<PAGE>
EXHIBIT 99.2
Index to Financial Information
Page
Reference
Report of Independent Accountants................................. F-2
Financial Statements:
Statements of Financial Position as of December 31, 1998
and 1999........................................................ F-3
Statements of Operations for the Years Ended December 31, 1997,
1998 and 1999................................................... F-4
Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1997, 1998 and 1999........................... F-5
Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999................................. F-6
Notes to Financial Statements.................................... F-7
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of Network Solutions, Inc.
In our opinion, the accompanying statements of financial position and the
related statements of operations, of changes in stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Network Solutions, Inc. at December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years ended December 31,
1999 in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain a 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
February 2, 2000
McLean, VA
except for Note 13 for which the date is March 15, 2000
F-2
<PAGE>
Network Solutions, Inc.
Statements of Financial Position
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,862,000 $196,589,000
Short-term investments 118,808,000 116,342,000
Accounts receivable, net 22,628,000 31,916,000
Income taxes receivable --- 16,193,000
Prepaids and other assets 4,001,000 8,809,000
Deferred tax asset 40,508,000 100,997,000
------------ ------------
Total current assets 198,807,000 470,846,000
Furniture and equipment, net 16,005,000 57,406,000
Long-term investments 13,590,000 62,475,000
Deferred tax asset 14,831,000 28,197,000
Goodwill and other, net 634,000 6,379,000
------------ ------------
Total Assets $243,867,000 $625,303,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 28,287,000 $ 52,957,000
Due to SAIC 4,766,000 30,177,000
Income taxes payable 5,409,000 1,045,000
Current portion of capital lease obligations 834,000 247,000
Deferred revenue, net 93,720,000 255,307,000
------------ ------------
Total current liabilities 133,016,000 339,733,000
Capital lease obligations 247,000 ---
Long-term deferred revenue, net 35,474,000 106,332,000
Other long-term liabilities --- 639,000
------------ ------------
Total liabilities 168,737,000 446,704,000
Commitments and contingencies --- ---
Stockholders' equity:
Preferred stock, $.001 par value; authorized 10,000,000 shares; none issued and --- ---
outstanding in 1998 and 1999
Common stock, $.001 par value; authorized 210,000,000 shares; 67,791,734 issued and --- 68,000
outstanding in 1999
Class A common stock, $.001 par value; 9,140,000 shares issued and outstanding in 1998 9,000 ---
Class B common stock, $.001 par value; 23,850,000 shares issued and outstanding in 1998 24,000 ---
Additional paid-in capital 72,331,000 117,289,000
Retained earnings 2,407,000 29,259,000
Accumulated other comprehensive income 359,000 31,983,000
------------ ------------
Total stockholders' equity 75,130,000 178,599,000
------------ ------------
Total Liabilities and Stockholders' Equity $243,867,000 $625,303,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
--------------------------------------------------------------------------------
<PAGE>
Network Solutions, Inc.
Statements of Operations
Year ended December 31,
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------- --------------
<S> <C> <C> <C>
Net revenue $ 45,326,000 $ 93,652,000 $220,811,000
Cost of revenue 25,798,000 38,530,000 81,606,000
------------ ------------ ------------
Gross profit 19,528,000 55,122,000 139,205,000
Research and development expenses 1,653,000 4,821,000 10,989,000
Selling, general and administrative expenses 12,268,000 37,144,000 92,517,000
Interest income (2,211,000 ) (6,303,000 ) (9,928,000 )
Other expenses 116,000 116,000 52,000
------------ ------------ ------------
Income before income taxes 7,702,000 19,344,000 45,575,000
Provision for income taxes 3,471,000 8,109,000 18,689,000
------------ ------------ ------------
Net income $ 4,231,000 $ 11,235,000 $ 26,886,000
============ ============ ============
Earnings per common share:
Basic $ 0.08 $ 0.18 $ 0.40
============ =========== ============
Diluted $ 0.08 $ 0.17 $ 0.38
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
--------------------------------------------------------------------------------
<PAGE>
Network Solutions, Inc.
Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock Common Stock Additional Retained
Paid-in Earnings
Shares Amount Shares Amount Shares Amount Capital (Deficit)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, --- $ --- --- $ --- 12,500,000 $12,000 $ 4,468,000 $ (3,043,000 )
December 31,
1996
Declaration of --- --- --- --- --- --- --- (10,000,000 )
Class B dividend
Conversion of --- --- 575,000 --- (575,000 ) --- --- ---
Class B common
stock
Issuance of --- --- 3,220,000 4,000 --- --- 51,983,000 ---
Class A common
stock
Net income for --- --- --- --- --- --- --- 4,231,000
------------ ------------ ------------ ---------- ---------- -------- ----------- -------------
the year ended
December 31,
1997
Balance, --- --- 3,795,000 4,000 11,925,000 12,000 56,451,000 (8,812,000 )
December 31,
1997
Issuance of --- --- 775,000 1,000 --- --- 10,273,000 ---
Common Stock
pursuant to stock
plans
Tax benefit --- --- --- --- --- --- 5,607,000 ---
associated with
stock plans
Two-for-one --- --- 4,570,000 4,000 11,925,000 12,000 --- (16,000 )
common stock
split effected in
the form of a
100% stock
dividend
Comprehensive
income:
Net income for --- --- --- --- --- --- --- 11,235,000
the year ended
December 31,
1998.
Other
comprehensive
income, net of
tax:
Unrealized gains --- --- --- --- --- --- --- ---
on securities
Comprehensive --- --- --- --- --- --- --- ---
---------- ------ --------- -------- ---------- -------- ---------- ---------
income
Balance, --- --- 9,140,000 9,000 23,850,000 24,000 72,331,000 2,407,000
December 31,
1998
Issuance of 583,000 1,000 323,000 --- --- --- 10,115,000 ---
common stock
pursuant to stock
plans
Tax benefit --- --- --- --- --- --- 34,843,000 ---
associated with
stock plans
Conversion of --- --- 23,850,000 24,000 (23,850,000 ) (24,000 ) --- ---
Class B common
stock
Reclassification 33,313,000 33,000 (33,313,000 ) (33,000 ) --- --- --- ---
of Class A common
stock
Two-for-one 33,896,000 34,000 --- --- --- --- --- (34,000 )
common stock
split effected in
the form of a
100% stock
dividend
Comprehensive
income:
Net income for --- --- --- --- --- --- --- 26,886,000
the year ended
December 31,
1999
Other
comprehensive
income, net of
tax:
Unrealized gains --- --- --- --- --- --- --- ---
on securities
Comprehensive --- --- --- --- --- --- --- ---
income
Balance, 67,792,000 $ 68,000 $ $ $117,289,000 $ 29,259,000
December 31, ========== ========= ========= ======= ========== ======== ============ ============
1999
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Compre- Compre- Total
hensive hensive Stockholders'
Income Income Equity
<S> <C> <C> <C>
Balance, December 31, 1996 $ --- $ --- $ 1,437,000
Declaration of Class B dividend --- --- (10,000,000 )
Conversion of Class B common stock --- --- ---
Issuance of Class A common stock --- --- 51,987,000
Net income for the year ended December 31, 1997 --- --- 4,231,000
-------------
Balance, December 31, 1997 --- --- 47,655,000
Issuance of Common Stock pursuant to stock plans --- --- 10,274,000
Tax benefit associated with stock plans --- --- 5,607,000
Two-for-one common stock split effected in the form of a 100% stock --- --- ---
dividend
Comprehensive income:
Net income for the year ended December 31, 1998. --- 11,235,000 11,235,000
Other comprehensive income, net of tax:
Unrealized gains on securities 359,000 359,000 359,000
----------- ------------ -------------
Comprehensive income --- $11,594,000 ---
----------- ------------ -------------
Balance, December 31, 1998 359,000 75,130,000
Issuance of common stock pursuant to stock plans --- --- 10,116,000
Tax benefit associated with stock plans --- --- 34,843,000
Conversion of Class B common stock --- --- ---
Reclassification of Class A common stock --- --- ---
Two-for-one common stock split effected in the form of a 100% stock --- --- ---
dividend
Comprehensive income:
Net income for the year ended December 31, 1999 --- 26,886,000 26,886,000
Other comprehensive income, net of tax:
Unrealized gains on securities 31,624,000 31,624,000 31,624,000
------------
Comprehensive income --- $58,510,000 ---
------------
Balance, December 31, 1999 $31,983,000 $ 178,599,000
=========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
--------------------------------------------------------------------------------
<PAGE>
Network Solutions, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1998 1999
-------------- --------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,231,000 $ 11,235,000 $ 26,886,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,432,000 3,754,000 12,223,000
Provision for uncollectible accounts receivable 8,082,000 2,247,000 ---
Deferred income taxes (13,226,000 ) (27,317,000 ) (95,823,000 )
Tax benefit associated with stock plans --- 5,607,000 34,843,000
Changes in operating assets and liabilities:
Increase in accounts receivable (1,287,000 ) (19,083,000 ) (9,288,000 )
Increase in income taxes receivable --- --- (16,193,000 )
Increase in prepaids and other assets (69,000 ) (2,996,000 ) (4,808,000 )
Increase in accounts payable and accrued liabilities 3,845,000 21,861,000 22,655,000
Increase (decrease) in income taxes payable 5,042,000 367,000 (4,364,000 )
Increase in deferred revenue 32,099,000 67,743,000 232,445,000
------------- -------------- -------------
Net cash provided by operating activities 41,149,000 63,418,000 198,576,000
------------- -------------- -------------
Cash flows from investing activities:
Purchase of furniture and equipment (3,240,000 ) (13,070,000 ) (52,778,000 )
Redemption (purchase) of short-term investments, net (40,200,000 ) (77,990,000 ) 9,479,000
Acquisition of businesses, net of cash acquired --- --- (3,936,000 )
Purchase of long-term investments --- (13,590,000 ) (11,656,000 )
Proceeds from maturity of long-term investments --- --- 9,350,000
------------- -------------- -------------
Net cash used in investing activities (43,440,000 ) (104,650,000 ) (49,541,000 )
------------- -------------- -------------
Cash flows from financing activities:
Net transactions with SAIC ( 14,045,000 ) 3,516,000 25,411,000
Proceeds from issuance of common stock 52,405,000 --- ---
Dividend paid (10,000,000 ) --- ---
Repayment of capital lease obligations (463,000 ) (842,000 ) (834,000 )
Issuance of common stock pursuant to stock plans --- 10,274,000 10,115,000
------------- -------------- -------------
Net cash provided by financing activities 27,897,000 12,948,000 34,692,000
-------------
Net increase (decrease) in cash and cash 25,606,000 (28,284,000 ) 183,727,000
equivalents
Cash and cash equivalents, beginning of period 15,540,000 41,146,000 12,862,000
------------- -------------- -------------
Cash and cash equivalents, end of period $ 41,146,000 $ 12,862,000 $ 196,589,000
============= ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
--------------------------------------------------------------------------------
<PAGE>
Network Solutions, Inc.
Notes to Financial Statements
Note 1 --- Company and Summary of Significant Accounting Policies
Network Solutions is the exclusive registry and the leading registrar for
second level domain names within the .com, .net, .org and .edu top level domains
pursuant to a series of agreements with the Internet Corporation for Assigned
Names and Numbers (``ICANN'') and the Department of Commerce. As a registry, we
maintain the master directory of all second level domain names in the .com, .net
and .org top level domains. We own and maintain the shared registration system
that allows all registrars, including us, to enter new second level domain names
into the master directory and to submit modifications, transfers, re-
registrations and deletions for existing second level domain names. As a
registrar, we market second level domain name registration services that enable
registrants to establish their identities on the web. In addition, we market a
portfolio of value-added products and services to help our customers maximize
the value of that identity throughout its life cycle. Network Solutions also
provides Internet Technology Services, focusing on network engineering, network
and systems security and network management solutions.
Agreements with ICANN
On November 10, 1999, a series of wide-ranging agreements were entered into
relating to the domain name system. These
agreements consist of the following:
o A registry agreement between Network Solutions and ICANN under which Network
Solutions will continue to act as the exclusive registry for the .com, .net
and .org top level domains through November 9, 2003.
o A revised registrar accreditation agreement between ICANN and all registrars
registering names in the .com, .net and .org domains.
o A revised registrar license and agreement between Network Solutions as
registry and all registrars registering names in the .com, .net and .org
domains using Network Solutions' proprietary shared registration system.
o An amendment to the Memorandum of Understanding between the U.S. government
and ICANN.
Under these agreements, Network Solutions has recognized ICANN as the not-for-
profit corporation described in Amendment 11 to the Cooperative Agreement, has
become an ICANN-accredited registrar and has agreed to operate the registry in
accordance with the provisions of the registry agreement and the consensus
policies established by ICANN in accordance with the terms of that agreement.
Network Solutions will be an accredited registrar through November 9, 2004 with
a right to renew indefinitely. As the registry, Network Solutions will continue
to charge registrars $9 per registration-year until January 15, 2000.
Thereafter, the fee will be $6 per registration-year unless increased to cover
increases in registry costs under the circumstances described in the registry
agreement.
The term of the registry agreement extends until November 9, 2003, except
that, if the ownership of Network Solutions' registry and registrar operations
is separated within 18 months as described in the agreement, the registry
agreement term would be extended until November 9, 2007.
Network Solutions has agreed to pay annual fees set by ICANN at levels
currently not to exceed $2 million for Network Solutions' registrar and $250,000
for the Network Solutions' registry.
Network Solutions, Inc.
Notes to Financial Statements --- (Continued)
Note 1 --- Company and Summary of Significant Accounting Policies ---
(Continued)
Cooperative Agreement
In December 1992, Network Solutions entered into the cooperative agreement
with the National Science Foundation under which Network Solutions was to
provide Internet domain name registration services for five top level domains:
.com, .net, .org, .edu and .gov. These registration services include the initial
two year domain name registration and annual re-registration, and throughout the
registration term, maintenance of and unlimited modifications to individual
domain name records and updates to the master file of domain names. The
cooperative agreement became effective January 1, 1993. It included a three-
month phase-in period, a five-year operational period, commencing April 1, 1993
and ending March 31, 1998, and a six-month flexibility period through September
30, 1998. Effective September 9, 1998, the Department of Commerce took over the
administration of the cooperative agreement from the National Science
Foundation. In October 1998, the cooperative agreement was amended to extend the
flexibility period until September 30, 2000. In November 1999, we entered into
the series of agreements with ICANN and the Department of Commerce relating to
our Internet domain name registration services.
The original terms of the cooperative agreement provided for a cost
reimbursement plus fixed-fee contract (with an initial fee of 8%). Effective
September 14, 1995, the National Science Foundation and Network Solutions
amended the cooperative agreement to require Network Solutions to begin charging
end users a services fee of $50 per year for each domain name in the .com, .net
and .org top level domains. Until April 1, 1998, registrants paid a services fee
of $100 for two years of domain name services upon each initial registration and
an annual re-registration fee of $50 per year thereafter. The National Science
Foundation paid the registration fees for domain names within the .edu and .gov
top level domains through March 31, 1997. Commencing April 1, 1997, Network
Solutions agreed with the National Science Foundation to provide domain name
registration services within the .edu and .gov top level domains free of charge.
As of October 1, 1997, Network Solutions no longer registers or administers
domain names in the .gov top level domain.
Under the terms of the September 14, 1995 amendment to the cooperative
agreement, 30% of the registration fees collected by Network Solutions was
required to be set aside for the enhancement of the intellectual infrastructure
of the Internet (set aside funds) and, as such, was not recognized as revenue by
Network Solutions. The set aside funds, plus any interest earned, were disbursed
at the direction of the National Science Foundation. As of December 31, 1998,
Network Solutions had disbursed all set aside funds collected and associated
interest to the National Science Foundation.
On March 12, 1998, the National Science Foundation and Network Solutions
amended the cooperative agreement to eliminate the 30% set aside requirement
effective April 1, 1998 and to reduce the registration fees by a corresponding
amount. Initial registrations on and after April 1, 1998 are charged $70 for two
years of registration services and an annual re-registration fee of $35 per year
thereafter. This amendment had no effect on the revenue currently recognized on
each registration, $70 for initial registrations and $35 for re-registrations,
since Network Solutions previously did not recognize revenue on the 30% set
aside funds. Accordingly, while the revenue to Network Solutions on a per
registration basis did not change, the amount charged to customers declined.
For purposes of Network Solutions' statements of cash flows, amounts relating
to these restricted assets and the Internet fund liability have been excluded in
their entirety.
F-7
<PAGE>
Network Solutions, Inc.
Notes to Financial Statements --- (Continued)
Note 1 --- Company and Summary of Significant Accounting Policies ---
(Continued)
Revenue Recognition
Registration fees for registration services provided by Network Solutions are
recognized on a straight-line basis over the life of the registration term.
Network Solutions records revenue net of an estimated provision for
uncollectible accounts receivable (Note 3).
Substantially all of Network Solutions' Internet Technology Services revenue
is derived from professional services, which are generally provided to clients
on a time and expense basis and is recognized as services are performed.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 (SAB 101), ``Revenue Recognition in Financial
Statements'' which summarizes certain of the staff's views on revenue
recognition. Network Solutions' revenue recognition policies have been and
continue to be in accordance with SAB 101.
Deferred Revenue
Deferred revenue primarily represents the unearned portion of revenue related
to the unexpired term of registration fees, net of an estimate for uncollectible
accounts receivable (Note 3).
Cash and Cash Equivalents
Network Solutions considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Short and Long-Term Investments
Short and long-term investments in marketable securities are classified as
available-for-sale and are reported at fair value, with unrealized gains and
losses, net of tax, recorded in stockholders' equity. Fair value is determined
based upon the quoted market prices of the securities as of the balance sheet
date. Unrealized gains and losses are reflected in other comprehensive income.
Financial Instruments
The recorded value of Network Solutions' financial instruments, which include
short and long-term investments, accounts receivable and accounts payable,
approximates market value. Concentration of credit risks with respect to
registration receivables is limited due to the wide variety and number of
customers, as well as their dispersion across geographic areas. Network
Solutions has no derivative financial instruments.
Furniture and Equipment
Furniture and equipment are stated at cost. Depreciation on furniture, office
and computer equipment is calculated principally using a declining-balance
method over the useful lives of three to seven years. Equipment under capital
leases is amortized using a declining-balance method over the shorter of the
assets' useful lives or lease term, ranging from two to three years. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or the estimated useful lives of the assets, generally six years
(see Note 4 ---Furniture and Equipment).
F-8
<PAGE>
Network Solutions, Inc.
Notes to Financial Statements --- (Continued)
Note 1 --- Company and Summary of Significant Accounting Policies ---
(Continued)
Goodwill
Goodwill represents the excess of the purchase cost over the fair value of net
assets acquired in Network Solutions' acquisition by Science Applications
International Corporation, or SAIC, in 1995, and in the acquisition of
ImageCafe, Inc. by Network Solutions in November 1999. The goodwill resulting
from these transactions is amortized over five years and three years,
respectively, using the straight-line method. Amortization expense of $686,000,
$543,000 and $846,000 for years ended December 31, 1997, 1998 and 1999,
respectively, was included in selling, general and administrative expenses.
Stock Splits
On December 21, 1999, Network Solutions' Board of Directors approved a
two-for-one stock split of its Common Stock, to be effected in the form of a
100% stock dividend on shares of Common Stock outstanding on February 25, 2000.
The stock dividend was distributed on March 10, 2000.
On December 31, 1998, Network Solutions' Board of Directors approved a
two-for-one stock split of the shares of Class A common stock and Class B common
stock, to be effected in the form of a 100% stock dividend on shares of Class A
common stock and Class B common stock outstanding on February 26, 1999. The
stock dividend was distributed on March 23, 1999.
Share and per share information for all periods presented in the accompanying
financial statements have been adjusted to reflect these stock splits.
Software Development Costs
Effective 1998, the Company adopted the American Institute of Certified Public
Accountants' Statement of Position 98-1(``SOP 98-1''), ``Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use.'' Under the
Company's previous accounting policy, costs for internal use software, whether
developed or obtained, were generally expensed as incurred. In compliance with
SOP 98-1, the Company expenses costs incurred in the preliminary project stage
and, thereafter, capitalizes costs incurred in the developing or obtaining of
internal use software. Certain costs, such as maintenance and training, are
expensed as incurred. Capitalized costs are amortized over a period of 3 to 6
years.
Advertising Costs
Advertising production costs are expensed upon commencement of the advertising
campaign. Television, Internet banner and print advertising costs are expensed
in the period the advertising is delivered.
Income Taxes
Deferred taxes are accounted for under SFAS No. 109, ``Accounting for Income
Taxes,'' whereby deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between financial
statement reporting and income tax purposes. A valuation allowance is recorded
if it is ``more likely than not'' that some portion of or all of a deferred tax
asset will not be realized.
F-9
<PAGE>
Network Solutions, Inc.
Notes to Financial Statements --- (Continued)
Note 1 --- Company and Summary of Significant Accounting Policies ---
(Continued)
Prior to Network Solutions' initial public offering, Network Solutions filed
tax returns as part of SAIC's consolidated tax group. Tax expense during this
period had been determined as if Network Solutions was a separate taxpayer and
was charged to Network Solutions by SAIC. Effective October 1, 1997, Network
Solutions is no longer part of SAIC's consolidated tax group for federal income
tax purposes and prepares its income tax returns as a separate entity.
Stock Based Compensation
Network Solutions accounts for its stock option and employee stock purchase
plans in accordance with the provisions of Accounting Principles Board Opinion
(APB) No. 25, ``Accounting for Stock Issued to Employees''. No compensation cost
has been recognized by Network Solutions for its employee stock plans. The SFAS
No. 123, ``Accounting for Stock-Based Compensation'', provides an alternative
accounting method to APB No. 25 and requires additional pro forma disclosures
(Note 10). Network Solutions expects to continue to account for its employee
stock plans in accordance with the provisions of APB No. 25.
Segment Data
During 1998, Network Solutions adopted SFAS No. 131, ``Disclosures about
Segments of an Enterprise and Related Information''. SFAS No. 131 supersedes
SFAS No. 14, ``Financial Reporting for Segments of a Business Enterprise'',
replacing the ``industry segment'' approach with the ``management'' approach.
The management approach designates internal reporting that is used by management
for making operating decisions and assessing performance as the source of an
entity's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas and major customers. The adoption of
SFAS No. 131 did not affect results of operations, financial position or segment
information disclosures of Network Solutions due to the nature and relative
magnitude of its business activities for 1998 and 1999.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make reasonable estimates and
assumptions, based upon all known facts and circumstances that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements. Actual results could
differ from those estimates.
Note 2 --- Common Stock
1999 Secondary Stock Offering and Stock Reclassification
On February 12, 1999, Network Solutions completed a secondary stock offering
in which a total of 9,160,000 shares of Class A common stock were sold.
Concurrent with the offering, SAIC converted 9,000,000 shares of Class B common
stock into 9,000,000 shares of Class A common stock sold in the offering. The
remaining 160,000 shares of Class A common stock were sold by other selling
stockholders after they exercised the applicable stock options simultaneously
with the closing of the offering. Network Solutions was not a selling
stockholder, and, therefore, did not receive any proceeds from the stock
offering other than proceeds from options exercised as part of the offering.
F-10
<PAGE>
Network Solutions, Inc.
Notes to Financial Statements --- (Continued)
Note 2 --- Common Stock --- (Continued)
After the offering, SAIC owned approximately 89% of the combined voting power
and approximately 45% of the economic interest of the outstanding common stock.
On June 3, 1999, SAIC, the sole Class B common stock stockholder, converted
the remaining Class B common stock into an identical number of shares of Class A
common stock. As a result, SAIC's voting power changed from 89% to 45%,
consistent with the number of Class A shares owned after the conversion. On June
17, 1999, Network Solutions filed an Amended and Restated Certificate of
Incorporation whereby its Class A common stock, par value $0.001 per share, and
Class B Common stock, par value $0.001 per share, were reclassified as a single
class of common stock, par value $0.001 per share, the ``Common Stock''. At the
time of the reclassification of the Class A common stock and Class B common
stock to Common Stock, there were 33,312,594 shares of Class A common stock and
no shares of Class B common stock outstanding.
1997 Recapitalization and Initial Public Offering
On June 26, 1997, the Board of Directors amended the Certificate of
Incorporation to provide for two classes of common stock, designated as Class A
and Class B. The holders of Class A and Class B common stock generally have
identical rights except that holders of Class A common stock are entitled to one
vote per share while holders of Class B common stock are entitled to ten votes
per share. Each share of Class B common stock is convertible at the holder's
option into one share of Class A common stock.
On October 1, 1997, Network Solutions completed an initial public offering of
7,590,000 shares of its $.001 par value Class A common stock, including 990,000
shares resulting from the exercise of certain over allotment provisions. Network
Solutions' net proceeds from the initial public offering, including over
allotment, were $52.5 million based on Network Solutions' direct sale of
6,440,000 shares of Class A common stock.
Prior to the offering, Network Solutions was a wholly-owned subsidiary of
SAIC. In conjunction with the initial public offering, SAIC converted 1,150,000
shares (including 150,000 over allotment shares) of Class B common stock into
1,150,000 shares of Class A common stock and directly sold the shares as a
selling stockholder. Upon completion of the offering, SAIC owned 100% of the
outstanding Class B common stock representing 75.9% of Network Solutions' equity
and 96.9% of the combined voting power of Network Solutions' outstanding Class B
and Class A common stock.
On August 21, 1997, Network Solutions' Board of Directors declared a
$10,000,000 dividend to be paid to SAIC upon consummation of the initial public
offering. This dividend was paid to SAIC on October 1, 1997.
F-11
<PAGE>
Network Solutions, Inc.
Notes to Financial Statements --- (Continued)
Note 3 --- Accounts Receivable
Accounts receivable consist of the following amounts as of December 31:
<TABLE>
<CAPTION>
1998 1999
------------- -------------
<S> <C> <C>
Billed $ 42,679,000 $ 79,340,000
Unbilled 5,695,000 1,296,000
------------ ------------
Total accounts receivable before allowances 48,374,000 80,636,000
Less --- Allowance for uncollectible accounts (25,746,000) (48,720,000)
------------ ------------
Accounts receivable, net $ 22,628,000 $ 31,916,000
============ ============
</TABLE>
Unbilled receivables consist of registration fees and time and material
contract costs which have been incurred but which have not yet been billed.
Effective April 1, 1998, Network Solutions consolidates and then amortizes
only the net deferred revenue balance as net revenue over the registration term.
Through March 1998, in accounting for registration fees, Network Solutions
initially recorded the gross amount of the registration fee to accounts
receivable and deferred revenue. The allowance for estimated uncollectible
accounts was recorded against both accounts receivable and deferred revenue
balances. From the deferred revenue and allowance balances, Network Solutions
recorded revenue and its provision for uncollectible accounts on a straight-line
basis over the registration term.
The provision for uncollectible accounts receivable, which was separately
recorded and deducted from gross registration fees in determining net
registration revenue through March 1998, was $7,782,000 and $2,168,000
respectively, for the years ended December 31, 1997 and 1998. An additional
$300,000 and $79,000 of bad debt expense was recorded in 1997 and 1998,
respectively, for the write-off of Internet Technology Services receivables.
Note 4 --- Furniture and Equipment
Furniture and equipment consist of the following amounts as of December 31:
<TABLE>
<CAPTION>
1998 1999
------------- -------------
<S> <C> <C>
Furniture and office equipment $ 833,000 $ 2,058,000
Computer equipment and software 19,400,000 64,677,000
Leasehold improvements 2,018,000 8,294,000
----------- ------------
Furniture and equipment, at cost 22,251,000 75,029,000
Less: Accumulated depreciation and amortization (6,246,000) (17,623,000)
----------- ------------
Furniture and equipment, net $16,005,000 $ 57,406,000
=========== ============
</TABLE>
Furniture and equipment includes $2,386,000 of computer equipment acquired
during 1997 under capital lease agreements. Amortization expense related to
capital leases totaled $915,000, $1,028,000 and $304,000 in 1997, 1998 and 1999,
respectively. Depreciation and amortization expense related to furniture and
equipment, for the years ended December 31, 1997, 1998 and 1999 was $1,746,000,
$3,211,000 and $11,377,000, respectively.
F-12
<PAGE>
Network Solutions, Inc.
Notes to Financial Statements --- (Continued)
Note 5 --- Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following amounts as of
December 31:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Accounts payable $ 7,647,000 $ 3,283,000
Accrued expenses 16,717,000 39,449,000
Accrued payroll 3,923,000 10,225,000
----------- -----------
Total accounts payable and accrued expenses $28,287,000 $52,957,000
=========== ===========
</TABLE>
Note 6 --- Leases
Future minimum lease payments, including fixed escalation increases for office
space and equipment under capital and operating leases with initial or remaining
noncancelable lease terms in excess of one year as of December 31, 1999 are:
Capital Operating
Year Ending December 31: Leases Leases
--------- ------------
2000 $252,000 $ 8,195,000
2001 --- 6,133,000
2002 --- 4,007,000
2003 --- 1,421,000
2004 --- 358,000
-------- -----------
Total minimum lease payments 252,000 $20,114,000
Less: Amounts representing interest (5,000) ===========
--------
Present value of minimum lease payments 247,000
Less: Current portion (247,000)
--------
Long-term portion of capital lease obligations $ ---
========
In December 1992, Network Solutions entered into a lease agreement for Network
Solutions' headquarters in Herndon, Virginia. Subsequent to the acquisition,
SAIC subleased the facilities to Network Solutions under a lease expiring
November 2002. During 1997, Network Solutions leased a second facility in
Herndon whose lease term expires in July 2002. In April and September 1999,
Network Solutions leased two additional facilities in Herndon with lease terms
expiring in March 2004 and November 2002, respectively.
Operating lease expense for the years ended December 31, 1997, 1998 and 1999
was $2,188,000, $3,533,000 and $6,031,000, respectively. Network Solutions
generated rental income from subleases of $291,000 and $215,000 for the years
ended December 31, 1997 and 1998, respectively. No rental income from subleases
was recorded for the year ended December 31, 1999.
Note 7 --- Transactions with SAIC
Network Solutions was acquired by SAIC on March 10, 1995 in a stock-for-stock
transaction accounted for as a purchase. The financial statements for the years
ended December 31, 1997, 1998 and 1999 include significant transactions with
other SAIC business units involving functions and services (such as cash
management, tax administration, accounting, legal, data processing, payroll and
F-13
<PAGE>
Network Solutions, Inc.
Notes to Financial Statements --- (Continued)
Note 7 --- Transactions with SAIC --- (Continued)
related taxes and employee benefit plans) that were provided to Network
Solutions by centralized SAIC organizations. Such charges and allocations are
not necessarily indicative of the costs that would have been incurred if Network
Solutions had been a separate entity. SAIC assesses a fee to Network Solutions
for corporate services provided by SAIC equal to a percentage of annual net
revenue. The corporate services fee is negotiated annually and was 2.5%, 1.5%
and 0.5% during 1997, 1998 and 1999, respectively. The agreement may be
terminated by either party upon 180 days' prior written notice. Prior to July 1,
1999, employees of Network Solutions were eligible to participate in various
SAIC benefit plans, including stock, bonus and retirement plans, subject to the
applicable eligibility requirements. SAIC charges Network Solutions directly for
the costs of such employee benefit plans. Charges related to the administration
of the SAIC benefit plans in which employees of Network Solutions participate,
are included within the SAIC corporate services fee.
Amounts charged and allocated to Network Solutions for these functions and
services for the years ended December 31, 1997, 1998 and 1999 were $1,126,000,
$1,447,000 and $1,000,000, respectively, and are principally included in
selling, general and administrative expenses.
Sales as a subcontractor to SAIC for the years ended December 31, 1997, 1998
and 1999 were $2,445,000, $525,000 and $234,000, respectively. In addition,
because Network Solutions was included in SAIC's consolidated tax returns for
periods from acquisition until the initial public offering, Network Solutions
was obligated to make payment for its tax liability to SAIC in accordance with
the tax sharing arrangement (Note 8).
The due to SAIC balance represents the cumulative net activity of all
transactions between Network Solutions and SAIC and is primarily composed of
direct reimbursement of salaries, payroll taxes and employee benefits funded
upon processing by SAIC. Network Solutions reflects this activity in the
statements of cash flows on a net basis because of the quick turnover, the large
amounts and the short maturities of these related party cash transactions.
Note 8 --- Provision for Income Taxes
The results of Network Solutions since its acquisition by SAIC until its
initial public offering were included in SAIC's consolidated tax returns.
Subsequent to the initial public offering, Network Solutions is no longer part
of SAIC's consolidated tax group for federal income tax purposes and prepares
its income tax returns as a separate entity.
F-14
<PAGE>
Network Solutions, Inc.
Notes to Financial Statements --- (Continued)
Note 8 --- Provision for Income Taxes --- (Continued)
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal $ 13,931,000 $ 29,559,000 $ 95,540,000
State 2,766,000 5,867,000 18,977,000
------------ ------------ ------------
Total current provision 16,697,000 35,426,000 114,517,000
------------ ------------ ------------
Deferred:
Federal (11,035,000) (22,792,000) (79,948,000)
State (2,191,000) (4,525,000) (15,880,000)
------------ ------------ ------------
Total deferred benefit (13,226,000) (27,317,000) (95,828,000)
------------ ------------ ------------
Provision for income taxes $ 3,471,000 $ 8,109,000 $ 18,689,000
============ ============ ============
</TABLE>
Deferred tax assets are comprised of the following temporary differences as of
December 31:
<TABLE>
<CAPTION>
1998 1999
------------- --------------
<S> <C> <C>
Deferred revenue $46,943,000 $133,398,000
Provision for uncollectible accounts receivable 8,409,000 17,986,000
Tax on accumulated other comprehensive income --- (22,223,000)
Other (13,000) 33,000
----------- ------------
Total deferred tax asset $55,339,000 $129,194,000
</TABLE>
------------
Network Solutions has not established a current valuation allowance for its
deferred tax assets since, in the opinion of management, it is more likely than
not that all of the deferred tax assets will be realized. The deferred tax
assets relate primarily to registration fees which are taxable upon initial
registration but are recognized in the financial statements over the
registration term.
A reconciliation of the provision for income taxes to the amount computed by
applying the statutory federal income tax rate of 35% to income before income
taxes is provided below:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Federal tax at statutory rate $2,696,000 $6,771,000 $15,952,000
State income taxes, net of federal tax benefit 374,000 1,015,000 2,230,000
Nondeductible goodwill amortization 240,000 213,000 331,000
Other 161,000 110,000 176,000
---------- ---------- -----------
Provision for income taxes $3,471,000 $8,109,000 $18,689,000
========== ========== ===========
</TABLE>
Network Solutions paid income taxes of $31,235,000 and $100,223,000 during the
years ended December 31, 1998 and 1999,
respectively.
F-15
<PAGE>
Network Solutions, Inc.
Notes to Financial Statements --- (Continued)
Note 9 --- Computation of Earnings Per Share
<TABLE>
<CAPTION>
The following is a reconciliation of the numerator and denominator used in the basic and diluted earnings per share
<S> <C> <C> <C>
computations:
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
1997 Earnings Per Share:
Basic $ 4,231,000 53,220,000 $0.08
Dilutive securities:
Outstanding options --- 712,000
----------- ----------
Diluted $ 4,231,000 53,932,000 $0.08
=========== ========== =====
1998 Earnings Per Share:
Basic $11,235,000 63,914,000 $0.18
=====
Dilutive securities:
Outstanding options --- 2,880,000
----------- ----------
Diluted $11,235,000 66,794,000 $0.17
=========== ==========
1999 Earnings Per Share:
Basic $26,886,000 66,687,000 $0.40
Dilutive securities:
Outstanding options --- 3,230,000
---- ----------
Diluted $26,886,000 69,917,000 $0.38
=========== ==========
</TABLE>
Common shares issued are weighted for the period the shares were outstanding
and incremental shares assumed issued under the treasury stock method for
dilutive earnings per share are weighted for the period the underlying options
were outstanding.
Note 10 --- Employee Benefit Plans
1996 Stock Incentive Plan
The 1996 Stock Incentive Plan, or Incentive Plan, of Network Solutions was
adopted by the Board of Directors on September 18, 1996. The Incentive Plan
provides for awards in the form of restricted shares, stock units, stock
appreciation rights, and stock options (including incentive stock options and
nonstatutory stock options). A total of 9,225,000 shares of Common Stock have
been initially reserved for issuance under the Incentive Plan. The number of
shares are increased by 2% of the total number of Common Stock outstanding at
the end of the most recent calendar year. Through December 31, 1999, an
additional 4,934,000 shares were eligible for issuance and have subsequently
been reserved for a combined total of 14,159,000 eligible shares under the
Incentive Plan.
F-16
<PAGE>
Network Solutions, Inc.
Notes to Financial Statements --- (Continued)
Note 10 --- Employee Benefit Plans --- (Continued)
Following is a summary of stock option activity pursuant to Network Solutions'
Incentive Plan:
Shares
Under Weighted Average
Option Exercise Price
----------- ----------------
Balance at December 31, 1996 4,902,000 $ 3.25
Granted 2,402,000 $ 3.56
Exercised --- ---
Cancelled (146,000) $ 3.50
----------
Balance at December 31, 1997 7,158,000 $ 3.34
Granted 2,718,000 $10.98
Exercised (3,040,000) $ 3.26
Cancelled (1,414,000) $ 4.63
----------
Balance at December 31, 1998 5,422,000 $ 6.87
Granted 4,624,000 $43.54
Exercised (1,757,000) $ 5.28
Cancelled (597,000) $23.57
----------
Balance at December 31, 1999 7,692,000 $27.97
==========
Granted stock options generally become exercisable one year after the date of
the grant, vest 30%, 30%, 20% and 20%, respectively, on each anniversary date of
the grant and have a term of five years. All options granted to date have been
nonstatutory stock options except for 404,000 incentive stock options granted in
1996. During 1999, Network Solutions granted 27,576 restricted shares to two
executives. No other restricted shares, stock units or stock appreciation rights
have been granted to date.
The following table summarizes the status of Network Solutions' stock options
outstanding and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Stock Options Stock Options
Outstanding Exercisable
----------- -----------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life Price Shares Price
--------------- ------ ---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
$ 3.50--$ 3.50 1,440,000 2.16 $ 3.50 300,000 $ 3.50
$ 3.72--$ 10.84 1,364,000 3.31 $ 7.73 222,000 $ 6.47
$11.75--$ 29.69 1,352,000 4.28 $ 23.80 29,000 $ 12.41
$30.25--$ 38.63 1,301,000 4.38 $ 33.47 132,000 $ 35.31
$39.41--$ 46.00 1,378,000 4.24 $ 45.00 94,000 $ 46.00
$47.00--$129.34 857,000 4.86 $ 72.14 --- ---
------- ----
$ 3.50--$129.34 7,692,000 3.78 $ 27.97 777,000 $ 15.22
========= =======
</TABLE>
F-17
<PAGE>
Network Solutions, Inc.
Notes to Financial Statements --- (Continued)
Note 10 --- Employee Benefit Plans --- (Continued)
Employee Stock Purchase Plan
Effective January 7, 1998, Network Solutions adopted an Employee Stock
Purchase Plan to provide substantially all full time employees an opportunity to
purchase shares of its Common Stock through payroll deductions of up to 10% of
eligible compensation. Semiannually, on June 30 and December 31, participant
account balances are used to purchase stock at the lesser of 85 percent of the
fair market value on the trading day before the participation period starts or
the trading day preceding the day on which the participation period ends. A
total of 1,000,000 shares were initially reserved for purchase under the plan.
For the years ended December 31, 1998 and 1999, 60,000 and 26,000 shares were
purchased under this plan, respectively.
Network Solutions 401(k) Retirement Plan
Effective July 1, 1999, Network Solutions sponsors an employee savings plan
that qualifies as a deferred salary arrangement under Section 401(k) of the
Internal Revenue Code. Participating employees may defer up to 18% of their
compensation, subject to certain regulatory limitations. Employee contributions
are invested, at the employee's direction, among a variety of investment
alternatives, including Network Solutions Common Stock. Network Solutions
matches employee contributions at a rate of 50% up to a maximum of 3% of
compensation. Employee contributions are fully vested, whereas vesting in
matching Company contributions occurs at a rate of 25% per year of employment.
During the period from July 1, 1999 through December 31, 1999, the Company's
matching contribution was $308,000 in cash. Matching contributions are
subsequently invested in Network Solutions Common Stock.
Pro Forma Disclosures
The weighted average fair value of the options granted using the Black Scholes
model during 1997, 1998 and 1999 amounted to $1.17, $7.46 and $33.96,
respectively for the Network Solutions Incentive Plan. The following weighted
average assumptions were used in calculating the option fair values.
Network Solutions Stock
Options
--------------------------
1997 1998 1999
------- ------- --------
Expected life (years) 4.0 4.0 4.0
Risk-free interest rate 6.25% 5.1% 5.48%
Volatility 20.79% 90.73% 115.65%
Dividend yield 0.00% 0.00% 0.00%
Under the above model, the total value of Network Solutions' employee stock
purchase program and stock options granted in 1997, 1998 and 1999 was
$2,809,000, $20,322,000, and $154,624,000, respectively, all of which would be
amortized ratably on a pro forma basis over the respective option terms. Had
Network Solutions recorded compensation costs for these plans in accordance with
SFAS No. 123, Network Solutions' pro forma income would have been $3,510,000,
$9,236,000 and $8,075,000, respectively, for the years ended December 31, 1997,
1998 and 1999. Pro forma earnings per share on a diluted basis would have been
$0.07, $0.14 and $0.12, respectively, for the years ended December 31, 1997,
1998 and 1999.
F-18
--------------------------------------------------------------------------------
<PAGE>
Table of Contents
Network Solutions, Inc.
Notes to Financial Statements --- (Continued)
Note 11 --- Comprehensive Income
The changes in the components of accumulated other comprehensive income, net
of income taxes, for the years ended December 31, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
Unrealized Accumulated Unrealized Accumulated
Gains Other Gains Other
On Comprehensive On Comprehensive
Securities Income Securities Income
---------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Pre-tax amount $618,000 $618,000 $53,588,000 $54,206,000
Income tax 259,000 259,000 21,964,000 22,223,000
-------- -------- ----------- -----------
Net of tax amount $359,000 $359,000 $31,624,000 $31,983,000
======== ======== =========== ===========
</TABLE>
Note 12 --- Commitments and Contingencies
On June 27, 1997, SAIC received a Civil Investigative Demand, or ``CID,'' from
the U.S. Department of Justice issued in connection with an investigation to
determine whether there is, has been, or may be any antitrust violation under
the Sherman Act relating to its Internet registration services. On January 28,
2000, the Department of Justice formally notified us that the investigation had
been closed. No enforcement action was taken.
On August 17, 1998, Network Solutions received notice from the Commission of
the European Communities, or ``EC,'' of an investigation concerning Network
Solutions' Premier Program agreements in Europe. On January 26, 2000, the EC
formally notified Network Solutions that its investigation had been closed. No
enforcement action was taken.
In 1997, a group of six plaintiffs filed the Thomas, et al., v. Network
Solutions, et al, suit against us and the National Science Foundation in the
United States District Court, District of Columbia, challenging the legality of
fees defendants charge for the registration of domain names on the Internet and
seeking restitution of fees collected from domain name registrants in an amount
in excess of $100 million, damages, and injunctive and other relief. On August
28, 1998, the District Court dismissed the entire case, issuing a final judgment
in the matter. In October 1998, the plaintiffs appealed the court's dismissal of
their claims. On May 14, 1999, the Court of Appeals ruled in our favor by
unanimously affirming the District Court's decision. On October 12, 1999, the
plaintiffs filed a Petition for a Writ of Certiorari with the U.S. Supreme
Court. On January 18, 2000, the U.S. Supreme Court denied the plaintiffs'
petition.
In 1997, PG Media, Inc., a New York-based corporation, filed a lawsuit against
us in the United States District Court, Southern District of New York alleging
that we had restricted access to the Internet by not adding PG Media's requested
490 top level domains to the Internet root zone in violation of the Sherman Act.
PG Media appealed to the Second Circuit Court of Appeals and on January 21,
2000, the Court of Appeals issued its opinion in our favor.
As of March 13, 2000, we were a defendant in eight active lawsuits involving
domain name disputes between trademark owners and domain name holders. We are
drawn into such disputes, in part, as a result of claims by trademark owners
that we are legally required, upon request by a trademark owner, to terminate
the right we granted to a domain name holder to register a domain name which is
alleged to be similar to the trademark in question. Although 68 out of
approximately 9,500 of these situations have resulted in suits actually naming
us as a defendant, as of March 13,
F-19
<PAGE>
Network Solutions, Inc.
Notes to Financial Statements --- (Continued)
Note 12 --- Commitments and Contingencies --- (Continued)
2000, no adverse judgment has been rendered and no award of damages has ever
been made against us. We believe that we have meritorious defenses and
vigorously defend ourselves against these claims.
Network Solutions is involved in various investigations, claims and lawsuits
arising in the normal conduct of business, none of which, in management's
opinion will materially harm Network Solutions' business. Legal proceedings in
which Network Solutions is involved have resulted and likely will result in, and
any future legal proceedings can be expected to result in, substantial legal and
other expenses and a diversion of the efforts of Network Solutions' personnel.
Note 13 --- Subsequent Events
Proposed Acquisition of Network Solutions by VeriSign Inc.
On March 7, 2000, VeriSign Inc., the leading provider of Internet trust
services, and Network Solutions, Inc. announced the signing of a definitive
agreement for VeriSign to acquire Network Solutions in an all-stock purchase
transaction. Under the agreement, VeriSign will issue 1.075 shares of VeriSign
common stock for each share of Network Solutions Common Stock. The transaction
has been approved by both companies' Boards of Directors and is subject to
approval by VeriSign and Network Solutions stockholders. After the merger,
VeriSign will own approximately 60% of the combined company while Network
Solutions stockholders will own approximately 40% of the combined company. The
transaction is expected to close in the third quarter of 2000, subject to
customary conditions, including obtaining necessary regulatory and stockholders
approvals.
Secondary Stock Offering
On February 8, 2000, Network Solutions completed a secondary offering in which
a total of 17,779,000 shares of Common Stock were sold. Of the shares sold,
Network Solutions sold 4,319,000 shares, SAIC Venture Capital Corporation sold
13,400,000 shares and other selling stockholders sold 60,000 shares. Total net
proceeds to Network Solutions was approximately $511 million. After the
offering, SAIC owns approximately 23% of Network Solutions' outstanding Common
Stock.
Litigation
On March 15, 2000, a group of eight plaintiffs filed suit against the U.S.
Department of Commerce, the National Science Foundation and us in the United
States District Court for the Northern District of California. The case,
entitled William Hoefer et al. v. U.S. Department of Commerce, et al., Civil
Action No. 000918-VRW, challenges the lawfulness of the registration fees that
we were authorized to charge for domain name registrations from September 1995
to November 1999. The suit purports to be brought on behalf of all domain name
registrants who paid registration fees during that period and seeks
approximately $1.7 billion in damages. Although none of the defendants have yet
been served with the complaint, we are aware that the same attorney who
challenged us in a similar action known as Thomas, et al. v. Network Solutions,
et al., has filed this new action on behalf of eight former and current domain
name registrants. The suit contains eight causes of action against the
defendants based on alleged violations of Art. I, (S) 8 and the Fifth
F-20
<PAGE>
Network Solutions, Inc.
Notes to Financial Statements --- (Continued)
Note 13 --- Subsequent Events --- (Continued)
Amendment of the U.S. Constitution, the Independent Offices Appropriations Act
(31 U.S.C. (S) 9701), the Administrative Procedure Act, the Sherman Act, and the
California Unfair Competition Act, (S) 17200. We believe that the complaint
lacks merit and we intend to vigorously defend ourselves as we did in response
to the Thomas case.
F-21
