 1997. Revenues from inception through
December 31, 1996 were primarily derived from sales of the Company's Server
Digital ID products. The increase in revenues from the Inception Period to
1996 was due primarily to increased market acceptance of Server Digital IDs
and, to a lesser extent, SET digital certificate solutions. The increase in
revenues from 1996 to 1997 was due primarily to increased sales of Server
Digital IDs and to increased services revenues, which included revenues from
digital certificate service and product development agreements. Revenues from
the sale of Universal Digital IDs have been nominal because substantially all
of the Company's Universal Digital IDs have been issued free of charge on a
promotional basis.
Revenues attributable to VISA accounted for approximately 21% and 14% of
revenues for 1996 and 1997, respectively. No other customer accounted for more
than 10% of the Company's revenues during the Inception Period, 1996 or 1997.
Revenues of VeriSign Japan and revenues from other international customers
accounted for less than 10% of revenues for the Inception Period and 1996 and
approximately 13% of revenues for 1997.
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COSTS AND EXPENSES
The Company's costs and expenses have increased in absolute dollars since
inception, primarily due to the overall growth of the Company. The total
number of the Company's employees increased from 26 at December 31, 1995 to
185 at December 31, 1997. In addition, the Company opened several new offices,
increased its sales and marketing and research and development efforts, and
expanded its headquarters and Digital ID Centers during this period. The
Company believes that it will need to continue to expand its operations in
order to execute its business strategy. Accordingly, the Company intends to
continue to increase its costs and expenses in all areas for the foreseeable
future.
Cost of Revenues. Cost of revenues consists primarily of costs related to
personnel providing digital certificate enrollment and issuance services,
customer support and training, consulting and development services, and
facilities and computer equipment used in such activities. Cost of revenues
also includes fees paid to third parties to verify certificate applicants'
identities and insurance premiums for the Company's NetSure warranty plan and
errors and omission insurance. Cost of revenues increased from $412,000 for
the Inception Period to $2.8 million for 1996 and to $7.8 million for 1997.
Cost of revenues was not material during the Inception Period as a result of
the Company's minimal revenues. The increases in 1996 and 1997 were due
primarily to increased facilities costs and related overhead that resulted
from building the Company's operations infrastructure, hiring full-time and
temporary personnel to support the additional volume of issuances of Server
Digital IDs, introduction of additional Server Digital ID products,
introduction of the Company's NetSure warranty program, increased costs of
errors and omission insurance, increased expenses for access to third-party
databases and, during 1997, implementation of the Company's disaster recovery
plan. Given the Company's limited operating history, limited history of
issuing Digital IDs and evolving industry and business model, the Company
believes that analysis of cost of revenues as a percentage of revenues is not
yet meaningful.
Sales and Marketing. Sales and marketing expenses consist primarily of costs
related to sales, marketing and practices and external affairs personnel,
including salaries, sales commissions and other personnel-related expenses,
computer equipment and support services used in such activities, facilities
costs, consulting fees and costs of marketing programs. Sales and marketing
expenses increased from $790,000 for the Inception Period to $4.9 million for
1996 and to $10.8 million for 1997. These increases were due primarily to
increased headcount and, to a lesser extent, increased expenditures for
marketing programs. The Company anticipates that sales and marketing expenses
will continue to increase in absolute dollars as it expands its direct sales
force, hires additional marketing personnel and increases its marketing and
promotional activities during 1998.
Research and Development. Research and development expenses consist
primarily of costs related to research and development personnel, including
salaries and other personnel-related expenses, consulting fees, facilities,
and computer equipment and support services used in product and technology
development. Research and development expenses increased from $642,000 for the
Inception Period to $2.1 million for 1996 and to $5.2 million for 1997. These
increases were due primarily to increased personnel to support the design,
testing and deployment of, and technical support for, the Company's expanded
product offerings and technology. The Company believes that timely development
of new and enhanced products and technology are necessary to remain
competitive in the marketplace. Accordingly, the Company intends to continue
recruiting and hiring experienced research and development personnel and make
other investments in research and development. Therefore, the Company expects
that research and development expenditures will continue to increase in
absolute dollars. To date, all research and development expenses have been
expensed as incurred.
General and Administrative. General and administrative expenses consist
primarily of salaries and other personnel-related expenses for the Company's
administrative, finance and human resources personnel, facilities and computer
equipment, support services and professional services fees. General and
administrative expenses increased from $680,000 for the Inception Period to
$2.6 million for 1996 and $4.6 million for 1997. These increases were due
primarily to increased staffing levels to manage and support the Company's
expanding operations. The Company anticipates hiring additional personnel and
incurring additional costs related to being a
24
<PAGE>
public company, including directors' and officers' liability insurance,
investor relations programs and professional services fees. Accordingly, the
Company anticipates that general and administrative expenses will continue to
increase in absolute dollars.
Nonrecurring Charges. In September 1996, VeriFone, which subsequently became
a wholly-owned subsidiary of Hewlett-Packard Company ("Hewlett-Packard"),
filed a lawsuit against the Company alleging, among other things, trademark
infringement. In November 1997, the parties executed a definitive agreement
under which, among other things, the Company issued an aggregate of 250,000
shares of Common Stock, which were transferred to Hewlett-Packard, and the
Company and VeriFone settled such claims. The settlement amount was recorded
during 1997 as a $2.0 million charge to operations. In November 1997, the
Company entered into a preferred provider agreement with Microsoft whereby the
companies will develop, promote and distribute a variety of client-based and
server-based digital certificate solutions and the Company will be designated
as the premier provider of digital certificates for Microsoft customers. In
connection with the agreement, the Company issued 100,000 shares of Common
Stock to Microsoft resulting in an $800,000 charge to operations.
OTHER INCOME (EXPENSE)
Other income (expense) consists primarily of interest earned on the
Company's cash, cash equivalents and short-term investments, less interest
expense on bank borrowings of VeriSign Japan and the effect of foreign
currency transaction gains and losses. The Company had other income of
$148,000 for the Inception Period, other expense of $67,000 for 1996 and other
income of $1.1 million for 1997. The increase for 1997 was due to interest
earned on the cash proceeds from the Company's November 1996 Series C
Preferred Stock financing.
INCOME TAXES
No provision for federal and California income taxes has been recorded
because the Company has experienced net losses since inception. As of December
31, 1997, the Company had federal and California net operating loss
carryforwards of approximately $26.9 million and $27.1 million, respectively.
These federal and California net operating loss carryforwards will expire, if
not utilized, in years 2010 through 2014 and in 2003, respectively. The Tax
Reform Act of 1986 imposes substantial restrictions on the utilization of net
operating losses and tax credits in the event of an "ownership change" of a
corporation. The Company's ability to utilize net operating loss carryforwards
may be limited as a result of an "ownership change" as defined in the Internal
Revenue Code. The Company does not anticipate that a material limitation on
its ability to use such carryforwards and credits will result from this
offering. The Company has provided a full valuation allowance on the deferred
tax asset because of the uncertainty regarding its realization. The Company's
accounting for deferred taxes under Statement of Financial Accounting
Standards No. 109 involves the evaluation of a number of factors concerning
the realizability of the Company's deferred tax assets. In concluding that a
full valuation allowance was required, management primarily considered such
factors as the Company's history of operating losses and expected future
losses and the nature of the Company's deferred tax assets. Although
management's operating plans assume taxable and operating income in future
periods, management's evaluation of all the available evidence in assessing
the realizability of the deferred tax assets indicates that such plans were
not considered sufficient to overcome the available negative evidence. See
Note 7 of Notes to Consolidated Financial Statements.
MINORITY INTEREST IN NET LOSS OF SUBSIDIARY
Minority interest in the net losses of VeriSign Japan was $838,000 for 1996
and $1.5 million for 1997. This increase was due to the increased expenses
incurred in establishing and expanding the operations of VeriSign Japan prior
to recognizing significant revenues and to an increasing percentage of
VeriSign Japan's capital stock being held by minority shareholders. VeriSign
Japan is still in an early stage of operations and, therefore, the Company
expects that the minority interest in net loss of subsidiary will continue to
fluctuate in future periods.
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth certain consolidated statement of operations
data for each quarter of 1996 and 1997. This information has been derived from
the Company's unaudited consolidated financial statements,
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<PAGE>
which, in management's opinion, have been prepared on the same basis as the
annual consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information for the quarters presented. This information
should be read in conjunction with the Consolidated Financial Statements and
notes thereto included elsewhere in this Prospectus. The operating results for
any quarter are not necessarily indicative of the results for any future
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 153 $ 246 $ 375 $ 577 $ 1,267 $ 2,249 $ 2,599 $ 3,267
Costs and expenses:
Cost of revenues....... 304 552 737 1,198 1,419 1,733 2,014 2,667
Sales and marketing.... 540 1,015 1,213 2,108 2,254 2,686 2,324 3,575
Research and
development........... 350 417 523 768 1,029 1,222 1,309 1,628
General and
administrative........ 396 408 713 1,123 953 864 1,084 1,703
Nonrecurring charges... -- -- -- -- -- -- 2,000 800
------- ------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............ 1,590 2,392 3,186 5,197 5,655 6,505 8,731 10,373
------- ------- ------- ------- ------- ------- ------- -------
Operating loss....... (1,437) (2,146) (2,811) (4,620) (4,388) (4,256) (6,132) (7,106)
Other income (expense).. 35 35 14 (151) 469 166 225 289
------- ------- ------- ------- ------- ------- ------- -------
Loss before minority
interest............ (1,402) (2,111) (2,797) (4,771) (3,919) (4,090) (5,907) (6,817)
Minority interest in net
loss of subsidiary..... (2) (128) (228) (480) (305) (482) (407) (344)
------- ------- ------- ------- ------- ------- ------- -------
Net loss............. $(1,400) $(1,983) $(2,569) $(4,291) $(3,614) $(3,608) $(5,500) $(6,473)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
REVENUES
The Company has experienced quarter-to-quarter sequential growth in revenues
since its inception. These quarterly increases were due primarily to the
increased number of Server Digital IDs sold during these periods. In addition,
during the first quarter of 1997, the Company completed certain work required
under various certificate service and product development agreements and,
therefore, recognized the related portion of revenues during that quarter. The
Company realized additional services fees during the second quarter of 1997 as
a result of entering into new certificate service and product development
agreements and completing work under existing certificate service and product
development agreements. During the third and fourth quarters of 1997, revenues
attributable to digital certificates grew as a result of the increased number
of digital certificates sold and an approximately 15% per unit price increase.
Revenues also increased in the third and fourth quarters of 1997 as a result
of the completion of work under other certificate service and product
development agreements.
COSTS AND EXPENSES
Cost of Revenues. Throughout 1996, the Company was developing a secure
operations and customer support infrastructure as well as related systems.
During the fourth quarter of 1996, the Company began building its new Digital
ID Center to manage enrollment and issuance of large volumes of Digital IDs
and moved its customer support and information systems teams into the new
Digital ID Center. Accordingly, facilities costs and related overhead
increased significantly in the first quarter of 1997. During the second and
third quarters of 1997, the Company added full-time and temporary personnel,
particularly for customer support and information systems, in order to support
the additional volume of issuances of Server Digital IDs. The Company also
devoted additional personnel resources to support work under the Company's
product development agreements during this time period. During the second
quarter of 1997, the Company introduced its NetSure warranty program,
resulting in higher insurance premiums. During the third quarter of 1997, the
Company also incurred increased
26
<PAGE>
expenses for access to third-party databases to verify certificate applicants'
identities and expenses relating to the implementation of the Company's
disaster recovery plan. During the fourth quarter of 1997, expenses for access
to third-party databases continued to increase as the Secure Server ID volume
increased. In addition, the Company accelerated the amortization of certain
software that the Company plans to replace during 1998.
Sales and Marketing. The quarterly increases in sales and marketing expenses
resulted primarily from the building of the Company's sales and marketing
organization, which began in 1996. During the third and fourth quarters of
1996, the Company began expanding its marketing organization to include
corporate, channel and product marketing programs. In each of the first three
quarters of 1997, the Company added sales and marketing personnel to support
its expanding product lines, which resulted in higher recruiting, benefits,
travel and facilities costs. Sales and marketing expenses were higher in the
second quarter of 1997 than the preceding two quarters and the following
quarter due to increased expenses incurred pursuing international and domestic
strategic relationships, increased public relations activities, Web site
management costs and channel development activities. Sales and marketing
expenses increased in the fourth quarter of 1997 as the Company continued to
develop a direct sales force and increased spending for new marketing
programs.
Research and Development. The sequential quarterly increases in research and
development expenses were due primarily to increased personnel and related
costs to support the design, testing and deployment of, and technical support
for, the Company's expanded product offerings and technology.
General and Administrative. The sequential quarterly increases in general
and administrative expenses over the four quarters of 1996 were primarily
related to the addition of personnel and related costs to support expansion of
the Company's operations. During the fourth quarter of 1996, the Company
incurred additional expenses for consulting services, increased legal fees
relating to a large number of contract negotiations and increased expenses
resulting from a growth in headcount. During the fourth quarter of 1996 and
into 1997, the Company incurred increased expenses for a larger facility and
for the implementation of additional systems and procedures. In addition to
building administrative infrastructure during the fourth quarter of 1997, the
Company increased its allowance for doubtful accounts commensurately with the
growth in accounts receivable.
Nonrecurring Charges. Nonrecurring charges in the third and fourth quarters
of 1997 are discussed above under "--Results of Operations--Costs and
Expenses--Nonrecurring Charges."
FACTORS AFFECTING OPERATING RESULTS
The Company's operating results have varied on a quarterly basis during its
short operating history and may fluctuate significantly in the future as a
result of a variety of factors, many of which are outside the Company's
control. Factors that may affect the Company's quarterly operating results
include the following: market acceptance of digital certificates; market
acceptance of its products and services, particularly VeriSign OnSite,
VeriSign V-Commerce and VeriSign SET; the long sales and implementation cycles
for and potentially large order sizes of certain of the Company's products and
services; the timing and execution of individual contracts; the timing of
releases of new versions of Internet browsers or other third-party software
products in which the Company's public root keys are embedded; customer
renewal rates for the Company's products and services; the Company's success
in marketing other products and services to its existing customer base and to
new customers; development of the Company's direct and indirect distribution
channels; market acceptance of the Company's or competitors' new products and
services; the amount and timing of expenditures relating to expansion of the
Company's operations; price competition or pricing changes; general economic
conditions and economic conditions specific to the Internet, intranet and
extranet industries. Any one of these factors could cause the Company's
revenues and operating results to vary significantly in the future. In
addition, the Company will need to expand its operations and attract,
integrate, retain and motivate a substantial number of sales and marketing and
research and development personnel. The timing of such expansion and the rate
at which new personnel become productive could cause material fluctuations in
the Company's quarterly operating results.
The Company's limited operating history and the emerging nature of its
market make prediction of future revenues difficult. The Company's expense
levels are based, in part, on its expectations regarding future revenues, and
to a large extent such expenses are fixed, particularly in the short term.
There can be no assurance that the Company will be able to predict its future
revenues accurately and the Company may be unable to adjust
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<PAGE>
spending in a timely manner to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall of revenue in relation to
the Company's expectations could cause significant declines in the Company's
quarterly operating results.
Due to all of the foregoing factors, the Company's quarterly revenues and
operating results are difficult to forecast. The Company believes that period-
to-period comparisons of its operating results will not necessarily be
meaningful and should not be relied upon as an indication of future
performance. Also, it is likely that the Company's operating results will fall
below the expectations of the Company, securities analysts or investors in
some future quarter. In such event, the market price of the Company's Common
Stock could be materially and adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company and its Japanese subsidiary financed their
operations primarily through private sales of equity securities raising
approximately $45.6 million. At December 31, 1997, the principal source of
liquidity for the Company was $11.9 million of cash, cash equivalents and
short-term investments. The Company also has an equipment loan agreement under
which it may borrow up to $3.0 million for purchases of equipment. This
equipment loan agreement expires on March 31, 1999. Any amounts borrowed under
this equipment loan agreement would bear interest at the rate of 7.5% per
annum and would be secured by the equipment purchased with the loan proceeds.
In the event that the Company borrows under this equipment loan agreement, it
will be obligated to issue to the lender a warrant to purchase 17,500 shares
of Common Stock. The Company currently has no plans to borrow any amounts
under this equipment loan agreement. VeriSign Japan has available a revolving
line of credit of up to $500,000 with a bank that bears interest at 1.625% per
annum and expires in May 1998. The line of credit is secured by a letter of
credit from the Company in the same amount. There were no borrowings
outstanding under this line of credit as of December 31, 1997.
The Company has had significant negative cash flows from operating
activities in each fiscal period to date. Net cash used in operating
activities for the Inception Period, 1996 and 1997 was $1.5 million, $6.0
million and $13.6 million, respectively. Net cash used in operating activities
in each of these periods was primarily the result of net losses, offset in
part by increases in accounts payable and accrued liabilities for the
Inception Period and 1996 and deferred revenues in all three fiscal periods.
Net cash used in investing activities for the Inception Period, 1996 and
1997 was $1.0 million, $4.4 million and $15.0 million, respectively. Net cash
used in investing activities in these periods was primarily the result of
capital expenditures for computer equipment, purchased software, office
equipment, furniture, fixtures and leasehold improvements. In addition, for
1997, cash used in investing activities included $8.0 million of net purchases
of short-term investments. Capital expenditures for property and equipment for
the Inception Period, 1996 and 1997 aggregated $1.0 million, $4.2 million and
$6.6 million, respectively. The Company's planned capital expenditures for
1998 are approximately $5.0 million, primarily for computer equipment and
other leasehold improvements. As of December 31, 1997, the Company also had
commitments under noncancelable operating leases of $6.3 million through 2002.
Net cash provided by financing activities for the Inception Period, 1996 and
1997 was $5.3 million, $37.8 million and $2.6 million, respectively, resulting
primarily from net proceeds from the sale of Preferred Stock by the Company.
In addition, for 1996 and 1997, net cash provided by financing activities of
VeriSign Japan was $4.2 million and $2.5 million, respectively, resulting from
the sale of its capital stock to minority investors and from the proceeds of
its bank borrowings.
The Company believes that the net proceeds from this offering, together with
existing cash, cash equivalents and short-term investments, will be sufficient
to meet its working capital and capital expenditure requirements for at least
the next 12 months. The Company may need to raise additional funds through
public or private financing, strategic relationships or other arrangements.
There can be no assurance that such additional funding,
28
<PAGE>
if needed, will be available on terms attractive to the Company, or at all.
Strategic relationships, if necessary to raise additional funds, may require
the Company to relinquish rights to certain of its technologies or products.
The failure of the Company to raise capital when needed could have a material
adverse effect on the Company's business, operating results and financial
condition. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the Company of its then-current
stockholders would be reduced. Furthermore, such equity securities might have
rights, preferences or privileges senior to those of the Company's Common
Stock. See "Risk Factors--Future Capital Needs; Uncertainty of Additional
Financing."
RECENT ACCOUNTING PRONOUNCEMENT
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 97-2, Software Revenue Recognition,
which supersedes SOP No. 91-1. The Company will be required to adopt SOP No.
97-2 prospectively for software transactions entered into beginning January 1,
1998. SOP No. 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. The fair value of an element must be
based on evidence that is specific to the vendor. If a vendor does not have
evidence of the fair value for all elements in a multiple-element arrangement,
all revenue from the arrangement is deferred until such evidence exists or
until all elements are delivered. The Company's management anticipates that
the adoption of SOP No. 97-2 will not have a material effect on the Company's
operating results.
29
<PAGE>
BUSINESS
VeriSign is the leading provider of digital certificate solutions and
infrastructure needed by companies, government agencies, trading partners and
individuals to conduct trusted and secure communications and commerce over IP
networks. The Company has established strategic relationships with industry
leaders, including AT&T, BT, Cisco, McAfee Associates, Microsoft, Netscape,
RSA, Security Dynamics, VeriFone and VISA, to enable widespread deployment of
the Company's digital certificate technology and products and to assure their
interoperability among a wide variety of applications over IP networks. The
Company's Digital IDs are enabled in millions of copies of Microsoft and
Netscape Web browsers, tens of thousands of copies of popular Web servers and
a variety of other software applications. The Company believes that it has
issued more digital certificates than any other company, having issued over
2.0 million of its Digital IDs for individuals and over 40,000 of its Digital
IDs for Web sites. In addition to providing Digital IDs for individuals and
Web sites, the Company provides turn-key and custom solutions needed by
organizations such as Dow Jones, NationsBank, NOVUS/Discover and VISA, to
conduct trusted and secure communications and commerce over IP networks. The
Company markets its products and services worldwide through multiple
distribution channels, including the Internet, direct sales, telesales, VARs,
systems integrators and OEMs, and intends to continue to expand these
distribution channels.
INDUSTRY BACKGROUND
GROWTH OF INTERNET COMMERCE AND COMMUNICATIONS
IP networks are revolutionizing the ways in which companies, government
agencies, trading partners and individuals communicate and conduct business.
IP networks provide an attractive medium for communications and commerce
because of their global reach, accessibility, use of open standards and
ability to enable real-time interaction. Organizations are seeking to leverage
the capabilities of IP networks to attract new customers, access new markets,
improve customer service and satisfaction and lower support and distribution
costs. Until recently, IP networks have been used primarily for informal
messaging, general information browsing and the exchange of non-sensitive
data. The use of IP networks is now beginning to extend beyond these initial
uses to a number of more valuable and sensitive activities, including
business-to-business transactions and Internet-based EDI, online retail
purchases and payments, Web-based access to account and benefits information
and secure messaging for both personal and business use. IDC estimates that
global Internet commerce revenues will grow from approximately $10.6 billion
in 1997 to approximately $223.1 billion in 2001.
REQUIREMENT FOR TRUSTED INTERACTION OVER IP NETWORKS
Although openness represents a fundamental strength of IP networks, their
accessibility and the anonymity of users resulting from the lack of "face-to-
face" interaction create threats to the privacy and integrity of information
that is transmitted across or stored on these networks. Despite the
convenience and the compelling economic incentives for the use of IP networks,
they cannot reach their full potential as a platform for global communications
and commerce until the current lack of security and trust associated with
these networks is resolved. According to a study conducted in 1997 by Zona
Research, Inc., 70% of the businesses and consumers surveyed listed concerns
about trust and security as the main impediment to broader use of the Internet
for commercial applications. Business concerns include the potential for theft
of corporate or customer information, impersonation of employees, loss of
reputation and economic loss through fraud. Consumer concerns include the
possibility of merchant impersonation and fraud and the risk that third
parties may be able to intercept and use personal information such as credit
card numbers. Traditional security mechanisms such as passwords and personal
identification numbers do not adequately address these issues, as they can be
easily lost, forgotten or misappropriated. Some security concerns are being
addressed through technologies such as encryption and firewalls, but these
technologies do not address the need to establish and maintain a common
framework of trust between parties conducting transactions or exchanging
sensitive information in the digital world.
30
<PAGE>
In the physical world, trust in communications and commerce is established
through a combination of social, business and legal practices that, in some
cases, have been developed over hundreds of years. These practices often
include the use of physical credentials, such as credit cards, business
licenses or employee badges, and the associated legal protections to avoid
loss from theft or fraud. The diligence, practices, policies and reputations
of the organizations standing behind the issuance, delivery, revocation and
renewal of physical credentials provide a readily understood and accepted
framework of trust for a given communication or transaction. The physical
credentials that embody these proven practices and frameworks of trust and the
social interactions that accompany their use cannot be utilized in the digital
world. As a result, there is a need for a trusted and convenient way to verify
the identity, authority and privilege of the parties involved in
communications and commerce over IP networks and to assure their proper and
trusted association with a specific organization or community.
EMERGENCE OF DIGITAL CERTIFICATE TECHNOLOGY
Digital certificates are emerging as the leading technology for establishing
a framework for trusted and secure communications and commerce over IP
networks, with many Internet security protocols dictating the use of digital
certificates. A digital certificate is a specially prepared software file that
functions as an electronic credential in the digital world, identifying the
certificate owner, authenticating the certificate owner's membership in a
given organization or community (credit card holder, employee, supply chain
participant or citizen) and establishing the certificate owner's authority to
engage in a given transaction. Utilizing the principles of public key
cryptography, a digital certificate binds a pair of unique mathematical keys,
one designated as "private" and securely maintained by its owner, and the
other designated as "public" and embedded in the digital certificate. What the
owner's private key digitally signs, only the corresponding public key can
verify. When properly prepared, issued and administered, digital certificates
create a framework for trusted interaction over IP networks, making it
possible, for example, to verify with certainty the identity of an account
holder or a Web-based business, the source of an electronic message or the
integrity of electronically distributed software or content.
Significant efforts are underway to utilize digital certificates as
"vehicles of trust" for securely transmitting e-mail, accessing information on
public and private Web sites, purchasing retail goods and services and
conducting other financial transactions such as electronic securities trading.
The leading vendors of Web browser, Web server, electronic mail, electronic
payment and content distribution applications have incorporated digital
certificate technology as the framework for establishing trusted and secure
communications and commerce over IP networks and are embedding support for
digital certificates in their products. A number of standard protocols that
are being widely adopted for communications and commerce require the use of
digital certificates. These protocols include the Secure Sockets Layer
protocol ("SSL") for browser/server authentication and secure data
transmission, the Secure Multipurpose Internet Mail Extensions protocol
("S/MIME") for secure e-mail and EDI, the Secure Electronic Transactions
protocol ("SET") for secure electronic payments, and the Internet Protocol
Security standard ("IP/SEC") for authentication of networking devices. Just as
an individual may have many forms of credit cards and IDs, he or she may
require multiple digital certificates, each corresponding to a unique digital
relationship between the individual and an organization. Thus, there is the
potential need over time for hundreds of millions of digital certificates to
be issued and managed.
CERTIFICATION AUTHORITIES AND THE NEED FOR TRUSTED INFRASTRUCTURE
Digital certificates are prepared and managed by trusted parties known as
Certification Authorities ("CAs"). To prepare a digital certificate for
issuance, a CA embeds an individual's or an organization's public key along
with specific personal information (name or e-mail address) or organizational
information (domain name or affiliation) in the digital certificate, which is
then cryptographically "signed" by the CA. The CA's digital signature acts as
a tamper-proof electronic seal that verifies the integrity of the information
within the digital certificate and validates its use within a specific
organization or community. This digital signature is linked to the CA's public
"root key," which is embedded in the browser, server or other application used
by the
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organization or community. Through the embedded public root key, a community
member can automatically confirm the authenticity of a digital certificate--
and hence the certificate owner's identity, authority and privilege--to verify
the source and integrity of any accompanying message or transaction request.
A CA may digitally sign certificates for multiple organizations or
communities, each having different rules, qualifications or procedures
governing the admission of members. The CA may sign and issue certificates
directly to the members of a given community or sign certificates on behalf of
other entities (credit card issuers, corporations or government agencies) that
wish to control the admission of members into their organizations and grant to
them certain authority and privileges.
The successful implementation and management of digital certificates as a
mechanism for trusted and secure commerce and communications present a number
of issues and challenges for a CA. The CA must establish and maintain rigorous
practices, policies and procedures to manage the technical complexities of
cryptographic key management and provide for the secure creation and
distribution of digital certificates. The CA must carefully manage the entire
lifecycle of all digital certificates issued, including identifying and
conducting initial due diligence on the owners, tracking digital certificates,
providing customer support for digital certificate owners, confirming in real-
time the continued validity of each digital certificate and revoking or
renewing the digital certificates. To be effective for large public and
private communities needing digital certificates, a CA must also have a highly
scaleable and flexible infrastructure, be able to provide a full range of
digital certificate services in high volume on a 24 hour x 7 day basis and
have its public root key embedded in and supported by a wide variety of
applications utilized across IP networks.
THE VERISIGN SOLUTION
VeriSign is the leading provider of digital certificate solutions and
infrastructure needed by companies, government agencies, trading partners and
individuals to conduct trusted and secure communications and commerce over IP
networks. The Company has established strategic relationships with industry
leaders, including AT&T, BT, Cisco, McAfee Associates, Microsoft, Netscape,
RSA, Security Dynamics, VeriFone and VISA to enable widespread deployment of
the Company's digital certificate technology and products and to assure their
interoperability among a wide variety of applications. The Company believes
that it has issued more digital certificates than any other company, having
issued over 2.0 million of its Digital IDs for individuals and over 40,000 of
its Digital IDs for Web sites. The Company's digital certificates are enabled
in millions of copies of Microsoft and Netscape browsers, tens of thousands of
copies of popular Web servers and a variety of software applications. In
addition, Microsoft and Netscape have integrated enrollment for the Company's
digital certificates into the registration process for their Web browsers,
prominently feature the Company and its digital certificate solutions in
certain of their products and on their Web sites, have integrated the
Company's public root key into their browsers and engage in a variety of joint
marketing activities with the Company. In addition to providing Digital IDs
for individuals and Web sites, the Company also provides turn-key and custom
solutions needed by organizations, such as Dow Jones, NationsBank,
NOVUS/Discover and VISA, to conduct trusted and secure communications and
commerce over IP networks.
The Company issues and manages digital certificates directly from its
Digital ID Centers for consumers, businesses and organizations that use IP
networks for trusted and secure communications and commerce. The Company also
offers a comprehensive range of digital certificate solutions tailored to meet
the specific needs of customers, such as financial institutions and
governmental agencies, that wish to issue their own, or have VeriSign issue on
their behalf, digital certificates for use within their private intranets and
extranets. These solutions vary based on the nature and complexity of the
applications, the degree of control customers desire to maintain and the
degree of operational responsibility customers wish to delegate. Each of the
Company's solutions leverages its infrastructure for managing digital
certificates to relieve customers from the burdensome responsibilities and
costs of designing, establishing, maintaining and staffing their own digital
certificate operations.
The key components of the Company's solution are its scaleable, modular
software architecture, highly reliable and secure operations and comprehensive
security and trusted practices, which together provide a
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platform designed for the timely, rapid deployment of large volumes of digital
certificates and the ongoing management of such digital certificates
throughout their lifecycles.
. Scaleable, Modular Software Architecture. The Company has designed its
software to provide the scaleability necessary to support the issuance and
management of millions of certificates for distinct communities ranging
from individual corporations to the entire population of Internet users.
The Company's WorldTrust software automates many of the processes for
digital certificate issuance and lifecycle management, including subscriber
enrollment, authentication and administration services. The Company's
modular software is also distributable over one or many computer systems to
enhance scaleability and allow for certain functions of the digital
certificate issuance and lifecycle management process to be deployed at
customer or affiliate locations while maintaining a secure and reliable
link to the Company's Digital ID Centers for back-end processing.
. Highly Reliable and Secure Operations. The Company's Digital ID Centers,
which are located in Mountain View, California and Kawasaki, Japan and
operate on a 24 hour x 7 day basis, support all aspects of issuance and
management of digital certificates as well as the delivery of its related
digital certificate services. Through the use of state-of-the-art computer,
telecommunications, network and monitoring systems, the Company's Digital
ID Centers are designed to provide the high levels of availability,
security and scaleability necessary to meet the needs of customers for high
volume digital certificate issuance and management.
. Comprehensive Security and Trusted Practices. The Company has been
instrumental in defining comprehensive, industry-endorsed practices and
procedures for the legal and business frameworks in which digital
certificate relationships are established as well as the physical security
and controls that are essential to operate secure, large-scale digital
certificate management operations. The Company believes that these
practices and procedures are a critical component to the creation of a
digital certificate infrastructure required for trusted and secure
communications and commerce over IP networks.
STRATEGY
The Company's objective is to enhance its position as the leading provider
of digital certificate solutions and infrastructure needed by companies,
government agencies, trading partners and individuals to conduct trusted and
secure communications and commerce over IP networks. The Company's strategy to
achieve this objective includes the following key elements:
Leverage Leadership Position to Drive Market Penetration. The Company
believes that it has developed a leading position in the market for digital
certificate solutions and underlying trust infrastructure by being the first
to market with a variety of digital certificate products and services,
building strategic relationships with industry leaders, issuing more digital
certificates than any other company, embedding its public root key in a
variety of communications, commerce and other software applications and
investing significant resources in developing its comprehensive trust
infrastructure. The Company intends to leverage this leadership position to
drive further adoption and deployment of its digital certificate solutions and
associated trust services. In addition, the Company intends to maintain its
first-to-market position by applying its knowledge and experience to new
products and services that the Company believes will have significant market
potential.
Leverage and Expand Strategic Relationships with Industry Leaders. The
Company has established strategic relationships with industry leaders,
including AT&T, BT, Cisco, McAfee Associates, Microsoft, Netscape, RSA,
Security Dynamics, VeriFone and VISA. The Company believes that these
relationships, as well as others that it intends to pursue, will enable the
widespread deployment of the Company's Digital IDs by allowing it to
capitalize on the brand recognition and broad customer bases of such strategic
partners. For example, both Microsoft and Netscape have incorporated the
Company's public root key in their Web browsers and feature the Company and
its digital certificate solutions in their products and on their Web sites.
The Company believes that this support from Microsoft and Netscape enhances
market awareness of the Company and provides a powerful endorsement of the
Company's digital certificate solutions and infrastructure. Certain of
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the Company's strategic relationships also involve joint marketing activities,
which enhance the Company's ability to target large customers and expand
overall brand awareness. The Company intends to pursue additional strategic
relationships that the Company believes will enhance the marketing and
distribution of its products and services.
Maintain Leadership in Technology, Infrastructure and Practices. The Company
has developed technical, operational and procedural expertise for the
widespread implementation of secure digital certificate solutions. The Company
intends to continue to enhance its technology, infrastructure and distributed
product architecture to enable further operational scaleability in order to
provide digital certificate solutions for a variety of industries with high
volume certificate issuance requirements. In order to ensure the alignment of
its technology with emerging trends, the Company actively participates in
industry consortia, standards setting organizations and other trade groups. In
addition, the Company is continually enhancing its internal "best practices"
and controls to ensure the physical security of its facilities, maintain
quality in the execution of its operations, verify the quality and consistency
of its services and promote the global acceptance of its digital certificate
solutions.
Continue to Build the VeriSign Brand. The Company will continue to promote
the VeriSign brand as synonymous with trusted and secure communications and
commerce over IP networks. In order to accelerate the acceptance and
penetration of its digital certificate solutions, the Company has developed
joint marketing relationships with brand leaders such as BT, Microsoft,
Netscape, VeriFone and VISA and intends to pursue additional relationships with
entities whose brands are well known and widely respected. The Company also
utilizes a variety of marketing programs to promote market awareness of the
Company and promote the VeriSign brand.
Expand Global Marketing and Distribution. The Company will continue to expand
its global marketing and distribution efforts to address the range of markets
and applications for digital certificate solutions. The Company intends to add
direct sales personnel and expand indirect channels, both domestically and
internationally. The Company also plans to leverage its technology
infrastructure to establish Digital ID Centers in appropriate international
markets. The Company believes that this strategy affords the opportunity to
create an international network of digital certificate providers operating
under common technology, operations and legal practices to provide a standard
for global interoperability.
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PRODUCTS AND SERVICES
The Company provides a comprehensive line of digital certificate solutions
that are designed to enable trusted and secure communications and commerce
over IP networks. All of these solutions and services are based upon the
Company's WorldTrust software architecture, scaleable operations
infrastructure and comprehensive security and trust practices. See "--
Technology and Architecture," "--Infrastructure" and "--Security and Trust
Practices."
The following table illustrates the range of the Company's products:
<TABLE>
<CAPTION>
VERISIGN END-USER
MARKET/CATEGORY PRODUCT/SERVICE DESCRIPTION LIST PRICE*
<C> <C> <C> <S>
Internet IDs
Client Digital Universal Digital Digital certificates for $9.95-$29.95
Certificates IDs individuals for secure e-mail, per year
access control and password
replacement
Server Digital Server Digital IDs Digital certificates for $249-$1,195
Certificates organizations' Web sites for per year
encrypted server operations
Content Signing Software Developer Digital certificates for $20-$400
Digital Certificates Digital IDs software developers, content per year
publishers and distributors
Channel Signing for authenticated software and
Digital IDs content distribution
- ----------------------------------------------------------------------------------------------
Enterprise and
Electronic
Commerce
Enterprise Solutions VeriSign OnSite Turn-key digital certificate $5,000-$50,000
solutions for managed IP per year
network applications for a
wide range of mid-sized to
large enterprises
Integrated Electronic VeriSign V-Commerce Customized solutions for $50,000-$500,000
Commerce Solutions Fortune 1000 companies and Web per year
sites with very large customer
or user bases
SET Certificate VeriSign SET Managed solutions for card $50,000-$500,000
Solutions brands, banks and payment per year
processors
</TABLE>
* The Company typically receives a percentage of the end-user list price for
Internet IDs that are sold through the Company's distribution channels. The
terms and conditions for the Company's enterprise, integrated electronic
commerce and SET certificate solutions, including sales prices and
discounts from list prices, may be negotiated in individual transactions
based on certificate volumes, associated services and required
customization and thus may vary from customer to customer.
The Company derived approximately one-half of its revenues in 1997 from
Internet IDs, principally Server Digital IDs for businesses, and approximately
one-third of its revenues in 1997 from enterprise and electronic commerce
products. There can be no assurance that the Company will be able to continue
to increase its revenues from these sources or that these products and
services will achieve widespread market acceptance. See "Risk Factors--Limited
Operating History; History of Losses and Anticipation of Future Losses" and
"--No Assurance of Market Acceptance for Digital Certificates and the
Company's Products and Services."
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INTERNET IDS
The Company issues Internet IDs directly to individuals and organizations
engaged in communications and commerce over the Internet. These Internet IDs
allow individuals, organizations and software developers to protect the
privacy and integrity of their communications by establishing the identity,
authority or privilege of the parties involved to avoid impersonations or
identity "spoofing" and malicious security breaches. Since its inception, the
Company has issued over 2.0 million of its Digital IDs for individuals and
over 40,000 of its Digital IDs for Web sites. The purchase of a Digital ID
allows the customer to use the Digital ID for a limited period of time,
generally 12 months. After this period, the Digital ID must be renewed for
continued usage by the customer. The Company has also established a warranty
protection program, the NetSure Protection Plan, that provides warranty
coverage to its customers at varying levels up to $250,000 in the event of
economic loss due to the theft, impersonation, corruption or loss of an
Internet ID. VeriSign has insured itself against losses under such coverage
with United States Fidelity and Guaranty Company.
Client Digital Certificates. VeriSign's Universal Digital IDs are issued
directly to individuals to enable users to exchange digitally signed and
encrypted e-mail using the S/MIME protocol. Universal Digital IDs can also be
used to replace passwords for more convenient access to and enhanced security
of Web sites.
The Company currently offers two versions of Universal Digital IDs and plans
to offer a third version in the second half of 1998. These versions are
differentiated principally by the subscriber identity authentication
procedures and due diligence performed by the Company prior to issuance and
the amount of NetSure warranty protection provided:
Universal Digital ID-Class 1. Class 1 Universal Digital IDs are the class
of Universal Digital ID most commonly issued by the Company. The Company
issues a Class 1 Universal Digital ID after authenticating a user's e-mail
address by providing an activation code, via e-mail, that can be used to
download the digital certificate from VeriSign's Web site. Class 1
Universal Digital IDs have NetSure warranty protection of $1,000. The
Company offers a Class 1 Universal Digital ID for free on a 60-day trial
basis, but the trial version does not include replacement, revocation,
NetSure warranty protection or other related digital certificate services.
To date, substantially all of the Class 1 Universal Digital IDs have been
issued without charge on a trial or promotional basis.
Universal Digital ID-Class 2. The Company issues a Class 2 Universal
Digital ID after authenticating a user's personal identity by matching
personal information provided by the user with information contained in
established third-party consumer credit databases. To date, the Company has
issued Class 2 Universal Digital IDs primarily to North American residents.
Class 2 Universal Digital IDs have NetSure warranty protection of up to
$25,000.
Universal Digital ID-Class 3. VeriSign expects to introduce a Class 3
Universal Digital ID in the second half of 1998. A Class 3 Universal
Digital ID will be issued after authentication of a user's identity through
personal presence verification by VeriSign or one of its certified agents
or affiliates. The Company anticipates that Class 3 Universal Digital IDs
will have NetSure warranty protection of up to $50,000.
Server Digital Certificates. The VeriSign Server Digital ID product line
enables organizations to implement and operate secure Web sites using the SSL
or S/MIME protocols in order to establish authenticated and private
communications and commerce on IP networks. Prior to issuing a Server Digital
ID, VeriSign establishes the authenticity of a Web site through a series of
background checks that corroborate an organization's authority to do business
under a given business name, as well as its right to operate a server with a
specific domain name or URL. These procedures protect an organization against
another server "spoofing" its site and also allows site visitors to establish
the site's authenticity. VeriSign's Server Digital IDs enable an individual's
Web browser to verify a Web site's identity automatically by checking the
site's Server Digital ID. Once this authentication has occurred, an encrypted
session based on SSL or the S/MIME messaging protocol can commence. These
private communications sessions are virtually impenetrable by external
parties, thereby protecting sensitive information from unauthorized access.
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The Company currently offers four versions of its Server Digital IDs,
differentiated by the target application of the server that hosts the Server
Digital ID. The Company provides NetSure warranty protection of up to $100,000
on each Secure Server ID, Global Server ID and Financial Server ID and up to
$250,000 on each EDI Server ID.
Secure Server ID. VeriSign Secure Server IDs enable Web sites to
implement SSL security features for transactions and communications
conducted between their Web servers and individual end users. A Secure
Server ID can also be used in conjunction with a Universal Digital ID to
restrict access to account information and content on a server hosted on an
IP network. The Company's public root key is embedded in more than 40
server software applications.
Global Server ID. VeriSign Global Server IDs enable organizations to
establish worldwide 128-bit encrypted SSL sessions using Netscape
Communicator or appropriately configured Microsoft Internet Explorer
software. Global Server IDs are available for use by U.S. corporations and
U.S. and foreign banks approved by the United States Department of Commerce
Bureau of Export Administration. VeriSign Global Server IDs are currently
the only commercially available server digital certificates for Netscape
and Microsoft products that utilize 128-bit encryption and can be used by
approved organizations on a global basis.
Financial Server ID. VeriSign Financial Server IDs are intended for use
with financial applications using the Open Financial Exchange specification
developed by Microsoft, Intuit Inc. ("Intuit") and CheckFree Corporation.
Financial Server IDs are used by financial institutions for authentication
of their Web servers and to enable the secure exchange of data between
these organizations and customers engaged in home banking, brokerage and
insurance services on the Internet. The Company's financial server public
root key is embedded in Intuit's Quicken product and will be embedded in
the next version of Microsoft Money.
EDI Server ID. VeriSign EDI Server IDs are intended for organizations or
individuals who participate in large online trading networks and who wish
to engage in secure communications. EDI Server IDs ensure the integrity of
messages, allow encrypted messages to be sent using a variety of EDI
standards and enable messages to be digitally signed to ensure
nonrepudiation. The Company's public root key is embedded in the Actra
ECXpert product and other EDI applications.
Content Signing Digital Certificates. The VeriSign content signing digital
certificate product line enables content providers, publishers and vendors to
digitally sign their content or distribution channels in order to ensure the
authenticity and integrity of content delivered to end users. All of the
Company's content signing digital certificates have NetSure warranty
protection of between $25,000 and $50,000.
The Company currently offers three versions of its content signing digital
certificates, differentiated principally by the subscriber identity
authentication procedures and due diligence performed by the Company prior to
issuance and the amount of NetSure warranty protection provided:
Individual Software Developer Digital ID. Individual Software Developer
Digital IDs are issued after VeriSign authenticates the identity of an
individual software publisher through the use of established third- party
consumer credit and other databases.
Commercial Software Developer Digital ID. Commercial Software Developer
Digital IDs are issued after VeriSign authenticates the identity of a
commercial software publisher by using registered credentials and online
commercial databases to verify the company's identity.
Both the Individual Software Developer Digital IDs and the Commercial
Software Developer Digital IDs are designed for use by software developers
that wish to digitally sign and distribute code electronically via the
Internet, including ActiveX controls under the Microsoft Authenticode
program or JAVA code in conjunction with the Netscape object signing
technology.
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Channel Signing Digital ID. Channel Signing Digital IDs authenticate a
distribution channel for software and content that is automatically
distributed or "pushed" via IP networks using an application such as
Marimba's Castanet, by authenticating that the software or content is from
the indicated source and establishing that the software or content has not
been tampered with or modified while en route over IP networks.
ENTERPRISE AND ELECTRONIC COMMERCE
The Company offers a broad range of turn-key and custom solutions tailored
to meet the specific needs of companies, government agencies and other
organizations that wish to issue digital certificates to customers, employees,
trading partners or citizens. The Company's enterprise and electronic commerce
solutions can be used for a variety of applications, including: controlling
access to sensitive data and account information; facilitating and protecting
online payment card transactions; enabling digitally signed e-mail; or
creating an electronic trading community. These solutions give customers the
option of issuing private label digital certificates, which have limited use
within their intranets and extranets, or VeriSign Digital IDs, which are
interoperable with IP network applications enabled with the Company's public
root key and can be customized to include customer-specified data.
Enterprise and electronic commerce solutions vary based on the nature and
complexity of the application, the degree of control customers desire to
maintain, and the degree of operational responsibility customers wish to
delegate. The modularity of the Company's WorldTrust architecture allows
certain functions of the certification process, such as registration,
authentication, issuance, revocation, renewal or replacement, to be deployed
at customer sites while maintaining a link to VeriSign's Digital ID Centers
for back-end processing. As a result, customers enjoy significant time-to-
market and cost reduction benefits by leveraging the Company's trusted,
scaleable infrastructure with complete certificate lifecycle management, high-
speed servers, redundant telecommunications, data storage and daily back-up,
full disaster recovery, availability of 24 hour x 7 day customer service and
rigorous network and physical security.
VeriSign OnSite. VeriSign OnSite combines the ease of use and low entry cost
of a turn-key software product with the flexibility and scaleability of a
fully managed service. VeriSign OnSite targets mid- to large-scale companies
and government agencies that wish to set up and administer their own digital
certificate solutions using VeriSign's trusted infrastructure. VeriSign OnSite
provides browser-based software for front-end processing complete with
configuration wizards, enrollment templates, authentication and administration
tools, directory files and a secure link to the Company's Digital ID Centers
for back-end processing. VeriSign OnSite provides several key benefits,
including complete control over configuration, quick deployment, low cost and
flexibility. VeriSign OnSite can be downloaded from one of the Company's
Digital ID Centers or sold through one of the Company's direct or indirect
sales channels and is priced on an annual subscription basis for a fixed
quantity of digital certificates.
VeriSign V-Commerce. VeriSign V-Commerce is a comprehensive, custom solution
that enables large-scale electronic commerce activities on IP networks, such
as virtual storefronts, electronic subscription services, content delivery and
information access and broadcast. VeriSign V-Commerce targets Fortune 1000
companies, financial institutions and large government agencies with high-
volume digital certificate issuance and management requirements. VeriSign V-
Commerce solutions involve special set-up and consulting services to support
the development and installation of custom digital certificate formats,
subscriber services, authentication interfaces, administration tools and root
keys. VeriSign V-Commerce solutions also support the deployment of certain of
the digital certificate service functions at the customer's site or remote
offices to allow for maximum control and flexibility. VeriSign V-Commerce
enables companies and government agencies to realize the full potential of IP
networks as a medium for trusted and secure communications and commerce by
relying on the Company to develop, deploy and administer a large scale digital
certificate implementation. VeriSign V-Commerce terms are negotiated based on
the annual volume of digital certificates, associated services and
customization required.
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VeriSign SET. VeriSign SET is an electronic commerce solution targeted at
certified banks, payment processors or major credit card brands to enable
cardholders, merchants and payment gateways to enroll for and obtain digital
certificates for use with the SET specification without the expense of
developing and hosting a custom digital certificate solution. The SET
specification was developed by an industry consortium, including MasterCard
and VISA, to enable secure payments and purchases over IP networks. SET
digital certificates are used to identify the identity of participants in a
SET transaction. The Company delivers SET services directly to certified banks
or payment processors and to banks on behalf of major credit card brands,
including Air Travel Card, Diner's Club, MasterCard, NOVUS/Discover and VISA.
There are currently over 130 VISA member banks that are using VeriSign SET
solutions in pilot programs.
SERVICES
In addition to its broad set of digital certificate solutions, the Company
also provides, or intends to provide, a range of services that augment its
solutions with added value or trust functionality. These services include:
Professional Consulting Services. The Company employs experts in
cryptography and digital certificate management who offer consulting and
training services to organizations implementing digital certificate solutions.
VeriSign's professional services group provides a variety of design,
development and implementation services, including interfacing with existing
applications and databases, consulting on policies and procedures related to
the management and deployment of digital certificates and the selection of
related software and hardware (e.g., smart cards and readers) to complement a
digital certificate solution. These consulting and training services are
billed on a time and materials basis.
Key Generation Ceremonies. For larger organizations wishing to establish
customized storage of their digital certificate root keys as well as an
auditable record of the root key generation process, the Company provides a
custom "key generation ceremony" as part of its setup services, complete with
videography, dedicated hardware and secret key sharing among trusted parties.
These key generation services provide an added measure of security and an
audit trail for the issuance and management of digital certificates.
Status Services. The Company has currently developed services that will
support real-time confirmation of the status of a particular digital
certificate used in specific applications by providing a digitally signed
receipt acknowledging "good," "revoked" or "unknown" status of a digital
certificate to the requesting party. The Company currently uses a real-time
status service to support Microsoft's Authenticode program. The Company
expects to broaden the use of status services to other digital certificate
markets during the first half of 1998.
Time Stamping Services. The Company offers a time stamping service that
allows software developers to add a verifiable time and date stamp to software
content that they digitally sign with their Software Developer Digital IDs.
The Company is currently developing time stamping services for a variety of
other applications.
Warranty and Insurance Plans. To extend its NetSure Protection Plan
offerings, the Company is developing programs to make insurance products
available to its enterprise and electronic commerce customers so that these
customers can purchase insurance from third-party insurers to cover losses
resulting from the use of digital certificates on both a per certificate and
per transaction basis.
CUSTOMERS AND MARKETS
VeriSign's target customers for its enterprise and electronic commerce
digital certificate solutions include consumers, government agencies,
financial institutions, content providers and other organizations requiring
trusted and secure communications and commerce over IP networks. The following
examples illustrate how certain organizations use VeriSign's digital
certificate solutions:
Credit Cards. VISA wants to promote the use of its cards as the preferred
payment method for purchases over the Internet. To accomplish this goal, it
must give consumers the confidence to use their account numbers
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safely over the Internet while reducing the potential for losses due to fraud.
VISA has adopted the SET protocol, which dictates the use of digital
certificates for all parties involved in transactions, including cardholders,
merchants, issuing banks, acquiring banks and payment gateways. VISA chose
VeriSign to provide SET digital certificate solutions to, and on behalf of,
its member banks. The benefits that VISA and its member banks expect to
receive include increased use of the card for purchases over the Internet,
increased customer loyalty and a reduction in losses due to credit card fraud.
VISA currently is conducting a pilot program with a number of member banks
using VeriSign SET solutions and anticipates full scale deployment of the
program in 1998.
Electronic Information Services. Dow Jones wants to distribute its services
more broadly, increase its penetration within its existing client base and
replace its existing proprietary terminals, which are in each of its clients'
locations, with an IP network-based service that can be delivered over its
clients' existing PCs. VeriSign will provide a custom digital certificate
solution, utilizing customer-branded client digital certificates, that enables
Dow Jones to deliver and charge for its services accurately at each desktop.
In addition, because the system is IP network-based, it provides a better user
experience due to graphical user interfaces and other IP network-based
features such as hyperlinks. The benefits that Dow Jones expects to receive
include reduced hardware costs, improved customer satisfaction, increased
revenue opportunities, increased market acceptance and reduced implementation
costs. The system is currently in beta testing with over 100 clients and Dow
Jones expects to release it fully in early 1998.
Banking. NationsBank wants to provide secure services such as home banking,
commercial banking and credit card purchases to its business and consumer
clients over the Internet. VeriSign will provide 128-bit Server Digital IDs
and bank-branded client digital certificates for home and commercial banking
as well as VeriSign SET digital certificates for NationsBank's credit card
holders. The benefits that NationsBank expects to receive include improved
customer service, reduced service costs and broader geographic reach.
NationsBank is currently utilizing VeriSign's 128-bit Server Digital IDs for
home banking and commercial banking and anticipates offering bank-branded
client digital certificates and VeriSign SET digital certificates in mid-1998.
VISA accounted for approximately 21% and 14% of the Company's revenues for
1996 and 1997, respectively. VISA also accounted for 13% and 11% of the
Company's accounts receivable as of December 31, 1996 and 1997, respectively.
In addition, two other customers, a South African systems integrator and a
financial services provider, accounted for approximately 28% and 13%,
respectively, of accounts receivables as of December 31, 1996 and one other
customer, a network equipment provider, accounted for approximately 13% of
accounts receivable as of December 31, 1997.
TECHNOLOGY AND ARCHITECTURE
The Company employs a modular set of software applications and toolkits,
which collectively make up its proprietary WorldTrust architecture, as the
core platform for all of its digital certificate solutions. The modular design
of the WorldTrust architecture enables the Company's digital certificate
services to be distributed over one or many co-located or dispersed computer
systems, allowing certain functions of the certification process, such as
registration, authentication, issuance, revocation, renewal or replacement, to
be deployed at customer or affiliate locations while maintaining a secure and
reliable link to one of the Company's Digital ID Centers for back-end
processing. These modules can also be replicated in order to handle increased
volumes of digital certificates. Digital certificate service modules
incorporated in the WorldTrust architecture include:
Subscriber Services Module. The subscriber services module supports requests
for digital certificate issuance, revocation, renewal and replacement.
Software toolkits are provided to permit rapid customization and integration
of digital certificate services with a customer's business-specific Web-based
solutions.
Authentication Services Module. The authentication services module supports
manual, automated and delegated authentication of subscribers by designated
sources prior to certificate issuance. Software toolkits and APIs are provided
to allow for integration with various process models and database systems.
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Administration and Support Modules. The administration and support modules
provide lifecycle services such as digital certificate revocation, renewal and
reissuance, as well as a customer support knowledge base to facilitate general
reporting of CA activity and Web-based and e-mail-based support of customers
and end users.
Directory Services Module. The directory services module utilizes database
applications typically hosted at one of the Company's Digital ID Centers to
support the storage of and access to digital certificates and associated
information for a particular customer. Enterprise and electronic commerce
customers can also download updated copies of their directory information to
their systems.
Service Control Module. The service control module is hosted at one of the
Company's Digital ID Centers and acts as a gatekeeper, decoding and routing
all certificate service requests based on customer type, application type,
security protocol, authentication policies, certificate content and billing
rules. This module utilizes a proprietary, data-driven programming model to
define each service and dispatch the appropriate control and error commands to
other modules.
Certificate Processing Module. The certificate processing module is hosted
at one of the Company's Digital ID Centers and creates digital certificates
with digital signatures on each certificate, delivers certificates to
subscribers and stores a copy of each digital certificate for archive, audit
and directory purposes.
INFRASTRUCTURE
The Company believes that its highly reliable and scaleable operations
infrastructure represents a strategic advantage in providing digital
certificate solutions. The Company's Digital ID Centers are located in
Mountain View, California and Kawasaki, Japan. These centers operate on a 24
hour x 7 day basis, and support all aspects of issuance and management of
digital certificates as well as delivery of related digital certificate
services. By leveraging the Company's WorldTrust architecture, certain
functionality of the Company's Digital ID Centers can be distributed in
optimum configurations based on customer requirements for availability and
capacity. Key features of the Company's infrastructure include:
Distributed Servers. The Company deploys a large number of high-speed
servers to support capacity and availability demands. Additional servers can
be added to support increases in certificate volumes, new services
introductions, new customers and higher levels of redundancy without service
interruptions or response time degradation. The WorldTrust architecture
provides automatic fail-over, load balancing and threshold monitoring on
critical servers.
Advanced Telecommunications. The Company deploys redundant
telecommunications and routing hardware and maintains high-speed connections
to multiple ISPs and throughout its internal network to ensure that its
mission critical services are readily accessible to customers at all times.
Network Security. The Company incorporates advanced architectural concepts
such as protected domains, restricted nodes and distributed access control in
its system architecture. The Company has also developed proprietary
communications protocols within and between the WorldTrust architecture
modules that it believes can prevent most known forms of electronic attacks.
In addition, the Company employs the latest network security technologies
including firewalls and intrusion detection software, and contracts with
security consultants who perform periodic attacks and security risk
assessments. The Company will continue to evaluate and deploy new
technological defenses as they become available. See "Risk Factors--System
Interruption and Security Breaches."
Call Center and Help Desk. The Company provides a wide range of customer
support services through a phone-based call center, e-mail help desk and Web-
based self-help system. The Company's call center is staffed from 8 a.m. to 5
p.m. PST and employs an Automated Call Director system. The Web-based support
services are available on a 24 hour x 7 day basis. E-mail support utilizes
customized auto response systems to provide self-help recommendations and a
staff of trained customer support agents.
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Disaster Recovery Plans. Although the Company believes its operations
facilities are highly resistant to systems failure and sabotage, it has
developed, and is in the process of implementing, a disaster recovery and
contingency operations plan and has an agreement with Comdisco Corporation to
provide replication of customer data, facilities and systems at another site
so that its main services can be re-instated within 24 hours of a failure. In
addition, all of the Company's digital certificate services are linked to
advanced storage systems that provide data protection through techniques such
as mirroring and replication. See "Risk Factors--System Interruption and
Security Breaches."
SECURITY AND TRUST PRACTICES
The Company believes that its perceived level of trustworthiness as a CA
will continue to be a significant determining factor in the acceptance of the
Company's digital certificate solutions. The Company believes that its
reputation as a trusted party will be based, to a large extent, on both the
security of its physical infrastructure and the special practices used in its
operations. The Company's Digital ID Centers include state-of-the-art physical
and network security. The Company also seeks to take a leading role in
defining and adhering to industry-endorsed trust practices and procedures,
which the Company believes are also critical to establishing its perceived
trustworthiness as a CA. The Company has invested significant capital and
human resources in its security and practices including:
Employees. The Company uses stringent hiring and personnel management
practices for all operations and certain engineering personnel as well as all
executive management. The Company utilizes a licensed private investigation
firm to conduct background checks into potential employees' criminal and
financial histories and conducts periodic investigations of such personnel on
an ongoing basis.
Security Monitoring Systems. The Company has sophisticated access control
and monitoring systems that help prevent unauthorized access to secure areas
and provide 24 hour x 7 day monitoring and logging of activities within its
facilities. These systems include electronic key and biometric access control
devices, video monitoring and recording devices, deployment and automatic
arming of motion detectors, glass breakage detectors and remote alarm system
monitoring.
Site Construction. The Company's Digital ID Centers have been built using
construction techniques modeled after U.S. Army specifications for facilities
accredited to handle classified information and contain a robust set of
physical and environmental defenses. These defenses include double layer,
slab-to-slab wall design, self-closing and locking metal doors at all secure
entrances, man traps, tamper proof enclosures for cryptographic materials and
fire prevention systems.
Back-up Power Systems. The Company has invested in back-up power systems
that automatically activate in the event of a failure in its primary power
sources. These include uninterruptible power supply systems and a diesel
generator and fuel supply. To ensure reliability, these systems are tested on
a periodic basis.
Audits. The Company's Practices and External Affairs Department periodically
performs, and retains accredited third parties to perform, audits of its
operational procedures under both internally-developed procedures and
externally-recognized standards.
Practices. The Company's Practices and External Affairs Department is
responsible for the development of the Company's practices for issuing and
managing digital certificates. These practices are set forth in the Company's
Certification Practice Statement, which the Company provides in order to
assure potential customers and strategic partners as to the trustworthiness of
the Company's digital certificate solutions. The Practices and External
Affairs Department is also responsible for the Company's accountability and
security controls and regularly monitors all aspects of the Company's Digital
ID Centers.
Policy Making Activities. The Practices and External Affairs Department also
takes a leading role in a variety of organizations that are defining standards
for trusted and secure communications and commerce over
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IP networks. For example, the Company actively participates in the United
Nations Commission on International Trade Law, which created the United
Nations Model Law on Electronic Commerce, the American Bar Association's
Information Security Committee, Section of Science and Technology, which has
drafted digital signature guidelines, the International Chamber of Commerce
ETERM Working Party, which is chaired by the Company's Vice President of
Practices and External Affairs, and the U.S. State Department Advisory
Committee on Electronic Commerce.
VERISIGN JAPAN
In February 1996, the Company formed VeriSign Japan in order to market and
deliver its digital certificate solutions in Japan. VeriSign Japan has built
and operates a secure Digital ID Center in Kawasaki, Japan, maintains sales
and marketing, engineering and administrative staffs and offers customer
support services, thus enabling it to provide the Company's digital
certificate solutions to the Japanese market. As of December 31, 1997,
VeriSign Japan had 23 employees. In 1996 and 1997, additional strategic
investors acquired 49.5% of the outstanding capital stock of VeriSign Japan.
These investors included the following: The Long Term Credit Bank of Japan,
Ltd.; Matsushita Graphic Communication Systems Co., Ltd.; Mitsubishi
Corporation; NEC Corporation; Nippon Investment & Finance Co., Ltd.; Nippon
Steel Corporation; NISSHO IWAI Corporation; NTT Data Corporation; NTT
Electronics Corporation; NTT PC Communications, Inc.; The Sakura Bank,
Limited; The Sanwa Bank, Limited; Sharp Corporation; SOFTBANK Corporation;
Sony Corporation; The Sumitomo Credit Service Co., Ltd.; The Sumitomo Trust
and Banking Company, Limited; and Toshiba Corporation.
STRATEGIC RELATIONSHIPS
The Company has established strategic relationships with leading companies
across a number of industry segments, including AT&T, BT, Cisco, Microsoft,
Netscape, SecureOne (a consortium of McAfee Associates, RSA and Security
Dynamics), Security Dynamics, VeriFone and VISA.
AT&T. The Company has entered into an agreement with AT&T that will enable
AT&T to offer VeriSign's digital certificates in conjunction with AT&T's
Internet services. AT&T plans to act as a certificate authority and issue
digital certificates under the AT&T brand beginning in 1998.
British Telecommunications plc. BT plans to issue digital certificates and
to provide a range of digital certificate services for secure Internet access
and electronic commerce under a license from VeriSign. Certain of these
services will be available in the Spring of 1998. With support from VeriSign,
BT plans to establish a certificate authority in the United Kingdom, and both
companies plan to collaborate to develop legal practices and policies to gain
and maintain compliance with United Kingdom and European-based regulations and
standards as they emerge.
Cisco. The Company has developed a custom software product to provide
digital certificate functionality in Cisco-based intranet environments. As a
result, intranets utilizing Cisco products will support applications that rely
on VeriSign digital certificates for authentication and network management.
The Company and Cisco also engage in a variety of joint marketing efforts.
Cisco is a stockholder of the Company.
Microsoft. The Company works with Microsoft to develop, promote and
distribute a variety of client-based and server-based digital certificate
solutions and has been designated as the preferred provider of digital
certificates for Microsoft customers. The Company's public root key has been
embedded in Microsoft's Internet Explorer since version 3.0, and users can
easily enroll for VeriSign's Universal Digital IDs through this product. The
Company also provides Server Digital IDs for Microsoft's Internet Information
Server product. The Company and Microsoft also jointly promote a set of
technologies and security policies for the secure authentication and
distribution of software over the Internet and engage in other joint marketing
activities. Microsoft is a 5% stockholder of the Company.
Netscape. The Company works with Netscape on a variety of technology
projects and joint marketing activities. The Company's public root key has
been embedded in Netscape's Navigator since version 2.0 and in Netscape's
Communicator since version 4.0. The Company also has an agreement with
Netscape through February 1998 which provides that Netscape will exclusively
feature the Company as the premier provider of
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digital certificates on the Netscape Web site and also provides for the
Company to have a first right of participation for any new Netscape products
incorporating digital certificate technology. Enrollment for free, limited-use
versions of the Company's Universal Digital IDs is integrated into the
registration process of Netscape's Netcenter online service and users of
Netscape browsers can easily enroll for standard VeriSign Universal Digital
IDs through these products. Netscape SuiteSpot and SuiteSpot with 128-bit
encryption capabilities can also utilize the Company's Server Digital IDs. The
Company also supports Netscape's object signing technology, enabling software
developers to digitally sign Java and JavaScript objects in order to
authenticate the developer's identity and assure end users that the downloaded
objects have not been tampered with or modified.
SecureOne. The Company, McAfee Associates, RSA and Security Dynamics are
jointly developing the SecureOne framework, which is designed to provide
enterprises with a platform for developing and maintaining secure networks
that link anti-virus, authentication, encryption and digital certificate
technologies. The SecureOne framework will integrate the programming
interfaces of McAfee Associates' Virus Interface for Protective Early
Response, Security Dynamics' Enterprise Security Services ("ESS")
architecture, RSA's digital signature, cryptographic, messaging and
transaction security engines and a VeriSign software developer toolkit to
enable digital certificate functionality in secure applications. The companies
have also agreed to integrate their security technologies through a series of
cross-licensing agreements, and, as a result, the Company's Class 1 Universal
Digital IDs are being issued on a trial basis to users of McAfee Associates'
VirusScan Security Suite. Security Dynamics, together with its wholly-owned
subsidiaries, is the largest stockholder of the Company.
Security Dynamics. The Company has entered into an agreement with Security
Dynamics under which Security Dynamics will incorporate custom digital
certificate technology developed by VeriSign into Security Dynamics' ESS
architecture, which is used in certain of Security Dynamics' security
solutions. Security Dynamics has also agreed to be a reseller of the Company's
VeriSign OnSite product. The Company believes that Security Dynamics is a
market leader in enterprise security and that, by including VeriSign
technology and products in Security Dynamics' products, the Company will have
a broader potential market for its digital certificate solutions. Security
Dynamics, through a controlled entity, is the largest stockholder of the
Company. See "Certain Transactions" and "Principal Stockholders."
VeriFone. The Company and VeriFone have executed a term sheet which provides
that VeriFone will become a reseller of the Company's SET services and Server
Digital ID products in connection with VeriFone's Internet payment solutions.
In addition, VeriFone has agreed to promote VeriSign as the preferred provider
of SET digital certificate services to its current and prospective customers
and to use its best efforts to position the Company as a premier provider of
SET and non-SET digital certificate services for use by Hewlett-Packard and
its affiliated entities. VeriFone has also agreed to engage in a variety of
joint marketing activities with the Company. Hewlett-Packard, VeriFone's
parent company, is a stockholder of the Company.
VISA. The Company has an agreement with VISA under which the Company
provides SET digital certificate solutions to VISA on behalf of its member
banks enabling them to offer branded SET-compliant digital certificates to
their cardholders and merchants. To date, over 130 member banks worldwide are
using VeriSign SET solutions in pilot programs. VISA is a 6% stockholder of
the Company. See "Certain Transactions" and "Principal Stockholders."
MARKETING, SALES AND DISTRIBUTION
MARKETING
The Company utilizes a variety of marketing programs to increase brand
awareness. In addition to joint marketing arrangements, the Company also
engages in a variety of direct marketing programs that are focused on owners
of Web servers, home and business PC users and enterprise professionals in
mid-sized and large organizations. The Company addresses these customers
through outbound e-mail, telemarketing and printed mail campaigns to stimulate
product trial, purchase and usage. The Company also uses banner ads that link
to the Company's Web site, participates in industry-specific events, trade
shows, executive seminars, industry association activities and various
national and international standards bodies.
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SALES AND DISTRIBUTION
The Company markets its digital certificate solutions worldwide through
multiple distribution channels. To date, direct sales and Internet sales have
accounted for a substantial majority of the Company's revenues. The Company
has recently begun to market its digital certificate solutions through other
distribution channels, including telesales, VARs, systems integrators and
OEMs.
Internet Sales. The Company distributes many of its products through its Web
sites. The Company believes that Internet distribution is particularly well-
suited for sales of certain of its enterprise solutions and Internet IDs and
can be used to serve a large number of Internet users from multiple countries.
The Company also utilizes its Web site to assist in disseminating product
information and in generating product leads and trials for a number of its
products and services.
Direct Sales. The Company's direct sales force targets mid-sized and large
corporations, financial institutions, commercial Web sites and federal and
state government agencies. The Company believes that these organizations have
a substantial installed base of PCs, Web servers, IP networks and high-speed
access to the Internet and are most likely to be able to benefit quickly from
the use of digital certificates. The direct sales force also targets
international organizations that the Company believes are the most suitable to
act as VeriSign affiliates. In certain instances, the Company's direct sales
force works with complementary VARs, hardware OEMs and systems integrators to
deliver complete solutions for major customers. As of December 31, 1997, the
Company had 26 direct sales and sales support personnel. The Company maintains
sales offices and personnel in California, Georgia, Illinois, Maryland,
Massachusetts, New York and Japan.
Telesales. The Company currently outsources its telemarketing operations to
a third party for use in customer prospecting, lead generation and lead
follow-up. This marketing activity qualifies leads for further follow up by
the direct sales force or resellers or leads the prospect to VeriSign's Web
site so that the prospect can access information or enroll for enterprise or
electronic commerce solutions. The Company anticipates taking its
telemarketing operations in-house in the first half of 1998.
VARs and Systems Integrators. The Company works with VARs and systems
integrators to package and sell its enterprise and electronic commerce
solutions and Internet IDs. The Company also has a VeriSign Business Partner
Program that allows leading ISPs to offer VeriSign Server Digital IDs as an
integral part of their secure Web site hosting services. Current members of
this program include AOL Primehost, Epoch Internet, Hiway Technologies,
Internet Servers, Inc., pcbank.net and PSINET, Inc.
OEMs. The Company provides technology and products for certificate
management to OEMs, which integrate the technology and products with value-
added software or service offerings and sell the bundled solution to end user
customers. Cisco and Security Dynamics have OEM relationships with the
Company. See "--Strategic Relationships."
International. The Company intends to market its products and services to
international markets directly over the Internet and through resellers and
affiliate relationships. The Company markets its products and services in
Japan through VeriSign Japan, which maintains a secure Digital ID Center in
Kawasaki, Japan, and employed 23 persons as of December 31, 1997. Revenues of
VeriSign Japan and from other international customers accounted for less than
10% of revenues through 1996 and for approximately 13% of revenues for 1997.
See "--VeriSign Japan."
RESEARCH AND DEVELOPMENT
The Company believes that its future success will depend in large part on
its ability to continue to maintain and enhance its current technologies,
products and services. To this end, the Company leverages the modular nature
of its WorldTrust software architecture to enable it to rapidly develop
enhancements to its WorldTrust software and to deliver complementary new
products and services. In the past, the Company has developed products and
services both independently and through efforts with leading application
developers and major customers. The Company has also, in certain
circumstances, acquired or licensed technology from third parties,
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including public key cryptography technology from RSA. Although the Company
will continue to work closely with developers and major customers in its
product development efforts, it expects that most of its future enhancements
to existing products and new products will be developed internally.
The Company has several significant projects currently in development. These
include the continued enhancement of the WorldTrust architecture and
associated software toolkits to broaden functionality and provide additional
packaging and integration options and the development of new services such as
real-time status checking, secure timestamping and smart card personalization.
As of December 31, 1997, VeriSign had 46 employees dedicated to research and
development. The Company also employs independent contractors for
documentation, usability, artistic design and editorial review. Research and
development expenses were $642,000, $2.1 million and $5.2 million for the
period from April 12, 1995 (inception) to December 31, 1995, 1996 and 1997,
respectively. To date, all development costs have been expensed as incurred.
The Company believes that timely development of new and enhanced products and
technology are necessary to remain competitive in the marketplace.
Accordingly, the Company intends to continue recruiting and hiring experienced
research and development personnel and to make other investments in research
and development.
The market for digital certificate products and related services is an
emerging market characterized by rapid technological developments, frequent
new product introductions and evolving industry standards. The emerging nature
of this market and its rapid evolution will require that the Company
continually improve the performance, features and reliability of its products
and services, particularly in response to competitive offerings and that it
introduce new products and services or enhancements to existing products and
services as quickly as possible and prior to its competitors. The success of
new product introductions is dependent on several factors, including proper
new product definition, timely completion and introduction of new products,
differentiation of new products from those of the Company's competitors and
market acceptance of the Company's new products and services. There can be no
assurance that the Company will be successful in developing and marketing new
products and services that respond to competitive and technological
developments and changing customer needs. The failure of the Company to
develop and introduce new products and services successfully on a timely basis
and to achieve market acceptance for such products and services could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, the widespread adoption of new Internet,
networking or telecommunication technologies or standards or other
technological changes could require substantial expenditures by the Company to
modify or adapt its products and services. To the extent that a specific
method other than digital certificates is adopted to enable trusted and secure
commerce and communications over IP networks, sales of the Company's existing
and planned products and services will be adversely affected and the Company's
products and services could be rendered unmarketable or obsolete, which would
have a material adverse effect on the Company's business, operating results
and financial condition. The Company believes there is a time-limited
opportunity to achieve market share, and there can be no assurance that the
Company will be successful in achieving widespread acceptance of its products
and services or in achieving market share before competitors offer products
and services with features similar to the Company's current offerings. Any
such failure by the Company could have a material adverse effect on the
Company's business, operating results and financial condition. See "Risk
Factors--Rapid Technological Change; New Product and Services Introductions."
CUSTOMER SUPPORT
The Company believes that a high level of customer support for commerce and
enterprise customers as well as end users of digital certificates is necessary
to achieve acceptance of its digital certificates and related products and
services. The Company provides a wide range of customer support services
through a staff of customer service personnel, call center, e-mail help desk
and a Web-based self-help system. Since it introduced its first products over
two years ago, the Company has developed a substantial knowledge base of
customer support information based on its customer interactions and believes
that this offers the Company a competitive advantage. The Company's call
center is staffed from 8 a.m. to 5 p.m. PST and employs an Automated Call
Director system
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to provide self-help services and, if necessary, to route support calls to
available support personnel. The Company also offers Web-based support
services that are available on a 24 hour x 7 day basis and that are frequently
updated to improve existing information and to support new services. The
Company's e-mail customer support service utilizes customized auto response
systems to provide self-help recommendations and also utilizes a staff of
trained customer support agents who typically respond to customer inquiries
within 24 hours. As of December 31, 1997, the Company had 57 employees in its
customer support organization.
The Company also employs technical support personnel who work directly with
its direct sales force, distributors and customers of its electronic commerce
and enterprise solutions. The Company's annual maintenance agreements for its
electronic commerce and enterprise solutions include technical support and
upgrades. The Company also provides training programs for customers of its
enterprise and electronic commerce solutions.
COMPETITION
The Company's digital certificate solutions are targeted at the new and
rapidly evolving market for trusted and secure communications and commerce
over IP networks. Although the competitive environment in this market has yet
to develop fully, the Company anticipates that it will be intensely
competitive, subject to rapid change and significantly affected by new product
and service introductions and other market activities of industry
participants.
The Company's primary competitors are Entrust, GTE CyberTrust and IBM. The
Company also experiences competition from a number of smaller companies that
provide digital certificate solutions. The Company expects that competition
from established and emerging companies in the financial and
telecommunications industries will increase in the near term, and that the
Company's primary long-term competitors may not yet have entered the market.
Netscape has introduced software products that enable the issuance and
management of digital certificates, and the Company believes that other
companies could introduce such products. There can be no assurance that
additional companies will not offer digital certificate solutions that are
competitive with those of the Company. Increased competition could result in
pricing pressures, reduced margins or the failure of the Company's products
and services to achieve or maintain market acceptance, any of which could have
a material adverse effect on the Company's business, operating results and
financial condition.
Several of the Company's current and potential competitors have longer
operating histories and significantly greater financial, technical, marketing
and other resources than the Company and therefore may be able to respond more
quickly than the Company to new or changing opportunities, technologies,
standards and customer requirements. Many of these competitors also have
broader and more established distribution channels that may be used to deliver
competing products or services directly to customers through bundling or other
means. If such competitors were to bundle competing products or services for
their customers, the demand for the Company's products and services might be
substantially reduced and the ability of the Company to distribute its
products successfully and the utilization of its services would be
substantially diminished. In addition, browser companies that embed the
Company's root keys or otherwise feature the Company as a provider of digital
certificate solutions in their Web browsers or on their Web sites could also
promote competitors of the Company or charge the Company substantial fees for
such promotions in the future. New technologies and the expansion of existing
technologies may increase the competitive pressures on the Company. There can
be no assurance that competing technologies developed by others or the
emergence of new industry standards will not adversely affect the Company's
competitive position or render its products or technologies noncompetitive or
obsolete. In addition, the market for digital certificates is nascent and is
characterized by announcements of collaborative relationships involving
competitors of the Company. The existence or announcement of such
relationships could adversely affect the Company's ability to attract and
retain customers. As a result of the foregoing and other factors, there can be
no assurance that the Company will compete effectively with current or future
competitors or that competitive pressures faced by the Company will not have a
material adverse effect on the Company's business, operating results and
financial condition. See "Risk Factors--Competition."
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INTELLECTUAL PROPERTY
The Company relies primarily on a combination of copyrights, trademarks,
trade secret laws, restrictions on disclosure and other methods to protect its
intellectual property and trade secrets. The Company also enters into
confidentiality agreements with its employees and consultants, and generally
controls access to and distribution of its documentation and other proprietary
information. Despite these precautions, it may be possible for a third party
to copy or otherwise obtain and use the Company's intellectual property or
trade secrets without authorization. In addition, there can be no assurance
that others will not independently develop substantially equivalent
intellectual property. There can be no assurance that the precautions taken by
the Company will prevent misappropriation or infringement of its technology. A
failure by the Company to protect its intellectual property in a meaningful
manner could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, litigation may be
necessary in the future to enforce the Company's intellectual property rights,
to protect the Company's trade secrets or to determine the validity and scope
of the proprietary rights of others. Such litigation could result in
substantial costs and diversion of management and technical resources, either
of which could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company also relies on certain licensed third-party technology, such as
public key cryptography technology licensed from RSA and other technology that
is used in the Company's products to perform key functions. In particular, the
Company has been granted a perpetual, royalty free, nonexclusive, worldwide
license to distribute products it develops that contain or incorporate the RSA
BSAFE and TIPEM products and that relate to digital certificate issuing
software, software for the management of private keys and for digitally
signing computer files on behalf of others, software for customers to preview
and forward digital certificate requests to the Company, or such other
products that, in RSA's reasonable discretion, are reasonably necessary for
the implementation of a digital certificate business. RSA is also required to
provide maintenance and technical support for these products to the Company.
RSA's BSAFE product is a software tool kit that allows for the integration of
encryption and authentication features into software applications and TIPEM is
a secure e-mail development tool kit that allows for secure e-mail messages to
be sent using one vendor's e-mail product and read by another vendor's e-mail
product. There can be no assurance that these third-party technology licenses
will continue to be available to the Company on commercially reasonable terms
or at all, and the loss of any of these technologies could have a material
adverse effect on the Company's business, operating results and financial
condition. Moreover, in the Company's current license agreements, the licensor
has agreed to defend, indemnify and hold the Company harmless with respect to
any claim by a third party that the licensed software infringes any patent or
other proprietary right. Although these licenses are fully paid, there can be
no assurance that the outcome of any litigation between the licensor and a
third party or between the Company and a third party will not lead to royalty
obligations of the Company for which the Company is not indemnified or for
which such indemnification is insufficient, or that the Company will be able
to obtain any additional license on commercially reasonable terms or at all.
In the future, the Company may seek to license additional technology to
incorporate in its products and services. There can be no assurance that any
third party technology licenses that the Company may be required to obtain in
the future will be available to the Company on commercially reasonable terms
or at all. The loss of or inability to obtain or maintain any of these
technology licenses could result in delays in introduction of the Company's
products or services until equivalent technology, if available, is identified,
licensed and integrated, which could have a material adverse effect on the
Company's business, operating results and financial condition.
From time to time, the Company has received, and may receive in the future,
notice of claims of infringement of other parties' proprietary rights. There
can be no assurance that infringement or other claims will not be asserted or
prosecuted against the Company in the future or that any past or future
assertions or prosecutions will not materially adversely affect the Company's
business, operating results and financial condition. Any such claims, with or
without merit, could be time-consuming, result in costly litigation and
diversion of technical and management personnel, cause product shipment delays
or require the Company to develop non-infringing technology or enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, or at all.
In the event of a
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successful claim of product infringement against the Company and the failure
or inability of the Company to develop non-infringing technology or license
the infringed or similar technology on a timely basis, the Company's business,
operating results and financial condition could be materially adversely
affected. See "Risk Factors--Intellectual Property; Potential Litigation."
EMPLOYEES
As of December 31, 1997, the Company had 185 full-time employees. Of the
total, 55 were employed in sales and marketing, 46 in research and
development, 57 in customer support, four in practices and external affairs,
three in federal markets, and 20 in finance and administration. The Company
has never had a work stoppage, and no employees are represented under
collective bargaining agreements. The Company considers its relations with its
employees to be good. The Company's ability to achieve its financial and
operational objectives depends in large part upon its continuing ability to
attract, integrate, retain and motivate highly qualified sales, technical and
managerial personnel, and upon the continued service of its senior management
and key sales and technical personnel, none of whom is bound by an employment
agreement. Competition for such qualified personnel in the Company's industry
and geographical location in the San Francisco Bay Area is intense,
particularly in software development and product management personnel. See
"Risk Factors--Dependence on Key Personnel."
FACILITIES
The Company's principal administrative, sales, marketing, research and
development and operations facilities are located in two adjacent buildings in
Mountain View, California, where they occupy approximately 44,000 square feet
under leases expiring in 2001. The Company intends to obtain additional office
space in 1998 contiguous to its headquarters. The Company believes that this
additional space will be available and that its current facilities, together
with this additional space, will be adequate to meet its needs for the
foreseeable future.
The Company also leases space for sales and support offices in Rosemont,
Illinois; Atlanta, Georgia; Linthicum, Maryland; Cambridge, Massachusetts; and
Melville, New York. In addition, VeriSign Japan leases space in Kawasaki,
Japan for its offices and Digital ID Center. The Company's success is largely
dependent on the uninterrupted operation of its Digital ID Centers and
computer and communications systems. See "Risk Factors--System Interruption
and Security Breaches."
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company as of December 31, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
D. James Bidzos (1).............. 42 Chairman of the Board
Stratton D. Sclavos.............. 36 President, Chief Executive Officer and
Director
Michael S. Baum.................. 45 Vice President of Practices and
External Affairs
Ethel E. Daly.................... 53 Vice President of Worldwide Operations
Dana L. Evan..................... 38 Vice President of Finance and
Administration
and Chief Financial Officer
Quentin P. Gallivan.............. 40 Vice President of Worldwide Sales
Nicholas F. Piazzola............. 51 Vice President of Federal Markets
Arnold Schaeffer................. 34 Vice President of Engineering
Richard A. Yanowitch............. 41 Vice President of Marketing
Timothy Tomlinson (2)............ 47 Secretary and Director
William Chenevich (1)(2)......... 54 Director
Kevin R. Compton (2)............. 39 Director
David J. Cowan (1)............... 31 Director
</TABLE>
- --------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
D. JAMES BIDZOS has served as Chairman of the Board of the Company since its
founding in April 1995 and served as Chief Executive Officer of the Company
from April 1995 to July 1995. He has also served as President and Chief
Executive Officer of RSA since 1986. RSA was acquired by Security Dynamics in
July 1996 and has been a wholly-owned subsidiary of Security Dynamics since
that time. Mr. Bidzos has been an Executive Vice President and a director of
Security Dynamics since its acquisition of RSA.
STRATTON D. SCLAVOS has served as President and Chief Executive Officer and
as a director of the Company since he joined the Company in July 1995. From
October 1993 to June 1995, he was Vice President, Worldwide Marketing and
Sales of Taligent, Inc. ("Taligent"), a software development company that was
a joint venture among Apple Computer, Inc. ("Apple"), IBM and Hewlett-Packard.
From May 1992 to September 1993, Mr. Sclavos was Vice President of Worldwide
Sales and Business Development of GO Corporation, a pen-based computer
company. Prior to that time, he served in various sales and marketing
capacities for MIPS Computer Systems, Inc. and Megatest Corporation. Mr.
Sclavos is also a director and a member of the compensation committee of
Network Solutions, Inc. Mr. Sclavos holds a B.S. degree in Electrical and
Computer Engineering from the University of California at Davis.
MICHAEL S. BAUM has served as Vice President of Practices and External
Affairs of the Company since he joined the Company in November 1995. From 1987
to October 1995, he was the founder and a principal of Independent Monitoring,
a consulting firm specializing in digital commerce and information security
law. Prior to that time, Mr. Baum was employed by BBN Corporation in various
capacities. Mr. Baum holds a B.A. degree in History from Carnegie Mellon
University, an M.B.A. degree in Management of Technology from the Wharton
School of the University of Pennsylvania and a J.D. degree from Western New
England School of Law.
ETHEL E. DALY has served as Vice President of Worldwide Operations of the
Company since she joined the Company in June 1996. From January 1995 to June
1996, she was Senior Vice President, Product Management and Marketing of
Knight-Ridder Information, Inc., an online information services company. Prior
to that time, from 1986 to January 1995, Ms. Daly worked for Charles Schwab
and Company, a stock brokerage firm, most
50
<PAGE>
recently as Managing Director, International Division. Prior to that time, she
held the positions of Vice President of Marketing for Attalla Corporation and
Vice President Electronic Banking of Crocker National Bank. Ms. Daly holds a
B.A. degree in Psychology from San Francisco State University and a Masters of
Business Management degree from Stanford University.
DANA L. EVAN has served as Vice President of Finance and Administration and
Chief Financial Officer of the Company since she joined the Company in June
1996. From 1988 to June 1996, she worked as a financial consultant in the
capacity of chief financial officer, vice president of finance or corporate
controller for various public and private companies and partnerships,
including the Company from November 1995 to June 1996, Delphi Bioventures, a
venture capital firm, from 1988 to June 1995, and Identix Incorporated, a
manufacturer of biometric identity verification and imaging products, from
1991 to August 1993. Prior to 1988, she was employed by KPMG Peat Marwick LLP,
most recently as a senior manager. Ms. Evan is a certified public accountant
and holds a B.S. degree in Commerce with a concentration in Accounting and
Finance from the University of Santa Clara.
QUENTIN P. GALLIVAN has served as Vice President of Worldwide Sales of the
Company since he joined the Company in October 1997. From April 1996 to
October 1997, he was Vice President for Asia Pacific and Latin America of
Netscape, a software company. Prior to that time, Mr. Gallivan was with
General Electric Information Services, an electronic commerce services
company, most recently as Vice President, Sales and Services for the Americas.
NICHOLAS F. PIAZZOLA has served as Vice President of Federal Markets of the
Company since he joined the Company in December 1996. From 1969 to November
1996, he was employed by the United States National Security Agency (the
"NSA"), most recently as Chief, Network Security Group from May 1994 to
November 1996 and Chief, Infosec Research & Technology Group until April 1994.
Mr. Piazzola holds a B.S. degree in Electrical Engineering from Villanova
University and an M.S. degree in Electrical Engineering from the University of
Maryland.
ARNOLD SCHAEFFER has served as Vice President of Engineering of the Company
since he joined the Company in January 1996. From March 1992 to December 1995,
he was employed by Taligent, most recently as Vice President of Engineering,
CommonPoint Products. Prior to working at Taligent, he served as a software
engineer for Apple, Intellicorp and Hewlett-Packard. Mr. Schaeffer holds a
B.S. degree in Information and Computer Science from the Georgia Institute of
Technology and an M.B.A. degree from the University of California at Berkeley.
RICHARD A. YANOWITCH has served as Vice President of Marketing of the
Company since he joined the Company in May 1996. From July 1995 to May 1996,
he was a management consultant to private software companies. From 1989 to
June 1995, he held a series of marketing positions with Sybase, Inc., a
software company, most recently as Vice President of Corporate Marketing.
Prior to that time, he held various sales, marketing and operating positions
with The Santa Cruz Operation, Inc., Digital Equipment Corporation, Lanier
Harris Corporation and Brooks International Corporation. Mr. Yanowitch holds a
B.A. degree in History from Swarthmore College and an M.B.A. degree in
Entrepreneurial Management and Marketing from Harvard Business School.
TIMOTHY TOMLINSON has been Secretary and a director of the Company since its
founding in April 1995. He has been a partner of Tomlinson Zisko Morosoli &
Maser LLP, a law firm, since 1983. Mr. Tomlinson is also a director of Portola
Packaging, Inc. and Oak Technology, Inc. Mr. Tomlinson holds a B.A. degree in
Economics, an M.B.A. degree and a J.D. degree from Stanford University.
WILLIAM CHENEVICH has been a director of the Company since its founding in
April 1995. He has been the Group Executive Vice President, Data Processing
Systems of VISA, a financial services company, since October 1993. From May
1992 to October 1993, he was Executive Vice President and Chief Information
Officer of Ahmanson Corporation, a financial services company. Mr. Chenevich
holds a B.B.A. degree in Business and an M.B.A. degree in Management from the
City College of New York.
51
<PAGE>
KEVIN R. COMPTON has been a director of the Company since February 1996. He
has been a general partner of Kleiner Perkins Caufield & Byers, a venture
capital firm, since January 1990. Mr. Compton is also a director of Citrix
Systems, Inc., Corsair Communications, Inc., Digital Generation Systems, Inc.
and Global Village Communication Inc. Mr. Compton holds a B.S. degree in
Business Management from the University of Missouri.
DAVID J. COWAN has been a director of the Company since its founding in
April 1995. He has been a general partner of Bessemer Venture Partners, a
venture capital investment firm, since August 1996. Mr. Cowan has also been a
manager of Deer IV & Co. LLC, a venture capital investment firm, since August
1996. Previously he was an associate with Bessemer Venture Partners from
August 1992 to August 1996. Mr. Cowan also served as President and Chief
Executive Officer of Visto Corporation, a computer software and service firm,
from August 1996 to April 1997, and as Chief Financial Officer of the Company
from April 1995 to June 1996. Mr. Cowan is also a director of Worldtalk
Communications Corporation. Mr. Cowan holds an A.B. degree in Mathematics and
Computer Science and an M.B.A. degree from Harvard University.
The Company's Bylaws currently authorize no fewer than five and no more than
seven directors. The Company's Board of Directors (the "Board") is currently
comprised of six directors. Directors are elected by the stockholders at each
annual meeting of stockholders to serve until the next annual meeting of
stockholders or until their successors are duly elected and qualified. The
existing directors were elected pursuant to the provisions of the
Stockholders' Agreement described in "Certain Transactions," which agreement
terminates upon the closing of this offering. Executive officers are elected
by, and serve at the discretion of, the Board. The Company's Amended and
Restated Bylaws, which will become effective upon the completion of this
offering, provide that the Board will be divided into three classes, Class I,
Class II and Class III, with each class serving staggered three-year terms.
The Class I directors, initially Messrs. Sclavos and Tomlinson, will stand for
reelection or election at the 1999 annual meeting of stockholders. The Class
II directors, initially Messrs. Compton and Cowan will stand for reelection or
election at the 2000 annual meeting of stockholders and the Class III
directors, initially Messrs. Bidzos and Chenevich will stand for reelection or
election at the 2001 annual meeting of stockholders.
BOARD COMMITTEES
The Board has established an Audit Committee to meet with and consider
suggestions from members of management, as well as the Company's independent
accountants, concerning the financial operations of the Company. The Audit
Committee also has the responsibility to review audited financial statements
of the Company and consider and recommend the employment of, and approve the
fee arrangements with, independent accountants for both audit functions and
for advisory and other consulting services. The Audit Committee is currently
comprised of Messrs. Chenevich, Compton and Tomlinson. The Board has also
established a Compensation Committee to review and approve the compensation
and benefits for the Company's key executive officers, administer the
Company's stock purchase, equity incentive and stock option plans and make
recommendations to the Board regarding such matters. The Compensation
Committee is currently comprised of Messrs. Bidzos, Chenevich and Cowan.
DIRECTOR COMPENSATION
Directors do not receive any cash fees for their service on the Board or any
Board committee, but they are entitled to reimbursement of all reasonable out-
of-pocket expenses incurred in connection with their attendance at Board and
Board committee meetings. At the Company's founding in April 1995, the Company
granted an option to purchase 25,000 shares of its Common Stock under the
Company's 1995 Stock Option Plan to D. James Bidzos with an exercise price of
$.12 per share. All Board members are eligible to receive stock options under
the Company's stock option plans, and outside directors receive stock options
pursuant to automatic grants of stock options under the 1995 Stock Option
Plan. In July 1996, the Company granted to each of Messrs. Bidzos, Chenevich,
Compton, Cowan and Tomlinson an option to purchase 10,000 shares of its Common
Stock under the Company's 1995 Stock Option Plan with an exercise price of
$8.00 per share. In June 1997, the Company granted to each of Messrs. Bidzos,
Compton, Cowan and Tomlinson an option to purchase 3,500 shares of its Common
Stock under the Company's 1995 Stock Option Plan with an exercise price of
$8.00 per share.
52
<PAGE>
In October 1997, the Board adopted, and in January 1998 the stockholders
approved, the 1998 Directors Stock Option Plan (the "Directors Plan") and
reserved a total of 125,000 shares of the Company's Common Stock for issuance
thereunder. Members of the Board who are not employees of the Company, or any
parent, subsidiary or affiliate of the Company, are eligible to participate in
the Directors Plan. The option grants under the Directors Plan are automatic
and nondiscretionary, and the exercise price of the options is 100% of the
fair market value of the Common Stock on the date of grant. Each eligible
director who first becomes a member of the Board on or after the effective
date of the Registration Statement of which this Prospectus forms a part (the
"Effective Date") will initially be granted an option to purchase 15,000
shares (an "Initial Grant") on the date such director first becomes a
director. On each anniversary of a director's Initial Grant (or most recent
grant if such director was ineligible to receive an Initial Grant), each
eligible director will automatically be granted an additional option to
purchase 7,500 shares if such director has served continuously as a member of
the Board since the date of such director's Initial Grant (or most recent
grant if such director did not receive an Initial Grant). The term of such
options is ten years, provided that they will terminate seven months following
the date the director ceases to be a director or, if the Company so specifies
in the grant, a consultant of the Company (twelve months if the termination is
due to death or disability). All options granted under the Directors Plan will
vest as to 6.25% of the shares each quarter after the date of grant, provided
the optionee continues as a director or, if the Company so specifies in the
grant, as a consultant of the Company. Additionally, immediately prior to the
dissolution or liquidation of the Company or a "change in control"
transaction, all options granted pursuant to the Directors Plan will
accelerate and will be exercisable for a period of up to six months following
the transaction, after which period any unexercised options will expire.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Bidzos, a member of the Compensation Committee, is an Executive Vice
President and a director of Security Dynamics, which, with its wholly-owned
subsidiaries, beneficially owns approximately 26.2% of the Company's Common
Stock, and also served as the Company's Chief Executive Officer from April to
July 1995. See "Certain Transactions." No interlocking relationship exists
between the Board or Compensation Committee and the board of directors or
compensation committee of any other company, nor has any such interlocking
relationship existed in the past.
53
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation awarded to, earned by, or paid for services rendered to the
Company in all capacities during 1997 by the Company's Chief Executive Officer
and the four most highly compensated executive officers, other than the Chief
Executive Officer, who were serving as executive officers at the end of 1997
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
------------------------------ ------------
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS(#)
--------------------------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Stratton D. Sclavos................. $200,000 $183,022 -- 100,000
President and Chief Executive
Officer
Dana L. Evan........................ 145,000 46,349 -- 45,000
Vice President of Finance and
Administration and Chief Financial
Officer
Michael S. Baum..................... 145,000 35,788 $15,000(1) 25,000
Vice President of Practices and
External Affairs
Arnold Schaeffer.................... 145,000 30,226 -- 58,000
Vice President of Engineering
Richard A. Yanowitch................ 140,000 59,084 -- --
Vice President of Marketing
</TABLE>
- --------
(1) Represents compensation that the Company paid Mr. Baum in exchange for his
agreement to forego certain consulting projects.
54
<PAGE>
OPTION GRANTS IN FISCAL 1997
The following table sets forth certain information regarding stock options
granted to each of the Named Executive Officers during the year ended December
31, 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
----------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERMS(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR(%)(3) PER SHARE(4) DATE 5% 10%
- ---- ---------- ----------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stratton D. Sclavos..... 100,000 7.1 $7.00 11/4/04 $ 284,970 $ 664,102
Dana L. Evan............ 45,000 3.2 6.00 10/6/04 109,917 256,154
Michael S. Baum......... 25,000 1.8 6.00 10/6/04 61,065 142,308
Arnold Schaeffer........ 58,000 4.1 6.00 10/6/04 141,671 330,154
Richard A. Yanowitch.... -- -- -- -- -- --
</TABLE>
- --------
(1) Options granted in 1997 were granted under the Company's 1995 Stock Option
Plan or, in the case of Mr. Sclavos, the Company's 1997 Stock Option Plan.
These options become exercisable with respect to 25% of the shares covered
by the option on the first anniversary of the date of grant and with
respect to an additional 6.25% of these shares each quarter thereafter.
These options have a term of seven years. Upon certain changes in control
of the Company, this vesting schedule will accelerate as to 50% of any
shares that are then unvested. See "--Employee Benefit Plans" and "--
Compensation Arrangements" for a description of the material terms of
these options.
(2) Potential realizable values are net of exercise price but before taxes,
and are based on the assumption that the Common Stock of the Company
appreciates at the annual rate shown (compounded annually) from the date
of grant until the expiration of the seven-year term. These numbers are
calculated based on Securities and Exchange Commission requirements and do
not reflect the Company's projection or estimate of future stock price
growth.
(3) The Company granted options to purchase 1,407,650 shares of Common Stock
to employees during 1997.
(4) Options were granted at an exercise price equal to the fair market value
of the Company's Common Stock, as determined by the Board of Directors.
AGGREGATE OPTION EXERCISES IN FISCAL 1997 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth for each of the Named Executive Officers the
shares acquired and the value realized on each exercise of stock options
during the year ended December 31, 1997 and the year-end number and value of
exercisable and unexercisable options:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT 12/31/97(1) AT 12/31/97(2)
ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stratton D. Sclavos..... -- -- -- 100,000 -- $300,000
Dana L. Evan............ -- -- -- 45,000 -- 180,000
Michael S. Baum......... -- -- -- 25,000 -- 100,000
Arnold Schaeffer........ -- -- -- 58,000 -- 232,000
Richard A. Yanowitch.... -- -- -- -- -- --
</TABLE>
- --------
(1) Options shown were granted under the Company's 1995 Stock Option Plan or,
in the case of Mr. Sclavos, under the Company's 1997 Stock Option Plan,
and are subject to vesting as described in footnote (1) to the option
grant table above. See "--Employee Benefit Plans" and "--Compensation
Arrangements" for a description of the material terms of these options.
(2) Based on an assumed initial public offering price of $10.00 per share and
net of the option exercise price.
55
<PAGE>
No options were exercised during 1997 by the Named Executive Officers. No
compensation intended to serve as incentive for performance to occur over a
period longer than one year was paid pursuant to a long-term incentive plan
during 1997 to any Named Executive Officer. The Company does not have any
defined benefit or actuarial plan under which benefits are determined
primarily by final compensation and years of service with any of the Named
Executive Officers.
EMPLOYEE BENEFIT PLANS
1995 Stock Option Plan. In April 1995, the Board adopted and the
stockholders approved the 1995 Stock Option Plan. At that time, 2,145,000
shares of Common Stock were reserved for issuance under the 1995 Stock Option
Plan, which number was increased to 4,145,000 shares in May 1996. As of
December 31, 1997, options to purchase 1,991,500 shares had been exercised
(net of repurchases), options to purchase an additional 2,102,518 shares of
Common Stock were outstanding under the 1995 Stock Option Plan with a weighted
average exercise price of $2.17 and 50,982 shares remained available for
future grants. Following the closing of this offering, no additional options
will be granted under the 1995 Stock Option Plan. Options granted under the
1995 Stock Option Plan are subject to terms substantially similar to those
described below with respect to options to be granted under the Equity
Incentive Plan. The 1995 Stock Option Plan does not provide for issuance of
restricted stock or stock bonus awards.
1997 Stock Option Plan. In October 1997, the Board adopted and the Company's
stockholders approved the 1997 Stock Option Plan. At that time, 800,000 shares
of Common Stock were reserved for issuance under the 1997 Stock Option Plan.
At December 31, 1997, options to purchase 414,300 shares of Common Stock were
outstanding under the 1997 Stock Option Plan with a weighted average exercise
price of $6.91 and 385,700 shares remained available for future grants.
Following the closing of this offering, no options will be granted under the
1997 Stock Option Plan. Options granted under the 1997 Stock Option Plan are
subject to terms substantially similar to those described below with respect
to options granted under the Equity Incentive Plan. The 1997 Stock Option Plan
does not provide for issuance of restricted stock or stock bonus awards.
1998 Equity Incentive Plan. In October 1997, the Board adopted, and in
January 1998 the stockholders approved, the Equity Incentive Plan. The total
number of shares of Common Stock reserved for issuance thereunder is 2,000,000
plus an additional number of shares described in (a) - (d) below. The Equity
Incentive Plan will become effective on the Effective Date and will serve as
the successor to the 1995 Stock Option Plan and the 1997 Stock Option Plan
(the "Prior Plans"). Options granted under the Prior Plans before their
termination will remain outstanding according to their terms, but no further
options will be granted under the Prior Plans after the Effective Date. Shares
that: (a) are subject to issuance upon exercise of an option granted under the
Prior Plans, or the Equity Incentive Plan that cease to be subject to such
option for any reason other than exercise of such option; (b) have been issued
pursuant to the exercise of an option granted under the Prior Plans or the
Equity Incentive Plan with respect to which the Company's right of repurchase
has not lapsed and are subsequently repurchased by the Company; (c) are
subject to an award granted pursuant to restricted stock purchase agreements
under the Equity Incentive Plan that are forfeited or are repurchased by the
Company at the original issue price; or (d) are subject to stock bonuses
granted under the Equity Incentive Plan that otherwise terminate without
shares being issued, will again be available for grant and issuance under the
Equity Incentive Plan. Any authorized shares not issued or subject to
outstanding grants under the Prior Plans on the Effective Date will no longer
be available for grant and issuance under the Prior Plans but will be
available for grant and issuance under the Equity Incentive Plan. The Equity
Incentive Plan will terminate in October 2007, unless sooner terminated in
accordance with the terms of the Equity Incentive Plan. The Equity Incentive
Plan authorizes the award of options, restricted stock awards and stock
bonuses (each an "Award"). No person will be eligible to receive more than
400,000 shares in any calendar year pursuant to Awards under the Equity
Incentive Plan other than a new employee of the Company who will be eligible
to receive no more than 1,000,000 shares in the calendar year in which such
employee commences employment. The Equity Incentive Plan will be administered
by the Compensation Committee. The Compensation Committee has the authority to
56
<PAGE>
construe and interpret the Equity Incentive Plan and any agreement made
thereunder, grant Awards and make all other determinations necessary or
advisable for the administration of the Equity Incentive Plan.
The Equity Incentive Plan provides for the grant of both incentive stock
options ("ISOs") that qualify under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and nonqualified stock options ("NQSOs"). ISOs
may be granted only to employees of the Company or of a parent or subsidiary of
the Company. NQSOs (and all other Awards other than ISOs) may be granted to
employees, officers, directors, consultants, independent contractors and
advisors of the Company or any parent or subsidiary of the Company, provided
such consultants, independent contractors and advisors render bona fide
services not in connection with the offer and sale of securities in a capital-
raising transaction ("Eligible Service Providers"). The exercise price of ISOs
must be at least equal to the fair market value of the Company's Common Stock
on the date of grant. The exercise price of NQSOs must be at least equal to 85%
of the fair market value of the Company's Common Stock on the date of grant.
The maximum term of options granted under the Equity Incentive Plan is ten
years. Awards granted under the Equity Incentive Plan may not be transferred in
any manner other than by will or by the laws of descent and distribution and
may be exercised during the lifetime of the optionee only by the optionee
(unless otherwise determined by the Compensation Committee and set forth in the
Award agreement with respect to Awards that are not ISOs). Options granted
under the Equity Incentive Plan generally expire three months after the
termination of the optionee's service to the Company or a parent or subsidiary
of the Company, except in the case of death or disability, in which case the
options generally may be exercised up to 12 months following the date of death
or termination of service. Options will generally terminate immediately upon
termination for cause. In the event of the Company's dissolution or liquidation
or a "change in control" transaction, outstanding Awards may be assumed or
substituted by the successor corporation (if any). If a successor corporation
(if any) does not assume or substitute the Awards, they will expire upon the
effectiveness of the transaction. The Committee, in its discretion, may provide
that the vesting of any or all Awards will accelerate prior to the
effectiveness of the transaction.
1998 Employee Stock Purchase Plan. In December 1997, the Board adopted, and
in January 1998 the stockholders approved, the Purchase Plan and reserved
500,000 shares of the Company's Common Stock for issuance thereunder. The
Purchase Plan will be administered by the Compensation Committee of the Board.
The Compensation Committee will have the authority to construe and interpret
the Purchase Plan and its decisions in such capacity will be final and binding.
The Purchase Plan will become effective on the first business day on which
price quotations for the Company's Common Stock are available on the Nasdaq
National Market. Employees generally will be eligible to participate in the
Purchase Plan if they are customarily employed by the Company (or its parent or
any subsidiaries that the Company designates) for more than 20 hours per week
and more than five months in a calendar year and are not (and would not become
as a result of being granted an option under the Purchase Plan) 5% stockholders
of the Company (or its designated parent or subsidiaries). Eligible employees
may select a rate of payroll deduction between 2% and 10% of their compensation
and are subject to certain maximum purchase limitations that will be described
in the Purchase Plan. A participant may change the rate of payroll deductions
or withdraw from an Offering Period by notifying the Company in writing.
Participation in the Purchase Plan will end automatically upon termination of
employment for any reason. Except for the first offering, each offering under
the Purchase Plan will be for a period of 24 months (the "Offering Period") and
will consist of six-month purchase periods (each a "Purchase Period"). The
first Offering Period is expected to begin on the first business day on which
price quotations for the Company's Common Stock are available on the Nasdaq
National Market and, depending on the effective date of this Registration
Statement, may be greater or less than 24 months long. Offering Periods
thereafter will begin on February 1 and August 1. Each participant will be
granted an option on the first day of the Offering Period and such option will
be automatically exercised on the last day of each Purchase Period during the
Offering Period. The purchase price for the Company's Common Stock purchased
under the Purchase Plan is 85% of the lesser of the fair market value of the
Company's Common Stock on the first day of the applicable Offering Period and
the last day of the applicable Purchase Period. The Committee will have the
power to change the duration of Offering Periods and Purchase Periods without
stockholder approval, if such change is announced at least 15 days prior to the
57
<PAGE>
beginning of the Offering or Purchase Period to be affected. The Purchase Plan
will be intended to qualify as an "employee stock purchase plan" under Section
423 of the Code. Rights granted under the Purchase Plan will not be
transferable by a participant other than by will or the laws of descent and
distribution. The Purchase Plan will provide that, in the event of the
proposed dissolution or liquidation of the Company, the Offering Period will
terminate immediately prior to the consummation of such proposed action,
provided that the Compensation Committee may fix a different date for
termination of the Purchase Plan and may give each participant the opportunity
to purchase shares under the Purchase Plan prior to such termination. The
Purchase Plan will provide that, in the event of certain "change of control"
transactions, the Plan will continue for all Offering Periods that began prior
to the transaction and shares will be purchased based on the fair market value
of the surviving corporation's stock on each Purchase Date. The Purchase Plan
will terminate in December 2007, unless earlier terminated pursuant to the
terms of the Purchase Plan. The Board will have the authority to amend,
terminate or extend the term of the Purchase Plan, except that no such action
may adversely affect any outstanding options previously granted under the
Purchase Plan and stockholder approval is required to increase the number of
shares that may be issued or change the terms of eligibility under the
Purchase Plan.
401(k) Plan. The Board maintains the VeriSign, Inc. 401(k) Plan (the "401(k)
Plan"), a defined contribution plan intended to qualify under Section 401 of
the Code. All eligible employees who are at least 18 years old and have been
employed by the Company for one month may participate in the 401(k) Plan. An
eligible employee of the Company may begin to participate in the 401(k) Plan
on the first day of January, April, July or October of the plan year
coinciding with or following the date on which such employee meets the
eligibility requirements. A participating employee may make pre-tax
contributions of a whole percentage (not more than 15%) of his or her eligible
compensation and up to 100% of any cash bonus, subject to limitations under
the federal tax laws. Employee contributions and the investment earnings
thereon are fully vested at all times. The 401(k) Plan permits, but does not
require, additional matching and profit-sharing contributions by the Company
on behalf of the participants. The Company has not made matching or profit-
sharing contributions. Contributions by employees or the Company to the 401(k)
Plan, and income earned on plan contributions, are generally not taxable to
employees until withdrawn, and contributions by the Company, if any, should be
deductible by the Company when made. The trustee under the 401(k) Plan, at the
direction of each participant, invests the assets of the 401(k) Plan in
selected investment options.
Executive Loan Program of 1996. In November 1996, the Compensation Committee
adopted the Company's Executive Loan Program of 1996 (the "Executive Loan
Program"). Pursuant to the Executive Loan Program, the Company's Chief
Executive Officer and each Vice President of the Company (each a "Qualified
Borrower") are each entitled to borrow an aggregate of up to $250,000 from the
Company. Each loan made under the Executive Loan Program is a full recourse
loan and bears interest at the then-minimum interest rate to avoid imputation
of income under federal, state and local tax laws. Interest on any loan made
under the Executive Loan Program is due and payable on December 31 of each
year in which such loan is outstanding. Principal and accrued interest are
payable in full on any such loan upon the earlier of December 31, 2005 or 90
days after the termination of the Qualified Borrower's employment with the
Company, unless extended by a separate written agreement approved by the
Board. Each loan made under the Executive Loan Program must be secured by
collateral represented by Common Stock of the Company or other marketable
securities acceptable to the Board having a fair market value equaling or
exceeding the principal amount of the loan.
COMPENSATION ARRANGEMENTS
Mr. Sclavos's employment offer letter of June 1995, as amended in October
1995, provided for an initial annual salary of $175,000 and an initial annual
bonus of up to $50,000 per year. In addition, it provided for a loan to Mr.
Sclavos of $48,000 which was to be forgiven after the first anniversary of Mr.
Sclavos's employment with the Company. This loan was forgiven by the Board in
October 1996. Mr. Sclavos was also granted an option to purchase 616,000
shares of Common Stock with an exercise price of $.12 per share. In October
1996, this
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option was amended such that it became immediately exercisable. Mr. Sclavos
exercised this option in full in November 1996. In connection with this
exercise, the Company loaned Mr. Sclavos $73,920 pursuant to the terms of the
Executive Loan Program, representing the full exercise price of such option.
As of December 31, 1997, 269,500 of the shares Mr. Sclavos received upon
exercise of the option were subject to a right of repurchase on behalf of the
Company. This right lapses as to 38,500 shares per quarter. Mr. Sclavos's
employment is "at will" and thus can be terminated at any time, with or
without cause.
Michael S. Baum, Dana L. Evan, Arnold Schaeffer and Richard A. Yanowitch
were granted options to purchase 150,000, 170,000, 200,000 and 290,000 shares,
respectively, of Common Stock under the 1995 Stock Option Plan, at exercise
prices ranging from $.12 to $6.00. Each of these options is subject to the
standard four-year vesting schedule under the 1995 Stock Option Plan or, in
certain circumstances, is immediately exercisable, subject to the Company's
right to repurchase shares subject to such options, which repurchase right
lapses on a schedule similar to the vesting schedule for options granted under
the 1995 Stock Option Plan. However, upon the occurrence of certain change-in-
control transactions, 50% of each such Named Executive Officer's then-unvested
options will become vested or, if applicable, the right of repurchase will
lapse as to 50% of the shares covered by such right of repurchase.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF
LIABILITY
As permitted by the Delaware General Corporation Law (the "DGCL"), the
Company's Third Amended and Restated Certificate of Incorporation, which will
become effective upon the closing of this offering, includes a provision that
eliminates the personal liability of its directors for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, (iii) under section 174 of the DGCL
(regarding unlawful dividends and stock purchases) or (iv) for any transaction
from which the director derived an improper personal benefit.
As permitted by the DGCL, the Company's Amended and Restated Bylaws, which
will become effective upon the completion of this offering, provide that (i)
the Company is required to indemnify its directors and officers to the fullest
extent permitted by the DGCL, subject to certain very limited exceptions, (ii)
the Company may indemnify its other employees and agents to the extent that it
indemnifies its officers and directors, unless otherwise required by law, its
Certificate of Incorporation, its Amended and Restated Bylaws, or agreement,
(iii) the Company is required to advance expenses, as incurred, to its
directors and executive officers in connection with a legal proceeding to the
fullest extent permitted by the DGCL, subject to certain very limited
exceptions and (iv) the rights conferred in the Amended and Restated Bylaws
are not exclusive.
The Company has entered into Indemnification Agreements with each of its
current directors and certain of its executive officers and intends to enter
into such Indemnification Agreements with each of its other executive officers
to give such directors and executive officers additional contractual
assurances regarding the scope of the indemnification set forth in the
Company's Certificate of Incorporation and Amended and Restated Bylaws and to
provide additional procedural protections. At present, there is no pending
litigation or proceeding involving a director, officer or employee of the
Company regarding which indemnification is sought, nor is the Company aware of
any threatened litigation that may result in claims for indemnification.
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CERTAIN TRANSACTIONS
Since April 12, 1995, the Company's inception date, there has not been nor
is there currently proposed, any transaction or series of similar transactions
to which the Company or any of its subsidiaries was or is to be a party in
which the amount involved exceeded or will exceed $60,000 and in which any
director, executive officer, holder of more than 5% of the Common Stock of the
Company or any member of the immediate family of any of the foregoing persons
had or will have a direct or indirect material interest other than (i)
compensation agreements and other arrangements, which are described where
required in "Management," and (ii) the transactions described below.
TRANSACTIONS WITH DIRECTORS, EXECUTIVE OFFICERS AND 5% STOCKHOLDERS
The Company has financed its operations to date through a series of private
Common Stock and Preferred Stock financings. Upon the closing of this
offering, all shares of Preferred Stock will be converted into shares of
Common Stock at a conversion rate of one share of Common Stock for each share
of Preferred Stock. See "Description of Capital Stock."
Common Stock at Formation. In April 1995, the Company sold an aggregate of
4,688,333 shares of its Common Stock at a purchase price of $.12 per share to
certain individuals and entities. Among the purchasers were the following 5%
stockholders, directors and entities affiliated with directors of the Company,
who purchased the number of shares set forth opposite their respective names:
RSA--4,000,000 shares; Bessemer Venture Partners DCI--258,333 shares; D. James
Bidzos--125,000 shares; Kairdos L.L.C.--100,000 shares; and TZM Investment
Fund--80,000 shares. Mr. Bidzos is the Chairman of the Board of the Company,
the President and Chief Executive Officer of RSA and the General Manager and a
member of Kairdos L.L.C. Mr. Tomlinson, a director of the Company, is a
general partner of TZM Investment Fund and TZM Investment Fund is a member of
Kairdos L.L.C. Mr. Cowan, a director of the Company, is a general partner of
the general partner of Bessemer Venture Partners DCI. All purchasers paid cash
except RSA, which assigned and transferred to the Company equipment, assets
and technology, which assets and technology included certain specified
software developed or under development by RSA relating to digital certificate
issuance and management, certain tangible personal property, consisting mostly
of computer equipment, and all of RSA's right, title and interest in certain
specified agreements to provide digital certificate services. In connection
with the contribution of these assets to the Company, RSA entered into a
BSAFE/TIPEM OEM Master License Agreement with the Company pursuant to which
the Company was granted a perpetual, royalty free, nonexclusive, worldwide
license to distribute products it develops that contain or incorporate the RSA
BSAFE and TIPEM products and that relate to digital certificate issuing
software, software for the management of private keys and for digitally
signing computer files on behalf of others, software for customers to preview
and forward digital certificate requests to the Company, or such other
products that, in RSA's reasonable discretion, are reasonably necessary for
the implementation of a digital certificate business. RSA is also required to
provide maintenance and technical support for these products to the Company.
RSA's BSAFE product is a software tool kit that allows for the integration of
encryption and authentication features into software applications and TIPEM is
a secure e-mail development tool kit that allows for secure e-mail messages to
be sent using one vendor's e-mail product and read by another vendor's e-mail
product. Also in connection with this contribution of assets, RSA entered into
a Non-Compete and Non-Solicitation Agreement pursuant to which RSA agreed, for
a five-year period, not to compete with the Company's certificate authority
business.
Series A Preferred Stock. In April 1995, the Company also sold an aggregate
of 4,306,883 shares of its Series A Preferred Stock at a cash purchase price
of $1.20 per share to nine entities. Among the purchasers were the following
5% stockholders and entities affiliated with directors of the Company, who
purchased the number of shares set forth opposite their respective names:
Bessemer Venture Partners DCI--850,000 shares; VISA--850,000 shares; Intel
Corporation--850,000 shares; Security Dynamics--425,000 shares and First TZMM
Investment Partnership--23,550 shares. Mr. Bidzos is an Executive Vice
President and a director of Security Dynamics. Mr. Tomlinson, a director of
the Company, is a general partner of First TZMM Investment Partnership.
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Series B Preferred Stock. In February 1996, the Company sold an aggregate of
2,099,123 shares of its Series B Preferred Stock at a cash purchase price of
$2.45 per share to 12 entities. Among the purchasers were the following 5%
stockholders and entities affiliated with directors of the Company, who
purchased the number of shares set forth opposite their respective names:
Kleiner Perkins Caufield & Byers VII--1,153,207 shares; Bessemer Venture
Partners DCI--187,819 shares; Intel Corporation--144,052 shares; VISA --
144,052 shares; KPCB VII Founders Fund--125,947 shares; Security Dynamics--
72,026 shares; KPCB Information Science Zaibatsu Fund II--32,799 shares; and
First TZMM Investment Partnership--17,554 shares. Mr. Compton, a director of
the Company, is a general partner of the general partner of Kleiner Perkins
Caufield & Byers VII, KPCB VII Founders Fund and KPCB Information Science
Zaibatsu Fund II.
Series C Preferred Stock. In November and December 1996, the Company sold an
aggregate of 3,625,000 shares of its Series C Preferred Stock at a cash
purchase price of $8.00 per share to 13 entities. Among the purchasers was
Microsoft, a 5% stockholder, which purchased 812,500 shares. No other 5%
stockholder, officer, director or entity affiliated with a director of the
Company purchased Series C Preferred Stock.
Stockholders' Agreement. In April 1995, the Company and each of the persons
who were then stockholders (the "Parties") entered into a Stockholders'
Agreement, which was amended at the time of the Series B Preferred Stock
financing and again in November 1996, when the Series C Preferred Stock
financing was closed, to include as parties to the agreement the new holders
of Preferred Stock. The Stockholders' Agreement, as amended, prohibits the
Parties from transferring any of their shares of capital stock of the Company,
without the prior consent of the Board and a majority in interest of the other
Parties, to certain specified corporations and entities affiliated with such
corporations. The Stockholders' Agreement also provides that no Party can vote
shares of capital stock of the Company with voting rights in excess of 45% of
the voting rights of the total voting capital stock of the Company entitled to
vote on any matter, thereby prohibiting a Party with more than 45% of the
voting rights of the total voting capital stock of the Company from
controlling the voting on any given matter. Finally, the Stockholders'
Agreement provides that, so long as any of Kleiner Perkins Caufield & Byers
VII, Bessemer Venture Partners DCI, VISA and Intel Corporation retained at
least 50% of the shares issued to them in the Series A or Series B Preferred
Stock financing, or so long as RSA retains not less than the lesser of 10% of
the issued and outstanding voting shares of the Company or 75% of the shares
of Common Stock held by it immediately following the Series A Preferred Stock
financing, the Company and the stockholders would cause and maintain the
election to the Board of a representative of each of those five entities that
satisfied their respective requirement. The Stockholders' Agreement terminates
upon the closing of this offering.
Co-Sale Agreement. In February 1996, the Company, each of the purchasers of
Series B Preferred Stock and RSA entered into a Co-Sale Agreement, pursuant to
which the holders of Series B Preferred Stock were granted rights to
participate in certain sales of capital stock of the Company owned by RSA.
Such co-sale rights will terminate upon the closing of this offering.
Investors' Rights Agreement. In November 1996, the Company, all of the
current holders of Preferred Stock and the purchasers of Common Stock in April
1995 entered into an Amended and Restated Investors' Rights Agreement (the
"Investors' Rights Agreement") pursuant to which the holders of all such
Preferred or Common Stock (the "Investors") have certain registration rights
with respect to their shares of Common Stock following this offering. See
"Description of Capital Stock--Registration Rights." Pursuant to the terms of
the Investors' Rights Agreement, each of the Investors and Stratton Sclavos,
the Company's President and Chief Executive Officer and a director of the
Company, were granted a right of first offer with respect to certain future
sales of securities by the Company.
Officer Loans. In November 1996, in connection with the exercise of stock
options granted under the 1995 Stock Option Plan, the Company permitted four
executive officers, Richard A. Yanowitch, Ethel E. Daly, Dana L. Evan and
Stratton D. Sclavos to purchase shares of Common Stock in exchange for
promissory notes issued under its Executive Loan Program in the amounts of
$217,500, $105,000, $93,750 and $73,920, respectively. See "Management--
Employee Benefit Plans--Executive Loan Program of 1996." In June 1997, in
connection
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with the exercise of a stock option granted under the 1995 Stock Option Plan,
the Company permitted Nicholas F. Piazzola, an executive officer, to purchase
shares of Common Stock in exchange for a promissory note issued under the
Executive Loan Program in the amount of $115,425. Each note is a recourse note
that is secured by the shares purchased with that note. The notes bear interest
at the rate of 6.95% per annum (6.87% in the case of Mr. Piazzola), payable
quarterly, and are due and payable on the earlier of December 31, 2005 or the
date the borrowers' employment relationship with the Company is terminated,
unless otherwise extended by a separate written agreement approved by the
Board. During 1997, the Company paid a bonus in the amount of the interest
accrued under each such executive officer's promissory note -- $23,603,
$11,395, $10,174 and $8,022 for Mr. Yanowitch, Ms. Daly, Ms. Evan and Mr.
Sclavos, respectively.
Development Agreement. In September 1997, the Company and Security Dynamics,
the parent company of RSA, entered into a Master Development and License
Agreement (the "Development Agreement"). Mr. Bidzos, the Chairman of the Board
of the Company, is also a director of Security Dynamics. Pursuant to the
Development Agreement, the Company will develop a customized certificate
authority product based upon the Company's WorldTrust software application in
order to enable Security Dynamics to offer a product with encryption and
digital certificate authority functionality. The Company has retained the
ownership rights to the technology developed under this agreement, except to
the extent such technology constitutes derivatives of Security Dynamics's pre-
existing technology or such technology is solely created by Security Dynamics.
The Development Agreement provides that Security Dynamics will pay the Company
an aggregate of $2.7 million as an initial license fee, $900,000 of which was
paid in October 1997 and the remainder of which will be payable upon the
achievement of certain technical milestones, which include a software code
completion milestone of February 6, 1998, the release of a beta version of this
product by February 27, 1998 and the release of the final version of the
product by April 1, 1998. Commencing in March 1998, Security Dynamics will also
be required to pay the Company a monthly product support fee for a three-year
period, and thereafter for successive annual terms, unless either of the
parties elects to terminate such product support within 60 days prior to the
end of the term or Security Dynamics terminates support services at any time on
60 days prior written notice to the Company. For a yearly fee, Security
Dynamics can purchase product maintenance services. For so long as Security
Dynamics is paying such maintenance fees, the Company will be obligated, at no
additional cost, to provide Security Dynamics with non-exclusive first-to-
market access to new technologies developed by the Company that are relevant to
the business of providing enterprise security solutions or solutions for secure
business communications. The Company is also obligated, upon the request of
Security Dynamics, to make its other technology available to Security Dynamics
and to offer maintenance after the term of the agreement on certain "most
favored pricing" terms. The Company believes that the terms of the Development
Agreement, taken as a whole, were no less favorable to the Company than the
Company could have obtained from unaffiliated third parties.
Microsoft Agreement. In November 1997, the Company entered into a Certificate
Authority Preferred Provider Agreement (the "Microsoft Agreement") under which
the Company will be featured as the preferred provider of digital certificates
for Microsoft customers. Upon the execution of this agreement, the Company
issued Microsoft 100,000 shares of Common Stock valued at $800,000. The Company
believes that the terms of the Microsoft Agreement, taken as a whole, were no
less favorable to the Company than the Company could have obtained from
unaffiliated third parties.
VISA Agreements. In April 1996, the Company entered into a Private Label
Agreement with VISA under which the Company developed and operates a digital
certificate system for VISA's member banks, based on a private VISA root key.
The Company provides certificate registration and issuing and management
functions through its Digital ID Center and retains the ownership rights to
this digital certificate system developed for VISA. The Company provides, at no
additional charge, all maintenance and support for the VISA digital certificate
system. If the Company does not meet certain minimum service standards, or if
the VISA system experiences a degradation in the quality of service, the
Company would be required to pay monetary penalties in the event that the
system is unavailable. VISA could terminate this agreement in the event the
service, once fully available in final form, is unavailable for a significant
amount of time. This agreement expires two and one-half
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years from the earlier of the commencement of the pilot program or April 8,
1997. The Company received aggregate payments from VISA of $455,000 during
1996 and $1.1 million during 1997, in the form of development fees, set-up
fees and certificate volume-based subscriber fees. VISA is obligated to
continue to pay subscriber fees for the remainder of the term of this
agreement. VISA prepays these fees on a quarterly basis and are subject to
offset against certificates issued. VISA is not entitled to any refunds in the
event that sufficient certificates are not issued to offset any remaining
prepaid subscriber fees. The Company is also obligated to provide VISA with
certain "most favored pricing" rights. VISA has the right to terminate this
agreement after April 1, 1998 by entering into a license agreement with the
Company and paying licensing fees as well as a royalty for future certificates
issued. Otherwise, the agreement is terminable upon the completion of its term
(or earlier in the event of a material breach of the agreement by the other
party), upon bankruptcy or insolvency of the other party or upon the Company's
failure to provide support.
In October 1996, the Company entered into a Private Label Agreement with
VISA under which the Company developed a pilot digital certificate system,
based on a private VISA root key, which provides certificate registration and
issuing and management functions through VeriSign's operations and Digital ID
Center in connection with the VISA Cash stored value card and the Chip Card
Payment Service. This agreement expired in October 1997. The Company received
aggregate payments of $40,000 during 1996 and $221,600 during 1997, in the
form of development fees, operation fees and subscriber fees. The Company
believes that the terms of the agreements with VISA, taken as a whole, were no
less favorable to the Company than the Company could have obtained from
unaffiliated third parties.
Sublease with Security Dynamics. Since September 1996, the Company has
sublet approximately 12,700 square feet of space for its offices in Cambridge,
Massachusetts. This space is subleased from Security Dynamics pursuant to a
sublease that expires in March 1998. The Company made lease payments to
Security Dynamics of $17,646 during 1996 and $179,000 during 1997. The Company
is obligated to pay monthly rent of approximately $20,000 from January 1998
through the expiration date. The Company is also obligated to pay all
electricity, heating, ventilation and air conditioning costs for the subleased
premises.
CERTAIN BUSINESS RELATIONSHIPS
Legal Fees. During 1996 and 1997, the law firm of Tomlinson Zisko Morosoli &
Maser LLP, of which Mr. Tomlinson is a partner, provided legal services to the
Company on a variety of matters. During 1996 and 1997, the Company paid to or
accrued for Tomlinson Zisko Morosoli & Maser LLP an aggregate of $344,120 and
$239,051, respectively.
The Company believes that the terms of each of the transactions described
above, taken as a whole, were no less favorable to the Company than the
Company could have obtained from unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of December 31, 1997 and
as adjusted to reflect the sale of the shares of Common Stock offered hereby
by: (i) each person who is known by the Company to own beneficially more than
5% of the Company's Common Stock, (ii) each director of the Company, (iii)
each of the Named Executive Officers and (iv) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF COMMON
STOCK BENEFICIALLY
NUMBER OF OWNED(1)
SHARES --------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING(2)
- ------------------------ ------------ -------- -----------
<S> <C> <C> <C>
D. James Bidzos
Security Dynamics Technologies, Inc. (3)... 4,742,442 27.6% 23.5%
Kevin R. Compton
Kleiner Perkins Caufield & Byers (4)....... 1,315,703 7.7 6.5
David J. Cowan
Bessemer Venture Partners DCI (5).......... 1,299,902 7.6 6.4
William Chenevich
Visa International Service Association
(6)....................................... 997,802 5.8 5.0
Intel Corporation (7)....................... 994,052 5.8 4.9
Microsoft Corporation (8)................... 912,500 5.3 4.5
Stratton D. Sclavos (9)..................... 616,000 3.6 3.1
Richard A. Yanowitch (10)................... 290,000 1.7 1.4
Arnold Schaeffer (11)....................... 142,000 * *
Dana L. Evan (12)........................... 135,000 * *
Michael S. Baum (13)........................ 125,000 * *
Timothy Tomlinson (14)...................... 124,854 * *
All officers and directors as a group (13
persons) (15).............................. 10,018,703 58.3 49.6
</TABLE>
- --------
* Less than 1% of the Company's outstanding Common Stock
(1) Percentage ownership is based on 17,151,244 shares outstanding as of
December 31, 1997, including shares issuable upon conversion of all
outstanding Preferred Stock into Common Stock in connection with this
offering, and 20,151,244 shares outstanding after the offering. Shares of
Common Stock subject to options currently exercisable or exercisable
within 60 days of December 31, 1997 are deemed outstanding for the
purpose of computing the percentage ownership of the person holding such
options but are not deemed outstanding for computing the percentage
ownership of any other person. Unless otherwise indicated below, the
persons and entities named in the table have sole voting and sole
investment power with respect to all shares beneficially owned, subject
to community property laws where applicable.
(2) Assumes the Underwriters' over-allotment option is not exercised.
(3) Represents 4,497,026 shares held of record by Security Dynamics or by
wholly-owned subsidiaries thereof, 113,000 shares held of record by D.
James Bidzos, 103,125 shares held of record by Kairdos L.L.C., 12,000
shares held of record by relatives and other associates of Mr. Bidzos,
16,666 shares subject to options held of record by D. James Bidzos that
are exercisable within 60 days of December 31, 1997 and 625 shares
subject to options that are held of record by Kairdos L.L.C. that are
exercisable within 60 days of December 31, 1997. Mr. Bidzos, the Chairman
of the Board of the Company, is the President of RSA, an Executive Vice
President and a director of Security Dynamics and the General Manager and
a member of Kairdos L.L.C. Mr. Bidzos disclaims beneficial ownership of
the shares held by Kairdos L.L.C. except for his proportional interest
therein, and disclaims beneficial ownership of the shares held by
Security Dynamics or its wholly-owned subsidiaries. The address for Mr.
Bidzos and Security Dynamics is 20 Crosby Drive, Bedford, Massachusetts
01730.
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(4) Represents 1,279,154 shares held of record by Kleiner Perkins Caufield &
Byers VII L.P., 32,799 shares held of record by KPCB Information Science
Zaibatsu Fund II and 3,750 shares subject to options held of record by
Kevin Compton that are exercisable within 60 days of December 31, 1997.
Mr. Compton, a director of the Company, is a general partner of the
general partner of each of these entities. Mr. Compton disclaims
beneficial ownership of shares held by such entities except for his
proportional interest therein. The address for Mr. Compton and these
entities is c/o Kleiner Perkins Caufield & Byers, 2750 Sand Hill Road,
Menlo Park, California 94025.
(5) Represents 1,296,152 shares held of record by Bessemer Venture Partners
DCI and 3,750 shares subject to options held of record by Deer III & Co.
LLC that are exercisable within 60 days of December 31, 1997. Mr. Cowan,
a director of the Company, is a general partner of the general partner of
Bessemer Venture Partners DCI and is a manager of Deer III & Co. LLC. Mr.
Cowan disclaims beneficial ownership of shares held by Bessemer Venture
Partners DCI except for his proportional interest therein. The address
for Mr. Cowan and Bessemer Venture Partners DCI is 535 Middlefield Road,
Menlo Park, California 94025.
(6) Represents 994,052 shares held by VISA and 3,750 shares subject to
options held of record by VISA that are exercisable within 60 days of
December 31, 1997. Mr. Chenevich, a director of the Company, is the Group
Executive Vice President, Data Processing Systems of VISA. Mr. Chenevich
disclaims beneficial ownership of shares held by VISA. The address for
Mr. Chenevich and VISA is 900 Metro Center, Foster City, California
94404.
(7) Represents shares held by Intel Corporation. The address for Intel
Corporation is 2200 Mission College Blvd., Building SC-4, Santa Clara,
California 95050.
(8) Represents shares held by Microsoft Corporation. The address of Microsoft
Corporation is One Microsoft Way, Redmond, Washington 98052.
(9) Includes 2,500 shares held of record by Stratton or Jody Sclavos as
Custodians under UTMA for Nicholas L. Sclavos and 2,500 shares held of
record by Stratton or Jody Sclavos as Custodians under UTMA for Alexandra
C. Sclavos. Mr. Sclavos is President, Chief Executive Officer and a
director of the Company. Of the shares shown in the table, as of December
31, 1997, 269,500 were subject to a repurchase right that lapses as to
38,500 of the shares each quarter.
(10) Mr. Yanowitch is Vice President of Marketing of the Company. Of the
shares shown in the table, as of December 31, 1997, 181,250 were subject
to a repurchase right that lapses as to 18,125 of the shares each
quarter.
(11) Mr. Schaeffer is Vice President of Engineering of the Company. Of the
shares shown in the table, as of December 31, 1997, 80,500 were subject
to a repurchase right that lapses as to 8,875 of the shares each quarter.
(12) Includes 2,500 shares held of record by Ms. Evan as Custodian under UTMA
for Christopher Thomas Evan and 2,500 shares held of record by Ms. Evan
as Custodian under UTMA for Ryan Joseph Evan. Ms. Evan is Vice President
of Finance and Administration and Chief Financial Officer of the Company.
Of the shares shown in the table, as of December 31, 1997, 78,125 were
subject to a repurchase right that lapses as to 7,812 of the shares each
quarter.
(13) Mr. Baum is Vice President of Practices and External Affairs of the
Company. Of the shares shown in the table, as of December 31, 1997,
58,594 were subject to a repurchase right that lapses as to 7,324 of the
shares each quarter.
(14) Includes 65,451 shares held of record by members of the law firm
Tomlinson Zisko Morosoli & Maser LLP, 5,000 shares held of record by the
Joy E. Tomlinson 1996 Trust, 5,000 shares held of record by the Tucker
Tomlinson 1996 Trust, 10,000 shares held of record by the Allison A.
Zisko 1996 Trust, 10,000 shares held of record by the Natalie L. Zisko
1996 Trust and 625 shares subject to options held of record by TZM
Investment Fund that are exercisable within 60 days of December 31, 1997.
Mr. Tomlinson is a general partner of TZM Investment Fund, a member of
Tomlinson Zisko Morosoli & Maser LLP and a trustee of each trust.
(15) Includes the shares described in footnotes (3)-(6) and (9)-(14) and an
additional 230,000 shares held by other executive officers, of which
155,000 were subject to repurchase rights as of December 31, 1997 that
lapse as to an aggregate of 14,375 of the shares each quarter.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
As of December 31, 1997, assuming the conversion of all outstanding shares
of Preferred Stock into shares of Common Stock, there were outstanding
17,151,244 shares of Common Stock, each with a par value of $.001, held of
record by approximately 144 stockholders, and outstanding options to purchase
2,516,818 shares of Common Stock.
The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of the Company's Certificate of
Incorporation, which is included as an exhibit to the Registration Statement,
of which this Prospectus forms a part, and by the provisions of applicable
law.
COMMON STOCK
Upon the closing of this offering, the Company will be authorized to issue
50,000,000 shares of Common Stock. Subject to preferences that may be
applicable to any Preferred Stock outstanding at the time, the holders of
outstanding shares of Common Stock are entitled to receive dividends out of
assets legally available therefor at such times and in such amounts as the
Board from time to time may determine. Holders of Common Stock are entitled to
one vote for each share held on all matters submitted to a vote of
stockholders. Cumulative voting for the election of directors will not be
authorized by the Company's Amended and Restated Certificate of Incorporation,
which means that the holders of a majority of the shares voted can elect all
of the directors then standing for election. The Common Stock is not entitled
to preemptive rights and is not subject to conversion or redemption. Upon
liquidation, dissolution or winding-up of the Company, the assets legally
available for distribution to stockholders are distributable ratably among the
holders of the Common Stock and any participating Preferred Stock outstanding
at that time after payment of liquidation preferences, if any, on any
outstanding Preferred Stock and payment of other claims of creditors. Each
outstanding share of Common Stock is, and all shares of Common Stock to be
outstanding upon completion of this offering will be upon payment therefor,
duly and validly issued, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, each outstanding share of Preferred Stock
(the "Convertible Preferred") will be converted into shares of Common Stock.
See Note 6 of Notes to Consolidated Financial Statements for a description of
the Convertible Preferred. Following the offering, the Company will be
authorized to issue up to 5,000,000 shares of "blank check" Preferred Stock.
The Board is authorized, subject to any limitations prescribed by Delaware
law, to provide for the issuance of Preferred Stock in one or more series, to
establish from time to time the number of shares to be included in each such
series, to fix the rights, preferences and privileges of the shares of each
wholly unissued series and any qualifications, limitations or restrictions
thereon, and to increase or decrease the number of shares of any such series
(but not below the number of shares of such series then outstanding), without
any further vote or action by the stockholders. The Board may authorize the
issuance of Preferred Stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders of Common
Stock. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company and may adversely
affect the market price of the Common Stock, and the voting and other rights
of the holders of Common Stock. The Company has no current plan to issue any
shares of Preferred Stock.
REGISTRATION RIGHTS
Following this offering, the holders of approximately 15,069,339 shares of
Common Stock (representing the purchasers of Common Stock at the founding of
the Company in April 1995, all of the purchasers of Preferred Stock, and
certain purchasers of Common Stock in November 1997) (the "Holders") will have
certain rights to cause the Company to register those shares (the "Registrable
Securities") under the Securities Act pursuant to the Investors' Rights
Agreement. The holders of at least a majority of the Registrable Securities
may require, after 180 days from the effective date of this offering, that the
Company use its best efforts to effect up
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<PAGE>
to two registrations. Holders not part of the initial registration demand are
entitled to notice of such registration and are entitled to include shares of
Registrable Securities therein. These registration rights are subject to
certain conditions and limitations, including (i) the right, under certain
circumstances, of the underwriters of an offering to limit the number of shares
included in such registration and (ii) the right of the Company to delay the
filing of a registration statement for not more than 120 days after receiving
the registration demand. The Company is obligated to pay all registration
expenses incurred in connection with such registration (other than
underwriters' discounts and commissions) and the reasonable fees and expenses
of a single counsel to the selling Holders.
In addition, if the Company proposes to register any of its securities under
the Securities Act (other than a registration relating solely to the sale of
securities to participants in a Company stock plan, a registration on a form
that does not include substantially the same information as would be required
in a registration statement covering the sale of the Registrable Securities or
a registration in which the only Common Stock being registered is Common Stock
issuable upon conversion of debt securities that are also being registered) in
connection with the sale of such securities solely for cash, whether or not for
sale for its own account, the Holders are entitled to notice of such
registration and are entitled to include Registrable Securities therein. These
rights are subject to certain conditions and limitations, including the right
of the underwriters of an offering to limit the number of shares included in
such registration under certain circumstances. The Company is obligated to pay
all registration expenses incurred in connection with such registration other
than underwriters' discounts and commissions. If the Company were to initiate a
registration and include shares pursuant to this "piggyback" right, such sales
might have an adverse effect on the Company's ability to raise capital.
The Holders may also require the Company, on no more than two occasions in
any twelve-month period, to register all or a portion of their Registrable
Securities on Form S-3 under the Securities Act when such form becomes
available for use by the Company, if the securities to be so registered
represent an aggregate selling price to the public of not less than $1.0
million. The Holders who are not part of the initial registration demand are
entitled to notice of such registration and are entitled to include shares of
Registrable Securities therein. These registration rights are subject to
certain conditions and limitations, including the right of the Company to delay
the filing of a registration statement on Form S-3 for a period of not more
than 60 days after receiving the registration demand. The Company is obligated
to pay all registration expenses incurred in connection with such registration
(other than underwriters' discounts and commissions) and the reasonable fees
and expenses of a single counsel to the selling Holders.
Each stockholder's registration rights will expire upon the earlier of the
fifth anniversary of the closing of this offering or at such time as the
stockholder can sell all of its securities under Rule 144(k).
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Upon the closing of this offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law (the "Anti-
Takeover Law") regulating corporate takeovers. The Anti-Takeover Law prevents
certain Delaware corporations, including those whose securities are listed on
the Nasdaq National Market, from engaging, under certain circumstances, in a
"business combination" (which includes a merger or sale of more than 10% of the
corporation's assets) with any "interested stockholder" (a stockholder who owns
15% or more of the corporation's outstanding voting stock, as well as
affiliates and associates of any such persons) for three years following the
date that such stockholder became an "interested stockholder" unless (i) the
transaction is approved by the Board of Directors prior to the date the
"interested stockholder" attained such status, (ii) upon consummation of the
transaction that resulted in the stockholder's becoming an "interested
stockholder," the "interested stockholder" owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced
(excluding those shares owned by (a) persons who are directors and also
officers and (b) employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer), or (iii) on or subsequent
to such date the "business combination" is approved by the Board of Directors
and authorized at an annual or special meeting of stockholders by the
affirmative vote of at least two-thirds of the outstanding
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<PAGE>
voting stock that is not owned by the "interested stockholder." A Delaware
corporation may "opt out" of the Anti-Takeover Law with an express provision
in its original certificate of incorporation or an express provision in its
certificate of incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares.
The Company has not "opted out" of the provisions of the Anti-Takeover Law.
The statute could prohibit or delay mergers or other takeover or change-in-
control attempts with respect to the Company and, accordingly, may discourage
attempts to acquire the Company.
The Company's Amended and Restated Bylaws, which will be in effect upon the
completion of this offering, will provide for the division of the Board into
three classes as nearly equal in size as possible with staggered three-year
terms. The classification of the Board could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of the Company. In addition, the Amended and Restated
Bylaws will provide that any action required or permitted to be taken by the
stockholders of the Company at an annual meeting or special meeting of
stockholders may only be taken if it is properly brought before such meeting
and may not be taken by written action in lieu of a meeting. The Amended and
Restated Bylaws will provide that special meetings of the stockholders may
only be called by the Chairman of the Board, the Chief Executive Officer or,
if none, the President of the Company or by the Board.
The Company's Amended and Restated Certificate of Incorporation and Amended
and Restated Bylaws will provide that the Company will indemnify officers and
directors against losses that they may incur in investigations and legal
proceedings resulting from their services to the Company, which may include
services in connection with takeover defense measures. Such provisions may
have the effect of preventing changes in the management of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is
ChaseMellon Shareholder Services, L.L.C.
LISTING
The shares of Common Stock offered hereby have been approved for quotation
on the Nasdaq National Market under the symbol "VRSN" subject to official
notice of issuance.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect prevailing market prices from time to
time. Furthermore, since no shares will be available for sale shortly after
this offering because of certain contractual and legal restrictions on resale
(as described below), sales of substantial amounts of Common Stock of the
Company in the public market after these restrictions lapse could adversely
affect the prevailing market price and the ability of the Company to raise
equity capital in the future.
Upon completion of this offering, the Company will have outstanding an
aggregate of 20,151,244 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options. Of
these shares, all of the shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, unless
such shares are purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act (the "Affiliates"). The remaining
17,151,244 shares of Common Stock held by existing stockholders are
"restricted securities" as that term is defined in Rule 144 under the
Securities Act ("Restricted Shares"). Restricted Shares may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rule 144 or 701 promulgated under the Securities Act, which
rules are summarized below. All officers, directors, stockholders and option
holders of the Company have agreed not to offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly (or enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of), any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for shares of
Common Stock, for a period of 180 days after the date of this Prospectus,
without the prior written consent of Morgan Stanley & Co. Incorporated. Morgan
Stanley & Co. Incorporated may in its sole discretion choose to release a
certain number of these shares from such restrictions prior to the expiration
of such 180 day period. As a result of such contractual restrictions and the
provisions of Rule 144 and 701, the Restricted Shares will be available for
sale in the public market as follows: (i) no shares will be eligible for
immediate sale on the date of this Prospectus; (ii) 16,801,244 shares will be
eligible for sale upon expiration of the lock-up agreements 180 days after the
date of this Prospectus, subject in the case of all but 2,661,052 shares to
the volume limitations and other conditions of Rule 144 described below; and
(iii) the remaining 350,000 shares will become eligible for sale in November
1998, subject to the volume limitations and other conditions of Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of: (i) 1% of the number of shares of Common Stock then
outstanding (which will equal approximately 201,500 shares immediately after
this offering); or (ii) the average weekly trading volume of the Common Stock
on the Nasdaq National Market during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to such sale. Sales under Rule 144
are also subject to certain manner of sale provisions and notice requirements
and to the availability of current public information about the Company. Under
Rule 144(k), a person who is not deemed to have been an Affiliate of the
Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an Affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144; therefore,
unless otherwise restricted, shares will qualify as "144(k) shares" on the
date of this Prospectus and may be sold immediately upon the completion of
this offering. Subject to certain limitations on the aggregate offering price
of a transaction and other conditions, employees, directors, officers,
consultants or advisors may rely on Rule 701 with respect to the resale of
securities originally purchased from the Company prior to the date the issuer
becomes subject to the reporting requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), pursuant to written compensatory
benefit plans or written contracts relating to the compensation of such
persons. In addition, the Securities and Exchange Commission has indicated
that Rule 701 will apply to typical stock options granted by an issuer before
it
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<PAGE>
becomes subject to the reporting requirements of the Exchange Act, along with
the shares acquired upon exercise of such options (including exercises after
the date of this Prospectus). Securities issued in reliance on Rule 701 are
restricted securities and, subject to the contractual restrictions described
above, beginning 90 days after the date of this Prospectus, may be sold by
persons other than Affiliates subject only to the manner of sale provisions of
Rule 144, and by Affiliates under Rule 144 without compliance with its holding
period requirements.
Upon completion of this offering, the holders of approximately 15,069,339
shares of Common Stock currently outstanding or issuable upon conversion of
Preferred Stock, or their transferees, will be entitled to certain rights with
respect to the registration of such shares under the Securities Act. See
"Description of Capital Stock--Registration Rights." Registration of such
shares under the Securities Act would result in such shares becoming freely
tradable without restriction under the Securities Act (except for share
purchases by affiliates) immediately upon the effectiveness of such
registration.
The Company intends to file a registration statement under the Securities
Act covering (i) 2,625,000 shares of Common Stock reserved or to be reserved
for issuance under the Equity Incentive Plan, the Purchase Plan and the
Directors Plan, (ii) an additional number of shares of Common Stock to be
reserved for issuance under the Equity Incentive Plan equal to the number of
shares reserved for future issuance under the Prior Plans as of the date of
this Prospectus (436,682 as of December 31, 1997), and (iii) shares subject to
outstanding options under the Prior Plans as of the date of this Prospectus
(2,516,818 as of December 31, 1997). See "Management--Employee Benefit Plans."
Such registration statement is expected to be filed and become effective as
soon as practicable after the effective date of this offering. Accordingly,
shares registered under such registration statement will, subject to Rule 144
volume limitations applicable to Affiliates, be available for sale in the open
market, beginning 180 days after the date of the Prospectus, unless such
shares are subject to vesting restrictions with the Company.
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<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the
Underwriters named below (the "Underwriters"), for whom Morgan Stanley & Co.
Incorporated, Hambrecht & Quist LLC and Wessels, Arnold & Henderson, L.L.C.
are acting as Representatives (the "Representatives"), have severally agreed
to purchase, and the Company has agreed to sell to them, severally, the
respective number of shares of Common Stock set forth opposite their
respective names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated.....................................
Hambrecht & Quist LLC.................................................
Wessels, Arnold & Henderson, L.L.C. ..................................
---------
Total............................................................. 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all of the shares of Common Stock offered hereby (other than
those covered by the over-allotment option described below) if any such shares
are taken.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the initial public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price. Any
Underwriter may allow, and such dealers may reallow, a concession not in
excess of $ a share to other Underwriters or to certain dealers. After the
initial offering of the shares of Common Stock, the offering price and other
selling terms may from time to time be varied by the Representatives.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of
450,000 additional shares of Common Stock at the initial public offering price
set forth on the cover page hereof, less underwriting discounts and
commissions. The Underwriters may exercise such option to purchase solely for
the purpose of covering over-allotments, if any, made in connection with the
offering of the shares of Common Stock offered hereby. To the extent such
option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares of Common Stock as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of shares
of Common Stock set forth next to the names of all Underwriters in the
preceding table.
The Underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
Common Stock offered by them.
Each of the Company and the directors, executive officers, certain other
stockholders and option holders of the Company has agreed that, without the
prior written consent of Morgan Stanley & Co. Incorporated on behalf of the
Underwriters, it will not during the period ending 180 days after the date of
this Prospectus (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer, lend or dispose
of, directly or indirectly, any shares
71
<PAGE>
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic
consequences of ownership of the Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise, except under certain
limited circumstances. The restrictions described in this paragraph to not
apply to (a) the sale of Shares to the Underwriters, (b) the issuance by the
Company of shares of Common Stock upon exercise of an option or a warrant
outstanding on the date of this Prospectus and described as such in the
Prospectus, (c) the issuance by the Company of shares of Common Stock under
the Equity Incentive Plan, the Directors Plan and the Purchase Plan or (d)
transactions by any person other than the Company relating to shares of Common
Stock or other securities acquired in open market transactions after the
completion of the offering of the Shares.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Common Stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the Common Stock, the Underwriters may bid for, and purchase,
shares of Common Stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an Underwriter or a dealer for
distributing the Common Stock in the offering, if the syndicate repurchases
previously distributed Common Stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in
these activities, and may end any of these activities at any time.
In November and December 1996, the Company issued an aggregate of 3,625,000
shares of Series C Preferred Stock for an aggregate consideration of $29.0
million. In connection with such financing, Morgan Stanley & Co. Incorporated
received an aggregate of $730,000 as a financial advisory fee.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the Common Stock
or any other securities of the Company. The initial public offering price for
the Common Stock will be determined by negotiations between the Company and
the Representatives. Among the factors to be considered in determining the
initial public offering price will be the future prospects of the Company and
its industry in general, sales, earnings and certain other financial and
operating information of the Company in recent periods, and the price-earnings
ratios, price-sales ratios, market prices of securities and certain financial
and operating information of companies engaged in activities similar to those
of the Company. The estimated initial public offering price range set forth on
the cover page of this Preliminary Prospectus is subject to change as a result
of market conditions and other factors.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Fenwick & West LLP, Palo Alto, California. Certain
legal matters in connection with this offering will be passed upon for the
Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California.
EXPERTS
The consolidated financial statements and schedule of VeriSign, Inc. and
subsidiary as of December 31, 1996 and 1997 and for the period from April 12,
1995 (inception) to December 31, 1995 and for each of the years in the two-
year period ended December 31, 1997 have been included herein and in the
Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent auditors, appearing elsewhere herein, and upon the authority of
said firm as experts in accounting and auditing.
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<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedule thereto. Certain items
are omitted in accordance with the rules and regulations of the Commission.
For further information with respect to the Company and the Common Stock
offered hereby, reference is made to the Registration Statement and the
exhibits and schedule thereto. Statements contained in this Prospectus
regarding the contents of any contract or any other document to which
reference is made are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement, and the
exhibits and schedule thereto, may be inspected without charge at the public
reference facilities maintained by the Commission in Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at the Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New
York, New York 10048, and copies of all or any part of the Registration
Statement may be obtained from such offices upon the payment of the fees
prescribed by the Commission. The Commission maintains a World Wide Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The
address of the site is http://www.sec.gov.
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<PAGE>
VERISIGN, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of KPMG Peat Marwick LLP, Independent Auditors...................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
VeriSign, Inc.:
We have audited the accompanying consolidated balance sheets of VeriSign,
Inc. and subsidiary as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the period from April 12, 1995 (inception) to December 31, 1995, and for
each of the years in the two-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of VeriSign,
Inc. and subsidiary as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for the period from April 12, 1995 (inception)
to December 31, 1995, and for each of the years in the two-year period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
San Francisco, California
January 8, 1998
F-2
<PAGE>
VERISIGN, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
PRO FORMA
1996 1997 1997
------- ------- -----------
ASSETS (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents...................... $29,983 $ 3,943 $ 3,943
Short-term investments......................... -- 7,951 7,951
Accounts receivable, net of allowance for
doubtful accounts of $35 and $214,
respectively.................................. 751 2,274 2,274
Prepaid expenses and other current assets...... 786 750 750
------- ------- -------
Total current assets......................... 31,520 14,918 14,918
Property and equipment, net...................... 4,617 8,622 8,622
Other assets..................................... 366 866 866
------- ------- -------
$36,503 $24,406 $24,406
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.................................. $ 258 $ -- $ --
Accounts payable............................... 2,461 2,526 2,526
Accrued liabilities............................ 2,034 2,346 2,346
Deferred revenue............................... 1,944 4,819 4,819
------- ------- -------
Total current liabilities.................... 6,697 9,691 9,691
------- ------- -------
Minority interest in subsidiary.................. 1,251 2,246 2,246
------- ------- -------
Commitments
Stockholders' equity:
Convertible preferred stock, $.001 par value;
actual--10,282,883 shares authorized;
10,031,006 shares issued and outstanding in
1996 and 1997; aggregate liquidation
preference of $39,206 in 1996 and 1997; pro
forma--5,000,000 shares authorized; no shares
issued and outstanding........................ 10 10 --
Common stock, $.001 par value; actual--
21,592,117 shares authorized; 6,376,708 and
7,120,238 shares issued and outstanding in
1996 and 1997, respectively; pro forma--
50,000,000 shares authorized; 17,151,244
shares issued and outstanding................. 6 7 17
Additional paid-in capital..................... 41,319 44,908 44,908
Notes receivable from stockholders............. (543) (644) (644)
Deferred compensation.......................... -- (380) (380)
Accumulated deficit............................ (12,237) (31,432) (31,432)
------- ------- -------
Total stockholders' equity................... 28,555 12,469 12,469
------- ------- -------
$36,503 $24,406 $24,406
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
VERISIGN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 12, 1995 YEAR ENDED
(INCEPTION) TO DECEMBER 31,
DECEMBER 31, ------------------
1995 1996 1997
-------------- -------- --------
<S> <C> <C> <C>
Revenues................................... $ 382 $ 1,351 $ 9,382
Costs and expenses:
Cost of revenues......................... 412 2,791 7,833
Sales and marketing...................... 790 4,876 10,839
Research and development................. 642 2,058 5,188
General and administrative............... 680 2,640 4,604
Nonrecurring charges..................... -- -- 2,800
------- -------- --------
Total costs and expenses............... 2,524 12,365 31,264
------- -------- --------
Operating loss......................... (2,142) (11,014) (21,882)
Other income (expense)..................... 148 (67) 1,149
------- -------- --------
Loss before minority interest.......... (1,994) (11,081) (20,733)
Minority interest in net loss of subsidi-
ary....................................... -- (838) (1,538)
------- -------- --------
Net loss............................... $(1,994) $(10,243) $(19,195)
======= ======== ========
Pro forma basic and diluted net loss per
share..................................... $ (.74) $ (1.13)
======== ========
Shares used in per share computations...... 13,836 17,018
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
VERISIGN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM APRIL 12, 1995 (INCEPTION) TO DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE TOTAL
----------------- ----------------- PAID-IN FROM DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION DEFICIT EQUITY
---------- ------ --------- ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock to founders... -- $ -- 688,333 $ 1 $ 82 $ -- $ -- $ -- $ 83
Issuance of common
stock to a founder
in exchange for
equipment, other
assets, and
technology.......... -- -- 4,000,000 4 115 -- -- -- 119
Issuance of common
stock............... -- -- 4,500 -- -- -- -- -- --
Issuance of Series A
convertible
preferred stock..... 4,306,883 4 -- -- 5,164 -- -- -- 5,168
Net loss............. -- -- -- -- -- -- -- (1,994) (1,994)
---------- ---- --------- --- -------- ------ ------ --------- --------
Balances, December
31, 1995............ 4,306,883 4 4,692,833 5 5,361 -- -- (1,994) 3,376
Issuance of Series B
convertible
preferred stock..... 2,099,123 2 -- -- 5,141 -- -- -- 5,143
Issuance of Series C
convertible
preferred stock..... 3,625,000 4 -- -- 28,192 -- -- -- 28,196
Exercise of common
stock options....... -- -- 1,637,375 1 559 (543) -- -- 17
Issuance of common
stock............... -- -- 46,500 -- 3 -- -- -- 3
Issuance of capital
stock by subsidiary
to minority
interest............ -- -- -- -- 2,063 -- -- -- 2,063
Net loss............. -- -- -- -- -- -- -- (10,243) (10,243)
---------- ---- --------- --- -------- ------ ------ --------- --------
Balances, December
31, 1996............ 10,031,006 10 6,376,708 6 41,319 (543) -- (12,237) 28,555
Deferred compensation
related to common
stock options, net
of amortization of
$34................. -- -- -- -- 414 -- (380) -- 34
Exercise of common
stock options and
advance to
stockholder......... -- -- 432,250 1 244 (116) -- -- 129
Issuance of common
stock............... -- -- 39,405 -- 141 -- -- -- 141
Issuance of common
stock for litigation
settlement.......... -- -- 250,000 -- 2,000 -- -- -- 2,000
Issuance of common
stock for preferred
provider agreement.. -- -- 100,000 -- 800 -- -- -- 800
Repurchase of common
stock............... -- -- (78,125) -- (10) 10 -- -- --
Payments on notes
receivable from
stockholders........ -- -- -- -- -- 5 -- -- 5
Net loss............. -- -- -- -- -- -- -- (19,195) (19,195)
---------- ---- --------- --- -------- ------ ------ --------- --------
Balances, December
31, 1997............ 10,031,006 $ 10 7,120,238 $ 7 $ 44,908 $ (644) $ (380) $ (31,432) $ 12,469
========== ==== ========= === ======== ====== ====== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
VERISIGN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 12, 1995 YEAR ENDED
(INCEPTION) TO DECEMBER 31,
DECEMBER 31, ------------------
1995 1996 1997
-------------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................... $(1,994) $(10,243) $(19,195)
Adjustments to reconcile net loss to net
cash used in
operating activities:
Nonrecurring charges...................... -- -- 2,800
Depreciation and amortization............. 52 559 2,611
Minority interest in net loss of
subsidiary............................... -- (838) (1,538)
Changes in operating assets and
liabilities:
Accounts receivable..................... (195) (556) (1,523)
Prepaid expenses and other current
assets................................. (79) (708) 36
Accounts payable........................ 437 2,047 65
Accrued liabilities..................... 216 1,818 312
Deferred revenue........................ 42 1,898 2,875
------- -------- --------
Net cash used in operating activities... (1,521) (6,023) (13,557)
------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments....... -- -- (14,918)
Maturities and sales of short-term
investments.............................. -- -- 6,967
Purchases of property and equipment....... (1,008) (4,168) (6,582)
Other assets.............................. (35) (281) (500)
------- -------- --------
Net cash used in investing activities... (1,043) (4,449) (15,033)
------- -------- --------
Cash flows from financing activities:
Proceeds from bank borrowings............. -- 258 2,481
Repayment of bank borrowings.............. -- -- (2,739)
Proceeds from issuance of convertible
preferred stock.......................... 5,168 33,339 --
Proceeds from issuance of common stock.... 83 20 275
Issuance of capital stock by subsidiary to
minority interest........................ -- 4,151 2,533
------- -------- --------
Net cash provided by financing
activities............................. 5,251 37,768 2,550
------- -------- --------
Net change in cash and cash equivalents..... 2,687 27,296 (26,040)
Cash and cash equivalents at beginning of
period..................................... -- 2,687 29,983
------- -------- --------
Cash and cash equivalents at end of year.... $ 2,687 $ 29,983 $ 3,943
======= ======== ========
Noncash financing and investing activities:
Issuance of common stock to a founder for
equipment, other assets, and technology.. $ 119 $ -- $ --
======= ======== ========
Issuance of notes receivable
collateralized by common stock........... $ -- $ 543 $ 116
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
VERISIGN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
VeriSign, Inc. (the "Company") was incorporated in Delaware in April 1995
when RSA Data Security, Inc. ("RSA") contributed equipment, other assets, and
technology for common stock. This transfer of nonmonetary assets was recorded
at the founder's historical cost basis. The Company provides digital
certificate solutions and infrastructure needed by companies, government
agencies, trading partners and individuals to conduct trusted and secure
communications and commerce over the Internet and over intranets and extranets
using the Internet Protocol.
Consolidation
In February 1996, the Company established a subsidiary in Japan. As of
December 31, 1997, the Company owned approximately 50.5% of the subsidiary's
outstanding shares of capital stock. The subsidiary provides the Company's
digital certificate solutions throughout Japan. The accompanying consolidated
financial statements include the accounts of the Company and its subsidiary.
All significant intercompany balances and transactions have been eliminated in
consolidation. The Company accounts for changes in its proportionate share of
the net assets of the subsidiary resulting from sales of capital stock by the
subsidiary as equity transactions.
Foreign Currency Translation
The functional currency for the Company's subsidiary is the U.S. dollar;
however, its books of record are maintained in Japanese yen. As a result, its
financial statements are remeasured into U.S. dollars using a combination of
current and historical exchange rates and any remeasurement adjustments are
included in net loss, along with all transaction gains and losses for the
period.
Cash, Cash Equivalents, and Short-Term Investments
The Company considers all highly liquid investments with maturities of three
months or less at the date of acquisition to be cash equivalents. Cash and
cash equivalents include money market funds, commercial paper, and various
deposit accounts.
Investments held by the Company are classified as "available-for-sale" and
are carried at fair value based on quoted market prices. Such investments
consist of U.S. government or agency securities and corporate bonds with
original maturities beyond 3 months and less than 12 months. Unrealized gains
and losses as of December 31, 1996 and 1997, and realized gains and losses for
the periods presented were not material.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets, generally three to five years.
Revenue Recognition
Revenues from the sale or renewal of digital certificates are deferred and
recognized ratably over the life of the digital certificate, generally 12
months. Revenues from services are recognized using the percentage-of-
completion method, based on the ratio of costs incurred to total estimated
costs for fixed-fee development arrangements, on a time-and-materials basis
for consulting and training services or ratably over the term of the agreement
for support and maintenance services. To the extent costs incurred and
anticipated costs to complete
F-7
<PAGE>
VERISIGN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fixed-fee contracts in progress exceed anticipated billings, a loss is accrued
for the excess. To date, the Company has not experienced such losses. Deferred
revenue principally consists of payments for unexpired digital certificates.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 97-2, Software Revenue Recognition,
which supersedes SOP No. 91-1. The Company will be required to adopt SOP No.
97-2 prospectively for software transactions entered into beginning January 1,
1998. SOP No. 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. The fair value of an element must be
based on evidence that is specific to the vendor. If a vendor does not have
evidence of the fair value for all elements in a multiple-element arrangement,
all revenue from the arrangement is deferred until such evidence exists or
until all elements are delivered. The Company's management anticipates that
the adoption of SOP No. 97-2 will not have a material effect on the Company's
operating results.
Research and Development Costs
Research and development costs are expensed as incurred. Costs incurred
subsequent to establishing technological feasibility, in the form of a working
model, are capitalized and amortized over their estimated useful lives. To
date, software development costs incurred after technological feasibility has
been established have not been material.
Income Taxes
The Company uses the asset and liability method to account for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance
is recorded for deferred tax assets whose realization is not sufficiently
likely.
Stock-Based Compensation
The Company accounts for its equity-based compensation plan using the
intrinsic value method.
Pro Forma Net Loss Per Share
Pro forma basic net loss per share is computed using the weighted average
number of shares of common stock and convertible preferred stock outstanding
on an as-if converted basis. Pro forma diluted net loss per share is computed
using the weighted average number of shares of common stock and convertible
preferred stock outstanding on an as-if converted basis and, when dilutive,
common equivalent shares from options to purchase common stock using the
treasury stock method. In accordance with certain Securities and Exchange
Commission Staff Accounting Bulletins, such computations included all common
and common equivalent shares issued within the 12 months preceding the initial
public offering ("IPO") date as if they were outstanding for all prior periods
presented using the treasury stock method and the estimated IPO price.
Concentration of Credit Risk, Related Party Transactions and Significant
Customers
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents,
short-term investments, and accounts receivable. The Company maintains
F-8
<PAGE>
VERISIGN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
its cash, cash equivalents, and short-term investments with high quality
financial institutions and, as part of its cash management process, performs
periodic evaluations of the relative credit standing of these financial
institutions. The Company also performs ongoing credit evaluations of its
customers and, generally, requires no collateral from its customers. The
Company maintains an allowance for potential credit losses, but to date has
not experienced significant write-offs.
The Company provided services to VISA International Services Association
("VISA"), a 6% stockholder of the Company on a fully-diluted basis, under an
agreement that included development and ongoing operations of a digital
certificate system for VISA's member banks. VISA accounted for approximately
21% and 14% of the Company's revenues for the year ended December 31, 1996 and
1997, respectively, and 13% and 11% of accounts receivable as of December 31,
1996 and 1997, respectively.
The Company entered into a development agreement in September 1997 with
Security Dynamics Technologies, Inc. ("Security Dynamics"), the parent company
of RSA, a 26% stockholder of the Company on a fully-diluted basis, to develop
a customized certificate authority product in order to enable Security
Dynamics to offer a product with encryption and digital certificate authority
functionality. The development agreement provides that Security Dynamics will
pay the Company an aggregate of $2.7 million as an initial license fee,
$900,000 of which was paid in October 1997 and the remainder of which will be
payable upon the achievement of certain milestones. The Company records
revenue related to the development agreement using the percentage-of-
completion method. Revenue from the development agreement accounted for
approximately 4% of the Company's revenues for the nine months ended
September 30, 1997.
The Company had one customer, a South African systems integrator, and
another customer, a financial services provider, which accounted for
approximately 28% and 13%, respectively, of accounts receivable as of December
31, 1996. One other customer, a network equipment provider, accounted for
approximately 13% of accounts receivable as of December 31, 1997.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Unaudited Pro Forma Consolidated Balance Sheet
Upon closing of the Company's proposed initial public offering, all
outstanding shares of preferred stock will be converted into 10,031,006 shares
of common stock. The unaudited pro forma consolidated balance sheet as of
December 31, 1997, reflects this conversion.
F-9
<PAGE>
VERISIGN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
Available-for-sale securities included in cash, cash equivalents, and short-
term investments are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------ -------
<S> <C> <C> <C>
Corporate bonds........................................... $ -- $ 3,244
Money market funds........................................ 521 3,311
U.S. government and agency securities..................... 84 1,000
Commercial paper.......................................... -- 1,060
------ -------
$ 605 $ 8,615
====== =======
Included in cash and cash equivalents..................... $ 605 $ 664
====== =======
Included in short-term investments........................ $ -- $ 7,951
====== =======
(3) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------ -------
<S> <C> <C> <C>
Computer equipment and purchased software................. $3,501 $ 7,927
Office equipment, furniture and fixtures.................. 792 1,442
Leasehold improvements.................................... 934 2,425
------ -------
5,227 11,794
Less accumulated depreciation and amortization............ 610 3,172
------ -------
$4,617 $ 8,622
====== =======
(4) ACCRUED LIABILITIES
A summary of accrued liabilities follows (in thousands):
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------ -------
<S> <C> <C> <C>
Employee compensation..................................... $ 566 $ 1,443
Professional fees......................................... 354 95
Financing charges......................................... 732 --
Other..................................................... 382 808
------ -------
$2,034 $ 2,346
====== =======
</TABLE>
(5) NOTES PAYABLE
The Company's Japanese subsidiary had an available credit facility of
250,000,000 yen with a bank, which bore interest at a rate of 1.625% per annum
and expired in December 1997. Borrowings were secured by certain assets of the
subsidiary. As of December 31, 1996, borrowings under this facility aggregated
$258,000.
F-10
<PAGE>
VERISIGN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's Japanese subsidiary has available a revolving line of credit
with a bank that provides up to $500,000, bears interest at 1.625% per annum
and expires in May 1998. The line of credit is secured by a letter of credit
in the same amount from the Company. There were no borrowings under this
arrangement as of December 31, 1996 or 1997.
In January 1997, the Company entered into an agreement for a non-revolving
equipment line of credit with a financing company that provides up to
$3,000,000, bears interest at 7.50% per annum and expires in March 1999. The
line of credit is secured by the Company's fixed assets. The Company is
obligated to grant a warrant to purchase up to 17,500 shares of common stock
at $8.00 per share in the event the Company borrows funds under the equipment
line of credit. There were no borrowings under this arrangement as of December
31, 1997.
(6) STOCKHOLDERS' EQUITY
Convertible Preferred Stock
In April 1995, the Company issued 4,306,883 shares of Series A convertible
preferred stock to previously unrelated third parties, except for 425,000
shares issued to Security Dynamics. In February 1996, the Company issued
2,099,123 shares of Series B convertible preferred stock. A majority of the
shares were issued to a previously unrelated third party venture capitalist
and the remainder were issued to existing investors, including Security
Dynamics and VISA. In November and December 1996, the Company issued 3,625,000
shares of Series C convertible preferred stock to previously unrelated third
parties.
As of December 31, 1997, convertible preferred stock consisted of the
following:
<TABLE>
<CAPTION>
SHARES
SHARES ISSUED AND
SERIES AUTHORIZED OUTSTANDING
------ ---------- -----------
<S> <C> <C>
A.................................................... 4,306,883 4,306,883
B.................................................... 2,101,000 2,099,123
C.................................................... 3,875,000 3,625,000
---------- ----------
10,282,883 10,031,006
========== ==========
</TABLE>
The rights, preferences, and privileges of the holders of convertible
preferred stock are as follows:
. The holders of Series A, B, and C preferred stock are entitled to
noncumulative dividends, if and when declared by the Board of Directors,
of $0.10, $0.20, and $0.64 per share, respectively.
. Shares of preferred stock are convertible to common stock at any time at
the rate of one share of common stock for each share of convertible
preferred stock. The convertible preferred stock automatically converts
to common stock upon the closing of an underwritten public offering of
the Company's common stock in which the aggregate proceeds for such
shares is at least $15,000,000 and the per share price is at least $9.00
per share.
. The holders of convertible preferred stock are protected by certain
antidilutive provisions.
. Shares of Series A, B, and C convertible preferred stock have a
liquidation preference of $1.20, $2.40, and $8.00 per share,
respectively, plus any declared and unpaid dividends.
. The convertible preferred stock generally votes equally with shares of
common stock on an "as if converted" basis.
No dividends have been declared or paid on the convertible preferred stock
or common stock since inception of the Company.
F-11
<PAGE>
VERISIGN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Common Stock
As of December 31, 1997, a total of 7,070,000 shares of common stock were
authorized for issuance under the Company's equity incentive plans (the
"Plans"), including 4,145,000 shares authorized under the 1995 Stock Option
Plan, 800,000 shares authorized under the 1997 Stock Option Plan, an
additional 2,000,000 shares authorized under the 1998 Equity Incentive Plan,
and 125,000 shares authorized under the 1998 Directors Plan.
Options may be granted at an exercise price not less than 100% of the fair
market value of the Company's common stock on the date of grant, as determined
by the Board of Directors, for incentive stock options and 85% of such fair
market value for nonqualified stock options. All options are granted at the
discretion of the Company's Board of Directors and have a term not greater
than 7 years from the date of grant. Options issued generally vest 25% on the
first anniversary date and ratably over the following 12 quarters.
A summary of stock option activity under the Plans follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
PERIOD FROM
APRIL 12, 1995
(INCEPTION) TO
DECEMBER 31, 1995 1996 1997
-------------------- --------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. -- $ -- 1,274,750 $.12 1,608,075 $ .80
Granted................. 1,398,750 .12 2,022,700 .83 1,425,150 4.53
Exercised............... -- -- (1,637,375) .34 (432,250) .58
Canceled................ (124,000) .12 (52,000) .13 (84,157) .91
--------- ---------- ---------
Outstanding at end of
period................. 1,274,750 .12 1,608,075 .80 2,516,818 2.95
========= ========== =========
Exercisable at end of
period................. 86,457 152,163 249,963
========= ========== =========
Weighted average fair
value of options
granted during the
period................. .03 .22 1.33
==== ==== =====
</TABLE>
The following table summarizes information about stock options outstanding
as of December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED-
RANGE AVERAGE WEIGHTED-
OF REMAINING AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER
PRICES OUTSTANDING LIFE PRICE EXERCISABLE
-------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
$.12-.25...................... 377,212 4.8 years $ .15 113,672
$.75-1.50..................... 709,206 5.7 years $ .86 126,791
$2.25......................... 569,050 6.3 years $2.25 125
$4.00-8.00.................... 861,350 6.7 years $6.35 9,375
</TABLE>
F-12
<PAGE>
VERISIGN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company applies the intrinsic value method in accounting for its equity-
based compensation plan. Had compensation cost for the Company's equity-based
compensation plans been determined consistent with the fair value approach set
forth in SFAS No. 123, Accounting for Stock-Based Compensation, the Company's
net loss for the period from April 12, 1995 (inception) to December 31, 1995,
and for each of the years in the two-year period ended December 31, 1997,
would have been as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Net loss as reported.......................... $(1,994) $(10,243) $(19,195)
Pro forma net loss under SFAS No. 123......... (1,999) (10,294) (19,472)
Pro forma basic and diluted net loss per share
as reported.................................. (.74) (1.13)
Pro forma basic and diluted net loss per share
under SFAS No. 123........................... (.74) (1.14)
</TABLE>
The fair value of options granted during the period from April 12, 1995
(inception) to December 31, 1995 and the years ended December 31, 1996 and
1997, is estimated on the date of grant using the minimum value method with
the following weighted-average assumptions: no dividend yield; risk-free
interest rates of 6.11%, 6.21%, and 6.14%, respectively; and an expected life
of 5 years.
Notes Receivable From Stockholders
In November 1996, the Company loaned several officers an aggregate of
$543,000, due December 31, 2005, bearing interest at a rate per annum of
6.95%, payable quarterly. In August 1997, the Company loaned an officer an
aggregate of $116,000, due December 31, 2006, bearing interest at a rate per
annum of 6.87%, payable quarterly. The loans are full recourse, are
collateralized by pledges of shares of common stock of the Company that were
purchased and may be prepaid in part or in full without notice or penalty.
1998 Employee Stock Purchase Plan
In December 1997, the Board of Directors adopted, and in January 1998, the
stockholders approved, the 1998 Employee Stock Purchase Plan ("Purchase
Plan"), for which 500,000 shares of the Company's common stock have been
authorized. Eligible employees may select a rate of payroll deduction between
2% and 10% of their compensation and each participant will be granted an
option on the first day of each 24 month offering period and such option will
be automatically exercised on the last day of each six month purchase period
during the offering period. The purchase price for the Company's common stock
purchase under the Purchase Plan is 85% of the lesser of the fair market value
of the Company's common stock on the first day of the applicable offering
period and the last day of the applicable purchase period. The first offering
period is expected to begin on the first business day on which price
quotations for the Company's common stock are available on the Nasdaq National
Market and, depending on the effective date of the registration statement for
the Company's proposed initial public offering, may be greater or less than 24
months. Offering periods thereafter will begin at February 1 and August 1.
F-13
<PAGE>
VERISIGN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the Company's deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards and deferred start-up
costs................................................ $ 4,016 $ 11,579
Tax credit carryforwards.............................. 177 839
Other................................................. 162 507
------- --------
4,355 12,925
Valuation allowance..................................... (4,355) (12,925)
------- --------
Net deferred tax assets............................. $ -- $ --
======= ========
</TABLE>
As of December 31, 1997, the Company has available net operating loss
carryforwards for federal and California income tax purposes of approximately
$26,900,000 and $27,100,000, respectively. The federal net operating loss
carryforwards will expire, if not utilized, in years 2010 through 2014. The
California net operating loss carryforwards will expire, if not utilized, in
the year 2003.
As of December 31, 1997, the Company has available for carryover research and
experimental tax credits for federal and California income tax purposes of
approximately $411,000 and $248,000, respectively. The federal research and
experimental tax credits will expire, if not utilized, in years 2010 through
2014. California research and experimental tax credits carry forward
indefinitely until utilized. The Company also has federal foreign tax credits
of approximately $180,000, which expire, if not utilized, in the year 2003.
The Tax Reform Act of 1986 imposed substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
"ownership change" of a corporation. Accordingly, the Company's ability to
utilize net operating loss and credit carryforwards may be limited as a result
of such an "ownership change" as defined in the Internal Revenue Code.
(8) COMMITMENTS
Leases
The Company leases its facilities under operating leases that extend through
2002. Future minimum lease payments under the Company's noncancelable operating
leases as of December 31, 1997, are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................. $1,645
1999................................................................. 1,667
2000................................................................. 1,679
2001................................................................. 1,293
2002................................................................. 9
------
Total minimum lease payments......................................... $6,293
======
</TABLE>
Net rental expense under operating leases for the period from April 12, 1995
(inception) to December 31, 1995 and for the years ended December 31, 1996 and
1997, was $141,000, $621,000, and $1,700,000, respectively.
F-14
<PAGE>
VERISIGN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) NONRECURRING CHARGES
VeriFone
In September 1996, VeriFone, Inc., which subsequently became a wholly-owned
subsidiary of Hewlett-Packard Company, filed a lawsuit against the Company
alleging, among other things, trademark infringement. In November 1997, both
parties executed a definitive agreement under which, among other things, the
Company issued an aggregate of 250,000 shares of common stock, which were
transferred to Hewlett-Packard, and the Company and VeriFone settled such
claims. The settlement amount was recorded during the year ended December 31,
1997 as a $2.0 million charge to operations.
Microsoft
In November 1997, the Company entered into a preferred provider agreement
with Microsoft Corporation ("Microsoft") whereby the companies will develop,
promote and distribute a variety of client-based and server-based digital
certificate solutions and the Company will be designated as the premier
provider of digital certificates for Microsoft customers. In connection with
the agreement, the Company issued 100,000 shares of common stock to Microsoft
resulting in an $800,000 charge to operations.
(10) GEOGRAPHIC INFORMATION
Financial information by geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
UNITED
DECEMBER 31, 1996 STATES JAPAN CONSOLIDATED
----------------- -------- ------- ------------
<S> <C> <C> <C>
Revenues................................... $ 1,296 $ 55 $ 1,351
Operating loss............................. $ (9,281) $(1,733) $(11,014)
Total assets, excluding cash and cash
equivalents............................... $ 5,922 $ 598 $ 6,520
DECEMBER 31, 1997
Revenues................................... $ 9,009 $ 373 $ 9,382
Operating loss............................. $(18,747) $(3,135) $(21,882)
Total assets, excluding cash and cash
equivalents............................... $ 16,703 $ 3,760 $ 20,463
</TABLE>
Intergeographic transactions have not been significant to date. Other
revenues derived from international customers aggregated $861,000 for the year
ended December 31, 1997.
F-15
<PAGE>
[LOGO OF VERISIGN]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses to be paid by the Registrant in connection with this offering
are as follows. All amounts other than the SEC registration fee, NASD filing
fee and Nasdaq National Market application fee are estimates.
<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 12,122
NASD Filing Fee.................................................. 4,500
Nasdaq National Market Application Fee........................... 50,000
Printing......................................................... 200,000
Legal Fees and Expenses.......................................... 425,000
Accounting Fees and Expenses..................................... 225,000
Road Show Expenses............................................... 50,000
Blue Sky Fees and Expenses....................................... 5,000
Transfer Agent and Registrar Fees................................ 5,000
Miscellaneous.................................................... 23,378
----------
Total.......................................................... $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the
"Securities Act").
As permitted by the Delaware General Corporation Law, the Registrant's Third
Amended and Restated Certificate of Incorporation, which will become effective
upon the completion of this offering, includes a provision that eliminates the
personal liability of its directors for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Registrant or its stockholders, (ii) for
acts or omissions not in good faith or that involve intentional misconduct or
a knowing violation of law, (iii) under section 174 of the Delaware General
Corporation Law (regarding unlawful dividends and stock purchases) or (iv) for
any transaction from which the director derived an improper personal benefit.
As permitted by the Delaware General Corporation Law, the Registrant's
Amended and Restated Bylaws, which will become effective upon the completion
of this offering, provide that (i) the Registrant is required to indemnify its
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law, subject to certain very limited exceptions, (ii) the
Registrant may indemnify its other employees and agents to the extent that it
indemnifies its officers and directors, unless otherwise required by law, its
Certificate of Incorporation, its Amended and Restated Bylaws, or agreement,
(iii) the Registrant is required to advance expenses, as incurred, to its
directors and executive officers in connection with a legal proceeding to the
fullest extent permitted by the Delaware General Corporation Law, subject to
certain very limited exceptions and (iv) the rights conferred in the Amended
and Restated Bylaws are not exclusive.
The Registrant has entered into Indemnification Agreements with each of its
current directors and certain of its executive officers and intends to enter
into such Indemnification Agreements with each of its other executive officers
to give such directors and executive officers additional contractual
assurances regarding the scope of the indemnification set forth in the
Registrant's Certificate of Incorporation and to provide additional procedural
protections. At present, there is no pending litigation or proceeding
involving a director, officer or employee of the Registrant regarding which
indemnification is sought, nor is the Registrant aware of any threatened
litigation that may result in claims for indemnification.
II-1
<PAGE>
Reference is also made to Article VIII of the Underwriting Agreement, which
provides for the indemnification of officers, directors and controlling
persons of the Registrant against certain liabilities. The indemnification
provisions in the Registrant's Certificate of Incorporation, Amended and
Restated Bylaws and the Indemnification Agreements entered into between the
Registrant and each of its directors and executive officers may be
sufficiently broad to permit indemnification of the Registrant's directors and
executive officers for liabilities arising under the Securities Act.
The Registrant, with approval by the Registrant's Board of Directors, has
applied for, and expects to obtain, directors' and officers' liability
insurance.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
EXHIBIT
DOCUMENT NUMBER
-------- -------
<S> <C>
Underwriting Agreement (draft dated November 20, 1997)............. 1.01
Form of Third Amended and Restated Certificate of Incorporation of
Registrant........................................................ 3.03
Form of Amended and Restated Bylaws of Registrant.................. 3.05
Form of Indemnification Agreement.................................. 10.05
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following table sets forth information regarding all securities sold by
the Registrant since April 12, 1995, the Company's inception date.
<TABLE>
<CAPTION>
AGGREGATE
NAME OR DATE TITLE OF NUMBER PURCHASE FORM OF
CLASS OF PURCHASER OF SALE SECURITIES OF SHARES PRICE CONSIDERATION
------------------ ------- ------------------ --------- --------- -------------
<S> <C> <C> <C> <C> <C>
RSA Data Security, 4/18/95 Common Stock 4,000,000 $ 480,000 Property(1)
Inc....................
Bessemer Venture 4/18/95 Common Stock 258,333 31,000 Cash
Partners DCI...........
D. James Bidzos......... 4/18/95 Common Stock 125,000 15,000 Cash
Ronald Rivest........... 4/18/95 Common Stock 125,000 15,000 Cash
Kairdos L.L.C........... 4/18/95 Common Stock 100,000 12,000 Cash
TZM Investment Fund..... 4/18/95 Common Stock 80,000 9,600 Cash
Bessemer Venture 4/18/95 Series A Preferred 850,000 1,020,000 Cash
Partners DCI........... Stock(2)
Visa International 4/18/95 Series A Preferred 850,000 1,020,000 Cash
Service Association.... Stock(2)
Intel Corporation....... 4/18/95 Series A Preferred 850,000 1,020,000 Cash
Stock(2)
Fischer Security 4/18/95 Series A Preferred 425,000 510,000 Cash
Corporation L.L.C...... Stock(2)
Ameritech Development 4/18/95 Series A Preferred 425,000 510,000 Cash
Corporation............ Stock(2)
Mitsubishi Corporation.. 4/18/95 Series A Preferred 425,000 510,000 Cash
Stock(2)
Security Dynamics 4/18/95 Series A Preferred 425,000 510,000 Cash
Technologies, Inc...... Stock(2)
GC&H Investments........ 4/18/95 Series A Preferred 33,333 40,000 Cash
Stock(2)
First TZMM Investment 4/18/95 Series A Preferred 23,550 28,260 Cash
Partnership............ Stock(2)
Kleiner Perkins Caufield 2/20/96 Series B Preferred 1,153,207 2,825,357 Cash
& Byers VII............ Stock (2)
KPCB VII Founders Fund.. 2/20/96 Series B Preferred 125,947 308,570 Cash
Stock (2)
KPCB Information 2/20/96 Series B Preferred 32,799 80,358 Cash
Sciences Zaibatsu Fund Stock (2)
II.....................
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
AGGREGATE
NAME OR TITLE OF NUMBER PURCHASE FORM OF
CLASS OF PURCHASER DATE OF SALE SECURITIES OF SHARES PRICE CONSIDERATION
------------------ ------------ ------------------ --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Bessemer Venture 2/20/96 Series B Preferred 187,819 460,157 Cash
Partners DCI........... Stock (2)
Mitsubishi Corporation.. 2/20/96 Series B Preferred 72,026 176,464 Cash
Stock (2)
Security Dynamics 2/20/96 Series B Preferred 72,026 176,464 Cash
Technologies, Inc. .... Stock (2)
Intel Corporation....... 2/20/96 Series B Preferred 144,052 352,927 Cash
Stock (2)
Ameritech Development 2/20/96 Series B Preferred 72,026 176,464 Cash
Corporation............ Stock (2)
GC&H Investments........ 2/20/96 Series B Preferred 5,589 13,693 Cash
Stock (2)
Visa International 2/20/96 Series B Preferred 144,052 352,927 Cash
Service Association.... Stock (2)
Fischer Security 2/20/96 Series B Preferred 72,026 176,464 Cash
Corporation L.L.C. .... Stock (2)
First TZMM Investment 2/20/96 Series B Preferred 17,554 43,007 Cash
Partnership............ Stock (2)
Cisco Systems, Inc. .... 11/18/96 Series C Preferred 812,500 6,500,000 Cash
Stock (2)
Microsoft Corporation... 11/18/96 Series C Preferred 812,500 6,500,000 Cash
Stock (2)
Venture Fund I, L.P. ... 11/18/96 Series C Preferred 250,000 2,000,000 Cash
Stock (2)
COMCAST Investment 11/18/96 Series C Preferred 250,000 2,000,000 Cash
Holdings, Inc. ........ Stock (2)
First Data Corporation.. 11/18/96 Series C Preferred 250,000 2,000,000 Cash
Stock (2)
Intuit Inc. ............ 11/18/96 Series C Preferred 250,000 2,000,000 Cash
Stock (2)
Reuters New Media 11/18/96 Series C Preferred 250,000 2,000,000 Cash
Inc. .................. Stock (2)
SOFTBANK Ventures, 11/18/96 Series C Preferred 250,000 2,000,000 Cash
Inc. .................. Stock (2)
Merrill Lynch & Co., 11/18/96 Series C Preferred 250,000 2,000,000 Cash
Incorporated........... Stock (2)
Amerindo Technology 11/18/96 Series C Preferred 62,500 500,000 Cash
Growth Fund II......... Stock (2)
Attractor L.P. ......... 11/18/96 Series C Preferred 62,500 500,000 Cash
Stock (2)
Chancellor LGT Asset 11/18/96 Series C Preferred 62,500 500,000 Cash
Management............. Stock (2)
Gemplus................. 12/17/96 Series C Preferred 62,500 500,000 Cash
Stock (2)
26 consultants.......... 3/28/96-12/19/97 Common Stock 90,405 172,150 Services
63 employee or director 2/27/96-12/18/97 Common Stock 2,069,625(3) 796,543 Cash
optionees.............. (option exercises)
Microsoft Corporation... 11/20/97 Common Stock 100,000 800,000 (4)
VeriFone, Inc./Hewlett-
Packard Company........ 11/20/97 Common Stock 250,000 2,000,000 (5)
</TABLE>
- --------
(1) All founding stockholders paid cash except RSA Data Security, Inc., which
contributed its equipment, other assets and technology, as described in
Exhibit A to its Founder's Subscription Agreement.
(2) Each share of Preferred Stock will convert automatically into one share of
Common Stock.
II-3
<PAGE>
(3) Of these shares, 78,125 were repurchased by cancellation of a promissory
note in the amount of $9,375, and 822,969 were subject to repurchase at
December 31, 1997. The repurchase right lapses ratably over four years.
(4) The shares of Common Stock were issued in connection with a preferred
provider agreement with the Registrant.
(5) The shares of Common Stock were issued in connection with the execution of
certain agreements, including a settlement of claims, with VeriFone, Inc.,
which is owned by Hewlett-Packard Company.
All sales of Common Stock to employees made pursuant to the exercise of stock
options granted under the Registrant's stock option plans or pursuant to
restricted stock purchase agreements, and all sales to consultants for
services, were made pursuant to the exemption from the registration
requirements of the Securities Act afforded by Rule 701 promulgated under the
Securities Act.
All other sales were made in reliance on Section 4(2) of the Securities Act
and/or Regulation D promulgated under the Securities Act. These sales were made
without general solicitation or advertising. Each purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate the
investment who represented to the Registrant that the shares were being
acquired for investment.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
1.01 Underwriting Agreement (draft dated November 20, 1997).+
3.01 Second Amended and Restated Certificate of Incorporation of the
Registrant, as amended.+
3.02 Form of Amendment to Second Amended and Restated Certificate of
Incorporation of the Registrant.+
3.03 Form of Third Amended and Restated Certificate of Incorporation of the
Registrant to be effective upon the closing of this offering.+
3.04 Bylaws of Registrant.+
3.05 Form of Amended and Restated Bylaws of Registrant, to be adopted prior
to the closing of this offering.+
4.01 Investors' Rights Agreement, dated November 15, 1996, among the
Registrant and the parties indicated therein.+
4.02 Stockholders' Agreement, dated April 18, 1995, among the Registrant
and the parties indicated therein, and amendments dated February 20,
1996 and November 15, 1996.+
4.03 Co-Sale Agreement, dated February 20, 1996, among the Registrant and
the parties indicated therein.+
4.04 Form of Specimen Common Stock Certificate.+
5.01 Opinion of Fenwick & West LLP regarding legality of the securities
being registered.
10.01 Series A Preferred Stock Purchase Agreement, dated April 18, 1995,
among the Registrant and the parties indicated therein.+
10.02 Series B Preferred Stock Purchase Agreement, dated February 20, 1996,
among the Registrant and the parties indicated therein.+
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
10.03 Series C Preferred Stock Purchase Agreement, dated November 15, 1996,
among the Registrant and the parties indicated therein.+
10.04 Termination and Release Agreement, dated February 20, 1996, among the
Registrant and the parties indicated therein.+
10.05 Form of Indemnification Agreement entered into by the Registrant with
each of its directors and executive officers.+
10.06 Registrant's 1995 Stock Option Plan and related documents.+
10.07 Registrant's 1997 Stock Option Plan.+
10.08 Registrant's 1998 Directors' Stock Option Plan and related documents.+
10.09 Registrant's 1998 Equity Incentive Plan and related documents.+
10.10 Registrant's 1998 Employee Stock Purchase Plan and related documents.+
10.11 Registrant's Executive Loan Program of 1996.+
10.12 Founder's Subscription Agreement, dated April 18, 1995, between the
Registrant and RSA Data Security, Inc. for purchase of Common Stock.+
10.13 Form of Subscription Agreement, dated April 18, 1995, between the
Registrant and certain founding Common Stock holders for purchase of
Common Stock.+
10.14 Form of Full Recourse Secured Promissory Note and Form of Pledge and
Security Agreement entered into between the Registrant and certain
executive officers.+
10.15 Assignment Agreement, dated April 18, 1995, between the Registrant and
RSA Data Security, Inc.+
10.16 BSAFE/TIPEM OEM Master License Agreement, dated April 18, 1995,
between the Registrant and RSA Data Security, Inc., as amended.+
10.17 Non-Compete and Non-Solicitation Agreement, dated April 18, 1995,
between the Registrant and RSA Data Security, Inc.+
10.18 Microsoft/VeriSign Certificate Technology Preferred Provider
Agreement, effective as of May 1, 1997, between the Registrant and
Microsoft Corporation.*+
10.19 Master Development and License Agreement, dated September 30, 1997,
between the Registrant and Security Dynamics Technologies, Inc.*+
10.20 License Agreement, dated December 16, 1996, between the Registrant and
VeriSign Japan K.K.+
10.21 Loan Agreement, dated January 30, 1997, between the Registrant and
Venture Lending & Leasing, Inc.+
10.22 Security Agreement, dated January 30, 1997, between the Registrant and
Venture Lending & Leasing, Inc.+
10.23 VeriSign Private Label Agreement, dated April 2, 1996, between the
Registrant and VISA International Service Association.*+
10.24 VeriSign Private Label Agreement, dated October 3, 1996, between the
Registrant and VISA International Service Association.*+
10.25 Lease Agreement, dated August 15, 1996, between the Registrant and
Shoreline Investments VII.+
10.26 Lease Agreement, dated September 18, 1996, between the Registrant and
Shoreline Investments VII.+
10.27 Sublease Agreement, dated September 5, 1996, between the Registrant
and Security Dynamics Technologies, Inc.+
10.28 Employment Offer Letter Agreement, between the Registrant and Stratton
Sclavos, dated June 12, 1995, as amended October 4, 1995.+
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
11.01 Statement regarding computation of pro forma basic and diluted net
loss per share.
21.01 Subsidiary of the Registrant.+
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of KPMG Peat Marwick LLP (see Page S-1 of the Registration
Statement).
24.01 Power of Attorney.+
27.01 Financial Data Schedule (available in EDGAR format only).
</TABLE>
- --------
+ Previously filed.
* Confidential treatment is being sought with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
(b) The following financial statement schedule is filed herewith:
Schedule II -- Valuation and Qualifying Accounts--Page S-2
Other financial statement schedules are omitted because the information
called for is not required or is shown either in the financial statements or
the notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Mountain View, State of California, on the 13th
day of January, 1998.
VERISIGN, INC.
/s/ Stratton D. Sclavos
By: _________________________________
Stratton D. Sclavos
President and Chief Executive
Officer
In accordance with the requirements of the Securities Act, this Amendment was
signed by the following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
PRINCIPAL EXECUTIVE OFFICER:
<S> <C> <C>
/s/ Stratton D. Sclavos President, Chief Executive January 13, 1998
____________________________________ Officer and Director
Stratton D. Sclavos
PRINCIPAL FINANCIAL AND PRINCIPAL ACCOUNTING OFFICER:
/s/ Dana L. Evan Vice President of Finance January 13, 1998
____________________________________ and Administration and
Dana L. Evan Chief Financial Officer
DIRECTORS:
* Chairman of the Board January 13, 1998
____________________________________
D. James Bidzos
* Director January 13, 1998
____________________________________
William Chenevich
* Director January 13, 1998
____________________________________
Kevin R. Compton
* Director January 13, 1998
____________________________________
David J. Cowan
* Director and Secretary January 13, 1998
____________________________________
Timothy Tomlinson
/s/ Dana L. Evan Attorney-in-Fact
* By _______________________________
Dana L. Evan
</TABLE>
II-7
<PAGE>
REPORT ON SCHEDULE AND CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors
VeriSign, Inc.:
The audits referred to in our report dated January 8, 1998 included the
related financial statement schedule for the period from April 12, 1995
(inception) to December 31, 1995 and for each of the years in the two-year
period ended December 31, 1997, included in the registration statement. This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
We consent to the use of our reports included herein and to the reference to
our firm under the headings "Selected Consolidated Financial Data" and
"Experts" in the prospectus.
KPMG Peat Marwick LLP
San Francisco, California
January 8, 1998
S-1
<PAGE>
VERISIGN, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT THE CHARGED TO BALANCE AT THE
BEGINNING OF COSTS AND END OF THE
DESCRIPTION THE PERIOD EXPENSES WRITE-OFFS YEAR
- ----------- -------------- ---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Period from April 12, 1995
(inception) to
December 31, 1995........ $ -- $ 30 $ -- $ 30
Year ended December 31,
1996..................... $ 30 $ 22 $ 17 $ 35
Year ended December 31,
1997..................... $ 35 $315 $136 $214
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
5.01 Opinion of Fenwick & West LLP regarding legality of the securities
being registered.
11.01 Statement regarding computation of pro forma basic and diluted net
loss per share.
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of KPMG Peat Marwick LLP (see Page S-1 of the Registration
Statement).
27.01 Financial Data Schedule (available in EDGAR format only).
</TABLE>
<PAGE>
EXHIBIT 5.01
------------
January 13, 1998
VeriSign, Inc.
1390 Shorebird Way
Mountain View, CA 94043
Gentlemen/Ladies:
At your request, we have examined the Registration Statement on Form S-1
(File No. 333-40789) (the "Registration Statement") filed by you with the
----------------------
Securities and Exchange Commission (the "Commission") on November 21, 1997, as
----------
subsequently amended, in connection with the registration under the Securities
Act of 1933, as amended, of an aggregate of 3,450,000 shares of your Common
Stock (the "Stock"), all of which shares are expected to be sold by you. The
-----
Stock is to be sold to the underwriters named in the Registration Statement for
resale to the public.
In rendering this opinion, we have examined the following:
(1) the Registration Statement, together with the Exhibits filed as a part
thereof;
(2) your registration statement on Form 8-A filed with the Commission on
January 6, 1998;
(3) the Prospectus prepared in connection with the Registration Statement;
(4) the minutes of meetings and actions by written consent of the stockholders
and Board of Directors that are contained in your minute books that are in
our possession;
(5) the stock records that you have provided to us (consisting of a list of
stockholders issued by you and a list of option holders respecting your
capital stock that was prepared by your corporate counsel Tomlinson Zisko
Morosoli & Maser LLP and dated December 31, 1997); and
(6) a Management Certificate addressed to us and dated of even date herewith
executed by the Company containing certain factual and other
representations.
In our examination of documents for purposes of this opinion, we have
assumed, and express no opinion as to, the genuineness of all signatures on
original documents, the authenticity of all documents submitted to us as
originals, the conformity to originals of all
<PAGE>
VeriSign, Inc.
January 13, 1998
Page 2
documents submitted to us as copies, the legal capacity of all natural persons
executing the same, the lack of any undisclosed terminations, modifications,
waivers or amendments to any documents reviewed by us and the due execution and
delivery of all documents where due execution and delivery are prerequisites to
the effectiveness thereof.
As to matters of fact relevant to this opinion, we have relied solely upon
our examination of the documents referred to above and have assumed the current
accuracy and completeness of the information included in the documents referred
to above. We have made no independent investigation or other attempt to verify
the accuracy of any of such information or to determine the existence or non-
existence of any other factual matters; however, we are not aware of any facts
-------
that would lead us to believe that the opinion expressed herein is not accurate.
Based upon the foregoing, it is our opinion that the up to 3,450,000
shares of Stock to be issued and sold by you, when issued and sold in accordance
in the manner referred to in the relevant Prospectus associated with the
Registration Statement, will be validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to all references to us, if any, in the
Registration Statement, the Prospectus constituting a part thereof and any
amendments thereto.
This opinion speaks only as of its date and is intended solely for the your
use as an exhibit to the Registration Statement for the purpose of the above
sale of the Stock and is not to be relied upon for any other purpose.
Very truly yours,
FENWICK & WEST LLP
/s/ FENWICK & WEST LLP
__________________________
<PAGE>
EXHIBIT 11.01
VERISIGN, INC.
STATEMENT REGARDING COMPUTATION OF PRO FORMA BASIC AND DILUTED NET LOSS PER
SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
Net loss................................................... $(10,243) $(19,195)
======== ========
Weighted average common shares outstanding................. 5,040 6,574
Convertible preferred stock, on an as-if converted basis... 6,835 10,031
Staff Accounting Bulletin No. 83 issuances and grants:
Common stock............................................. 70 58
Stock options............................................ 1,226 355
Convertible preferred stock.............................. 665 --
-------- --------
Shares used in per share computations...................... 13,836 17,018
======== ========
Pro forma basic and diluted net loss per share............. $ (0.74) $ (1.13)
======== ========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1996 AND 1997 AND THE CONSOLIDATED
STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 29,983 3,943
<SECURITIES> 0 7,951
<RECEIVABLES> 786 2,488
<ALLOWANCES> 35 214
<INVENTORY> 0 0
<CURRENT-ASSETS> 31,520 14,918
<PP&E> 5,227 11,794
<DEPRECIATION> 610 3,172
<TOTAL-ASSETS> 36,503 24,406
<CURRENT-LIABILITIES> 6,697 9,691
<BONDS> 0 0
0 0
10 10
<COMMON> 6 7
<OTHER-SE> 28,539 12,452
<TOTAL-LIABILITY-AND-EQUITY> 36,503 24,406
<SALES> 1,351 9,382
<TOTAL-REVENUES> 1,351 9,382
<CGS> 2,791 7,833
<TOTAL-COSTS> 12,365 31,264
<OTHER-EXPENSES> (67) 1,149
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (11,081) (20,733)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (11,081) (20,733)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (10,243) (19,195)
<EPS-PRIMARY> (.74) (1.13)
<EPS-DILUTED> (.74) (1.13)
</TABLE>
