<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number: 000-23593
----------------
VERISIGN, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-3221585
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
1350 Charleston Road, Mountain View,
CA 94043-1331
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (650) 961-7500
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Shares
Outstanding
July 31,
Class 2000
----- -----------
<S> <C>
Common stock, $.001 par value 194,455,435
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I -- FINANCIAL
INFORMATION
Item 1. Condensed Financial
Statements (Unaudited)........ 3
Item 2. Management's Discussion and
Analysis of Financial
Condition and Results of
Operations................. 13
Item 3. Quantitative and
Qualitative Disclosures
About Market Risk.......... 36
PART II -- OTHER
INFORMATION
Item 1. Legal Proceedings.......... 38
Item 4. Submission of Matters to a
Vote of Security Holders... 39
Item 5. Other Information.......... 40
Item 6. Exhibits and Reports on
Form 8-K................... 40
Signatures.......................... 41
Summary of Trademarks............... 42
Exhibits............................ 44
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS (Unaudited)
As required under Item 1--Condensed Financial Statements (Unaudited)
included in this section are as follows:
<TABLE>
<CAPTION>
Financial Statement Description Page
------------------------------- ----
<S> <C>
.Condensed Consolidated Balance Sheets
As of June 30, 2000 and December 31, 1999............................ 4
.Condensed Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2000 and 1999............ 5
.Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2000 and 1999...................... 6
.Notes to Condensed Consolidated Financial Statements.................. 7
</TABLE>
3
<PAGE>
VERISIGN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents......................... $ 1,013,527 $ 70,382
Short-term investments............................ 31,288 86,098
Accounts receivable, net.......................... 55,685 22,727
Refundable income taxes........................... 52,882 --
Prepaid expenses and other current assets......... 58,769 3,635
------------ --------
Total current assets............................ 1,212,151 182,842
Property and equipment, net......................... 88,223 10,194
Goodwill and other intangible assets, net........... 19,993,020 --
Long-term investments............................... 238,455 144,751
Other assets, net................................... 3,128 3,379
------------ --------
$ 21,534,977 $341,166
============ ========
Liabilities And Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities.......... $ 149,603 $ 10,902
Accrued merger costs.............................. 91,377 --
Deferred revenue.................................. 384,158 31,777
------------ --------
Total current liabilities....................... 625,138 42,679
------------ --------
Deferred income taxes, net.......................... 174,150 --
Long-term deferred revenue.......................... 94,786 --
Other long-term liabilities......................... 510 128
------------ --------
Total long-term liabilities..................... 269,446 128
------------ --------
Commitments and contingencies
Stockholders' equity:
Preferred stock--par value $.001 per share
Authorized shares:5,000,000
Issued and outstanding shares:none............... -- --
Common stock--par value $.001 per share
Authorized shares:1,000,000,000
Issued and outstanding shares:194,264,745 at June
30, 2000
103,482,841 at December 31, 1999................. 194 103
Additional paid-in capital.......................... 21,125,593 258,239
Notes receivable from stockholders.................. (255) --
Unearned compensation............................... (121) (172)
Accumulated deficit................................. (526,545) (47,452)
Accumulated other comprehensive income.............. 41,527 87,641
------------ --------
Total stockholders' equity...................... 20,640,393 298,359
------------ --------
$ 21,534,977 $341,166
============ ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
4
<PAGE>
VERISIGN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Six Months Ended
Ended June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Revenues............................... $ 70,254 $18,736 $ 104,325 $34,318
--------- ------- --------- -------
Costs and expenses:
Cost of revenues..................... 22,570 7,373 35,032 13,974
Sales and marketing.................. 28,885 8,148 42,518 15,663
Research and development............. 7,114 3,085 11,543 6,073
General and administrative........... 8,154 2,073 11,836 3,980
Write-off of acquired in-process
research and development............ 54,000 -- 54,000 --
Amortization of goodwill and other
intangible assets................... 409,216 -- 470,230 --
--------- ------- --------- -------
Total costs and expenses........... 529,939 20,679 625,159 39,690
--------- ------- --------- -------
Operating loss..................... (459,685) (1,943) (520,834) (5,372)
Other income:
Gain on sale of marketable
securities.......................... -- -- 32,623 --
Interest income...................... 6,871 1,876 9,484 3,381
Other expense, net................... (124) (85) (366) (154)
--------- ------- --------- -------
Total other income................. 6,747 1,791 41,741 3,227
--------- ------- --------- -------
Net loss........................... $(452,938) $ (152) $(479,093) $(2,145)
========= ======= ========= =======
Net loss per share:
Basic and diluted.................... $ (3.37) $ (.00) $ (3.94) $ (.02)
========= ======= ========= =======
Shares used in per share computation:
Basic and diluted.................... 134,437 99,118 121,586 98,186
========= ======= ========= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
5
<PAGE>
VERISIGN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------
2000 1999
----------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................. $ (479,093) $ (2,145)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization of property and
equipment.......................................... 7,905 2,362
Amortization of goodwill and other intangible
assets............................................. 470,230 --
Write-off of acquired in-process research and
development........................................ 54,000 --
Gain on sale of marketable securities............... (32,623) --
Minority interest in net loss of subsidiary......... (90) (428)
Stock-based compensation............................ 51 52
Loss on disposal of property and equipment.......... 77 337
Changes in operating assets and liabilities:
Accounts receivable................................. (14,023) (6,691)
Prepaid expenses and other current assets........... 963 (2,627)
Accounts payable and accrued liabilities............ 32,872 2,332
Deferred revenue.................................... 26,788 7,129
----------- --------
Net cash provided by operating activities......... 67,057 321
----------- --------
Cash flows from investing activities:
Purchases of short-term investments................... (18,186) (79,592)
Proceeds from maturities and sales of short-term
investments.......................................... 82,446 36,097
Purchases of long-term investments.................... (80,456) (7,521)
Proceeds from maturities and sales of long-term
investments.......................................... 52,184 --
Purchases of property and equipment................... (17,246) (3,049)
Cash acquired in purchase transactions, less amounts
paid................................................. 852,412 --
Transaction costs..................................... (11,580) --
Other assets.......................................... 615 (2,356)
----------- --------
Net cash provided by (used in) investing
activities....................................... 860,189 (56,421)
----------- --------
Cash flows from financing activities:
Collections on notes receivable from stockholders..... 511 409
Net proceeds from issuance of common stock............ 15,211 125,111
----------- --------
Net cash provided by financing activities......... 15,722 125,520
----------- --------
Effect of exchange rate changes on cash................. 177 --
----------- --------
Increase in cash and cash equivalents................... 943,145 69,420
Cash and cash equivalents at beginning of period........ 70,382 22,786
----------- --------
Cash and cash equivalents at end of period.............. $ 1,013,527 $ 92,206
=========== ========
Supplemental schedule of non-cash investing and
financing activities:
Unrealized gain on long-term investments.............. $ 7,750 $ --
=========== ========
Non-cash consideration issued in connection with
purchase transactions................................ $19,330,837 $ --
=========== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
6
<PAGE>
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying interim unaudited condensed consolidated balance sheets,
statements of operations and cash flows reflect all adjustments, consisting of
normal recurring adjustments and other adjustments as explained in Note 2 --
Business Combinations, that are, in the opinion of management, necessary for a
fair presentation of the financial position of VeriSign, Inc. and subsidiaries,
(VeriSign or the Company), at June 30, 2000, and the results of operations and
cash flows for the interim periods ended June 30, 2000 and 1999.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions for Form 10-Q and, therefore,
do not include all information and notes normally provided in annual financial
statements and should be read in conjunction with the financial statements of
the Company for the year ended December 31, 1999 included in the annual report
previously filed on Form 10-K. In addition, we recently acquired Network
Solutions. Network Solutions previously filed audited financial statements for
the three-year period ended December 31, 1999 in its 1999 Annual Report on Form
10-K.
The results of operations for any interim period are not necessarily
indicative, nor comparable to the results of operations for any other interim
period or for a full fiscal year.
Note 2. Business Combinations
THAWTE Consulting (Pty) Ltd. Acquisition
On February 1, 2000, VeriSign completed its acquisition of THAWTE Consulting
(Pty) Ltd., or THAWTE, a privately held South African company that provides
digital certificates to website owners and software developers. VeriSign issued
approximately 4.4 million shares of its common stock in exchange for all of the
outstanding shares of THAWTE. The acquisition has been accounted for as a
purchase and, accordingly, the total purchase price of approximately $652
million has been allocated to the tangible and intangible assets acquired and
the liabilities assumed based on their respective fair values on the
acquisition date. THAWTE's results of operations have been included in the
consolidated financial statements from its date of acquisition.
Signio, Inc. Acquisition
On February 29, 2000, VeriSign completed its acquisition of Signio, Inc., or
Signio, a privately held company that provides payment services that connect
online merchants, business-to-business exchanges, payment processors and
financial institutions on the Internet. VeriSign issued approximately 5.6
million shares of its common stock in exchange for all the outstanding shares
of Signio and also assumed all of Signio's outstanding stock options. The
acquisition has been accounted for as a purchase and, accordingly, the total
purchase price of approximately $876 million has been allocated to the tangible
and intangible assets acquired and the liabilities assumed based on their
respective fair values on the acquisition date. Signio's results of operations
have been included in the consolidated financial statements from its date of
acquisition.
Network Solutions, Inc. Acquisition
On June 8, 2000, VeriSign completed its acquisition of Network Solutions,
Inc., or Network Solutions, a publicly traded company that provides Internet
domain name registration and global registry services. The total consideration
of approximately $19.3 billion was based on: the fair value of VeriSign's
common stock issued; stock options assumed; and merger-transaction-related
costs. At the closing, VeriSign issued approximately 72.3 million shares of its
common stock valued at approximately $17.8 billion, based on an exchange ratio
of 1.075 shares of VeriSign's common stock for each outstanding share of
Network Solutions common stock.
7
<PAGE>
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
VeriSign assumed outstanding options to purchase Network Solutions common
stock, which were converted into options to acquire approximately 8.1 million
shares of the VeriSign's common stock, with a fair value of approximately $1.4
billion, based on the same exchange ratio, subject to terms and conditions,
including exercisability and vesting schedules, of the original options. In
addition, VeriSign incurred merger-transaction-related costs of approximately
$50.0 million, which were included in the purchase consideration. These merger-
transaction-related costs primarily consisted of investment banking fees,
printing costs and other professional fees.
This transaction was accounted for as a purchase. Accordingly, the purchase
consideration of $19.3 billion has been preliminarily allocated to the
estimated fair value of the assets acquired and liabilities assumed based on
their estimated fair values as of the date of the acquisition. Goodwill and
other intangible assets are being amortized on a straight-line basis over
useful lives of two to four years. Network Solutions results of operations have
been included in the consolidated financial statements from its date of
acquisition.
Purchase Price Allocations
The purchase consideration for THAWTE, Signio and Network Solutions was
allocated to the assets acquired and liabilities assumed based on fair values
as follows:
<TABLE>
<CAPTION>
Straight-Line
Network Amortization
THAWTE Signio Solutions Period
-------- -------- ----------- -------------
(Dollars in thousands) (Years)
<S> <C> <C> <C> <C>
Net tangible assets.............. $ 566 $ 2,888 $ 716,621 --
ISP hosting relationships........ 11,389 -- -- 2.0
Customer relationships........... 2,815 15,402 -- 3.0
Technology in place.............. 2,963 5,680 29,500 3.0
Non-compete agreement............ 939 -- -- 3.0
Trade name....................... 913 4,501 67,400 3.0
Workforce in place............... 342 1,353 16,900 3.0-4.0
Contracts with ICANN and customer
lists........................... -- -- 800,700 3.4
In-process research and
development..................... -- -- 54,000 --
Goodwill......................... 632,087 854,635 17,958,357 3.0-4.0
Deferred income tax liabilities
attributable to identifiable
intangible assets............... -- (8,732) (365,800) --
-------- -------- -----------
Net assets acquired.............. $652,014 $875,727 $19,277,678
======== ======== ===========
</TABLE>
Purchased In-Process Research and Development
The portion of the Network Solutions purchase price allocated to in-process
research and development ("IPR&D") was $54 million and was expensed during the
quarter ended June 30, 2000. Network Solution's IPR&D efforts focused on
significant and substantial improvements and upgrades to its shared
registration system ("SRS"). The SRS is the system that provides shared
registration interface to the accredited and licensed registrars into the .com,
.net, and .org generic top level domain ("gTLD") name registry. It is through
this system that registrars from all over the world are able to register domain
names with the central database at the same time. Given the high demand on the
SRS, it is in need of improvements and upgrades in the area of scalability,
security, non-english language capability next generation resource provisioning
protocol.
8
<PAGE>
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of the acquisition date, Network Solutions was in the process of
developing technology that would add substantial functionality and features to
the SRS. The IPR&D had not yet reached technological feasibility and had no
alternative uses. The IPR&D under development may not achieve technical or
commercial viability. The technological feasibility of the in-process
development efforts is established when the enterprise has completed all
planning, designing, coding, and testing activities that are necessary to
establish that the technology can be utilized to meet its design specifications
including functions, features, and technical performance requirements. At the
date of the acquisition, management estimated that completion of the Network
Solutions IPR&D would be accomplished in 2000 while the initial development
effort had commenced in late 1999. This estimate was based on the project costs
and milestones.
The fair value assigned to IPR&D was estimated by discounting, to present
value, the cash flows attributable to the technology once it has reached
technological feasibility. A discount rate consistent with the risks of the
project was used to estimate the present value of cash flows. The value
assigned to IPR&D was the amount attributable to the efforts of the seller up
to the time of acquisition. This amount was estimated through application of
the "stage of completion" calculation by multiplying the estimated present
value of future cash flows, excluding costs of completion, by the percentage of
completion of the purchased research and development project at the time of
acquisition.
Pro Forma Results of Operations
The following summary, prepared on a pro forma basis, presents the results
of operations as if THAWTE, Signio and Network Solutions had been acquired as
of the beginning of the periods presented, after including the impact of
certain adjustments, primarily amortization of goodwill and intangible assets
and excluding the one-time IPR&D charge.
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
2000 1999
------------ ------------
(In thousands, except per
share data)
<S> <C> <C>
Pro forma revenues............................. $ 291,554 $ 120,322
Pro forma net loss............................. $ (2,506,894) $ (2,445,767)
Pro forma basic and diluted net loss per
share......................................... $ (12.24) $ (13.92)
</TABLE>
Note 3. Fair Values of Financial Instruments
The carrying amount of cash and cash equivalents, investments, accounts
receivable, and accounts payable approximate their respective fair values.
Note 4. Commitments and Contingencies
As of July 31, 2000, Network Solutions, Inc. was a defendant in fifteen
active lawsuits involving domain name disputes between trademark owners and
domain name holders. Network Solutions is drawn into such disputes, in part, as
a result of claims by trademark owners that Network Solutions is legally
required, upon request by a trademark owner, to terminate the contractual right
between Network Solutions and a domain name holder that registered a domain
name, which is alleged to be similar to the trademark in question. On October
25, 1999, however, the Ninth Circuit Court of Appeals ruled in Network
Solutions' favor and against Lockheed Corporation, holding that Network
Solutions' services do not make Network Solutions liable for contributory
infringement to trademark owners. Thus, Network Solutions believes, this type
of suit should decline. The holders of the domain name registrations in dispute
have, in turn, questioned our right, absent a court order, to take any action
that suspends their contractual rights to the domain names in question.
Although
9
<PAGE>
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
80 of these situations over the past six and a half years have resulted in
suits actually naming Network Solutions as a defendant, as of July 31, 2000, no
adverse judgment has been rendered and no award of damages has ever been made
against Network Solutions. Network Solutions believes that it has meritorious
defenses and vigorously defends itself against these claims.
On March 15, 2000, a group of eight plaintiffs filed suit against the United
States Department of Commerce, the National Science Foundation and Network
Solutions, Inc. 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 Network Solutions was 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. On June 19,
2000 the plaintiffs filed their first amended complaint, adding two plaintiffs
and naming VeriSign as a defendant.
All of the defendants filed motions to transfer the suit to the Federal
District Court in the District of Columbia and the court granted those actions
on June 28, 2000. The same attorney who unsuccessfully challenged Network
Solutions in a similar action known as Thomas, et al. v. Network Solutions, et
al., 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, Section 8 and the Fifth Amendment of the
U.S. Constitution, the Independent Offices Appropriations Act (31 U.S.C.
Section 9701), the Administrative Procedure Act, the Sherman Act, and the
California Unfair Competition Act, Section 17200. The case was docketed with
the Federal District Court in the District of Columbia on July 28, 2000 and on
August 4, 2000 the plaintiffs filed their Notice of Voluntary Dismissal without
Prejudice under Rule 41(A) of the Federal Rules of Civil Procedure.
On June 15, 2000, plaintiff David Moran filed a putative shareholder
derivative complaint on behalf of himself and others similarly situated against
Charles Stuckey, Jr., James Bidzos, Richard L. Earnest, Dr. Taher Elgamal,
James K. Sims, Joseph B. Lassiter III, Robert P. Badavas, and against nominal
defendant VeriSign, Inc. The complaint alleges, among other things, that the
directors of RSA Security mismanaged RSA's business, failed to protect its
intellectual property or enforce the terms of its license agreement with
VeriSign, and that VeriSign violated the terms of the licensing agreement and
competed against RSA. Defendants have not yet responded to the Complaint in
this matter. While VeriSign cannot ascertain the outcome of this matter
presently, VeriSign believes that the claims against it are without merit and
intends to vigorously defend itself against these claims.
VeriSign is involved in various other investigations, claims and lawsuits
arising in the normal conduct of our business, none of which, in our opinion
will harm our business. VeriSign cannot assure that it will prevail in any
litigation. Regardless of the outcome, any litigation may require VeriSign to
incur significant litigation expense and may result in significant diversion of
management attention. An unfavorable outcome may have a material adverse effect
on VeriSign's financial position or results of operations.
Note 5. Realized Gains on Investments
In February 2000, VeriSign sold twenty percent of the common stock of
Keynote Systems, Inc. that it held, and received net proceeds of $34.1 million.
As a result of the sale, the Company recorded a pre-tax gain of $32.6 million.
10
<PAGE>
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6. Calculation of Net Loss per Share
Basic and diluted net loss per share is computed using the weighted average
number of common shares outstanding during the period. Since we have a net loss
for all periods presented, net loss per share on a diluted basis is equivalent
to basic net loss per share because the effect of converting outstanding stock
options would be anti-dilutive. In addition, options to purchase shares of
common stock were not included in the computation of diluted earnings per share
because the options exercise price was greater than the average market price of
the common shares and therefore, the effect would be anti-dilutive. For the
three-month period ended June 30, 2000, options to purchase 20,815,477 shares
of common stock were outstanding, and for the three-month period ended June 30,
1999, options to purchase 13,243,450 shares of common stock were outstanding.
For the six-month period ended June 30, 2000, options to purchase 21,755,855
shares of common stock were outstanding, and for the six-month period ended
June 30, 1999, options to purchase 13,072,666 shares of common stock were
outstanding. The calculation of net loss per share is presented below.
<TABLE>
<CAPTION>
Three Months Six Months Ended
Ended June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
--------- ------- --------- -------
(In thousands, except per share
data)
<S> <C> <C> <C> <C>
Net loss........................... $(452,938) $ (152) $(479,093) $(2,145)
========= ======= ========= =======
Shares used in net loss per share
calculation:
Weighted average shares
outstanding..................... 134,469 100,320 121,811 99,578
Weighted average shares issued
and subject to repurchase
agreements...................... (32) (1,202) (225) (1,392)
--------- ------- --------- -------
134,437 99,118 121,586 98,186
========= ======= ========= =======
Basic and diluted net loss per
share............................. $ (3.37) $ (.00) $ (3.94) $ (.02)
========= ======= ========= =======
Note 7. Comprehensive Loss
Comprehensive loss consists of net loss and other comprehensive income. The
components of comprehensive loss are as follows:
<CAPTION>
Three Months Six Months Ended
Ended June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
--------- ------- --------- -------
(In thousands)
<S> <C> <C> <C> <C>
Net loss........................... $(452,938) $ (152) $(479,093) $(2,145)
Unrealized loss on investments..... (38,130) -- (46,291) --
Translation adjustments............ 87 -- 177 --
--------- ------- --------- -------
Comprehensive loss................. $(490,981) $ (152) $(525,207) $(2,145)
========= ======= ========= =======
</TABLE>
Note 8. Segment Information
VeriSign operates in the Americas, Europe, Middle East and Africa, Asia-
Pacific and Japan and derives substantially all of its revenues from sales of
trusted infrastructure services. For the three months ended June 30, 2000, the
Company derived 39% of its revenue from international subsidiaries and
affiliates and for the three months ended June 30, 1999, the Company derived
27% of its revenue from international subsidiaries and affiliates. For the six
months ended June 30, 2000, the Company derived 24% of its revenue from
international subsidiaries and affiliates and for the six months ended June 30,
1999, the Company derived 24% of its revenue from international subsidiaries
and affiliates.
11
<PAGE>
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
VeriSign is in the initial stages of integration activities with the THAWTE,
Signio and Network Solutions acquisitions and we are currently evaluating our
organizational and financial reporting structures. Pending completion of this
review and reorganization, the operating segments are naturally aligned along
subsidiaries, with Network Solutions being the only significant operation in
terms of revenue and net assets in addition to VeriSign's core authentication
business. On a standalone basis, excluding the 22-day contribution from Network
Solutions, VeriSign had revenue of $41.1 million during the three months ended
June 30, 2000. VeriSign had operating income of $657,000 before the charge for
amortization of goodwill and intangible assets.
Note 9. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Because VeriSign
currently holds no derivative instruments and does not engage in hedging
activities, we expect that the adoption of SFAS No. 133 will have no material
impact on our financial position, results of operations or cash flows. We will
be required to implement SFAS No. 133 for the year ending December 31, 2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101 regarding recognition, presentation and
disclosure of revenue. Interpretive guidance for the SAB is expected to be
issued soon. We are currently evaluating SAB No. 101 and do not believe that
the pronouncement will have a significant impact on our financial position,
results of operations or cash flows.
In March 2000, the Emerging Issues Task Force reached a consensus on Issue
00-2, "Accounting for the Costs of Developing a Web Site" (EITF 00-2). In
general, EITF 00-2 states that the costs of developing a web site should be
accounted for under the provisions of Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." We are currently evaluating EITF 00-2 and do not believe that
the pronouncement will have a significant impact on our financial position,
results of operations or cash flows. EITF 00-2 is effective for costs incurred
after June 30, 2000.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 (FIN No. 44), "Accounting for Certain Transactions
Involving Stock Compensation, an Interpretation of APB Opinion No. 25." FIN No.
44 was effective July 1, 2000. This interpretation provides guidance for
applying APB Opinion No. 25, "Accounting for Stock Issued to Employees." We are
currently evaluating FIN No. 44 and do not believe that the pronouncement will
have a significant impact on our financial position, results of operations or
cash flows.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion in conjunction with the interim
unaudited consolidated financial statements and related notes.
Except for historical information, this Report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements involve risks and uncertainties, including, among other things,
statements regarding our anticipated costs and expenses. Our actual results may
differ significantly from those projected in the forward-looking statements.
Factors that might cause or contribute to these differences include, but are
not limited to; those discussed in the section below entitled "Factors That May
Affect Future Results of Operations." You should carefully review the risks
described in other documents we file from time to time with the Securities and
Exchange Commission, including the Quarterly Reports on Form 10-Q that we have
filed or will file in 2000 and our Annual Report on Form 10-K, which was filed
on March 22, 2000. You are cautioned not to place undue reliance on the
forward-looking statements, which speak only as of the date of this Quarterly
Report on Form 10-Q. We undertake no obligation to publicly release any
revisions to the forward-looking statements or reflect events or circumstances
after the date of this document.
Overview
VeriSign is the leading provider of trusted infrastructure services to
website owners, enterprises, electronic commerce service providers and
individuals. The Company's domain name, digital certificate and payment
services provide the critical web identity, authentication and transaction
infrastructure that online businesses need to conduct secure e-commerce and
communications.
VeriSign's core authentication service offerings were established as the
cornerstone of the business in 1995 with the introduction of website digital
certificates. Through our secure online infrastructure we sell our website
digital certificates to online businesses, large enterprises, government
agencies and other organizations. We have established strategic relationships
with industry leaders, including AOL/Netscape, British Telecommunications plc,
Cisco, Microsoft, RSA Security and VISA, to enable widespread utilization of
our digital certificate services and to assure interoperability with a wide
variety of applications and network equipment. We also offer VeriSign OnSite, a
managed service that allows an organization to leverage our trusted data
processing infrastructure to develop and deploy customized digital certificate
services for use by employees, customers and business partners.
We market our authentication services worldwide through multiple
distribution channels, including the Internet, direct sales, telesales, value
added resellers, systems integrators and our international affiliates. A
significant portion of our revenues to date have been generated through sales
from our website, but we intend to continue increasing our direct sales force,
both in the United States and abroad, and to continue to expand our other
distribution channels. We continue to build an international network of
affiliates who provide our trust services under licensed co-branding
relationships using our proprietary technology and business practices. The
VeriSign Trust Network now consists of affiliated organizations including
Arabtrust in the Middle East, British Telecommunications plc in the United
Kingdom, Canadian Imperial Bank of Commerce (CIBC) of Canada, CertiSur of
Argentina, Certplus of France, eSign of Australia, HiTrust of Taiwan, KPN
Telecom of The Netherlands, Roccade of The Netherlands, the South African
Certification Agency in South Africa, and Telia in Sweden. These international
service providers utilize common technology, operating practices and
infrastructure to deliver interoperable trust services for a specific
geographic region or vertical market.
We expanded our authentication service offerings on February 1, 2000, when
we completed our acquisition of THAWTE Consulting (Pty) Ltd., a privately held
South African company that provides digital certificates to website owners and
software developers. In connection with this acquisition, we issued
approximately 4.4 million shares of our common stock in exchange for all of the
outstanding shares of
13
<PAGE>
THAWTE. The transaction has been accounted for as a purchase and, accordingly,
the results of THAWTE's operations are included in our consolidated financial
statements from the date of acquisition. As a result of our acquisition of
THAWTE, we recorded goodwill and other intangible assets of approximately $0.7
billion. These amounts will be amortized over a two to three year period.
On February 29, 2000, we completed our acquisition of Signio, Inc., a
privately held company that provides payment services that connect online
merchants, business-to-business exchanges, payment processors and financial
institutions on the Internet. During the second quarter of 2000 the product
offering was extended to include new business-to-business payment services,
including support for Automated Clearing House (ACH) and purchasing card
transactions. In connection with this acquisition, we issued approximately 5.6
million shares of our common stock in exchange for all of the outstanding
shares of Signio and we also assumed Signio's outstanding employee stock
options. The transaction has been accounted for as a purchase and, accordingly,
the results of Signio's operations are included in our consolidated financial
statements from the date of acquisition. As a result of our acquisition of
Signio, we recorded goodwill and other intangible assets of approximately $0.9
billion. These amounts will be amortized over a two to three year period.
We market our payment services worldwide through multiple distribution
channels, including the Internet, direct sales, telesales, value added
resellers, and systems integrators. A significant portion of our revenues to
date has been generated through sales from our website, but we intend to
continue increasing our direct sales force, both in the United States and
abroad, and to continue to expand our other distribution channels.
Network Solutions Subsidiary
On June 8, 2000, we completed our acquisition of Network Solutions, Inc., a
publicly traded company that provides Internet domain name registration and
global registry services. We issued approximately 72.3 million shares of our
common stock for all of the outstanding shares of Network Solutions and we also
assumed all of Network Solutions' outstanding stock options. The acquisition
has been accounted for as a purchase and, accordingly, the total purchase price
of approximately $19.3 billion has been allocated to the tangible and
intangible assets acquired and the liabilities assumed based on their
respective fair values on the acquisition date. Network Solutions' results of
operations have been included in the consolidated financial statements from its
date of acquisition. As a result of our acquisition of Network Solutions, we
recorded goodwill and other intangible assets of approximately $18.9 billion.
These amounts will be amortized over a two to four year period. Therefore, we
will report losses as we incur charges relating to the amortization of acquired
intangible assets.
Network Solutions is the exclusive registry and the leading registrar for
second level domain names within the .com, .net and .org generic top-level
domains (gTLD) under agreements with ICANN and the Department of Commerce
(DOC). Internet domain names are unique identities that enable businesses,
other organizations and individuals to communicate and conduct commerce on the
Internet. As a registry, Network Solutions maintains the master directory of
all second level domain names in the .com, .net and .org top-level domains.
Network Solutions owns and maintains the shared registration system that allows
all registrars, including our own, 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, Network Solutions markets second level domain name
registration services and other value-added services that enable our customers
to establish their identities on the web. The Network Solutions Registrar ("the
Registrar") markets its services through a number of distribution channels,
including the Internet, premier partner and business account partner programs,
and strategic alliances. The Registrar has registered approximately 11.8
million cumulative domain names in the .com, .net and .org top-level domains.
Recently, the Registrar signed a key marketing alliance with America Online
(AOL) to offer the Registrar's domain name registration and value-added
services across AOL brands on a global basis. In addition, the Registrar
expanded its relationship with Yahoo! and integrated their Affiliate Program
into the Registrar's storefront enabling its more than 50,000 affiliate members
access to Network Solutions' value-added domain name registration services.
14
<PAGE>
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.
In September 1998, the DOC 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 and to transition to a shared registration system.
On November 10, 1999, Network Solutions, the DOC and ICANN entered into a
series of wide-ranging agreements relating to the domain name system. Under
these agreements Network Solutions recognized ICANN as the not-for-profit
corporation described in the Cooperative Agreement as amended; became an ICANN-
accredited registrar and 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 in accordance with the cooperative agreement. As the registry,
Network Solutions charges registrars $6 per registration per year unless
increased to cover increases in registry costs under circumstances described in
the cooperative agreement.
Network Solutions has implemented modifications to the shared registration
system that enable a registrar to (a) accept registrations and re-registrations
in one-year increments and (b) add one year to a registrant's registration
period upon transfer of a registration from one registrar to another. The
unexpired term of any registration may not exceed ten years. Network Solutions
is obligated to provide equivalent access to the shared registration system to
all ICANN-accredited registrars and to ensure that the revenues and assets of
the registry are not utilized to advantage our registrar to the detriment of
other registrars. Network Solutions has agreed to and has implemented an
organizational conflict of interest compliance plan that includes
organizational, physical and procedural safeguards in connection with these
obligations.
The term of the registry agreement extends until November 9, 2003, except in
the event that Network Solutions effects the legal separation of the ownership
of its registry business from its registrar business by May 9, 2001 as
described in the cooperative agreement, then the term will be extended until
November 9, 2007. Network Solutions has agreed to pay annual fees to ICANN as
set by ICANN at levels currently not to exceed $2 million for our registrar and
$250,000 for our registry.
The Network Solutions Registry (the "Registry") growth is not only driven by
the natural growth of the Internet, but also by a growing number of accredited
registrars and expanding new markets. As of June 30, 2000, the Registry had
over 19 million domain names in service that originated through 51 registrars.
During the second quarter, the Registry continued to upgrade its shared
registration system and gTLD infrastructure to support more than 25 million
transactions and 1.5 billion queries it now receives on a daily basis. The
Registry also made an investment in Nominum, Inc., the leading provider of
Berkeley Internet Name Domain (BIND) software. We plan to work together with
Nominum to accelerate the development of new products and to facilitate
technical deployment of new services related to the Domain Name System (DNS).
Results of Operations
We have experienced substantial net losses in the past. As of June 30, 2000,
we had an accumulated deficit of approximately $526.5 million.
15
<PAGE>
Revenues
Revenues from authentication services consist of fees for the issuance of
digital certificates, fees for digital certificate service provisioning, fees
for technology and business process licensing to affiliates and fees for
consulting, implementation, training, support and maintenance services. Each of
these sources of revenue has different revenue recognition methods. We defer
revenues from the sale or renewal of digital certificates and recognize these
revenues ratably over the life of the digital certificate, generally 12 months.
We defer revenues from the sale of our OnSite managed services and recognize
these revenues ratably over the term of the license, generally 12 months. We
recognize revenues from the sale of digital certificate technology and business
process licensing to affiliates upon delivery of the technology and signing of
an agreement, provided the fee is fixed and determinable, collectibility is
probable and the arrangement does not require significant production,
modification or customization of the software. We recognize revenues from
consulting and training services using the percentage-of-completion method for
fixed-fee development arrangements or as the services are provided for time-
and-materials arrangements. We recognize revenues ratably over the term of the
agreement for support and maintenance services.
Revenues from payment services primarily consist of service revenues from
transaction processing services. These revenues have been immaterial to date.
We recognize service revenue ratably over the periods in which the services are
provided. Advance customer deposits received are deferred and allocated ratably
to revenue over the periods the services are provided.
Network Solutions' revenues consist of registration fees charged to
customers and registrars for domain name registration services and fees for
professional consulting. We defer revenues from the sale or renewal of domain
name registration services and recognize these revenues ratably over the
registration term. We recognize revenues from professional consulting as the
services are provided.
We accounted for the June 8, 2000 Network Solutions acquisition as a
purchase and Network Solutions' revenues, which are derived primarily from web
identity services, have been included in our results of operations commencing
June 9, 2000. In addition, we also acquired THAWTE in January 2000 and Signio
in February 2000. Therefore, comparisons of revenues for the three and six
months ended June 30, 2000 and 1999 are not relevant, as the businesses of the
combined company were not equivalent.
A comparison of revenues for the three-month periods and the six-month
periods ended June 30, 2000 and 1999 is presented below.
<TABLE>
<CAPTION>
2000 1999 Change
-------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C>
Three-month period:
Revenues........................................... $ 70,254 $18,736 275%
Six-month period:
Revenues........................................... $104,325 $34,318 204%
</TABLE>
Revenues increased significantly from the prior year primarily due to
increased sales of our authentication services, particularly our website
digital certificates and VeriSign OnSite services, the expansion of our
international affiliate network and delivery of more training and consulting
services. As of June 30, 2000 we have sold over 340,000 website digital
certificates, and over 1,200 OnSite service solutions to enterprises, and we
now have 28 affiliates in our international network of affiliates.
A small portion of our revenue mix is from payment transaction services
provided by Signio, whose revenues are included for the entire quarter ended
June 30, 2000. By the end of the first half of 2000, the customer base for
these services grew to in excess of 7,400 online merchants using Signio, now
VeriSign payment services, to payment-enable their online stores and business-
to-business commerce activities.
16
<PAGE>
While the second quarter of 2000 only includes revenues from Network
Solutions from June 9, 2000 to June 30, 2000, the new web identity
infrastructure business experienced significant demand for domain name
registration services. For the three months ended June 30, 2000 (including
prior to the acquisition), the Registrar added nearly 2.1 million new names and
the Registry added over 3.5 million new names from non Network Solutions
registrars.
No customer accounted for 10% or more of revenues during the three months
ended, or during the six months ended June 30, 2000 or 1999. Revenues from
international subsidiaries and affiliates accounted for 39% of revenues in the
second quarter of 2000, and 27% of revenues in the second quarter of 1999. For
the first half of the year, revenues from international subsidiaries and
affiliates accounted for 24% of revenues in 2000, and 24% of revenues in 1999.
Costs and Expenses
We accounted for the Network Solutions acquisition as a purchase and Network
Solutions' costs and expenses have been included in our results of operations
commencing June 9, 2000. In addition, we also acquired THAWTE in January 2000
and Signio in February 2000. Therefore, comparisons of costs and expenses for
the three and six months ended June 30, 2000 and 1999 are not relevant, as the
businesses of the combined company were not equivalent.
Cost of revenues
Cost of revenues consists primarily of costs related to providing digital
certificate enrollment and issuance services, payment services, domain name
registration services, customer support and training, consulting and
development services and costs of facilities and computer equipment used in
these activities. In addition, with respect to our digital certificate
services, cost of revenues also includes fees paid to third parties to verify
certificate applicants' identities, insurance premiums for our service warranty
plan and errors and omission insurance and the cost of software resold to
customers.
A comparison of cost of revenues for the three-month periods and the six-
month periods ended June 30, 2000 and 1999 is presented below.
<TABLE>
<CAPTION>
2000 1999 Change
------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C>
Three-month period:
Cost of revenues................................. $22,570 $ 7,373 206%
Percentage of revenues........................... 32% 39%
Six-month period:
Cost of revenues................................. $35,032 $13,974 151%
Percentage of revenues........................... 34% 41%
</TABLE>
During the second quarter of 2000 and during the first six months of 2000
cost of revenues increased, in terms of dollars, due to an increase in
headcount required to support the growth in demand for our products and
services and to support the growth of our security consulting and training
activities during the period. The cost of insurance premiums for our service
warranty plan increased because of greater levels of sales of digital
certificates. In addition, we incurred increased expenses for access to third-
party databases, higher support charges for our external disaster recovery
program and increased expenses related to the cost of software products resold
to customers as part of network security solution implementations.
Additionally, recent acquisitions, such as THAWTE, Signio and Network
Solutions, have resulted in an increase in our cost of revenues over prior
quarters. Future acquisitions, further expansion into international markets and
introductions of additional products will result in further increases in cost
of revenues, due to additional personnel and related expenses and other
factors. In addition, future cost of revenues will increase to reflect the full
impact of Network Solutions' operations in subsequent periods.
17
<PAGE>
Cost of revenues as a percentage of revenue decreased from 1999 to 2000
primarily due to the overall mix of revenues, the experience of economies of
scale on our technology infrastructure and the efficiency gains in the
certificate enrollment and issuance process. Certain of our services, such as
implementation consulting and training, require greater initial personnel
involvement and therefore have higher costs than other types of services. In
addition, revenues derived from our recent acquisitions of THAWTE, Signio and
Network Solutions, have a different cost structure from our authentication
services. As a result, we anticipate that cost of revenues will vary in future
periods depending on the mix of services sold and historic cost of revenues are
not indicative of future cost of revenues.
Sales and marketing
Sales and marketing expenses consist primarily of costs related to sales,
marketing, practices and external affair activities. These expenses include
salaries, sales commissions and other personnel-related expenses, travel and
related expenses, costs of computer and communications equipment and support
services, facilities costs, consulting fees and costs of marketing programs,
such as Internet, television, radio and print advertising.
A comparison of sales and marketing expenses for the three-month periods and
the six-month periods ended June 30, 2000 and 1999 is presented below.
<TABLE>
<CAPTION>
2000 1999 Change
------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C>
Three-month period:
Sales and marketing.............................. $28,885 $ 8,148 255%
Percentage of revenues........................... 41% 43%
Six-month period:
Sales and marketing.............................. $42,518 $15,663 171%
Percentage of revenues........................... 41% 46%
</TABLE>
The increase in sales and marketing expenses is primarily attributable to an
increase of 153% from the second quarter of 1999 to the second quarter of 2000
resulting from the acquisition of Network Solutions in June 2000. The Network
Solutions acquisition accounted for almost half of the increase in sales and
marketing expenses from the first half of 1999 when compared to the first half
of 2000. Network Solutions continues to incur expenses promoting the value of
the .com and .net web addresses as well as their value-added services including
web site design and other enhanced service offerings. The remainder of the
increase was driven by lead and demand generation activities in our
authentication businesses, expansion of our sales force, an increase in
international sales expenses, and the effect of a full quarter of sales and
marketing expenses from THAWTE and Signio. While the absolute dollar spending
increases for sales and marketing expenses, we continue to realize a decline in
spending from 1999 to 2000 as a percentage of revenue. This is primarily due to
the increase in recurring revenue from existing customers, which tend to have
lower acquisition costs associated with them, the increase in the productivity
of the direct and inside sales forces, and the increase in the effectiveness of
the marketing lead and demand generation activities. However, we cannot assure
you that these sales and marketing expenses will continue to decline as a
percentage of revenues.
We expect sales and marketing expenses will continue to increase on an
absolute dollar basis in the future, primarily due to:
. expanded sales forces;
. expanded marketing and demand generation activities;
. development and enhancement of the Network Solutions partner and
distribution channels;
. promotional activities for Network Solutions' products and services; and
. integration of our recent acquisitions.
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<PAGE>
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 and the costs of facilities, computer and
communications equipment and support services used in service and technology
development.
A comparison of research and development expenses for the three-month
periods and the six-month periods ended June 30, 2000 and 1999 is presented
below.
<TABLE>
<CAPTION>
2000 1999 Change
------- ------ ------
(Dollars in
thousands)
<S> <C> <C> <C>
Three-month period:
Research and development........................... $ 7,114 $3,085 131%
Percentage of revenues............................. 10% 16%
Six-month period:
Research and development........................... $11,543 $6,073 90%
Percentage of revenues............................. 11% 18%
</TABLE>
Research and development expenses increased in absolute dollars in the
second quarter of 2000 from the second quarter of 1999 as we invested in the
design, testing and deployment of, and technical support for, our expanded
Internet trust service offerings and technology. The increase reflects the
expansion of our engineering staff and related costs required to support our
continued emphasis on developing new products and services as well as enhancing
existing products and services. In addition, the second quarter of 2000
includes expenses related to THAWTE and Signio for a full quarter, as well as
expenses incurred by Network Solutions from June 9, 2000 through June 30, 2000.
The decrease in research and development expenses as a percentage of revenues
from 1999 to 2000 is primarily due to the fact that revenues increased faster
than research and development costs.
We believe that timely development of new and enhanced authentication
services, transaction services, web identity services and technology are
necessary to maintain our position in the marketplace. Accordingly, we intend
to continue to recruit experienced research and development personnel and to
make other investments in research and development. We also expect to
experience increased research and development expenses as a result of our
acquisitions of THAWTE, Signio and Network Solutions. As a result, we expect
research and development expenses will continue to increase in absolute
dollars. To date, we have expensed all research and development expenditures as
incurred.
General and administrative
General and administrative expenses consist primarily of salaries and other
personnel-related expenses for our executive, administrative, legal, finance
and human resources personnel, facilities and computer and communications
equipment, support services and professional services fees.
A comparison of general and administrative expenses for the three-month
periods and the six-month periods ended June 30, 2000 and 1999 is presented
below.
<TABLE>
<CAPTION>
2000 1999 Change
------- ------ ------
(Dollars in
thousands)
<S> <C> <C> <C>
Three-month period:
General and administrative......................... $ 8,154 $2,073 293%
Percentage of revenues............................. 12% 11%
Six-month period:
General and administrative......................... $11,836 $3,980 197%
Percentage of revenues............................. 11% 12%
</TABLE>
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<PAGE>
The increase in general and administrative expenses for the second quarter,
as well as for the first half of 2000, over the second quarter and first half
of 1999 was related to the acquisition of Network Solutions in June 2000 and
the acquisition of THAWTE and Signio in the first quarter of 2000. Expenses
also increased due to additional staffing levels required to manage and support
our expanded operations, the implementation of additional management
information systems and related procedures, and the expansion of our corporate
headquarters.
We anticipate that general and administrative expenses will continue to
increase on an absolute dollar basis in the future as we expand our
administrative and executive staff, add infrastructure, expand facilities and
assimilate acquired technologies and businesses.
Write-off of acquired in-process research and development
In connection with the acquisition of Network Solutions, we recorded in the
second quarter of 2000, a one-time charge to operating expenses of
approximately $54 million for acquired in-process research and development
related to the acquisition of Network Solutions.
Amortization of goodwill and other intangible assets
Goodwill and other intangible assets resulted primarily from our
acquisitions of THAWTE in January 2000, Signio in February 2000 and Network
Solutions in June 2000. We expect to recognize goodwill and other intangible
asset amortization charges related to these acquisitions of up to $1.3 billion
per quarter until the goodwill and other intangible asset balances from each of
our historic acquisitions become fully amortized ending in 2004. In addition,
in the event we complete future acquisitions, we expect to incur additional
goodwill and other intangible asset amortization charges.
Other Income
Other income consists primarily of interest earned on our cash, cash
equivalents and short-term and long-term investments and the net effect of
foreign currency transaction gains and losses, as well as gains on sales of
equity investments. Other income also includes charges for any gains or losses
on the disposal of property and equipment and other miscellaneous expenses.
A comparison of other income for the three-month periods and the six-month
periods ended June 30, 2000 and 1999 is presented below.
<TABLE>
<CAPTION>
2000 1999 Change
------- ------ ------
(Dollars in
thousands)
<S> <C> <C> <C>
Three-month period:
Other income..................................... $ 6,804 $1,613 322%
Percentage of revenues........................... 10% 9%
Six-month period:
Other income..................................... $41,651 $2,799 1,388%
Percentage of revenues........................... 40% 8%
</TABLE>
The increase in other income in the second quarter of 2000 compared to the
second quarter of 1999 is primarily due to increased earnings on funds invested
by VeriSign. VeriSign's investments have increased as a result of our
investment of the net proceeds of $121.4 million generated from the follow-on
public offering of our common stock during January 1999 and investment of cash
generated from operations. The investment base was also significantly increased
through the acquisition of Network Solutions, which had significant cash
balances. For the first half of 2000 the increase over the first half of 1999
was also due to a $32.6 million gain from the sale of shares of Keynote
Systems, Inc. Other than our remaining investment in Keynote Systems, Inc., we
do not currently expect to achieve significant amounts of other income from our
other investments in the near future.
20
<PAGE>
Provision for Income Taxes
No provision has been made for income taxes due to cumulative losses. As
discussed above under Note 2--Business Combinations--Purchase Price
Allocations, we recorded deferred tax liabilities for Network Solutions and
Signio for identifiable intangibles assets that are not deductible for federal
and state income tax purposes in the amount of $63.6 million. As a result of
recording the deferred tax liabilities and considering their effect on the
combined entity, a corresponding amount of deferred tax asset valuation
allowance was reduced and offset against goodwill.
We are making a federal tax election to treat the acquisition of THAWTE's
South African operation as an asset acquisition together with a federal
election to include the South African operation in the federal tax return of
VeriSign. These elections will allow the goodwill and other intangibles of
THAWTE in South Africa to be amortized over 15 years in the United States tax
return of VeriSign.
As of December 31, 1999, our federal net operating loss carry forwards
approximated $127.0 million and our California net operating loss carry
forwards approximated $65.0 million. The federal net operating loss carryovers
expire between 2010 and 2019, and the California net operating losses expire in
2004.
Factors That May Affect Future Results of Operations
We have a limited operating history under our current business structure.
We were incorporated in April 1995, and we began introducing our trusted
infrastructure services in June 1995. In addition, we have completed three
acquisitions in 2000, including the acquisition of Network Solutions.
Therefore, we have only a limited operating history on which to base an
evaluation of our business and prospects. Our prospects must be considered in
light of the risks and uncertainties encountered by companies in the early
stages of development. These risks and uncertainties are often worse for
companies in new and rapidly evolving markets and for companies integrating
many businesses. Our success will depend on many factors, including, but not
limited to, the following:
. the successful integration of THAWTE, Signio and Network Solutions;
. the rate and timing of the growth and use of IP networks for electronic
commerce and communications;
. the extent to which digital certificates and domain names are used for
these communications and/or e-commerce;
. the continued growth in the number of web sites;
. the growth in demand for our payment services;
. the continued evolution of electronic commerce as a viable means of
conducting business;
. the demand for our Internet-based trust services and web identity
services;
. the competition for any of our services;
. the perceived security of electronic commerce and communications over IP
networks;
. the perceived security of our services, technology, infrastructure and
practices; and
. our continued ability to maintain our current, and enter into additional,
strategic relationships
To address these risks we must, among other things:
. successfully market our Internet-based trust services, our digital
certificates and our web identity and domain name registration services
to new and existing customers;
. attract, integrate, train, retain and motivate qualified personnel;
21
<PAGE>
. respond to competitive developments;
. successfully introduce new Internet-based trust services and web identity
services; and
. successfully introduce enhancements to our existing Internet-based trust
services and web identity services to address new technologies and
standards and changing market conditions.
We cannot be certain that we will successfully address any of these risks.
Our business depends on the future growth of the Internet and adoption and
continued use of IP networks.
Our future success substantially depends on the continued growth in the use
of the Internet and IP networks. If the use of and interest in the Internet and
IP networks does not continue to grow, our business would be harmed. To date,
many businesses and consumers have been deterred from utilizing the Internet
and IP networks for a number of reasons, including, but not limited to:
. potentially inadequate development of network infrastructure;
. security concerns, particularly for online payments, including the
potential for merchant or user impersonation and fraud or theft of stored
data and information communicated over IP networks;
. other security concerns such as attacks on popular websites by "hackers;"
. inconsistent quality of service;
. lack of availability of cost-effective, high-speed systems and service;
. limited numbers of local access points for corporate users;
. inability to integrate business applications on IP networks;
. the need to operate with multiple and frequently incompatible products;
. government regulation; and
. a lack of tools to simplify access to and use of IP networks.
The widespread acceptance of the Internet and IP networks will require a
broad acceptance of new methods of conducting business and exchanging
information. Organizations that already have invested substantial resources in
other methods of conducting business may be reluctant to adopt new methods.
Also, individuals with established patterns of purchasing goods and services
and effecting payments may be reluctant to change.
Our near-term success depends, in part, on the growth of Network Solutions
domain name registration business
Network Solutions may not be able to sustain the revenue growth it has
experienced in recent periods. In addition, past revenue growth may not be
indicative of future operating results. If Network Solutions does not
successfully maintain its current position as a leading provider of domain name
registration services or develop or market additional value-added products and
services, our business could be harmed.
Network Solutions will account for a very significant portion of our revenue
in at least the near term. Its future success will depend largely on:
. the continued increase in domain name registrations;
. re-registration rates of its customers;
. its ability to maintain its current position as a leading registrar of
domain names;
. the successful development, introduction and market acceptance of new
services that address the demands of Internet users;
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. its ability to provide robust domain name registration systems; and
. its ability to provide a superior customer service infrastructure as a
registry and registrar.
Issues arising from implementation of Network Solutions' agreements with
ICANN and the Department of Commerce could harm its registration business
The Department of Commerce has adopted a plan for a phased transition of
the Department of Commerce's responsibilities for the domain name system to
ICANN by September 30, 2000. Network Solutions faces risks from this
transition, including:
. ICANN could adopt or promote policies, procedures or programs that are
unfavorable to its role in the registration of domain names or that are
inconsistent with its current or future plans;
. The Department of Commerce or ICANN could terminate Network Solutions'
agreements to be the registry and/or a registrar in the .com, .net and
.org top level domains if they find that it is in violation of its
agreements with them;
. If it does not separate ownership of its registry and registrar by May
2001 in accordance with the registry agreement, the term of the registry
agreement will expire in November 2003 and it may not be chosen as the
successor registry;
. The terms of the registrar accreditation contract could change, as a
result of an ICANN-adopted policy, in a manner that is unfavorable to it;
. The Department of Commerce's or ICANN's interpretation of provisions of
its agreements with either of them described above could differ from
Network Solutions;
. The Department of Commerce could revoke its recognition of ICANN, as a
result of which the Department of Commerce would take the place of ICANN
for purposes of the various agreements described above, and could take
actions that are harmful to it;
. ICANN may approve new top level domains and it may not be selected to act
as a registrar or registry with respect to those top level domains;
. The U.S. Government could refuse to transfer certain responsibilities for
domain name system administration to ICANN due to security, stability or
other reasons, resulting in fragmentation or other instability in domain
name system administration; and
. Its registry business could face legal or other challenges resulting from
the activities of other registrars.
Challenges to ongoing privatization of Internet administration could harm
Network Solutions' registration business
Risks Network Solutions faces from challenges by third parties, including
other domestic and foreign governmental authorities, to its role in the
ongoing privatization of the Internet include:
. Legal, regulatory or other challenges, including challenges to the
agreements governing its relationship with, or to the legal authority
underlying the roles and actions of, the Department of Commerce, ICANN
and/or it, could be brought;
. Congress has held two hearings in which various issues about the domain
name system have been raised and Congress could take action that is
unfavorable to it;
. Congress has issued a Conference Report directing the General Accounting
Office to review the relationship between the Department of Commerce and
ICANN and the adequacy of security arrangements under existing Department
of Commerce cooperative agreements. An adverse report could cause
Congress to take action that is unfavorable to it or the stability of the
domain name system;
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. ICANN could fail to maintain its role, potentially resulting in
instability in domain name system administration; and
. Some foreign governments and governmental authorities have in the past
disagreed with, and may in the future disagree with, the actions,
policies or programs of ICANN, the U.S. Government and it relating to the
domain name system. These foreign governments or governmental authorities
may take actions or adopt policies or programs that are harmful to its
business.
Our quarterly operating results may fluctuate and our future revenues and
profitability are uncertain.
Our quarterly operating results have varied and may fluctuate significantly
in the future as a result of a variety of factors, many of which are outside
our control. These factors include the following:
. continued market acceptance of our trusted infrastructure services;
. the long sales and implementation cycles for, and potentially large order
sizes of, some of our Internet trust services and the timing and
execution of individual contracts;
. volume of domain name registrations through Network Solutions' Registrar
or from other registrars into the Network Solutions Registry.
. customer renewal rates for our trusted infrastructure services and domain
name registration services;
. competition in the domain name registration business from competing
registrars and registries;
. the additional introduction of alternative Internet naming systems:
. the timing of releases of new versions of Internet browsers or other
third-party software products and networking equipment that include our
digital certificate service interface technology;
. the mix of all our offered services sold during a quarter;
. our success in marketing other trusted infrastructure services and web
identity value added services to our existing customers and to new
customers;
. continued development of our direct and indirect distribution channels,
both in the U.S. and abroad;
. market acceptance of our trust infrastructure services and new service
offerings or our competitors' products and services;
. our ability to expand operations;
. our success in assimilating the operations and personnel of any acquired
businesses;
. the amount and timing of expenditures related to expansion of our
operations;
. the impact of price changes in our trusted infrastructure services and
domain name registration services or our competitors' products and
services; and
. general economic conditions and economic conditions specific to IP
network and Internet industries.
In addition, we expect a significant increase in our operating expenses as
we:
. amortize goodwill and other intangible assets from out prior
acquisitions;
. increase our sales and marketing operations and activities, and
. continue to update our systems and infrastructure.
If the increase in our expenses is not accompanied by a corresponding
increase in our revenue, our operating results will suffer, particularly as
revenues from many of our services are recognized ratably over the term of the
service, rather than immediately when the customer pays for them.
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Due to all of the above factors, our quarterly revenues and operating
results are difficult to forecast. Therefore, we believe that period-to-period
comparisons of our operating results will not necessarily be meaningful, and
you should not rely upon them as an indication of future performance. Also,
operating results may fall below our expectations and the expectations of
securities analysts or investors in one or more future quarters. If this were
to occur, the market price of our common stock would likely decline.
We face significant competition.
We anticipate that the market for services that enable trusted and secure
electronic commerce and communications over IP networks will remain intensely
competitive. We compete with larger and smaller companies that provide products
and services that are similar to some aspects of our Internet trust services.
We expect that competition will increase in the near term, and that our primary
long-term competitors may not yet have entered the market. Increased
competition could result in pricing pressures, reduced margins or the failure
of our Internet trust services to achieve or maintain market acceptance, any of
which could harm our business. Several of our current and potential competitors
have longer operating histories and significantly greater financial, technical,
marketing and other resources. As a result, we may not be able to compete
effectively.
The introduction of additional competition into the domain name registration
business could harm Network Solutions' business. This includes, in particular,
competition among registrars within a single top-level domain, such as .com,
and competition among registrars and registries of existing and potential new
top-level domains. Network Solutions currently faces competition in the domain
name registration business from other registrars in the top level domains for
which it acts as registry, third level domain name providers such as Internet
access providers and registrars and registries of top level domains other than
those top level domains for which it acts as registry. As of June 30, 2000, 50
accredited registrars (in addition to us) in the .com, .net and .org top level
domains used Network Solutions' shared registration system to register domain
names. ICANN has accredited approximately 75 additional registrars as of that
date. Network Solutions expects these and additional accredited registrars to
offer competing registration services in these top-level domains in the near
future.
The introduction of potential new top-level domains is currently under
review. At its most recent meeting in Yokohama, the ICANN Board of Directors
adopted the Names Council of the Domain Name Supporting Organization's
recommendation that a policy be established for the introduction of new top-
level domains and approved a schedule to implement the policy which set a
October 1, 2000 deadline for ICANN's receipt of applications from prospective
parties seeking to sponsor or operate one or more new top-level domains and
December 31, 2000 as the target date for completion of negotiations with the
new top-level domain registry sponsors or operators.
Future competition in the domain name registration business as a registry or
registrar could come from many new sources, including:
. domain name registration resellers;
. country code registries;
. Internet access providers; and
. major telecommunications firms.
Many of these entities have core capabilities to deliver registry and/or
registrar services, such as help desks, billing services and network
management, along with strong name recognition and Internet industry
experience. The recent agreements among ICANN, the Department of Commerce,
Network Solutions and other registrars permit flexibility in pricing for and
term of registrations. Network Solutions' revenue, therefore, could be reduced
due to pricing pressures, bundled service offerings and variable terms
resulting from increased competition. Some registrars and resellers in the
.com, .net and .org top-level domains are already charging lower prices for
domain name registration services in those domains. In addition, other entities
are bundling, and may in the future bundle, domain name registrations with
other products or services at reduced rates or for free.
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Our trusted infrastructure services market is new and evolving.
We target our Internet-based trust services at the market for trusted and
secure electronic commerce and communications over IP networks. This is a new
and rapidly evolving market that may not continue to grow. Accordingly, the
demand for our Internet-based trust services is very uncertain. Even if the
market for electronic commerce and communications over IP networks grows, our
Internet-based trust services may not be widely accepted. The factors that may
affect the level of market acceptance of digital certificates and,
consequently, our Internet-based trust services include the following:
. market acceptance of products and services based upon authentication
technologies other than those we use;
. public perception of the security of digital certificates and IP
networks;
. the ability of the Internet infrastructure to accommodate increased
levels of usage; and
. government regulations affecting electronic commerce and communications
over IP networks.
Even if digital certificates achieve market acceptance, our trusted
infrastructure services may fail to address the market's requirements
adequately. If digital certificates do not sustain or increase their
acceptance, or if our Internet-based trust services in particular do not
achieve or sustain market acceptance, our business would be materially harmed.
System interruptions and security breaches could harm our business.
We depend on the uninterrupted operation of our various registration
systems, secure data centers and our other computer and communications systems.
We must protect these systems from loss, damage or interruption caused by fire,
earthquake, power loss, telecommunications failure or other events beyond our
control. Most of our systems are located at, and most of our customer
information is stored in, our facilities in Mountain View, California,
Kawasaki, Japan, both of which are susceptible to earthquakes, and Herndon,
Virginia. All of Network Solutions systems, including those used in its domain
name registry and registrar business are located at the Herndon, Virginia
facility. All of the systems VeriSign uses to deliver its services to customers
other than in Japan are located in Mountain View, California. Any damage or
failure that causes interruptions in either of these facilities or our other
computer and communications systems could materially harm our business. In
addition, our ability to issue digital certificates and register domain names
depends on the efficient operation of the Internet connections from customers
to our secure data centers and our various registration systems as well as from
customers to our registrar and from our registrar and other registrars to the
shared registration system. These connections depend upon efficient operation
of web browsers, Internet service providers and Internet backbone service
providers, all of which have had periodic operational problems or experienced
outages in the past. Any of these problems or outages could decrease customer
satisfaction.
A failure in the operation of our various registration systems or other
events could result in deletion of one or more domain names from the Internet
for a period of time. A failure in the operation of our shared registration
system could result in the inability of one or more other registrars to
register and maintain domain names for a period of time. A failure in the
operation or update of the master database that we maintain could result in
deletion of one or more top level domains from the Internet and the
discontinuation of second level domain names in those top-level domains for a
period of time. The inability of our registrar systems, including our back
office billing and collections infrastructure, and telecommunications systems
to meet the demands of the increasing number of domain name registration
requests and corresponding customer e-mails and telephone calls, including
speculative, otherwise abusive and repetitive e-mail domain name registration
and modification requests, could result in substantial degradation in our
customer support service and our ability to process, bill and collect
registration requests in a timely manner.
We retain certain confidential customer information in our secure data
centers and various registration systems. It is critical to our business
strategy that our facilities and infrastructure remain secure and are
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perceived by the marketplace to be secure. Our domain name registration
operations also depends on our ability to maintain our computer and
telecommunications equipment in effective working order and to reasonably
protect our systems against interruption and potentially on such maintenance
and protection by other registrars in the shared registration system. The root
zone servers and top-level domain zone servers that Network Solutions operates
are critical hardware to our web identity and domain name registration
operations. Therefore, we may have to expend significant time and money to
maintain or increase the security of our facilities and infrastructure.
Despite our security measures, our infrastructure may be vulnerable to
physical break-ins, computer viruses, and attacks by hackers or similar
disruptive problems. It is possible that we may have to expend additional
financial and other resources to address such problems. Any physical or
electronic break-ins or other security breaches or compromises of the
information stored at our secure data centers and domain name registration
systems may jeopardize the security of information stored on our premises or in
the computer systems and networks of our customers. In such an event, we could
face significant liability and customers could be reluctant to use our
Internet-based trust services and domain name registration services. Such an
occurrence could also result in adverse publicity and therefore adversely
affect the market's perception of the security of electronic commerce and
communications over IP networks as well as of the security or reliability of
our services.
Acquisitions could harm our business.
We acquired THAWTE and Signio in February 2000 and Network Solutions in June
2000. We could experience difficulty in integrating the personnel, products,
technologies or operations of these companies. In addition, assimilating
acquired businesses involves a number of other risks, including, but not
limited to:
. the potential disruption of our business;
. the potential impairment of relationships with our employees, customers
and strategic partners;
. the additional expenses associated with the amortization of goodwill and
other intangible assets, which we expect will be an aggregate of
approximately $20 billion for the three acquisitions and will be
amortized straight-line generally from two to three years;
. unanticipated costs or the incurrence of unknown liabilities;
. the need to manage more geographically-dispersed operations, such as
Network Solutions' offices in Virginia and THAWTE's offices in North
Carolina and South Africa;
. diversion of management's resources from other business concerns;
. the inability to retain the employees of the acquired businesses;
. adverse effects on existing customer relationships of THAWTE, Signio or
Network Solutions;
. the difficulty of assimilating the operations and personnel of the
acquired businesses;
. our inability to incorporate acquired technologies successfully into our
Internet-based trust services; and
. the inability to maintain uniform standards, controls, procedures and
policies.
If we are unable to successfully address any of these risks for future
acquisitions, our business could be harmed.
Our equity investments in other companies may not yield any returns.
We have equity investments in a number of companies. In most instances these
investments are in the form of illiquid securities of private companies. These
companies are typically in the early stage of development and may be expected
to incur substantial losses. Therefore, these companies may never become
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publicly traded companies. Even if they do, an active trading market for their
securities may never develop and we may never realize any return on these
investments. Although, we have realized other income from sales of some of the
stock we hold in Keynote Systems during the six months ended June 30, 2000, we
do not expect to experience similar levels of other income in the future.
Further, if these companies are not successful, we could incur charges related
to write-downs or write-offs of these types of assets. Losses or charges
resulting from these investments could harm our operating results.
Technological changes will affect our business.
The emerging nature of the Internet, digital certificate business and the
domain name registration business, and their rapid evolution, requires us to
continually improve the performance, features and reliability of our Internet
trust services and web identity services, particularly in response to
competitive offerings. We must also introduce any new Internet trust services
and web identity services, as quickly as possible. The success of new Internet
trust services and web identity services depends on several factors, including
proper new service definition and timely completion, introduction and market
acceptance of our new Internet trust services or web identity services. We may
not succeed in developing and marketing new Internet trust services and web
identity services that respond to competitive and technological developments
and changing customer needs. This could harm our business.
We must manage our growth and expansion.
Our historical growth has placed, and any further growth is likely to
continue to place, a significant strain on our resources. We have grown from 26
employees at December 31, 1995 to over 1,500 employees at June 30, 2000. In
addition to internal growth, our employee base grew by acquiring SecureIT
during 1998, Signio and THAWTE in February 2000, and Network Solutions in June
2000. We have also opened additional sales offices and have significantly
expanded our operations, both in the U.S. and abroad, during this time period.
To be successful, we will need to implement additional management information
systems, develop further our operating, administrative, financial and
accounting systems and controls and maintain close coordination among our
executive, engineering, accounting, finance, marketing, sales and operations
organizations. Any failure to manage growth effectively could harm our
business.
We depend on key personnel.
We depend on the performance of our senior management team and other key
employees. Our success will also depend on our ability to attract, integrate,
train, retain and motivate these individuals and additional highly skilled
technical and sales and marketing personnel, both in the U.S. and abroad. There
is intense competition for these personnel. In addition, our stringent hiring
practices for some of our key personnel, which consist of background checks
into prospective employees' criminal and financial histories, further limit the
number of qualified persons for these positions. We have no employment
agreements with any of our key executives that prevent them from leaving us at
any time. In addition, we do not maintain key person life insurance for any of
our officers or key employees other than our President and Chief Executive
Officer. The loss of the services of any of our senior management team or other
key employees or failure to attract, integrate, train, retain and motivate
additional key employees could harm our business.
Network Solutions relies on third parties who maintain and control root zone
servers and route Internet communications.
Network Solutions currently administers and operates only two of the 13 root
zone servers. The others are administered and operated by independent operators
on a volunteer basis. Because of the importance to the functioning of the
Internet of these root zone servers, Network Solutions' registration business
could be harmed if these volunteer operators fail to properly maintains such
servers or abandon such servers.
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Further, Network Solutions' registration business could be harmed if any of
these volunteer operators fail to include or provide accessibility to the data
that it maintains in the root zone servers that it controls.
In the event and to the extent that ICANN is authorized to set policy with
regard to an authoritative root server system, as provided in the registry
agreement, it is required to ensure that the authoritative root will point to
the top level domain zone servers designated by it. If ICANN does not do this,
Network Solutions' business could be harmed.
Network Solutions' registration business also could be harmed if a
significant number of Internet service providers decided not to route Internet
communications to or from domain names registered by it or if a significant
number of Internet service providers decided to provide routing to a set of
domain name servers that did not point to its top level domain zone servers.
We must establish and maintain strategic and other relationships.
One of our significant business strategies has been to enter into strategic
or other similar collaborative relationships in order to reach a larger
customer base than we could reach through our direct sales and marketing
efforts. Examples of these types of relationships include AOL/Netscape, Cisco,
Microsoft, and RSA Security. We may need to enter into additional relationships
to execute our business plan. We may not be able to enter into additional, or
maintain our existing, strategic relationships on commercially reasonable
terms. If we fail to enter into additional relationships, we would have to
devote substantially more resources to the distribution, sale and marketing of
our Internet-based trust services and domain name registration services than we
would otherwise. As a result of our emphasis on these relationships, our
success in these relationships will depend both on the ultimate success of the
other parties to these relationships, particularly in the use and promotion of
IP networks for trusted and secure electronic commerce and communications, and
on the ability of these parties to market our Internet-based trust services
successfully. Furthermore, our ability to achieve future growth will also
depend on our ability to continue to establish direct seller channels and to
develop multiple distribution channels, particularly with respect to our web
identity business. To do this we must maintain relationships with Internet
access providers and other third parties. Failure of one or more of our
strategic relationships to result in the development and maintenance of a
market for our Internet-based trust services or domain name registration and
value added services could harm our business.
Many of our existing relationships do not, and any future relationships may
not, afford us any exclusive marketing or distribution rights. In addition, the
other parties may not view their relationships with us as significant for their
own businesses. Therefore, they could reduce their commitment to us at any time
in the future. These parties could also pursue alternative technologies or
develop alternative products and services either on their own or in
collaboration with others, including our competitors. If we are unable to
maintain our relationships or to enter into additional relationships, this
could harm our business.
Some of our Internet-based trust services have lengthy sales and
implementation cycles.
We market many of our trusted infrastructure services directly to large
companies and government agencies. The sale and implementation of our services
to these entities typically involves a lengthy education process and a
significant technical evaluation and commitment of capital and other resources.
This process is also subject to the risk of delays associated with customers'
internal budgeting and other procedures for approving large capital
expenditures, deploying new technologies within their networks and testing and
accepting new technologies that affect key operations. As a result, the sales
and implementation cycles associated with certain of our Internet-based trust
services can be lengthy, potentially lasting from three to six months. Our
quarterly and annual operating results could be materially harmed if orders
forecasted for a specific customer for a particular quarter are not realized.
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Our services could have unknown defects.
Services as complex as those we offer or develop frequently contain
undetected defects or errors. Despite testing, defects or errors may occur in
our existing or new services, 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 our reputation, tort or warranty claims,
increased insurance costs or increased service and warranty costs, any of which
could harm our business. Furthermore, we often provide implementation,
customization, consulting and other technical services in connection with the
implementation and ongoing maintenance of our services, which typically
involves working with sophisticated software, computing and communications
systems. Our failure or inability to meet customer expectations 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 our reputation and increased
costs.
Public key cryptography technology is subject to risks.
Our Internet trust services depend on public key cryptography technology.
With public key cryptography technology, a user is given a public key and a
private key, both of which are required to encrypt and decode messages. The
security afforded by this technology depends on the integrity of a user's
private key and that it is not stolen or otherwise compromised. The integrity
of private keys also depends in part on the application of specific
mathematical principles known as "factoring." This integrity is predicated on
the assumption that the factoring of large numbers into their prime number
components is difficult. Should an easy factoring method be developed, the
security of 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
our existing trusted infrastructure services obsolete or unmarketable. If
improved techniques for attacking cryptographic systems were ever developed, we
would likely have to reissue digital certificates to some or all of our
customers, which could damage our reputation and brand or otherwise harm our
business. In the past there have been public announcements of the successful
decoding of some types of cryptographic messages and of the potential
misappropriation of private keys. This type of publicity could also hurt the
public perception as to the safety of the public key cryptography technology
included in our digital certificates. This negative public perception could
harm our business.
Our international operations are subject to certain risks.
Revenues of VeriSign Japan K.K., or VeriSign Japan, and revenues from other
international affiliates, and customers accounted for approximately 27% of our
revenues in the full year of 1999 and 21% of our revenues in the second quarter
of 2000. We intend to expand our international operations and international
sales and marketing activities. For example, with our acquisition of THAWTE we
have additional operations in South Africa and with our acquisition of Network
Solutions we have additional operations in Asia and Europe. Expansion into
these markets has required and will continue to require significant management
attention and resources. We may also need to tailor our Internet-based trust
services and web identity services for a particular market and to enter into
international distribution and operating relationships. We have limited
experience in localizing our services and in developing international
distribution or operating relationships. We may not succeed in expanding our
services into international markets. Failure to do so could harm our business.
In addition, there are risks inherent in doing business on an international
basis, including, among others:
. competition with foreign companies;
. regulatory requirements;
. legal uncertainty regarding liability and compliance with foreign laws;
. export and import restrictions on cryptographic technology and products
incorporating that technology;
. tariffs and other trade barriers and restrictions;
. difficulties in staffing and managing foreign operations;
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. longer sales and payment cycles;
. problems in collecting accounts receivable;
. currency fluctuations;
. difficulty of authenticating customer information;
. political instability;
. failure of foreign laws to adequately protect our U.S. proprietary
rights;
. seasonal reductions in business activity; and
. potentially adverse tax consequences.
We have licensed to international affiliates the VeriSign Processing Center
platform, which is designed to replicate our own secure data centers and allows
the affiliate to offer back-end processing of Internet-based trust services.
The VeriSign Processing Center platform provides an affiliate with the
knowledge and technology to offer Internet-based trust services similar to
those offered by us. It is critical to our business strategy that the
facilities and infrastructure used in issuing and marketing digital
certificates remain secure and we are perceived by the marketplace to be
secure. Although we provide the affiliate with training in security and trust
practices, network management and customer service and support, these practices
are performed by the affiliate and are outside of our control. Any failure of
an affiliate to maintain the privacy of confidential customer information could
result in negative publicity and therefore adversely affect the market's
perception of the security of our services as well as the security of
electronic commerce and communication over IP networks generally. For further
information, please see "--System interruptions and security breaches could
harm our business."
All of our international revenues from sources other than VeriSign Japan are
denominated in U.S. dollars. If additional portions of our international
revenues were to be denominated in foreign currencies, we could become subject
to increased risks relating to foreign currency exchange rate fluctuations.
Our Internet based trust services could be affected by government regulation.
Exports of software products utilizing encryption technology are generally
restricted by the United States and various non-Unites States governments.
Although we have obtained approval to export our Global Server digital
certificate service, and none of our other Internet trust services are
currently subject to export controls under United States law, the list of
products and countries for which export approval is required could be revised
in the future to include more digital certificate products and related
services. If we do not obtain required approvals we may not be able to sell
specific Internet trust services in international markets. There are currently
no federal laws or regulations that specifically control certificate
authorities, but a limited number of states have enacted legislation or
regulations with respect to certificate authorities. If the market for digital
certificates grows, the United States federal or state or non-United States
governments may choose to enact further regulations governing certificate
authorities or other providers of digital certificate products and related
services. These regulations or the costs of complying with these regulations
could harm our business.
On July 3, 2000, President Bill Clinton signed a bill, as passed by
Congress, known as the Electronic Signatures in Global and National Commerce
Act, or "E-Sign." E-Sign is intended to render digital signatures legally
equivalent to those signed on paper. The execution of E-Sign could materially
and adversely affect our digital certificates services business. For example,
there may be an increasing demand for digital signatures and certificates as a
result of the new E-Sign law. However, due to competition or other reasons, our
services may not be adopted. If we cannot meet market expectations or demand
for our products and services does not increase, our business may be materially
and adversely affected. Furthermore, a successful implementation of E-Sign may
further encourage competitors to enter the marketplace because of the possible
increase in demand for digital signatures and certificates. This could
effectively lower barriers to entry and increasingly flood the marketplace with
competitors. While we cannot assure you that E-Sign will be effectively
implemented or how this implementation will affect our business, we must
continue to meet the demand and expectations of our customers, our failure to
do so could materially and adversely harm our business.
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We face risks related to intellectual property rights.
Our success depends on our internally developed technologies and other
intellectual property. Despite our precautions, it may be possible for a third
party to copy or otherwise obtain and use our intellectual property or trade
secrets without authorization. In addition, it is possible that others may
independently develop substantially equivalent intellectual property. If we do
not effectively protect our intellectual property, our business could suffer.
In the future we may have to resort to litigation to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. This type of
litigation, regardless of its outcome, could result in substantial costs and
diversion of management and technical resources.
We also license third-party technology, such as public key cryptography
technology licensed from RSA and other technology that is used in our products,
to perform key functions. These third-party technology licenses may not
continue to be available to us on commercially reasonable terms or at all. Our
business could suffer if we lost the rights to use these technologies. A third
party could claim that the licensed software infringes a patent or other
proprietary right. Litigation between the licensor and a third party or between
us and a third party could lead to royalty obligations for which we are not
indemnified or for which indemnification is insufficient, or we may not be able
to obtain any additional license on commercially reasonable terms or at all.
The loss of, or our inability to obtain or maintain, any of these technology
licenses could delay the introduction of our Internet trust services until
equivalent technology, if available, is identified, licensed and integrated.
This could harm our business.
From time to time, we have received, and may receive in the future, notice
of claims of infringement of other parties' proprietary rights. Infringement or
other claims could be made against us in the future. Any 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 us to develop non-infringing technology or enter into royalty or
licensing agreements. Royalty or licensing agreements, if required, may not be
available on acceptable terms or at all. If a successful claim of product
infringement were made against us and we could not develop non-infringing
technology or license the infringed or similar technology on a timely and cost-
effective basis, our business could be harmed.
In addition, legal standards relating to the validity, enforceability, and
scope of protection of intellectual property rights in Internet-related
businesses are uncertain and still evolving. Because of the growth of the
Internet and Internet related businesses, patent applications are continuously
and simultaneously being filed in connection with Internet-related technology.
There are a significant number of U.S. and foreign patents and patent
applications in our areas of interest, and we believe that there has been, and
is likely to continue to be, significant litigation in the industry regarding
patent and other intellectual property rights.
Network Solutions is party to legal proceedings that could have a negative
financial impact on it.
Network Solutions is involved in a number of legal proceedings. It cannot
reasonably estimate the potential impact of any of these proceedings. An
adverse determination in these cases or any other of these proceedings,
however, could harm our business. Legal proceedings in which it is involved are
expensive and divert the attention of its personnel.
32
<PAGE>
Our stock price, like that of many Internet companies, is highly volatile.
The market price of our common stock has been and is likely to continue to
be highly volatile and significantly affected by factors such as:
. general market and economic conditions and market conditions affecting
technology and Internet stocks generally;
. actual or anticipated fluctuations in its quarterly or annual
registrations or operating results;
. announcements of technological innovations, acquisitions or investments,
developments in Internet governance or corporate actions such as stock
splits; and
. industry conditions and trends.
The stock market has experienced significant price and volume fluctuations
that have particularly affected the market prices of the stocks of technology
companies, especially Internet-related companies. These broad market or
technology or Internet sector fluctuations may adversely affect the market
price of our common stock. Recently, the market price of our common stock, like
that of many Internet-related companies, has experienced significant
fluctuations. For instance, between January 1, 1999, and July 31, 2000, the
reported last sale price for our split-adjusted common stock ranged from $15.00
per share to $253.00 per share. On July 31, 2000, the reported last sale price
of our split-adjusted common stock was $158.69 per share.
The market price of our common stock also has been and is likely to continue
to be significantly affected by expectations of analysts and investors. Reports
and statements of analysts do not necessarily reflect our views. The fact that
we have in the past met or exceeded analyst or investor expectations does not
necessarily mean that it will do so in the future.
In the past, securities class action lawsuits have often followed periods of
volatility in the market price of a particular company's securities. This type
of litigation could result in substantial costs and a diversion of its
management's attention and resources.
We have implemented anti-takeover provisions.
Provisions of our Amended and Restated Certificate of Incorporation and
Bylaws contain provisions that could make it more difficult for a third party
to acquire us without the consent of our board of directors. These provisions
include:
. our stockholders may only take action at a meeting and not by written
consent;
. our board must be given advance notice regarding stockholder-sponsored
proposals for consideration at annual meetings and for stockholder
nominations for the election of directors;
. we have a classified board of directors, with the board being divided
into three classes that serve staggered three-year terms;
. vacancies on our board may be filled until the next annual meeting of
stockholders only by majority vote of the directors then in office; and
. special meetings of our stockholders may only be called by the Chairman
of the Board, the President or by the board, not by our stockholders.
While we believe these provisions provide for an opportunity to receive a
higher bid by requiring potential acquirors to negotiate with our board of
directors, these provisions may apply even if the offer may be considered
beneficial by some stockholders.
33
<PAGE>
Financial Condition
<TABLE>
<CAPTION>
June 30, December 31
2000 1999 Change
----------- ----------- ------
(Dollars in thousands)
<S> <C> <C> <C>
Cash, cash equivalents and short-term
investments............................... $ 1,044,815 $156,480 568%
Working capital............................ $ 587,013 $140,163 319%
Stockholders' equity....................... $20,640,393 $298,359 6,818%
</TABLE>
At June 30, 2000, our principal source of liquidity was approximately $1.0
billion of cash, cash equivalents and short-term investments, consisting
principally of commercial paper, medium term notes, corporate bonds and notes,
market auction securities, United States government agency securities and money
market funds. In addition, we hold $238.5 million of long-term equity minority
investments and corporate bonds.
Net cash provided by operating activities was $67.1 million in the first six
months of 2000 compared to net cash provided by operating activities of $.3
million in the first six months of 1999. In the first six months of 2000, the
net loss of $479.1 million was offset by non-cash charges totaling $470.2
million related to the amortization of goodwill and other intangible assets and
$54.0 million related to the write-off of acquired in-process research and
development, and was decreased by the $32.6 million gain on the sale of a
portion of our interest in Keynote Systems, Inc. In addition, increases in
accounts payable and accrued liabilities, and deferred revenue, were only
partially offset by increases in accounts receivable. Net cash used in
operating activities in the first six months of 1999 was primarily the result
of the $2.1 million net loss and increases in accounts payable and deferred
revenue. These amounts were partially offset by non-cash charges for
depreciation and increases in accounts receivable and prepaid expenses and
other current assets.
Net cash provided by investing activities was $860.2 million in the first
six months of 2000 compared to net cash used of $56.4 million in the first six
months of 1999. In the first six months of 2000, net cash provided by investing
activities was primarily the result of the cash acquired in our acquisitions,
partially offset by costs relating to our acquisitions of THAWTE, Signio and
Network Solutions. In the first six months of 1999, net cash used in investing
activities was substantially due to net purchases of $79.6 million of short-
term investments. Capital expenditures for property and equipment totaled $17.2
million in the first six months of 2000 and $3.0 million in the first six
months of 1999. As of June 31, 2000, we also had commitments under
noncancelable operating leases for our facilities for various terms through
2005.
Net cash provided by financing activities was $15.7 million in the first six
months of 2000 resulting primarily from the issuance of common stock for stock
option exercises. In the first six months of 1999, net cash provided by
financing activities was $125.5 million, primarily from the sale of additional
common stock to the public.
We believe our existing cash, cash equivalents and short-term investments,
will be sufficient to meet our working capital and capital expenditure
requirements for at least the next 12 months. However, at some time, we may
need to raise additional funds through public or private financing, strategic
relationships or other arrangements. This additional funding, if needed, might
not be available on terms attractive to us, or at all. Failure to raise capital
when needed could materially harm our business. If we raise additional funds
through the issuance of equity securities, the percentage of our stock owned by
our then-current stockholders will be reduced. Furthermore, these equity
securities might have rights, preferences or privileges senior to those of our
common stock.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established methods of
accounting for derivative financial instruments and hedging activities related
to those
34
<PAGE>
instruments as well as other hedging activities. Because VeriSign currently
holds no derivative instruments and does not engage in hedging activities, we
expect that the adoption of SFAS No. 133 will have no material impact on our
financial position, results of operations or cash flows. We will be required to
implement SFAS No. 133 for the year ending December 31, 2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101 regarding recognition, presentation and
disclosure of revenue. Interpretive guidance for the SAB is expected to be
issued soon. We are currently evaluating SAB No. 101 and do not believe that
the pronouncement will have a significant impact on our financial position,
results of operations or cash flows.
In March 2000, the Emerging Issues Task Force reached a consensus on Issue
00-2, "Accounting for the Costs of Developing a Web Site" (EITF 00-2). In
general, EITF 00-2 states that the costs of developing a web site should be
accounted for under the provisions of Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." We are currently evaluating EITF 00-2 and do not believe that
the pronouncement will have a significant impact on our financial position,
results of operations or cash flows. EITF 00-2 is effective for costs incurred
after June 30, 2000.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 (FIN No. 44), "Accounting for Certain Transactions
Involving Stock Compensation, an Interpretation of APB Opinion No. 25." FIN No.
44 was effective July 1, 2000. This interpretation provides guidance for
applying APB Opinion No. 25, "Accounting for Stock Issued to Employees." We are
currently evaluating FIN No. 44 and do not believe that the pronouncement will
have a significant impact on our financial position, results of operations or
cash flows.
35
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate sensitivity
The primary objective of VeriSign's investment activities is to preserve
principal while at the same time maximizing the income we receive from our
investments without significantly increasing risk. Some of the securities that
we have invested in may be subject to market risk. This means that a change in
prevailing interest rates may cause the principal amount of the investment to
fluctuate. For example, if we hold a security that was issued with a fixed
interest rate at the then-prevailing rate and the prevailing interest rate
later rises, the principal amount of our investment will probably decline. To
minimize this risk, we maintain our portfolio of cash equivalents and short-
term investments in a variety of securities, including commercial paper,
medium-term notes, corporate bonds and notes, market auction securities, U.S.
government and agency securities and money market funds. In general, money
market funds are not subject to market risk because the interest paid on such
funds fluctuates with the prevailing interest rate. In addition, we generally
invest in relatively short-term securities. As of June 30, 2000, 97% of our
non-strategic investments mature in less than one year.
The following table presents the amounts of our cash equivalents and
investments that are subject to market risk by range of expected maturity and
weighted-average interest rates as of June 30, 2000. This table does not
include money market funds because those funds are not subject to market risk.
<TABLE>
<CAPTION>
Maturing in
-------------------------------
Six Months Estimated
Six Months to More than Fair
or Less One Year One Year Total Value
---------- ---------- --------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Included in cash and cash
equivalents............... $874,559 $ -- $ -- $874,559 $874,451
Weighted-average interest
rate...................... 7.01% -- --
Included in short-term
investments............... $ 5,655 $ 7,996 $ -- $ 13,651 $ 13,647
Weighted-average interest
rate...................... 6.20% 7.33% --
Included in long-term
investments............... $ 41,231 $11,261 $25,729 $ 78,221 $ 77,620
Weighted-average interest
rate...................... 5.94% 5.44% 7.05%
</TABLE>
Exchange rate risk
VeriSign considers its exposure to foreign currency exchange rate
fluctuations to be minimal. All revenues derived from affiliates other than
VeriSign Japan are denominated in United States Dollars and, therefore, are not
subject to exchange rate fluctuations.
Both the revenues and expenses of our majority-owned subsidiary in Japan are
denominated in Japanese Yen, and the revenues and expenses of our activities
conducted through South Africa are denominated in South African Rand. In both
regions, we believe this serves as a natural hedge against exchange rate
fluctuations because although an unfavorable change in the exchange rate of the
foreign currency against the United States Dollar will result in lower revenues
when translated to United States Dollars, operating expenses will also be lower
in these circumstances. Our subsidiary in Sweden has not had significant
operations to date.
Because of our minimal exposure to foreign currencies, we have not engaged
in any hedging transactions to date.
Equity price risk
We own shares of common stock of certain public companies. We value these
investments using the closing fair market value stated in the Wall Street
Journal for the last day of each month. The value of these investments are
subject to market price volatility. We reflect these investments in our balance
sheet at their market value, with the unrealized gains and losses excluded from
earnings and reported in the "Accumulated other comprehensive income" component
of stockholders' equity. As a result of recent market price volatility
36
<PAGE>
of our publicly traded investments, we experienced a $38.1 million unrealized
loss on these investments during the second quarter of 2000. In addition, we
have invested in equity instruments of several privately held companies many of
which can still be considered in the startup or development stages. These
investments are accounted for under the cost method. We do not hedge against
equity price changes.
37
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of July 31, 2000, Network Solutions, Inc. was a defendant in fifteen
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 contractual right between us and a domain
name holder that registered a domain name, which is alleged to be similar to
the trademark in question. On October 25, 1999, however, the Ninth Circuit
Court of Appeals ruled in our favor and against Lockheed Corporation, holding
that our services do not make us liable for contributory infringement to
trademark owners. Thus, we believe, this type of suit should decline. The
holders of the domain name registrations in dispute have, in turn, questioned
our right, absent a court order, to take any action that suspends their
contractual rights to the domain names in question. Although 80 of these
situations over the past six and a half years have resulted in suits actually
naming us as a defendant, as of July 31, 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.
On March 15, 2000, a group of eight plaintiffs filed suit against the United
States Department of Commerce, the National Science Foundation and Network
Solutions, Inc. 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 Network Solutions was 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. On June 19,
2000 the plaintiffs filed their first amended complaint, adding two plaintiffs
and naming VeriSign as a defendant.
All of the defendants filed motions to transfer the suit to the Federal
District Court in the District of Columbia and the court granted those actions
on June 28, 2000. The same attorney who unsuccessfully challenged Network
Solutions in a similar action known as Thomas, et al. v. Network Solutions, et
al., 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, Section 8 and the Fifth Amendment of the
U.S. Constitution, the Independent Offices Appropriations Act (31 U.S.C.
Section 9701), the Administrative Procedure Act, the Sherman Act, and the
California Unfair Competition Act, Section 17200. The case was docketed with
the Federal District Court in the District of Columbia on July 28, 2000 and on
August 4, 2000 the plaintiffs filed their Notice of Voluntary Dismissal without
Prejudice under Rule 41(A) of the Federal Rules of Civil Procedure.
On June 15, 2000, plaintiff David Moran filed a putative shareholder
derivative complaint on behalf of himself and others similarly situated against
Charles Stuckey, Jr., James Bidzos, Richard L. Earnest, Dr. Taher Elgamal,
James K. Sims, Joseph B. Lassiter III, Robert P. Badavas, and against nominal
defendant VeriSign, Inc. The complaint alleges, among other things, that the
directors of RSA Security mismanaged RSA's business, failed to protect its
intellectual property or enforce the terms of its license agreement with
VeriSign, and that VeriSign violated the terms of the licensing agreement and
competed against RSA. Defendants have not yet responded to the Complaint in
this matter. While VeriSign cannot ascertain the outcome of this matter
presently, VeriSign believes that the claims against it are without merit and
intends to vigorously defend itself against these claims.
VeriSign is involved in various other investigations, claims and lawsuits
arising in the normal conduct of our business, none of which, in our opinion
will harm our business. VeriSign cannot assure that it will prevail in any
litigation. Regardless of the outcome, any litigation may require VeriSign to
incur significant litigation expense and may result in significant diversion of
management attention. An unfavorable outcome may have a material adverse effect
on VeriSign's financial position or results of operations.
38
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2000 Annual Meeting of Stockholders was held on June 8, 2000 at our
corporate offices, located at 1350 Charleston Road, Mountain View, California.
Eight proposals were voted on at the meeting. The results of each proposal are
as follows.
Proposal No. 1 to approve the issuance of shares of VeriSign stock in the
merger of Nickel Acquisition Corporation, a wholly owned subsidiary of
VeriSign, with and into Network Solutions, Inc. In the merger, VeriSign issued
1.075 shares of common stock for each share of outstanding Network Solutions
common stock. The proposal received the following votes:
<TABLE>
<CAPTION>
Votes
----------
<S> <C>
For............................................................... 77,641,743
Against........................................................... 782,257
Abstain........................................................... 76,326
Proposal No. 2 to approve an amendment to VeriSign's Certificate of
Incorporation to increase the number of authorized shares of common stock from
200,000,000 to 1,000,000,000 was approved by the stockholders. The proposal
received the following votes:
<CAPTION>
Votes
----------
<S> <C>
For............................................................... 67,458,217
Against........................................................... 10,910,113
Abstain........................................................... 131,996
Proposal No. 3 to approve an amendment to VeriSign's bylaws to increase the
number of board members from six to nine, or to another number as the board may
approve. The proposal received the following votes:
<CAPTION>
Votes
----------
<S> <C>
For............................................................... 82,788,473
Against........................................................... 14,320,891
Abstain........................................................... 145,474
</TABLE>
Proposal No. 4 to elect two (2) Class II directors to serve for a three-year
term expiring at the Annual Meeting of Stockholders in 2003 was approved by the
stockholders. The nominees received the following votes:
<TABLE>
<CAPTION>
For Withheld
---------- ---------
<S> <C> <C>
Kevin R. Compton........................................ 96,425,606 829,232
David J. Cowan.......................................... 96,223,661 1,031,177
</TABLE>
Incumbent Class III directors D. James Bidzos and William Chenevich are
currently serving for a term expiring at the Annual Meeting of Stockholders in
2001. Incumbent Class I directors Stratton D. Sclavos and Timothy Tomlinson are
currently serving for a term expiring at the Annual Meeting of Stockholders in
2002.
Proposal No. 5 to approve an amendment to VeriSign's 1998 Equity Incentive
Plan to increase the number of shares reserved and authorized for issuance by
5,500,000 shares was approved by the stockholders. The proposal received the
following votes:
<TABLE>
<CAPTION>
Votes
----------
<S> <C>
For............................................................... 57,417,345
Against........................................................... 20,907,787
Abstain........................................................... 175,194
</TABLE>
39
<PAGE>
Proposal No. 6 to approve an amendment to VeriSign's 1998 Employee Stock
Purchase Plan to increase the number of shares issuable by an aggregate of
250,000 shares and to provide for an automatic annual increase in an amount
equal to one (1) percent of the outstanding shares of VeriSign common stock
was approved by the stockholders. The proposal received the following votes:
<TABLE>
<CAPTION>
Votes
----------
<S> <C>
For............................................................... 76,231,756
Against........................................................... 2,094,235
Abstain........................................................... 174,335
Proposal No. 7 to approve an amendment to VeriSign's 1998 Directors Stock
Option Plan to increase the number of shares issuable by an aggregate of
250,000 shares was approved by the stockholders. The proposal received the
following votes:
<CAPTION>
Votes
----------
<S> <C>
For............................................................... 60,280,639
Against........................................................... 17,672,315
Abstain........................................................... 192,347
In addition, in Proposal No. 8 stockholders ratified the appointment of
KPMG LLP as independent auditors of VeriSign for the fiscal year ending
December 31, 2000. This proposal received the following votes:
<CAPTION>
Votes
----------
<S> <C>
For............................................................... 97,120,183
Against........................................................... 66,589
Abstain........................................................... 68,066
</TABLE>
Abstentions and broker non-votes were included in the determination of the
number of shares represented at the meeting for purposes of determining the
presence of a quorum at the Annual Meeting of Stockholders. Abstentions had
the same effect as a vote against a proposal, for Proposals No. 1 2, 3, 5, 6,
7 and 8. Broker non-votes had the same effect as a vote against the proposal,
for Proposal No. 2.
ITEM 5. OTHER INFORMATION
Upon the completion of our acquisition of Network Solutions, William A.
Roper and Michael A. Daniels were appointed to our Board of Directors. Mr.
Roper will serve as a Class I Director with a term expiring 2002 and Mr.
Daniels will serve as a Class II Director with a term expiring 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
<TABLE>
<CAPTION>
Incorporated by
Reference
Exhibit ------------------ Filed
Number Exhibit Description Form Date Number Herewith
------- ------------------- ----- ----- ------ --------
<C> <S> <C> <C> <C> <C>
27.01 Financial Data Schedule X
(Available in EDGAR version only)
</TABLE>
(b) Reports on Form 8-K
The following reports were filed on Form 8-K or Form 8-K/A during the
quarter ended June 30, 2000:
. Current Report on Form 8-K dated June 8, 2000 was filed on June 19, 2000
pursuant to Item 2 --Acquisition or Disposition of Assets.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Verisign, Inc.
Date: August 9, 2000 /s/ Stratton D. Sclavos
By: _________________________________
Stratton D. Sclavos
President and Chief Executive
Officer (Principal Executive
Officer)
/s/ Dana L. Evan
Date: August 9, 2000 By: _________________________________
Dana L. Evan
Executive Vice President of
Finance and Administration and
Chief Financial Officer (Principal
Financial and Accounting Officer)
41
<PAGE>
SUMMARY OF TRADEMARKS
The following trademarks and service marks of VeriSign, Inc., which may be
registered in certain jurisdictions, may be referenced in this Form 10-Q:
Trademarks
Authenticated Payment(TM)
Authenticated Payment Services(TM)
Authenticated Payment Solution(TM)
Commerce Site(TM)
dot com biz card(TM)
dot com directory(TM)
dot com essentials(TM)
dot com mail(TM)
dot com people(TM)
dot com promotions(TM)
dot com toolkit(TM)
Global Site(TM)
Global Site Plus(TM)
ImageCafe(TM)
idNames(TM)
Network Solutions(R)
OnSite(R)
Secure Site(TM)
Secure Site Plus(TM)
SecureIT(TM)
THAWTE(TM)
The Sign of Trust on the Internet(R)
VeriSign(R)
VeriSign Logo
VeriSign Service Center(TM)
VeriSign Processing Center(TM)
WebPass(R)
Service Marks
Digital ID SM
Digital ID Center SM
42
<PAGE>
Global Trust Network SM
GoSecure! SM
NetSure(R) Protection Plan
PayFlow SM
PayFlow Pro SM
The Internet Trust Company SM
V-Commerce SM
VeriSign Trust Network SM
WebTrust SM
Worldtrust SM
All other brand or product names are trademarks or registered trademarks of
their respective holders.
43
<PAGE>
EXHIBITS
As required under Item 6--Exhibits and Reports on Form 8-K, the exhibits
filed as part of this report are provided in this separate section. The
exhibits included in this section is as follows:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
27.01 Financial Data Schedule (Available in EDGAR version only)
</TABLE>
44
