<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 4, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NETWORK SOLUTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 52-1146119
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
505 HUNTMAR PARK DRIVE ROBERT J. KORZENIEWSKI
HERNDON, VIRGINIA 20170 CHIEF FINANCIAL OFFICER AND
(703) 742-0400 ACTING CHIEF OPERATING OFFICER
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, NETWORK SOLUTIONS, INC.
INCLUDING 505 HUNTMAR PARK DRIVE
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) HERNDON, VIRGINIA 20170
(703) 742-0400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
</TABLE>
------------------------
Copies to:
<TABLE>
<S> <C> <C> <C>
JORGE DEL CALVO, ESQ. JONATHAN W. EMERY, ESQ. DOUGLAS E. SCOTT, ESQ. GERALD S. TANENBAUM, ESQ.
KEITH J. MENDELSON, ESQ. SENIOR VICE PRESIDENT, ALOMA H. AVERY, ESQ. CAHILL GORDON & REINDEL
DAVINA K. KAILE, ESQ. GENERAL COUNSEL AND SECRETARY SCIENCE APPLICATIONS EIGHTY PINE STREET
PILLSBURY MADISON & SUTRO LLP NETWORK SOLUTIONS, INC. INTERNATIONAL CORPORATION NEW YORK, NEW YORK 10005
2550 HANOVER STREET 505 HUNTMAR PARK DRIVE 10260 CAMPUS POINT DRIVE (212) 701-3000
PALO ALTO, CALIFORNIA 94306 HERNDON, VIRGINIA 20170 SAN DIEGO, CALIFORNIA 92121
(650) 233-4500 (703) 742-0400 (619) 546-6000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE(1) PRICE(1) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock, $.001 par
value............................. 5,267,000 shares $139 $732,113,000 $203,527
- ---------------------------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) based upon the average of the high and low prices of
the Company's Class A Common Stock on the Nasdaq National Market on December
29, 1998.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
DATED JANUARY 4, 1999
PROSPECTUS
4,580,000 Shares
[NETWORK SOLUTIONS -- LOGO]
Class A Common Stock
Selling Stockholders identified in this Prospectus are offering all of these
shares and will receive all of the proceeds of this offering. One of the Selling
Stockholders, Science Applications International Corporation ("SAIC"), currently
owns 100% of our outstanding Class B Common Stock, or approximately 72.3% of our
outstanding Class A Common Stock and Class B Common Stock combined. After this
offering, SAIC will own approximately 44.8% of our outstanding Class A Common
Stock and Class B Common Stock combined.
Except as otherwise noted, no share or per share information in this Prospectus
has been adjusted to reflect a 2-for-1 stock split of the shares of Class A
Common Stock and Class B Common Stock approved by our Board of Directors on
December 31, 1998. The stock split will be effected in the form of a stock
dividend on the shares of Class A Common Stock and Class B Common Stock. The
stock dividend will be distributed on March 23, 1999 to stockholders of record
on February 26, 1999.
The Class A Common Stock is traded on the Nasdaq National Market under the
symbol "NSOL." On December 31, 1998, the reported last sale price of the Class A
Common Stock was $130.875 per share.
We currently have two classes of Common Stock outstanding, Class A Common Stock
and Class B Common Stock. SAIC intends to convert the remaining shares of Class
B Common Stock into shares of Class A Common Stock by May 31, 1999, assuming
completion of this offering.
INVESTING IN THE CLASS A COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PROCEEDS TO
PRICE TO UNDERWRITING THE SELLING
PUBLIC DISCOUNT STOCKHOLDERS
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<S> <C> <C> <C>
Per Share $ $ $
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Total $ $ $
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</TABLE>
SAIC has agreed to grant the Underwriters the right to purchase up to an
additional 687,000 shares of Class A Common Stock to cover over-allotments.
It is expected that delivery of the shares will be made to investors on or about
, 1999.
J.P. MORGAN & CO. HAMBRECHT & QUIST
Joint Lead Managers
PAINEWEBBER INCORPORATED BANCBOSTON ROBERTSON STEPHENS
, 1999
<PAGE> 3
[INSIDE FRONT COVER]
.com Drives Net Registration Growth
[Bar graph depicting number of .com, .net, .org and .edu net registrations on a
quarterly basis from December 1995 through September 1998]
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary..................... 1
Risk Factors........................... 5
Price Range of Common Stock and
Dividend Policy................... 18
Use of Proceeds........................ 18
Selected Financial Information......... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................ 21
Business............................... 34
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Management............................. 51
Selling Stockholders................... 54
Description of Capital Stock........... 56
Underwriting........................... 61
Legal Matters.......................... 62
Experts................................ 62
Incorporation of Certain Documents by
Reference......................... 63
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
AVAILABLE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. We have also filed with the SEC a Registration
Statement on Form S-3 to register the shares of Class A Common Stock being
offered in this Prospectus. This Prospectus, which forms part of the
Registration Statement, does not contain all of the information included in the
Registration Statement. For further information about us and the shares of Class
A Common Stock offered in this Prospectus, you should refer to the Registration
Statement and its exhibits and our other SEC filings.
You may read and copy any document we file with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for further information on the operation of the Public
Reference Room. We file our SEC materials electronically with the SEC, so you
can also review our filings by accessing the Web site maintained by the SEC at
http://www.sec.gov. This Web site contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC.
You should rely only on the information contained or incorporated by reference
in this Prospectus. We have not authorized anyone to provide you with
information different from that contained or incorporated by reference in this
Prospectus. This Prospectus is an offer to sell, or a solicitation of offers to
buy, shares of Class A Common Stock only in jurisdictions where offers and sales
are permitted. The information contained in this Prospectus is accurate only as
of the date of this Prospectus, regardless of the time of delivery of this
Prospectus or of any sale of the Class A Common Stock. In this Prospectus, "the
Company," "Network Solutions," "we," "us," "our" and "NSI" refer to Network
Solutions, Inc. Unless otherwise indicated, the references to the number and
percentage of shares of Common Stock in this Prospectus assume that the
underwriters' over-allotment option is not exercised.
------------------------
Network Solutions, Inc.(R) is a registered trademark of the Company.
WorldNIC(TM), RegistrationPlus(TM), dot com mail(TM), dot com toolkit(TM), dot
com promotions(TM), dot com people(TM) and dot com family(TM) are also
trademarks of the Company. This Prospectus also includes trademarks,
servicemarks and tradenames of other companies.
-i-
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights certain of the information contained elsewhere in this
Prospectus. This summary is not complete and does not contain all of the
information that you should consider before investing in Class A Common Stock.
To understand this offering fully, you should read the entire Prospectus
carefully, including the risk factors, the financial statements and the
information incorporated by reference in this Prospectus. Except as otherwise
noted, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. On December 31, 1998, our Board of
Directors approved a 2-for-1 stock split of the shares of Class A Common Stock
and Class B Common Stock, to be effected in the form of a stock dividend on
shares of Class A Common Stock and Class B Common Stock outstanding on February
26, 1999. The stock dividend will be distributed on March 23, 1999. Except as
otherwise noted, no share or per share information in this Prospectus has been
adjusted to reflect the 2-for-1 stock split.
NETWORK SOLUTIONS, INC.
We are the leading Internet domain name registration service provider worldwide.
We currently act as the exclusive registry and registrar for second level domain
names within the .com, .org, .net and .edu top-level domains ("TLDs"). We also
facilitate global registration of domain names in other existing TLDs including
country code TLDs. By registering Internet domain names, we enable businesses,
other organizations and individuals to establish a unique Internet presence from
which to communicate and conduct commerce. Net registrations within the TLDs
maintained by us increased by 114% from 1,296,000 domain names registered at
September 30, 1997 to 2,777,000 domain names registered at September 30, 1998.
We believe that commercial enterprises and individual Internet users worldwide
are increasingly recognizing the .com TLD as a desirable address for commercial
presence on the Internet. Net registrations in the .com TLD represented 84.4% of
our total net registrations at September 30, 1998. Net revenue from Internet
domain name registration subscriptions accounted for 92.5% of our net revenue
for the nine months ended September 30, 1998. With over 10 million businesses in
the United States alone, we believe that the potential for growth of domain name
registrations by commercial entities and services related to those registrations
is substantial.
Since 1993, we have acted as exclusive registry and registrar of Internet domain
names in the .com, .org, .net and .edu TLDs under a cooperative agreement (as
amended, the "Cooperative Agreement") with the National Science Foundation (the
"NSF"), and subsequently the Department of Commerce. Currently, basic initial
registrations are charged $70 for two years of registration services and an
annual re-registration fee of $35 per year thereafter. Registration fees charged
to customers for registration services are recognized as revenue evenly over the
registration term. We have agreed with the Department of Commerce to transition
to a shared registration system, in which multiple registrars may register
domain names with the single registry for each TLD administered by us, in a
phased approach, prior to the expiration of the Cooperative Agreement in
September 2000. The first phase of this transition is scheduled to be completed
by March 31, 1999.
We believe we have several competitive advantages in the domain name
registration business, including:
- a large customer base with over 3,000,000 net second level domain name
registrations;
- recognition of the .com TLD, for which we currently act as exclusive
registry and registrar, as the leading TLD for commercial and other
entities;
- strategic agreements with over 140 Internet access providers around the
world;
- skilled technical personnel who are experienced in the domain name
registration business;
- custom-developed and proprietary technical infrastructure that offers
automated registration capabilities; and
- experience in the administration of a domain name dispute policy.
We are working to expand our domain name registration business and to continue
to improve the registration process by:
- promoting the use of the .com TLD worldwide;
- expanding our relationships with Internet access providers;
- establishing and expanding marketing and other strategic relationships
worldwide;
- stimulating demand for domain name registrations in targeted customer
segments;
- facilitating the ease of use and access to our registration service;
1
<PAGE> 6
- establishing international alliances and developing multilingual
capabilities; and
- working with major platform providers to embed our registration function
into desktop and server software applications.
In 1998, we introduced a portfolio of Internet-based products and services which
builds upon our position in the registration process. Our products and services
include RegistrationPlus, a Web-based domain name registration process that
allows customers to register or to reserve a domain name on-line in real time;
dot com mail, a portable, personalized e-mail service to help small businesses
maximize their brand names on the Internet; dot com toolkit, a small business
resource center that provides access to tools and services for building an
Internet storefront and conducting business on the Internet; and dot com
promotions, a service that provides customers with a broad range of services
that enable Web site owners to get listed on Internet search engines and to
promote their Web sites. We intend to continue to develop additional
Internet-based products and services, which may include directory and other
Internet identity services.
We also provide enterprise network consulting services to large companies that
desire to establish or enhance their Internet presence or re-engineer legacy
network infrastructures to accommodate the integration of both Internet
connectivity and Intranet network technology into their information technology
base. Our enterprise network consulting services include network engineering,
network and systems security and network management. Net revenue from enterprise
network consulting services accounted for 7.5% of our net revenue for the nine
months ended September 30, 1998.
THE OFFERING
CLASS A COMMON STOCK OFFERED
BY SELLING STOCKHOLDERS (1):
SAIC........................ 4,500,000 shares of Class A Common Stock
Certain Members of our
Management................ 80,000 shares of Class A Common Stock
Total Offering........... 4,580,000 shares of Class A Common Stock
COMMON STOCK OUTSTANDING AFTER
THE OFFERING (2)(3)........... 16,564,835 shares of Class A Common Stock and
Class B Common Stock
OVER-ALLOTMENT OPTION......... 687,000 shares of Class A Common Stock from
SAIC
USE OF PROCEEDS............... We will not receive any proceeds from the sale
of shares of Class A Common Stock in this
offering. The proceeds of approximately
$1,127,326 received by the Company upon the
exercise of options by certain of the Selling
Stockholders will be used for general corporate
purposes.
DIVIDEND POLICY (4)........... We do not intend to pay dividends on our Common
Stock. We plan to retain any earnings for use
in the operation of our business.
NASDAQ NATIONAL MARKET
SYMBOL........................ "NSOL"
- ---------------
(1) Excludes up to 687,000 shares of Class A Common Stock subject to an
over-allotment option granted by SAIC to the Underwriters. See "Underwriting."
(2) Excludes 2,380,815 shares of Class A Common Stock reserved for issuance
under the Company's employee benefit plans.
(3) Each share of Class B Common Stock has ten votes per share and each share of
Class A Common Stock has one vote per share. By May 31, 1999, assuming
completion of this offering, SAIC intends to convert all of its Class B Common
Stock into an identical number of shares of Class A Common Stock, which will
then be the only class of Common Stock outstanding.
(4) On December 31, 1998, our Board of Directors approved a 2-for-1 stock split
of the shares of Class A Common Stock and Class B Common Stock, to be effected
in the form of a stock dividend on the shares of Class A Common Stock and Class
B Common Stock outstanding on February 26, 1999, to be distributed on March 23,
1999.
2
<PAGE> 7
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
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NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------- --------------------
1995(1) 1996 1997 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
In thousands, except per share data
STATEMENT OF OPERATIONS DATA:
Net revenue.............................. $ 6,486 $18,862 $45,326 $30,896 $62,395
Income (loss) from continuing
operations............................ (1,434) (1,625) 4,231 2,488 7,517
Net income (loss)........................ (2,837) (1,625) 4,231 2,488 7,517
Basic net income (loss) per share........ (0.27) (0.13) 0.32 0.20 0.47
Diluted net income (loss) per share...... (0.27) (0.13) 0.31 0.20 0.45
OTHER OPERATING DATA: (2)
Net new registrations.................... 141 489 960 698 1,290
Registrations not renewed................ 1 39 46 29 54
Net registrations at period end.......... 177 627 1,541 1,296 2,777
</TABLE>
<TABLE>
<CAPTION>
------------------
In thousands SEPTEMBER 30, 1998
BALANCE SHEET DATA: ------------------
<S> <C>
Cash and cash equivalents................................. $ 9,124
Total marketable securities (3)........................... 114,148
Working capital (4)....................................... 63,506
Total assets.............................................. 191,915
Deferred revenue, net..................................... 106,730
Capital lease obligations................................. 1,297
Total stockholders' equity................................ 62,019
</TABLE>
SUMMARY QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
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QUARTER ENDED
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1997 1997 1997 1997 1998 1998 1998
-------- -------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
In thousands, except per share
data
STATEMENT OF OPERATIONS DATA:
Net revenue..................... $6,853 $8,655 $10,069 $12,172 $14,430 $16,492 $20,476 $25,427
Net income...................... 126 516 740 1,232 1,743 2,049 2,463 3,005
Basic net income per share
(5)........................... 0.01 0.04 0.06 0.10 0.11 0.13 0.15 0.19
Diluted net income per share
(5)........................... 0.01 0.04 0.06 0.10 0.11 0.13 0.15 0.18
</TABLE>
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(1) The Summary Financial Data for the year ended December 31, 1995 was derived
by combining the Company's results of operations for the period January 1, 1995
through March 10, 1995 and the period March 11, 1995 through December 31, 1995
which, respectively, are periods before and after the date SAIC acquired us. The
data for those two periods were prepared on differing bases of accounting and,
accordingly, the comparability of such data with other periods is limited,
primarily as a result of goodwill amortization, new corporate services
agreements and the repayment of outstanding debt balances. See Note 1 of Notes
to Financial Statements for a discussion of the presentation for each of these
periods.
(2) Net new registrations for each period include gross new registrations less
an estimate of registrations that are uncollectible. Net registrations include
net new registrations less management's estimate of registrations not renewed.
Prior to September 14, 1995, net registrations equaled gross registrations
because the Company was reimbursed by the NSF for all registrations under a cost
reimbursement plus fixed-fee contract.
(3) Total marketable securities includes $6,272 of long-term investments.
(4) Working capital calculation includes $77,766 of current deferred revenue.
(5) Since there are changes in the weighted average number of shares outstanding
each quarter, the sum of the quarterly diluted net income per share amounts may
not equal the diluted net income per share for 1997 and the nine months ended
September 30, 1998.
3
<PAGE> 8
RELATIONSHIP WITH SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
Science Applications International Corporation holds in the aggregate 11,925,000
shares of Class B Common Stock, representing 100% of our Class B Common Stock
and approximately 96.3% of the voting power and approximately 72.3% of the
economic interest of all the outstanding Common Stock. After this offering, SAIC
will own 7,425,000 shares of Class B Common Stock, representing 100% of our
Class B Common Stock and approximately 89.0% of the voting power and
approximately 44.8% of the economic interest of the outstanding Common Stock. By
May 31, 1999, assuming completion of this offering, SAIC intends to convert all
of the remaining Class B Common Stock into an identical number of shares of
Class A Common Stock, which will then be the only class of Common Stock
outstanding. Upon conversion of the remaining Class B Common Stock into Class A
Common Stock, SAIC will own approximately 44.8% of the voting power and economic
interest of the outstanding Common Stock. We do not intend to issue any Class B
Common Stock in the future.
Several officers and employees of SAIC currently serve as directors of the
Company. It is anticipated that the composition of the Board of Directors of the
Company will change in connection with the decrease in SAIC's percentage
ownership and voting control of the Company. SAIC will, however, continue to be
our largest stockholder and may be able to exercise significant influence over
us.
SAIC is not under any obligation to retain its remaining interest, except that
SAIC has agreed not to sell or otherwise dispose of any shares of Common Stock
for 180 days after the date of this Prospectus without the prior written consent
of J.P. Morgan Securities Inc.
Prior to our initial public offering of Class A Common Stock in October 1997,
the Company was a wholly-owned subsidiary of SAIC. SAIC continues to provide
certain services to the Company, and the Company and SAIC have entered into
agreements, and may enter into additional agreements in the future, relating to
these services and other matters. Our certificate of incorporation includes
provisions relating to competition by SAIC with us, allocations of corporate
opportunities, transactions with interested parties and intercompany agreements
and provisions limiting the liability of certain people. Such provisions will
continue to remain in effect after this offering.
4
<PAGE> 9
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider the
risks described below and the other information in this Prospectus or
incorporated by reference before deciding to invest in shares of our Class A
Common Stock. This Prospectus also contains certain forward-looking statements
that involve risks and uncertainties. These statements relate to our future
plans, objectives, expectations and intentions. These statements may be
identified by the use of words such as "expects," "anticipates," "intends" and
"plans" and similar expressions. Our actual results could differ materially from
those discussed in these statements. Factors that could contribute to such
differences include, but are not limited to, those discussed below and elsewhere
in this Prospectus.
ONGOING PRIVATIZATION OF INTERNET ADMINISTRATION
The Internet is not bound by geography, and neither the U.S. Government nor any
single organization or entity currently has formal authority over all aspects of
the Internet. There is, however, a need for central policy decisions surrounding
the coordination of the administrative services required for the registration,
allocation and use of TLDs and Internet Protocol ("IP") numbers, and for the
effective global operation of the Internet. This role has been generally filled
through mutual cooperation, interrelated informal agreements, historical
leadership from an unincorporated entity called the Internet Assigned Numbers
Authority (the "IANA") and involvement from the U.S. Government. With the onset
of increased commercial growth of the Internet, the U.S. Government initiated an
activity directed at increased privatization of the policy making and central
administration of the Internet. Without authoritative policy making, it has
become more difficult to achieve consensus in the historical manner. Failure to
achieve consensus among the various groups who now informally administer the
Internet could disrupt Internet operations or delay infrastructure improvements
or changes in operations needed to maintain and expand the Internet. Our
business, financial condition and results of operations could be materially and
adversely affected by such a failure.
Within the U.S. Government, leadership for the continued privatization of
Internet administration is currently provided by the Department of Commerce's
National Telecommunications and Information Administration (the "NTIA"). After a
series of draft proposals and public comment periods, on June 10, 1998, the NTIA
published in the Federal Register a plan referred to as the Statement of Policy
or "White Paper," calling for the formation of a not-for-profit corporation to
assume certain responsibilities relating to the domain name system (the "DNS"),
but not to perform actual registration of domain names either as a registrar or
registry. The Statement of Policy invites private sector Internet stakeholders
to work together to form a new private, not-for-profit corporation to oversee
policy for the Internet name and address system. The Statement of Policy
distinguishes between the registry and registrar functions of the DNS, both of
which functions we currently perform exclusively in the .com, .org, .net and
.edu TLDs, and calls for increased competition.
As part of the process initiated by the Statement of Policy, several proposals
were put forward to the NTIA on the establishment and governance of the
not-for-profit corporation. A newly formed U.S. based private not-for-profit
corporation with an international board of directors, denoted the Internet
Corporation for Assigned Names and Numbers ("ICANN"), submitted various
proposals which formed the basis of discussion at a number of public and private
meetings. As a result of these and other meetings and private negotiations, the
process initiated by the Statement of Policy has resulted in the entry by the
U.S. Government into a Memorandum of Understanding with ICANN (the "MOU"). Under
the MOU, the parties will jointly design, develop and test the mechanisms,
methods and procedures that should be in place and the steps necessary to
transition management responsibility for certain DNS functions to a
private-sector not-for-profit entity. The MOU provides that once testing is
successfully completed, it is contemplated that management of certain DNS
functions will be transitioned to the mechanisms, methods and procedures
designed and developed in this joint project.
The NTIA plan calls for a phased transition of its responsibilities for the DNS
to the not-for-profit corporation by September 30, 2000. There are several risks
associated with private sector DNS policy making and the
5
<PAGE> 10
establishment of, and transfer of certain DNS responsibilities from the NTIA to,
the not-for-profit corporation. Some of those risks are:
- failure to achieve consensus on the many issues relating to the
functioning and governance of the not-for-profit corporation could
prevent or delay the transition and thereby result in instability in DNS
administration,
- the not-for-profit corporation could fail to achieve consensus or gain
legitimacy resulting in instability in the operation of the Internet,
- the U.S. Government could refuse to transfer certain responsibilities for
DNS administration to the not-for-profit corporation due to security,
stability or other reasons thereby resulting in fragmentation or other
instability in DNS administration,
- we might not succeed in establishing an acceptable contractual agreement
with the not-for-profit corporation, and
- the not-for-profit corporation could adopt or promote policies,
procedures or programs that are unfavorable to our role in the
registration of domain names or that are not consistent with our current
or future plans.
Despite the significant efforts undertaken to date, it is impossible to predict
at this time whether or when the process initiated by the Statement of Policy
will result in the transition of specific DNS responsibilities and, if it does,
the effect on us of such transition. Our business, financial condition and
results of operations could be materially and adversely affected by any of these
events and the uncertainty regarding authoritative sources for DNS policies.
STATUS OF COOPERATIVE AGREEMENT
On January 1, 1993, we initiated phase-in of the Cooperative Agreement with the
NSF. The three-month phase-in was followed by a five year operations period
(commencing April 1, 1993 and ending March 31, 1998) and a six-month flexibility
period through September 30, 1998. Effective in September 1998, the
responsibility for the Cooperative Agreement was transferred to the NTIA. In
October 1998, the Cooperative Agreement was amended (the "October 1998
Amendment") to extend the flexibility period through September 30, 2000. As the
U.S. Government transitions certain responsibilities for the DNS to the
not-for-profit corporation, corresponding obligations under the Cooperative
Agreement may be terminated and, as appropriate, covered in a contract between
the not-for-profit corporation and us. In the October 1998 Amendment, we agreed
with the NTIA to plan for the transition to a shared registration system, in
which multiple registrars may register domain names with the single registry for
each TLD administered by us, in a phased approach, the first phase of which is
scheduled to be completed by March 31, 1999.
While the Cooperative Agreement by its terms expires in September 2000, it may
be terminated earlier. Our business, financial condition and results of
operations could be materially and adversely affected by a termination or a
change in the terms of the Cooperative Agreement. There is also a risk that the
U.S. Government's interpretation of certain provisions of the Cooperative
Agreement could differ from ours. Certain aspects of implementation of the
Cooperative Agreement also remain to be negotiated, including the maximum price
we will charge for registry services in the TLDs for which we now act as
registry. If we are unsuccessful in negotiating acceptable terms of
implementation, the costs of implementation of the Cooperative Agreement, our
relationship with the not-for-profit corporation and other matters affecting our
position in a more competitive DNS environment could be materially and adversely
affected.
There is a risk that withdrawal of or challenges to the government's sponsorship
or authorization of certain functions that we perform could create a public
perception or result in a legal finding that we lack authority to continue in
our current role as registry or registrar within the .com, .org, .net and .edu
TLDs. The legal authority underlying the roles of NTIA and the not-for-profit
corporation with regard to the DNS system also could be challenged. The impact,
if any, of any such public perception or finding is unknown, but it could
materially and adversely affect our business, financial condition and results of
operations.
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INCREASED COMPETITION IN DOMAIN NAME REGISTRATION BUSINESS
A principal objective of the Statement of Policy is to introduce additional
competition and global participation in the management of Internet names and
addresses, including competition among registrars within a single TLD and
competition among existing and new TLDs. The October 1998 Amendment provides for
the transition to a shared registration system in a phased approach, the first
phase of which is scheduled to be completed by March 31, 1999. Many aspects of
how competition will work in the DNS, however, remain unsettled and could be
impacted by, among other things, actions of the not-for-profit corporation.
Although the Statement of Policy contemplates establishment of additional
competition, we currently face competition in the domain name registration
business from registries for country code TLDs, third level domain name
providers such as Internet access providers and registrars and registries of
TLDs other than those TLDs which we currently register. A number of entities
have already begun to offer competing registration services using other TLDs and
when the shared registration system takes effect we will no longer be the
exclusive registrar in the .com, .org and .net TLDs.
Future competition in the domain name registration business as a registry or
registrar could come from many different companies, including:
- domain name registration resellers,
- Internet access providers,
- major telecommunications firms, and
- cable companies.
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. Our
position as the leading registry and registrar of domain names could be
materially and adversely affected by the emergence of any of these competitors
and potential competitors, many of which have longer operating histories and
significantly greater name recognition and greater financial, technical,
marketing, distribution and other resources than we do. Our revenue could be
reduced due to increased competition, pricing pressures or a modification of
billing practices. For example, other entities may bundle domain name
registrations with other products or services. The introduction of additional
competition into the domain name registration business could have a material
adverse effect on our business, financial condition and results of operations.
See "Business -- Competition."
DEPENDENCE ON KEY PERSONNEL
Our future success depends on the continued service of our key engineering,
sales, marketing, executive and administrative personnel, and our ability to
identify, hire and retain additional personnel. On November 16, 1998, we
announced the resignation of Gabriel A. Battista from his positions as Chief
Executive Officer and Director. While we conduct a search for a new Chief
Executive Officer, Michael A. Daniels, our Chairman of the Board, is acting as
the Chief Executive Officer and assuming the executive responsibilities
previously performed by Mr. Battista. In addition, Robert J. Korzeniewski, our
Chief Financial Officer, is also acting as our Chief Operating Officer, assuming
responsibility for day-to-day operations. We cannot be certain of the timing of
our hiring of a new Chief Executive Officer or the effect of any delays in our
hiring of a new Chief Executive Officer on the development or implementation of
the Company's strategic plan. We cannot reasonably estimate at this time the
potential impact on us of Mr. Battista's departure or of the hiring of a new
Chief Executive Officer.
In addition, the future success of our enterprise network consulting services
business depends in large part on our ability to hire, train and retain
engineers who have expertise in a wide array of network and computer systems and
a broad understanding of the industries we serve. If we fail to hire, train and
retain a sufficient number of qualified engineers, our ability to adequately
manage and complete our existing projects or to obtain new projects, as well as
expanding our business, could be impaired. Competition for engineering, sales,
marketing and executive personnel is intense. We cannot be certain that we will
be able to retain existing personnel or identify, hire or retain additional
qualified personnel.
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VOLATILITY OF STOCK PRICE
The market price of our Class A Common Stock has been and is likely to continue
to be highly volatile and may be significantly affected by factors such as
actual or anticipated fluctuations in our quarterly operating results,
announcements of technological innovations, industry conditions and trends,
changes in or our failure to meet the expectations of securities analysts and
investors, general market conditions and other factors. It is possible that in
some future quarter, our operating results may be below the expectations of
securities analysts and investors. If this occurs, the price of our Class A
Common Stock would likely decline, perhaps substantially. In addition, the stock
market has experienced significant price and volume fluctuations that have
particularly affected the market prices of the stocks of technology companies,
including Internet-related companies. These broad market fluctuations may
adversely affect the market price of our Class A Common Stock. In the past,
following periods of volatility in the market price of a particular company's
securities, securities class action litigation has often been brought. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect on our
business, financial condition and results of operations.
LIMITED SERVICE OFFERINGS TO DATE; RELIANCE ON DOMAIN NAME REGISTRATION SERVICES
FOR A SIGNIFICANT PORTION OF REVENUES
Our domain name registration services business generates over 90% of our revenue
and is expected to continue to account for a very significant portion of our
revenue in at least the near term. Our future success will depend largely on:
- the continued increase in domain name registrations,
- re-registration rates of our customers,
- our ability to maintain our current position as a leading registrar of
domain names, and
- the successful development, introduction and market acceptance of new
services that address the demands of Internet users.
Although we have experienced revenue growth in recent periods, we may not be
able to sustain it and such growth may not be indicative of future operating
results. For example, we may not be able to maintain our current position as a
leading provider of domain name registration services or to develop or market
additional services. Our failure to do so could materially and adversely affect
our business, financial condition and results of operations.
LIMITED OPERATING HISTORY
Prior to September 14, 1995, we were paid directly by the NSF for providing
registration services on a cost reimbursement plus fixed fee basis. Accordingly,
we have only a limited operating history for our current domain name
registration business upon which you can base your evaluation of us and our
prospects. Our prospects must be considered in light of the risks frequently
encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving markets. To address these risks, we must,
among other things:
- respond to competitive developments,
- increase our sales and marketing operations,
- continue to identify, attract, retain and motivate qualified persons, and
- continue to upgrade and integrate technologies, products and services.
Due to the rapidly evolving nature of Internet technologies, our enterprise
network consulting services business faces similar risks. We may not be
successful in addressing such risks.
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EVOLVING SALES AND MARKETING ORGANIZATION AND DISTRIBUTION CHANNELS
We will need to effectively manage our growing sales and marketing organization
if we want to achieve future revenue growth. We do not know if we will be able
to identify, attract and retain experienced sales and marketing personnel with
relevant experience. Further, our sales and marketing organization may not be
able to successfully compete against the significantly more extensive and
well-funded sales and marketing operations of our current or potential
competitors.
In addition to establishing direct sales channels, we are also continuing to
develop multiple distribution channels. Our ability to achieve future revenue
growth will also depend on our ability to continue to establish and maintain
relationships with Internet access providers and other third parties and on our
effective use of the Internet as a medium of distribution.
If we fail to manage and grow our sales and marketing organization, develop and
expand our distribution channels or effectively use the Internet as a medium of
distribution, our business, financial condition and results of operations could
be materially and adversely affected.
RELIANCE ON THIRD PARTIES
The functioning of the DNS is facilitated through a hierarchy of domain name
servers (specialized software programs resident in network computers). The top
level of this hierarchy consists of 13 globally distributed servers (ten in the
United States, two in Europe and one in Asia), which together are referred to as
the Root Server System. These root servers function as the equivalent of master
"white pages" of the Internet. We administer and operate two of the 13 root
servers (designated by the letters A and J). Root Server A has special
significance. Every night we update Root Server A with a file (called the root
zone file) that contains the current list of TLDs, including country code TLDs,
and the IP numbers of the servers associated with each TLD. The other 12 root
servers then copy the updated file.
Nine of the 13 root servers provide an additional function as a TLD zone server.
The nine, designated by the letters A through I, plus two additional servers
that do not contain a copy of the root zone file (and, therefore, are not root
servers), contain TLD zone files for the TLDs (.com, .org, .net and .edu)
currently administered by us. Every night we update Root Server A with four
files (called TLD zone files), one each for .com, .org, .net and .edu. Each file
contains the current list of active second-level domain names and the IP numbers
associated with each. The other 10 TLD zone servers then copy the updated files.
With respect to both root servers and TLD zone servers, multiple servers are
required for purposes of load balancing and redundancy.
The location and control of these root servers and TLD zone servers historically
has been determined by consensus of various members of the Internet community.
The root servers and the TLD zone servers that we do not maintain and control
are maintained and controlled by independent operators on a volunteer basis. If
these volunteer operators at any time, for any reason, fail to properly maintain
such servers or abandon such servers, our business, financial condition and
results of operations could be materially and adversely affected.
Further, no single organization or entity currently has formal authority over
all aspects of the Internet. It is unclear whether the U.S. Government or any
organization or entity has clear legal authority to direct root server or TLD
zone server operations including where the servers are to point. If any or all
of the root servers or TLD zone servers fail to include or provide accessibility
to our data, the Internet and our business, financial condition and results of
operations would be materially and adversely affected.
Our success and ability to compete also depend upon our relationships with
Internet service providers ("ISPs") worldwide. Our business, financial condition
and results of operations would be materially and adversely affected if enough
ISPs decided not to route Internet communications to or from domain names
registered by us or if enough ISPs decided to provide routing to a set of root
servers or TLD zone servers which did not point to our TLD zone servers.
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SYSTEM INTERRUPTION AND SECURITY RISKS
A failure in the operation of our registration system could result in deletion
of one or more domain names from the Internet for a period of time. A failure in
the operation or update of Root Server A could result in deletion of one or more
TLDs from the Internet and the discontinuation of domain names in those TLDs for
a period of time.
Our operations depend on our ability to maintain our computer and
telecommunications equipment in effective working order and to reasonably
protect our systems against interruption. Such interruptions could result from:
- fire, natural disaster, sabotage, power loss, telecommunication failure,
human error or similar events,
- computer viruses, hackers or similar disruptive problems caused by
employees, customers or other Internet users, and
- systems strain caused by the growth of our customer base and our
inability to sufficiently maintain or upgrade our systems.
Our business, financial condition and results of operations could be materially
and adversely affected by any damage, failure or delay that causes significant
interruptions in our systems.
YEAR 2000 COMPLIANCE ISSUES
We are in the process of assessing the potential effects of the Year 2000
millennium change on our business systems and processes, including the Internet
root servers under our control, telecommunications systems, facilities, data
networking infrastructure, commercial-off-the-shelf hardware, software and
components used by our employees and our outsourcing vendors. Our Year 2000
project is proceeding on schedule. The project goal is to ensure that our
business is not impacted by the date transitions associated with the Year 2000.
In the normal course of our business, we anticipate replacing or upgrading,
prior to the millennium change, portions of our registration-related systems
with new systems which will also be Year 2000 compliant. Currently, we are
enhancing our back office and registration-related systems and the software
relating to our core domain name registration services business. When complete
in 1999, this enhancement effort will result in replacing portions of the
existing registration-related systems. The new systems, procured from vendors as
Year 2000 compliant, will be subjected to both component and end-to-end testing
and validation to determine the Year 2000 compliance of such systems prior to
acceptance and deployment in our business. This enhancement effort is a function
of our growth and not a Year 2000 remediation effort.
We are contacting our hardware and software vendors, other significant
suppliers, outsourcing service providers and other contracting parties to
determine the extent to which we may be vulnerable to any such third party's
failure to achieve Year 2000 compliance for their own systems. At the present
time, we do not expect Year 2000 issues of any such third parties to materially
affect our business. However, we can give no assurances that the systems of such
companies will be Year 2000 compliant or that the failure of such third parties
to achieve Year 2000 compliance will not have a material adverse effect on our
business, financial condition or results of operations.
Based on our inventory and assessment to date, we have found no material Year
2000 problems. We are now in the remediation and testing phases of our project
cycle which we expect to complete by May 31, 1999.
Furthermore, our business depends on the continued operation of, and widespread
access to, the Internet. This, in turn, depends to a large extent on the
software and systems of third parties on which our systems rely or to which they
are connected. These third parties include, among others, Internet-related
companies, including Internet Web hosting companies, Internet access providers
and Internet root server operators. We can give no assurances that the software
or systems of such third parties will be Year 2000 compliant or that the failure
of such third parties to achieve Year 2000 compliance will not have a material
adverse effect on our business, financial condition or results of operations. To
the extent that the normal operation of the Internet is disrupted by the Year
2000 millennium change, our business, financial condition or results of
operations could be materially and adversely affected.
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If we fail to solve a Year 2000 compliance problem with our mission critical
business systems and processes, including the Internet root servers under our
control, telecommunications systems, facilities, data-networking infrastructure,
commercial-off-the-shelf hardware, software and components used by our
employees, the result could be a failure or interruption to normal business
operations. The primary risks with regard to Year 2000 failures are those which
impact our domain name registration business. These risks include:
- significant and protracted interruption of electrical power to data and
call-center operations in our engineering facility,
- significant and protracted interruption of telecommunications and data
network services in either of our headquarters or engineering facilities,
- the failure of components of our current back office and domain name
registration related systems, and
- the occurrence of a Year 2000 problem with respect to third-party
suppliers', vendors' and outsourcing service providers' products and
services.
Although we are taking appropriate steps so that our business is not impacted by
the date transitions associated with the Year 2000, we have no responsibility
for, nor control over other Internet root server operators or tens of thousands
of lower level domain name system server operators that are critical to the
efficient operation of the Internet. We do not know whether such root server
operators or other server operators have hardware, software or firmware that is
Year 2000 compliant.
REGULATION
In the United States, apart from our obligations under the Cooperative
Agreement, we are not currently subject to direct regulation other than federal
and state regulation applicable to businesses generally. However, if there are
changes in the regulatory environment, we could become subject to direct
regulation by U.S. regulatory agencies. For example, we are aware that certain
industry requests have been made to the Federal Communications Commission (the
"FCC") to review the impact of Internet usage on the U.S. telecommunications
service providers, in particular, the generally lower cost for data transmission
versus voice. In addition, as the Internet becomes more widespread
internationally, international regulation becomes more likely. We cannot predict
whether or to what extent any such new regulation will occur; however, such
regulation could have a material adverse effect on our business, financial
condition and results of operations.
Additionally, we are not certain how existing laws governing issues such as
intellectual property ownership would be applied to us. We also are not certain
how courts will interpret the obligation of domain name registration providers
to prevent trademark infringement and other legal issues. See "-- Legal
Proceedings."
LEGAL PROCEEDINGS
We are involved in several legal proceedings. As of December 1, 1998, we were
named as a defendant in three active lawsuits involving domain name disputes
between trademark owners and domain name holders. In addition, on March 20,
1997, PG Media, Inc., a New York-based corporation ("PG Media"), filed a lawsuit
(the "PG Media suit"), alleging that we had violated the Sherman Act by
restricting access to the Internet by not adding PG Media's requested TLDs to
the Internet root zone system. In its complaint, PG Media, in addition to
requesting damages, asked that we be ordered to include reference to PG Media's
TLDs and name servers in the root zone file that we administer under the
Cooperative Agreement. We received written direction from the NSF not to take
any action which would create additional TLDs or to add any new TLDs to the
Internet root zone until the NSF provides further guidance. On September 17,
1997, PG Media filed a Second Amended Complaint adding the NSF as a defendant.
On May 14, 1998, PG Media served us with a motion for a preliminary injunction
against both defendants to compel both defendants to add PG Media's TLDs to the
Internet root zone within 30 days. In response, both we and the NSF filed cross
motions for summary judgment against PG Media. On July 20, 1998, all motions
were heard. The basic issue before the court was the NSF's authority to control
the Internet's root zone system. The court has taken the issue under advisement
and no date has been indicated for the issuance of a decision. With the
transition of the Cooperative Agreement from the NSF to the Department of
Commerce, we are still required to request written direction from the
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U.S. Government before making or rejecting any modifications, additions or
deletions to the root zone file, in accordance with the October 1998 Amendment.
On October 17, 1997, a group of six plaintiffs filed a lawsuit (the "Thomas
suit") against us and the NSF. The lawsuit:
- challenged the legality of fees charged for the registration and
re-registration of domain names on the Internet; and
- sought restitution of fees collected from domain name registrants in an
amount in excess of $100 million.
The plaintiffs alleged violations of the Administrative Procedures Act,
Independent Offices Appropriations Act, the Sherman Act and the U.S.
Constitution. In August 1998, the court dismissed all of the plaintiffs' claims
against us. In October 1998, the plaintiffs appealed the court's dismissal of
their claims, with the oral argument scheduled for February 25, 1999.
On October 20, 1998, we were included as a defendant in a suit brought by the
Pennsylvania Attorney General's office against a domain name holder who was
alleged to have used his domain name in connection with a Web site promoting
white supremacy and threatening certain state employees. The Pennsylvania
Attorney General named all of the communications companies in any way connected
with the domain name or Web site, including Internet access providers and Web
site hosting companies. The Pennsylvania Attorney General seeks to permanently
enjoin these entities, including us, from providing services to this domain name
holder in the event that the domain name holder fails to comply with the order
of the court. We have answered the complaint and deny any knowledge or
participation in the actions of the primary defendant. No motions are pending
and we expect to be dismissed from the matter.
While we cannot reasonably estimate the potential impact of the claims advanced
in the PG Media, Thomas or Pennsylvania Attorney General suits, a successful
claim against us in any of these proceedings could have a material adverse
effect on our business, financial condition and results of operations.
In addition, on June 27, 1997, SAIC received a Civil Investigative Demand from
the U.S. Department of Justice issued in connection with an investigation
regarding possible antitrust violations under the Sherman Act relating to
Internet registration products and services. We cannot reasonably estimate the
potential impact of the investigation nor can we predict whether a civil action
will ultimately be filed by the Department of Justice or the form of relief that
might be sought. Any such relief could have a material adverse effect on our
business, financial condition and results of operations.
On August 17, 1998, we received notice from the Commission of the European
Communities (the "EC") of an investigation concerning our Premier Domain
Registration Service Program ("Premier Program") in Europe. The EC requested
production of these agreements and related materials for review. We cannot
reasonably estimate the potential impact of the investigation nor can we predict
whether an action will ultimately be brought by the EC or the form of relief
that might be sought. Any such relief could have a material adverse effect on
our business, financial condition and results of operations.
Legal proceedings in which we are involved have resulted and likely will result
in, and any future legal proceedings can be expected to result in, substantial
legal and other expenses to us and a diversion of the efforts of our personnel.
See "Business -- Legal Proceedings."
TECHNOLOGICAL CHANGE AND ADDITIONAL TECHNOLOGY, PRODUCTS AND SERVICES
Our future financial success will depend upon our ability to develop, integrate
or commercialize in a timely manner new technology, products and services that
can be offered with our current domain name registration and enterprise network
consulting services and that can meet the changing requirements of our current
and future customers. The market for such technology, products and services is
characterized by rapidly changing
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technology and evolving industry standards. Generally, the successful
development and commercialization of new technology, products and services
involves many risks, including:
- identifying opportunities for new products or services,
- identifying, hiring and retaining appropriate research and development
personnel,
- successfully completing the development process, and
- customer acceptance of the product or service.
UNCOLLECTIBLE RECEIVABLES; MODIFICATIONS TO BILLING PRACTICES
Currently, we invoice substantially all of our customers and permit them to pay
their services fee after the domain name is registered. We believe we have
experienced a high level of uncollectible receivables due to, among other
factors, the large number of individuals and corporations that have registered
multiple domain names with the apparent intention of reselling such names at a
profit. Our experience has been that such resellers have a greater tendency than
other customers to default on their services fees. We have established a
provision for uncollectible accounts which we believe to be adequate to cover
anticipated uncollectible receivables; however, actual results could differ from
our estimates. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 4 of Notes to Financial Statements.
We continually review our billing practices for modification to respond to
market conditions and to implement operational improvements. These modifications
could have unanticipated consequences which could materially and adversely
affect our business, financial condition and results of operations.
COMPETITION IN INTERNET-BASED BUSINESSES AND ENTERPRISE NETWORK CONSULTING
SERVICES
In developing and distributing products and services for the Internet-based
services markets, we face intense competition and expect to have multiple
competitors for each of the products or services we develop or sell. Many of our
potential competitors for these products have longer operating histories,
greater name recognition and significantly greater financial, technical,
marketing, distribution and other resources than we do. In addition, our
industry is characterized by rapid changes and frequent product and service
introductions. To the extent a competitor introduces a competitive product or
service before we introduce the same or similar product or service, market
acceptance of the competitor's product or service may adversely affect our
competitive position.
Our current and potential competitors in our enterprise network consulting
services business are companies with Internet expertise including systems
integrators and consulting firms, such as Andersen Consulting, IBM Global
Services and International Network Services. We also compete with certain
companies that have developed products that automate the management of IP
addresses and name maps throughout enterprise-wide networks and with companies
with internally-developed systems integration efforts. Many of these competitors
and potential competitors have longer operating histories, greater name
recognition and significantly greater financial, technical, marketing,
distribution and other resources than we do. See "Business -- Competition."
MANAGEMENT OF GROWTH
We continue to experience growth in the number of our employees and in the scope
of our operating and financial systems. This growth has increased the
responsibilities for both existing and new management personnel. To manage
growth, we will have to successfully integrate our management team, continue to
implement and improve our operational, financial and management information
systems and to train, motivate, manage and retain our employees. If we cannot
manage our growth, our business, financial condition and results of operations
could be materially and adversely affected. In addition, growth of our customer
base may strain the capacity of our computers and telecommunications systems.
Therefore, we must maintain or upgrade our systems or risk degradation in
performance or system failure.
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INTELLECTUAL PROPERTY RIGHTS
As agreed under the Cooperative Agreement, we submitted to the U.S. Government
the functional and interface specifications for the shared registration system
and a milestone schedule for its development and implementation. Also as agreed
under the Cooperative Agreement, we submitted to the U.S. Government an
electronic copy of all software and data generated under the Cooperative
Agreement through September 30, 1998 and a copy of all existing documentation
for that software and data generated through September 30, 1998. The U.S.
Government has agreed to take appropriate measures to protect the security and
confidentiality of such data, software and documentation. For privacy and other
reasons, we are considering measures to limit access to our customer data. Our
business, financial condition and results of operations could be materially and
adversely affected if:
- our ownership rights in our data, software and documentation were to be
successfully challenged,
- we cannot protect such rights,
- we are required to share our data, software and documentation with
potential competitors, or
- our potential competitors were otherwise able to obtain our data,
software or documentation.
We rely on a combination of nondisclosure and other contractual arrangements
with the U.S. Government, our employees and third parties, privacy and trade
secret laws to protect our proprietary rights and limit the distribution of our
proprietary information. These actions may not be adequate to protect our
proprietary rights. Furthermore, even if these steps are successful, other
companies may develop technologies that are similar or superior to our
proprietary technology. Although we believe that our services do not infringe on
the intellectual property rights of others and that we have all rights needed to
use the intellectual property employed in our business, it is possible that we
could become subject to claims alleging infringement of third party intellectual
property rights. Any claims could subject us to costly litigation, and may
require us to pay damages and develop non-infringing intellectual property or
acquire licenses to the intellectual property that is the subject of the alleged
infringement. If we fail to adequately protect our proprietary rights or if we
become involved in litigation relating to intellectual property rights, our
business, financial condition and results of operations could be materially and
adversely affected.
DEPENDENCE ON FUTURE GROWTH OF THE INTERNET AND INTERNET INFRASTRUCTURE
Our future success substantially depends on the continued growth in the use of
the Internet. If the use of and interest in the Internet does not continue to
grow, our business, financial condition and results of operations would be
materially and adversely affected. Continued growth of the Internet could be
slowed by:
- inadequate infrastructure,
- lack of availability of cost-effective, high speed systems and service,
- failure to develop a reliable network system,
- delays in developing or adopting new standards and protocols to handle
increased levels of Internet activity, or
- government regulation.
If the use of the Internet does not continue to grow, if the necessary
infrastructure or complementary products are not developed or do not effectively
support growth that may occur, or if the Internet does not continue to become a
viable information medium or commercial marketplace, our business, financial
condition and results of operations would be materially and adversely affected.
UNCERTAINTY OF FUTURE ACQUISITIONS AND INVESTMENTS
We evaluate potential acquisitions and investments on an ongoing basis. We may
not be able to compete successfully for available acquisition candidates,
complete future acquisitions and investments or accurately estimate the
financial effect on our company of any businesses we acquire or investments we
make. Future
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acquisitions and investments may require us to spend significant cash amounts or
decrease operating income, either of which could have a material adverse effect
on our business, financial condition and results of operations. We may also make
future acquisitions or investments in companies which are in the early stages of
development. Our failure to implement successfully our acquisition and
investment strategy could materially and adversely affect our business,
financial condition and results of operations. To the extent that any of the
companies which we acquire or in which we invest fail, it could have a material
adverse effect on our business, financial condition and results of operations.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
Our quarterly operating results may fluctuate significantly in the future due to
a variety of factors, many of which are beyond our control. Such factors may
include, but are not limited to:
- increased competition, through the introduction of competing TLDs or
competing registrars in .com, .org or .net,
- variations in the number of requests for domain name registrations or
demand for our services,
- litigation costs,
- adverse results of litigation,
- termination or completion of contracts in our enterprise network
consulting services business or failure to obtain additional contracts in
that business,
- introduction or enhancements of services by us or our competitors,
- market acceptance of new service offerings,
- costs associated with developing or providing domain name registration or
other services,
- developments in Internet governance including our relationship with the
not-for-profit corporation and the effect of the October 1998 Amendment,
- patterns of growth in the use of and interest in the Internet, or
- general economic conditions.
In addition, we expect a significant increase in our operating expenses as we:
- increase our sales and marketing operations and activities,
- continue to update our systems and infrastructure,
- fund greater levels of product and services development,
- develop new distribution channels,
- broaden our customer support capabilities, and
- expand our facilities.
If the increase in our expenses is not followed by an increase in revenue, our
business, financial condition and results of operations will be materially and
adversely affected.
In addition, a majority of our enterprise network consulting services operating
expenses, particularly personnel and related costs, depreciation and rent, are
substantially fixed before any particular quarter. As a result, any
under-utilization of engineers may cause our operating results to vary
significantly in any particular quarter and could result in losses for such
quarter.
CONTROL BY SAIC
As of December 28, 1998, SAIC owned 100% of our outstanding Class B Common
Stock, representing approximately 72.3% of the economic interest of our
outstanding Common Stock and approximately 96.3% of the voting power of our
outstanding Common Stock. The Class B Common Stock is convertible into Class A
15
<PAGE> 20
Common Stock, subject to certain limitations set forth in our Second Amended and
Restated Certificate of Incorporation (the "Certificate of Incorporation"). As a
result, SAIC effectively controls all matters requiring approval by our
stockholders including the election of members of our Board of Directors,
changes in the size and composition of the Board of Directors and a change in
control. We do not have an agreement with SAIC which restricts its rights to
convert, distribute or sell its shares of our Common Stock.
SAIC currently intends to convert all of its remaining shares of Class B Common
Stock into an identical number of shares of Class A Common Stock by May 31,
1999, assuming completion of this offering. Although SAIC's economic interest
and voting power will be below 50% of the total economic interest and voting
power of our Common Stock after such conversion, SAIC will remain our largest
stockholder and may be able to exercise significant influence over us. Several
individuals currently serve as directors, officers and employees of both us and
SAIC. Therefore, there may be various conflicts of interest or conflicting
duties for these individuals. Since our directors and officers may also own
stock of SAIC, there may be conflicts of interest when directors and officers
are faced with decisions that could have different implications for us and SAIC.
RELIANCE ON SAIC FOR CERTAIN CORPORATE SERVICES
We have entered into certain intercompany agreements with SAIC, including an
agreement pursuant to which SAIC will provide various corporate services to us
that may be material to the conduct of our business (the "Corporate Services
Agreement"). These services include certain routine and ordinary corporate
services, including business insurance, accounting systems, employee benefits,
payroll, tax and legal services as well as assistance in government relations
and corporate quality assurance services as described in the Corporate Services
Agreement. With respect to matters covered by the Corporate Services Agreement,
our relationship with SAIC is intended to continue in a manner generally
consistent with past practices. If, as will be the case after this offering,
SAIC's ownership of our outstanding Common Stock drops below 50%, the Corporate
Services Agreement will be terminable by either party upon 180 days' prior
written notice. Certain individual services are also terminable by either party
upon 180 days' prior written notice, regardless of SAIC's stock holdings.
Although neither we nor SAIC currently intends to terminate the Corporate
Services Agreement, if SAIC did elect to terminate the Corporate Services
Agreement, we may not be able to secure alternative sources for such services
within 180 days or such services may only be available at prices higher than
those charged by SAIC.
Our employees are currently eligible to participate in certain SAIC employee
benefit plans. After this offering and after SAIC converts its remaining shares
of Class B Common Stock to Class A Common Stock, SAIC's economic interest and
voting power will drop below 50% of the total economic interest and voting power
of our Common Stock. As a consequence, we will have to establish certain
employee benefit plans of our own which could result in incremental costs to us.
SHARES ELIGIBLE FOR FUTURE SALE
SAIC currently owns 100% of our outstanding Class B Common Stock, which, as of
December 28, 1998, represented approximately 72.3% of our outstanding Common
Stock. By May 31, 1999, SAIC intends to convert all of its Class B Common Stock
into an identical number of shares of Class A Common Stock, which will then be
the only class of Common Stock outstanding. We do not intend to issue any Class
B Common Stock in the future. After this offering, SAIC will own 7,425,000 of
the outstanding shares of Common Stock, which will represent approximately 89.0%
of the voting power and approximately 44.8% of the economic interest of the
outstanding Common Stock. Upon conversion of the remaining Class B Common Stock
into Class A Common Stock, SAIC will own Common Stock representing approximately
44.8% of the voting power and economic interest of outstanding Common Stock. A
decision by SAIC to sell such stock could materially and adversely affect the
market price of the Class A Common Stock. SAIC has agreed not to sell or
otherwise dispose of any shares of Common Stock for 180 days after the date of
this Prospectus without the prior written consent of J.P. Morgan Securities Inc.
We have entered into a registration rights agreement (the "Registration Rights
Agreement") with SAIC which requires us to register some or all of the shares of
Class A Common Stock to be owned by SAIC upon conversion of its Class B Common
Stock and any other shares of Class A Common Stock otherwise acquired by SAIC,
subject to certain terms and conditions. We have agreed to indemnify SAIC in
connection with any such registration.
16
<PAGE> 21
CERTAIN CHARTER PROVISIONS AND LIMITATIONS ON LIABILITY
Our Certificate of Incorporation includes provisions relating to competition by
SAIC with us, allocations of corporate opportunities, transactions with
interested parties and intercompany agreements and provisions limiting the
liability of certain people. Such provisions will continue to remain in effect
after this offering. It is unclear whether such provisions are enforceable under
Delaware corporate law. Our Certificate of Incorporation provides that any
person purchasing or acquiring an interest in shares of our capital stock shall
be deemed to have consented to the provisions in the Certificate of
Incorporation relating to competition with SAIC, conflicts of interest,
corporate opportunities and intercompany agreements, and such consent may
restrict such person's ability to challenge transactions carried out in
compliance with such provisions. The corporate charter of SAIC does not include
similar provisions. Therefore, persons who are directors and/or officers of ours
and who are also directors and/or officers of SAIC may choose to take action in
reliance on such provisions rather than act in a manner that might be favorable
to us but adverse to SAIC.
Under our Certificate of Incorporation, the personal monetary liability of our
directors for breach of their fiduciary duty of care, including actions
involving gross negligence, is eliminated to the fullest extent permitted under
Delaware law.
INTERNATIONAL REVENUES
While substantially all of our operations, facilities, and personnel are located
within the United States, our revenues from sources outside the U.S. have
increased significantly and may continue to increase in the future. As a result,
we are subject to the risks of conducting business internationally, including
unexpected changes in regulatory requirements, fluctuations in the U.S. dollar,
tariffs and other barriers and restrictions and the burdens of complying with a
variety of foreign laws. We do not know what the impact of such regulatory,
geopolitical and other factors will be on our business in the future or if we
will have to modify our business practice. In addition, the laws of certain
foreign countries may not protect our proprietary rights to the same extent as
do the laws of the United States.
17
<PAGE> 22
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The following table sets forth the high and low last reported last sales prices
for the Class A Common Stock on the Nasdaq National Market for the periods
indicated.
<TABLE>
<CAPTION>
----------------------------
HIGH LOW
------------- ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
Fourth Quarter from September 26, 1997.................... $ 26 3/4 $11 3/4
Year Ended December 31, 1998:
First Quarter............................................. 37 1/8 12 15/16
Second Quarter............................................ 55 32 1/2
Third Quarter............................................. 46 5/16 25 3/4
Fourth Quarter............................................ 164 23/32 28 3/8
</TABLE>
The Company does not intend to pay dividends on its Common Stock. The Company
plans to retain any earnings for use in the operation of its business.
On December 31, 1998, the Board of Directors of the Company approved a 2-for-1
stock split of the shares of Class A Common Stock and Class B Common Stock, to
be effected in the form of a stock dividend on shares of Class A Common Stock
and Class B Common Stock outstanding on February 26, 1999. The stock dividend
will be distributed on March 23, 1999. Except as otherwise noted, no information
in this Prospectus has been adjusted to reflect this stock split.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the shares of Class A
Common Stock by the Selling Stockholders. The proceeds of approximately
$1,127,326 received by the Company upon the exercise of options by certain of
the Selling Stockholders will be used for general corporate purposes.
18
<PAGE> 23
SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial and operating data of the
Company for the periods indicated and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Financial Statements and the Notes related thereto included
elsewhere and incorporated by reference in this Prospectus. The selected
financial data for the years ended December 31, 1996 and 1997 and for the
periods January 1, 1995 to March 10, 1995 and March 11, 1995 to December 31,
1995, were derived from the Company's audited financial statements included
elsewhere and incorporated by reference in this Prospectus. The information for
the years ended December 31, 1993 and 1994 and for the nine months ended
September 30, 1997 and 1998 is derived from the Company's unaudited financial
statements which, in the opinion of management, reflect all adjustments
(consisting only of normal recurring items) necessary to present fairly the
financial position and results of operations for the periods then ended. The
selected financial data for the year ended December 31, 1995 were derived by
combining the Company's Results of Operations for the period January 1, 1995
through March 10, 1995 and the period March 11, 1995 through December 31, 1995,
both as derived from the Company's audited financial statements included
elsewhere and incorporated by reference in this Prospectus. Comparability of
pre-acquisition periods to post-acquisition periods is limited because the
financial statements have been prepared on differing bases of accounting as a
result of the acquisition by SAIC. See Notes 1 and 9 of Notes to Financial
Statements. Except as otherwise noted, no share or per share information has
been adjusted to reflect the 2-for-1 stock split, approved on December 31, 1998,
to be effected in the form of a stock dividend on the shares of Class A Common
Stock and Class B Common Stock outstanding on February 26, 1999 and to be
distributed on March 23, 1999. See Note 15 of Notes to Financial Statements. The
accompanying financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for all periods presented for
continuing operations reflect the results of operations of the commercial
business of the Company, which includes registration services and enterprise
network consulting services. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview -- The SAIC
Acquisition" and "-- Registration Services."
<TABLE>
<CAPTION>
---------------------------------------------------------------------
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ ------------------
1993 1994 1995(1) 1996 1997 1997 1998
------- ------- ------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
In thousands, except per share data
STATEMENT OF OPERATIONS DATA:
Net revenue............................................... $ 4,369 $ 5,029 $6,486 $18,862 $ 45,326 $30,896 $ 62,935
Cost of revenue........................................... 2,924 3,073 5,704 14,666 25,798 18,468 26,451
------- ------- ------- ------- -------- ------- --------
Gross profit.............................................. 1,445 1,956 782 4,196 19,528 12,428 35,944
Research and development expenses......................... -- -- -- 680 1,653 1,095 2,893
Selling, general and administrative expenses.............. 1,401 1,544 2,394 6,280 12,268 7,893 24,438
Interest income........................................... -- -- -- 496 2,211 1,054 4,423
Other expenses............................................ 120 109 61 -- 116 -- 93
------- ------- ------- ------- -------- ------- --------
Income (loss) from continuing operations before income
taxes and cumulative effect of a change in accounting
principle............................................... (76) 303 (1,673) (2,268) 7,702 4,494 12,943
Provision (benefit) for income taxes...................... 34 114 (239) (643) 3,471 2,006 5,426
------- ------- ------- ------- -------- ------- --------
Income (loss) from continuing operations.................. (110) 189 (1,434) (1,625) 4,231 2,488 7,517
Loss from discontinued operations, net of income taxes
(2)..................................................... (936) (1,169) (1,403) -- -- -- --
Cumulative effect of change in accounting for income
taxes................................................... 660 -- -- -- -- -- --
------- ------- ------- ------- -------- ------- --------
Net income (loss)......................................... $ (386) $ (980) $(2,837) $(1,625) $ 4,231 $ 2,488 $ 7,517
======= ======= ======= ======= ======== ======= ========
Basic earnings per share:
Income (loss) from continuing operations.............. $ (0.10) $ 0.18 $(0.14) $ (0.13) $ 0.32 $ 0.20 $ 0.47
Loss from discontinued operations..................... (0.90) (1.12) (0.13) -- -- -- --
Cumulative effect of accounting change................ 0.63 -- -- -- -- -- --
------- ------- ------- ------- -------- ------- --------
Net income (loss)..................................... $ (0.37) $ (0.94) $(0.27) $ (0.13) $ 0.32 $ 0.20 $ 0.47
======= ======= ======= ======= ======== ======= ========
Weighted average shares................................... 1,048 1,042 10,335 12,500 13,305 12,501 15,888
Diluted earnings per share:
Income (loss) from continuing operations.............. $ (0.10) $ 0.18 $(0.14) $ (0.13) $ 0.31 $ 0.20 $ 0.45
Loss from discontinued operations..................... (0.90) (1.12) (0.13) -- -- -- --
Cumulative effect of accounting change................ 0.63 -- -- -- -- -- --
------- ------- ------- ------- -------- ------- --------
Net income (loss)..................................... $ (0.37) $ (0.94) $(0.27) $ (0.13) $ 0.31 $ 0.20 $ 0.45
======= ======= ======= ======= ======== ======= ========
Weighted average shares................................... 1,048 1,047 10,335 12,500 13,483 12,600 16,544
</TABLE>
19
<PAGE> 24
<TABLE>
<CAPTION>
---------------------------------------------------------------------
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ ------------------
1993 1994 1995(1) 1996 1997 1997 1998
------- ------- ------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
In thousands
OTHER OPERATING DATA (3):
Net new registrations................................. 13 24 141 489 960 698 1,290
Registrations not renewed............................. -- -- 1 39 46 29 54
Net registrations as of period end.................... 13 37 177 627 1,541 1,296 2,777
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30,
---------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
------ ------ ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
In thousands
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ -- $ 136 $ 5 $15,540 $ 41,146 $ 19,062 $ 9,124
Total marketable securities............................ -- -- -- -- 40,200 28,321 114,148
Working capital (4).................................... (179) (1,340) (559) 1,362 50,947 (2,652) 63,506
Total assets (5)....................................... 3,124 2,448 11,748 66,118 149,620 127,268 191,915
Deferred revenue, net.................................. 73 137 3,346 29,352 61,451 54,508 106,730
Long-term obligations, excluding current
portion.............................................. 344 81 1,353 9,440 18,743 17,329 29,400
Total stockholders' equity............................. 1,221 252 3,062 1,437 47,655 (6,075) 62,019
</TABLE>
- ---------------
(1) The Selected Financial Data for the year ended December 31, 1995 were
derived by combining the Company's results of operations for the period January
1, 1995 through March 10, 1995 and the period March 11, 1995 through December
31, 1995, which, respectively, are periods before and after the date of the SAIC
acquisition. The data for these two periods were prepared on differing bases of
accounting and, accordingly, the comparability of such data with other periods
is limited, primarily as a result of goodwill amortization, new corporate
services agreements and the repayment of outstanding debt balances. See Notes 1
and 9 of Notes to Financial Statements for a discussion of the presentation for
each of these periods.
(2) See Note 13 of Notes to Financial Statements for a discussion of
discontinued operations.
(3) Net new registrations for each period include gross new registrations less
an estimate of registrations that are uncollectible. Net registrations include
net new registrations less an estimate of registrations not renewed. Prior to
September 14, 1995, net registrations equaled gross registrations because the
Company was reimbursed by the NSF for all registrations under a cost plus
fixed-fee contract.
(4) Working capital calculation includes $73, $137, $1,993, $19,912, $43,789,
$38,281 and $77,766 of current deferred revenue as of December 31, 1993, 1994,
1995, 1996 and 1997 and September 30, 1997 and 1998, respectively.
(5) Total assets include $0, $0, $1,408, $17,453, $25,873, $40,135 and $627 of
restricted assets as of December 31, 1993, 1994, 1995, 1996, 1997 and September
30, 1997 and 1998, respectively.
20
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Financial Statements and Notes
thereto included elsewhere and incorporated by reference in this Prospectus.
Except for the historical information contained herein and incorporated herein
by reference, the discussion in this Prospectus contains certain forward-looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Prospectus should be read as being applicable to all
related forward-looking statements wherever they appear in this Prospectus. The
Company's actual results may differ materially from the results discussed in the
forward-looking statements as a result of certain factors, including, but not
limited to, those discussed in "Risk Factors" and elsewhere in this Prospectus
and from time to time in the Company's periodic reports. Unless otherwise
indicated, the accompanying financial statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for all periods
presented for continuing operations reflect the financial position and results
of operations of the Company's commercial business, which includes registration
services and consulting services.
OVERVIEW
The Company
The Company currently acts as the exclusive registry and registrar of Internet
domain names within the .com, .org, .net and .edu TLDs pursuant to the
Cooperative Agreement with the NTIA. Domain names are used to identify a unique
site or presence on the Internet. As registry and registrar for these TLDs, the
Company registers new domain names and is responsible for the maintenance and
dissemination of the master file of domain names through daily updates to the
Internet. The Company also provides enterprise network consulting services,
focusing on network engineering, network and systems security and network
management solutions.
Cumulative net registrations (gross registrations less management's estimate of
uncollectible registrations and of non-re-registrations) within the TLDs
administered by the Company increased by 114%, from 1,296,000 domain names
registered at September 30, 1997 to 2,777,000 domain names registered at
September 30, 1998. Net registrations in the .com TLD represent 84.4% of the
Company's total net registrations at September 30, 1998. Of the 2,777,000
cumulative net registrations at September 30, 1998, 1,238,000 registrations will
be up for annual re-registration during the next twelve months based upon their
respective anniversaries of initial registration. International registrations
accounted for 28% of net new registrations during the first nine months of both
1998 and 1997. Net revenue from registration services accounted for 92.5% of the
Company's net revenue for the nine months ended September 30, 1998.
The Company delivers enterprise network consulting services to large companies
that desire to establish or enhance their Internet presence or re-engineer
legacy network infrastructures to accommodate the integration of both Internet
connectivity and internal enterprise network ("Intranet") technology into their
information technology base. Our enterprise network consulting services include
network engineering, network and systems security and network management. During
the nine months ended September 30, 1998, the Company provided enterprise
network consulting services to more than 20 companies. Net revenue from
enterprise network consulting services accounted for 7.5% of the Company's net
revenue for the nine months ended September 30, 1998.
Registration Services
In December 1992, the Company entered into the Cooperative Agreement with the
NSF under which the Company was to provide Internet domain name registration
services for five TLDs: .com, .org, .net, .edu and .gov. These registration
services include the initial two year domain name registration and annual
re-registration, and throughout the registration term, maintenance of and
unlimited modifications to individual domain name records and updates to the
master file of domain names. The Cooperative Agreement became effective January
1, 1993. It included a three-month phase-in period, a five-year operational
period (commencing April 1,
21
<PAGE> 26
1993 and ending March 31, 1998), and a six-month flexibility period through
September 30, 1998. Effective September 9, 1998, the NTIA took over the
administration of the Cooperative Agreement from the NSF. In October 1998, the
Cooperative Agreement was amended and extended until September 30, 2000.
The original terms of the Cooperative Agreement provided for a cost
reimbursement plus fixed-fee contract (with an initial fee of 8%). Effective
September 14, 1995, the NSF and the Company amended the Cooperative Agreement to
require the Company to begin charging end users a services fee of $50 per year
for each domain name in the .com, .org and .net TLDs. Prior to April 1, 1998,
registrants paid a services fee of $100 for two years of domain name services
upon each initial registration and an annual re-registration fee of $50 per year
thereafter (collectively "registration fees"). The NSF paid the registration
fees for domain names within the .edu and .gov TLDs through March 31, 1997.
Commencing April 1, 1997, the Company agreed with the NSF to provide domain name
services within the .edu and .gov TLDs free of charge. As of October 1, 1997,
the Company no longer registers or administers domain names in the .gov TLD.
Under the terms of the September 14, 1995 amendment to the Cooperative
Agreement, 30% of the registration fees collected by the Company was required to
be set aside for the enhancement of the intellectual infrastructure of the
Internet and, as such, was not recognized as revenue by the Company. The Company
has reflected these funds, along with the appropriate percentage of net accounts
receivable, as restricted assets and has recorded an equivalent, related current
liability. The Company maintains the cash received relating to the set aside
funds in a separate interest bearing account. The set aside funds, plus any
interest earned, are disbursed at the direction of the NSF. To date, the Company
has disbursed $62.2 million to the NSF at their direction, and as of September
30, 1998, has a remaining restricted cash balance of approximately $627,000.
On March 12, 1998, the NSF and the Company amended the Cooperative Agreement to
eliminate the 30% set aside requirement effective April 1, 1998 and to reduce
the registration fees by a corresponding amount. Initial registrations on and
after April 1, 1998 are charged $70 for two years of registration services and
an annual re-registration fee of $35 per year thereafter. This amendment has no
effect on the revenue currently recognized on each registration ($70 for initial
registrations and $35 for re-registrations), since the Company previously did
not recognize revenue on the 30% set aside funds. Accordingly, while the revenue
to the Company on a per registration basis does not change, the amount charged
to customers declined.
In order to provide prompt access to new domain names on the Internet, the
Company generally invoices customers and permits them to pay their registration
fees after their domain names are registered. The Company's experience has been
that, for the period from September 1995 through September 1998, approximately
30% of new registrations have ultimately been deactivated for non-payment. The
Company believes that this level of uncollectible receivables is due to, among
other factors, the large number of individuals and corporations that have
registered multiple domain names with the apparent intention of transferring
registration for such names at a profit. Such resellers have a greater tendency
than other customers to default on their registration fees. As a consequence,
the Company has recorded a comparable provision for uncollectible accounts in
determining net registration revenue. This 30% provision has been consistently
applied for the period from September 1995 through September 1998 and is
considered adequate by the Company.
Registration fees charged to customers for registration services are recognized
as revenue evenly over the registration term. For example, the Company
recognizes $70 on a straight-line basis over the two-year service period for
each $70 initial domain name registration, equivalent to $35 per year. Annual
re-registrations of domain names are recorded as revenue based upon $35
recognized on a straight-line basis over the one-year service period. This
subscription-based model defers revenue recognition until the Company provides
the registration services, including maintenance of and unlimited modifications
to individual domain name records, over the respective registration terms. At
September 30, 1998, the Company had net deferred revenue of $106.7 million.
Expenses for the Company increased each quarter during 1995, 1996, 1997 and the
first nine months of 1998 as a result of increased business activities,
primarily attributable to subscriber growth for the Company's registration
services business. The Company believes continued investments in its back office
infrastructure as well as significant expansion of its sales and marketing and
product development activities are critical to the
22
<PAGE> 27
achievement of its goals and anticipates that costs and expenses will continue
to increase in each quarter for the foreseeable future.
Enterprise Network Consulting Services
Substantially all of the Company's enterprise network consulting services
revenue is derived from professional services which are generally provided to
clients on a time and expense basis and is recognized as services are performed.
The majority of the Company's enterprise network consulting services are
provided to customers in the financial services industry. Bank America (formerly
NationsBanc) is currently the Company's largest enterprise network consulting
services client, accounting for 49% of the Company's enterprise network
consulting services business net revenue and 3.7% of the Company's total net
revenue in the nine months ended September 30, 1998. NationsBanc originally
contracted with the Company in 1993 and the Company currently provides network
design and engineering services as well as a variety of project specific
services under the contract.
The SAIC Acquisition
The Company was incorporated in the District of Columbia in 1979 and was
reincorporated in Delaware in 1996. The Company was acquired by SAIC on March
10, 1995 in a stock-for-stock transaction accounted for as a purchase and is
currently a majority-owned subsidiary of SAIC. Prior to the acquisition of the
Company by SAIC, the Company's principal lines of business consisted of
providing integration, engineering for computer and telecommunications networks
for government and commercial customers and domain name registration services.
The Company's business included commercial and government contracts awarded to
the Company on a competitive basis, including government contracts that were
awarded to the Company based partially upon the Company's then minority-owned
status. The contracts which had been awarded to the Company based in part on the
Company's then minority-owned status were transferred into a separately-owned
entity prior to the acquisition of the Company by SAIC. In November 1995, SAIC
adopted a plan to transfer the Company's remaining government-based business to
SAIC in order to enable the Company to focus on the growth of its commercial
business, which includes registration services and enterprise network consulting
services. This transfer was effective as of February 1996. The operating results
of both the minority-based government contracts business and the remaining
government-based business are reflected as discontinued operations in the
Company's Financial Statements and the Notes thereto included elsewhere and
incorporated by reference in this Prospectus for all periods presented.
Financial Presentation
The Company's Financial Statements and the Notes thereto included elsewhere and
incorporated by reference in this Prospectus for all periods presented reflect
the results of continuing operations related to the commercial activities of the
Company only. The operating results of both the minority-based government
contracts business, which was transferred into a separate entity prior to the
acquisition of the Company by SAIC, and the remaining government-based business,
which was transferred to SAIC effective February 1996, are reflected as
discontinued operations in the Company's financial statements. See Notes 1 and 9
of Notes to Financial Statements for a discussion of transactions with SAIC.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net revenue of certain items in the Company's Statements of
Operations. The percentage relationships for the year ended December 31, 1995
were derived by combining the Company's results of operations for the period
January 1, 1995 through March 10, 1995 and the period March 11, 1995 through
December 31, 1995 which, respectively, are periods before and after the date of
the SAIC acquisition. Accordingly, the data for these two periods and the
periods preceding and following the acquisition were prepared on differing bases
of accounting and, as a result, the
23
<PAGE> 28
comparability of such percentage relationships with other periods is limited,
primarily as a result of the goodwill amortization, new corporate services
agreements and interest expense related to outstanding debt balances.
<TABLE>
<CAPTION>
-----------------------------------------
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Percentage of net revenue
Net revenue........................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue.................................... 87.9 77.8 56.9 59.8 42.4
----- ----- ----- ----- -----
Gross profit....................................... 12.1 22.2 43.1 40.2 57.6
Research and development expenses.................. -- 3.6 3.6 3.5 4.6
Selling, general and administrative expenses....... 36.9 33.3 27.1 25.5 39.2
Interest and other expense (income)................ 0.9 (2.7) (4.6) (3.4) (6.9)
----- ----- ----- ----- -----
Income (loss) from continuing operations before
income taxes..................................... (25.7) (12.0) 17.0 14.6 20.7
Provision (benefit) for income taxes............... (3.6) (3.4) 7.7 6.5 8.7
----- ----- ----- ----- -----
Income (loss) from continuing operations, net of
income taxes..................................... (22.1)% (8.6)% 9.3% 8.1% 12.0%
===== ===== ===== ===== =====
</TABLE>
In September 1995, the Cooperative Agreement between the Company and the NSF was
amended from a cost reimbursement plus fixed-fee contract to a fee-based
registration contract. The Company believes that the change to a
subscription-based pricing model, combined with the Company's recent growth,
make period to period comparisons of its operating results less meaningful and
that the results for any period should not be relied upon as an indication of
future performance. The recent revenue growth experienced by the Company should
not be taken as being indicative of the rate of revenue growth, if any, that can
be expected in the future.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
Net Revenue
Net revenue increased 102% from $30.9 million for the nine months ended
September 30, 1997 to $62.4 million for the nine months ended September 30,
1998. This increase in net revenue was primarily attributable to the increase in
the number of domain name registrations, principally in the .com TLD. Net
revenue from registration services increased 123% from $25.9 million for the
nine months ended September 30, 1997 to $57.7 million for the nine months ended
September 30, 1998. Net new registrations increased 85% from 698,000 for the
nine months ended September 30, 1997 to 1,290,000 for the nine months ended
September 30, 1998. Growth in net registrations continues to be driven by the
widespread use and adoption by businesses of the Internet and Intranets on a
global basis. Cumulative net registrations as of September 30, 1997 were
1,296,000 as compared to 2,777,000 as of September 30, 1998, for a 114%
increase.
Additionally, net new registrations increased 89% from 269,000 for the three
months ended September 30, 1997 to 507,000 for the three months ended September
30, 1998. This also represents a 14% increase over the 443,000 net new
registrations for the three months ended June 30, 1998. In addition, this growth
in cumulative net registrations is a 21% increase in the Company's entire
customer base since June 30, 1998.
While net revenue from enterprise network consulting services decreased 6% from
$5.0 million for the nine months ended September 30, 1997 to $4.7 million for
the nine months ended September 30, 1998, the most recent quarter reflected an
increase of 53% over both the same quarter last year and the second quarter of
1998. NationsBanc accounted for $1.7 million or 5.5% of the Company's total net
revenue for the nine months ended September 30, 1997 and $2.3 million or 3.7%
for the nine months ended September 30, 1998.
During the nine months ended September 30, 1998, the consulting services
division continued to add new leadership in sales and operations and hired
additional technical consultants. In addition, the division continued
24
<PAGE> 29
to emphasize its efforts targeted at lead generation and regional sales and
marketing programs by opening offices in New York City and Atlanta, Georgia.
Cost of Revenue
Cost of revenue consists primarily of salaries and employee benefits, fees paid
to subcontractors for work performed in connection with revenue producing
projects, depreciation and equipment costs, lease costs of the operations
infrastructure and the associated operating overhead. Cost of revenue increased
from $18.5 million for the nine months ended September 30, 1997 to $26.5 million
for the nine months ended September 30, 1998. This 43% increase was driven by a
$1.8 million increase in labor, a $3.7 million increase in outsourcing costs and
$2.6 million in additional depreciation charges and equipment expenditures
primarily associated with supporting the growth of the Company's registration
services business. In the near term, the continued investment in the back office
infrastructure and provision of customer service is expected to partially offset
future margin improvements arising from economies of scale.
As a percentage of net revenue, cost of revenue decreased from 59.8% for the
nine months ended September 30, 1997 to 42.4% for the nine months ended
September 30, 1998 principally reflecting economies of scale and other
operational efficiencies achieved in the Company's registration business.
Research and Development Expenses
Research and development expenses consist primarily of compensation and
consultant expenses to support the creation, development and enhancement of the
Company's products, services and technologies. Research and development expenses
increased 164% from $1.1 million for the nine months ended September 30, 1997 to
$2.9 million for the nine months ended September 30, 1998. As a percentage of
net revenue, research and development expenses increased from 3.5% for the nine
months ended September 30, 1997 to 4.6% for the nine months ended September 30,
1998. To date, all research and development costs have been expensed as
incurred. The Company expects that the level of research and development
expenses will continue to increase in the near future in terms of absolute
dollars as the Company invests in developing new product and service offerings.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries of
business development, general management, administrative and financial
personnel, marketing expenses, corporate services from SAIC, legal and other
professional costs and amortization of goodwill associated with the Company's
1995 acquisition by SAIC. Selling, general and administrative expenses increased
210% from $7.9 million for the nine months ended September 30, 1997 to $24.4
million for the nine months ended September 30, 1998. The increase was
attributable to a $10.2 million increase in marketing and business development
expenses including television, Internet banner advertising and targeted direct
mail campaigns, increased staffing expenses of $1.5 million and an increase in
legal and other professional costs of $2.7 million. As a percentage of net
revenue, selling, general and administrative expenses increased from 25.5% for
the nine months ended September 30, 1997 to 39.2% for the nine months ended
September 30, 1998. The Company expects that the level of selling, general and
administrative expenses will increase significantly in the near future in terms
of absolute dollars as operations continue to expand. In particular, sales,
marketing and business development expenses will increase as the Company
continues to promote the value of a .com Web address and other new
Internet-based value-added services. The Company also plans to continue to
develop its distribution channels, both domestically and internationally.
Interest Income
The Company had net interest income of $1.1 million for the nine months ended
September 30, 1997 as compared to $4.4 million for the nine months ended
September 30, 1998. The increase is attributable to the investment of the
positive cash flow resulting primarily from increasing domain name registrations
and the net proceeds of the Company's initial public offering.
25
<PAGE> 30
Income Taxes
The provision for income taxes was 45% of pretax earnings, or $2.0 million for
the nine months ended September 30, 1997, and 42%, or $5.4 million for the nine
months ended September 30, 1998. The difference between the effective rates for
both periods presented is principally attributable to the relative impact that
non-deductible goodwill had on pretax operating income. Goodwill is being
amortized by the Company over five years and is associated with the acquisition
of the Company by SAIC in 1995.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1997
Net Revenue
Net revenue increased 140% from $18.9 million in 1996 to $45.3 million in 1997.
This increase in net revenue was primarily attributable to the increase in the
number of domain name registrations, principally in the .com TLD. Net revenue
from registration services increased 246% from $11.2 million in 1996 to $38.8
million in 1997. Net new registrations increased 96% from 489,000 during 1996 to
960,000 during 1997. Growth in registrations was driven by the widespread use
and adoption by businesses of the Internet and Intranets on a global basis.
Cumulative net registrations as of December 31, 1996 were 627,000 as compared to
1,541,000 as of December 31, 1997, for a 146% increase.
Net revenue from enterprise network consulting services decreased 16% from $7.7
million in 1996 to $6.5 million in 1997. This decrease was primarily
attributable to a decrease in business from NationsBanc. NationsBanc, the
Company's largest enterprise network consulting services client, accounted for
$3.7 million or 20% of the Company's total net revenue in 1996 and $1.9 million
or 4% of the Company's total net revenue in 1997.
Cost of Revenue
Cost of revenue increased 76% from $14.7 million in 1996 to $25.8 million in
1997. The increase was primarily driven by the growth of the Company's
registration business which experienced additional labor costs of $4.2 million
and additional outsourcing costs of $1.6 million in support of the Company's
invoicing, collection and processing activities. In June 1997, the Company
opened a 31,200 square foot facility to support its Internet business operations
and in January 1998, the Company signed an agreement to lease an additional
9,100 square feet at the same location. This leased facility is designed to meet
current registration services customer support needs as well as to provide
expansion capability for future business.
As a percentage of net revenue, cost of revenue decreased from 77.8% in 1996 to
56.9% in 1997. This decrease primarily reflects economies of scale that the
Company achieved due to the growth of its subscription-based domain name
registration business.
Research and Development Expenses
Research and development expenses increased 150% from $680,000 in 1996 to $1.7
million in 1997. All of the Company's research and development costs have been
expensed as incurred. As a percentage of net revenue, research and development
expenses were 3.6% for both 1996 and 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 95% from $6.3 million in
1996 to $12.3 million in 1997. The increase is primarily attributable to
increased management and administrative labor expenses of $1.8 million, business
development expenses of $1.3 million and an increase in legal costs of $1.0
million.
As a percentage of net revenue, selling, general and administrative expenses
decreased from 33.3% in 1996 to 27.1 % in 1997. The decrease in percentage of
net revenue reflects economies of scale the Company achieved due primarily to
the growth of its domain name registration business.
26
<PAGE> 31
Interest Income
The Company had net interest income of $496,000 in 1996 as compared to $2.1
million in 1997. The increase is attributable to the investment of the net
proceeds of the Company's stock offering as well as improved cash flow resulting
from the increase in domain name registrations.
Income Taxes (Benefit)
The income tax benefit was $643,000 in 1996 as compared to an income tax expense
of $3.5 million in 1997. The effective tax rate changed from 28% in 1996 to 45%
in 1997. The difference between the effective rates is principally attributable
to the relative impact that non-deductible goodwill had on pretax operating
income or loss for the year. Goodwill is being amortized by the Company over
five years and is associated with the acquisition of the Company by SAIC in
1995.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1996
Net Revenue
Net revenue increased 191% from $6.5 million in 1995 to $18.9 million in 1996.
This increase in net revenue was primarily attributable to the increase in the
number of domain name registrations, principally in the .com TLD, as well as the
Company's shift to a subscription-based pricing model. Net revenue from
registration services increased 600% from $1.6 million in 1995 to $11.2 million
in 1996. Net revenue in 1995 primarily reflects the cost reimbursement plus
fixed-fee contract with the NSF whereas net revenue for 1996 reflects the
Company's subscription-based pricing model. Net new registrations increased 247%
from 141,000 during the year ended December 31, 1995 to 489,000 during the year
ended December 31, 1996. Cumulative net registrations increased 254% from
177,000 at December 31, 1995 to 627,000 at December 31, 1996.
Net revenue from enterprise network consulting services increased 57% from $4.9
million in 1995 to $7.7 million in 1996, including an increase in net revenue
from NationsBanc, the Company's largest consulting services customer, which
increased 42% from $2.6 million in 1995 to $3.7 million in 1996. This growth was
primarily attributable to increased funding within NationsBanc to support
internal network integration and expansion. The Company also experienced growth
from a number of new consulting services customers, many of which were obtained
through subcontracting with and utilizing leads from SAIC.
NationsBanc accounted for 19.6% of total net revenue in 1996. NationsBanc
accounted for 40.0% of total net revenue and the NSF (under the cost
reimbursement plus fixed-fee contract) accounted for 20.8% of total net revenue
in 1995. No other source of revenue accounted for more than 7.1% of total net
revenue in either year.
Cost of Revenue
Cost of revenue increased 157% from $5.7 million in 1995 to $14.7 million in
1996. The increase in cost was related primarily to an increase in the cost of
labor of $3.7 million as a result of the Company's rapid growth. Effective with
the September 14, 1995 amendment to the Cooperative Agreement which implemented
the subscription-based pricing model, the Company established and continued to
develop its back office capability. This required the Company to make
significant investments in hardware and software as well as to utilize a number
of third-party vendors in support of back office requirements. In particular,
the Company began to outsource portions of its back office operations during the
fourth quarter of 1996. A principal benefit of outsourcing was to increase the
capacity and efficiency of its back office operations; however, such action
alone did not significantly impact operating margins.
As a percentage of net revenue, cost of revenue decreased from 87.9% in 1995 to
77.8% in 1996. This decrease reflects economies of scale that the Company
achieved due to the growth of its domain name registration business.
27
<PAGE> 32
Research and Development Expenses
There were no research and development expenses in 1995, in large part because
registration system enhancements were reimbursable under the Cooperative
Agreement. In 1996, research and development expenses were $680,000 or 3.6% of
net revenue. All of the Company's research and development costs have been
expensed as incurred.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 162% from $2.4 million in
1995 to $6.3 million in 1996. This increase was primarily attributable to
increases in management, administrative and business development staff, as well
as increased legal costs associated with the administration of the Company's
domain name dispute policy. Selling, general and administrative expenses include
$237,000 in 1995 and $822,000 in 1996 of expenses allocated from SAIC in
accordance with the then current intercompany agreement. If the expenses were
based on the fee of 2.5% of net revenue under the intercompany agreement in
effect during 1997, such expenses would have been $133,000 and $472,000,
respectively.
As a percentage of net revenue, selling, general and administrative expenses
decreased from 36.9% in 1995 to 33.3% in 1996, reflecting the generally fixed
nature of certain general and administrative expenses as well as management's
control of such costs.
Interest Expense (Income)
The Company had net interest expense of $61,000 in 1995 as compared to interest
income of $496,000 in 1996. The change is primarily attributable to positive
cash flow in 1996 associated with the Company's domain name registration
business.
Income Taxes (Benefit)
The income tax benefit was $239,000 in 1995 as compared to $643,000 in 1996. The
effective tax rate increased from 14.3% in 1995 to 28.4% in 1996. The difference
between the effective tax rates was primarily attributable to non-deductible
goodwill comprising a higher percentage of the Company's net loss in 1995.
Discontinued Operations
Immediately prior to the acquisition of the Company by SAIC, the portion of the
Company's business relating to the minority-based government business had been
transferred into a separately-owned entity. In November 1995, SAIC adopted a
plan to transfer the Company's remaining government-based business to SAIC in
order to enable the Company to focus on the growth of its commercial business,
which includes registration and consulting services. This transfer was effective
as of February 1996. November 1995 was the measurement date for discontinued
operations for accounting purposes. The activities of both the minority-based
government business and the remaining government-based business are reflected as
discontinued operations. Net income (loss) from discontinued operations excludes
general corporate overhead of the Company. No gain or loss was incurred as a
consequence of the transfer of these businesses.
In 1995, discontinued operations incurred a net loss of $1.4 million. The loss
was primarily attributable to the Company's remaining government business, which
increased the Company's provision for uncollectible accounts associated with the
bankruptcy of a prime contractor, high interest costs associated with payment
issues from other prime contractors and over-runs of fixed-price and fixed-rate
contracts. As mentioned above, this business was transferred to SAIC effective
as of February 1996.
28
<PAGE> 33
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited quarterly financial information
for reach of the eight quarters in the period ended September 30, 1998. In the
opinion of management, this information has been presented on the same basis as
the audited financial statements appearing elsewhere and incorporated by
reference in this Prospectus, and all necessary adjustments (consisting only of
normal recurring adjustments) have been included in the amounts stated below to
present fairly the unaudited quarterly results when read in conjunction with the
audited financial statements of the Company and notes thereto. The operating
results for any quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
QUARTER ENDED
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1997 1997 1997 1997 1998 1998 1998
-------- -------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
In thousands
Net revenue............... $6,853 $8,655 $10,069 $12,172 $14,430 $16,492 $20,476 $25,427
Cost of revenue........... 4,426 5,294 6,141 7,033 7,330 7,348 8,791 10,312
------ ------ ------- ------- ------- ------- ------- -------
Gross profit.............. 2,427 3,361 3,928 5,139 7,100 9,144 11,685 15,115
Research and development
expenses................ 396 311 407 377 558 725 815 1,353
Selling, general and
administrative
expenses................ 1,978 2,301 2,487 3,105 4,375 6,182 8,008 10,248
Interest income........... (122) (149) (335) (570) (1,041) (1,292) (1,384) (1,654)
------ ------ ------- ------- ------- ------- ------- -------
Income before income
taxes................... 175 898 1,369 2,227 3,208 3,529 4,246 5,168
Provision for income
taxes................... 49 382 629 995 1,465 1,480 1,783 2,163
------ ------ ------- ------- ------- ------- ------- -------
Net income................ $ 126 $ 516 $ 740 $ 1,232 $ 1,743 $ 2,049 $ 2,463 $ 3,005
====== ====== ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
QUARTER ENDED
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1997 1997 1997 1997 1998 1998 1998
-------- -------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Percentage of net revenue
Net revenue............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue........... 64.6 61.2 61.0 57.8 50.8 44.6 42.9 40.6
------ ------ ------- ------- ------- ------- ------- -------
Gross profit.............. 35.4 38.8 39.0 42.2 49.2 55.4 57.1 59.4
Research and development
expenses................ 5.8 3.5 4.0 3.1 3.9 4.4 4.0 5.3
Selling, general and
administrative
expenses................ 28.9 26.6 24.7 25.5 30.3 37.4 39.1 40.3
Interest income........... (1.8) (1.7) (3.2) (4.7) (7.2) (7.8) (6.7) (6.5)
------ ------ ------- ------- ------- ------- ------- -------
Income before income
taxes................... 2.5 10.4 13.5 18.3 22.2 21.4 20.7 20.3
Provision for income
taxes................... 0.7 4.4 6.2 8.2 10.1 9.0 8.7 8.5
------ ------ ------- ------- ------- ------- ------- -------
Net income................ 1.8% 6.0% 7.3% 10.1% 12.1% 12.4% 12.0% 11.8%
====== ====== ======= ======= ======= ======= ======= =======
</TABLE>
29
<PAGE> 34
LIQUIDITY AND CAPITAL RESOURCES
From the time of its acquisition by SAIC in March 1995 until December 1996, the
Company participated in SAIC's centralized cash management system whereby cash
received from operations was transferred to SAIC's centralized cash accounts and
cash disbursements were funded from such centralized cash accounts. Accordingly,
cash requirements for operating purposes and for capital expenditures were met
from this source. Beginning in 1997, the Company implemented its own cash
management system.
At September 30, 1998, the Company's principal source of liquidity was its cash
and cash equivalents of $9.1 million and its short-term investments of $107.9
million, which when combined represent an increase of $35.7 million from the
December 31, 1997 balance in those accounts. The Company also has $6.3 million
of marketable securities held as long term investments as of September 30, 1998.
At September 30, 1998, the Company's cumulative net obligation to SAIC for
intercompany activity was $2.6 million, a net increase of $1.3 million from
December 31, 1997. Intercompany activity is primarily comprised of salaries and
benefits paid by SAIC on behalf of the Company. The Company currently reimburses
SAIC for intercompany activity on a monthly basis. Pursuant to the Tax Sharing
Agreement dated September 26, 1997, the Company now generally remits income tax
payments directly to tax authorities as it no longer is part of SAIC's
consolidated group for federal income tax purposes.
Cash provided by operations was $42.1 million for the nine months ended
September 30, 1998. This amount is principally attributed to net income plus the
increase in deferred revenue reflecting cash collected in advance of
registration services revenue recognition ratably over the two- and one-year
registration terms. Partially offsetting this amount is an increase in deferred
tax assets resulting from accelerated revenue recognition for tax purposes and
the subsequent tax liabilities.
Investing activities totaled $79.3 million for the nine months ended September
30, 1998, of which $67.7 million was net purchases of short-term investments and
$6.0 million of long-term investments. These investments are primarily comprised
of commercial investment grade securities.
Capital expenditures for continuing operations were $3.2 million and $6.1
million for the year ended December 31, 1997 and the nine months ended September
30, 1998, respectively. These expenditures were primarily for computer
equipment. The Company had additional expenditures of approximately $10.0
million to $12.0 million for the balance of 1998 as it continued to invest in
the back office infrastructure in advance of continued growth in domain name
registrations and as the Company designs and builds the shared registration
system in accordance with the Cooperative Agreement.
The Company believes that its existing cash balance, investments and cash flows
expected from future operations will be sufficient to meet the Company's capital
requirements for at least the next 12 months.
YEAR 2000 COMPLIANCE
The Company is in the process of assessing the potential effects of the "Year
2000" millennium change on the Company's business systems and processes,
including the Internet root servers under the Company's control,
telecommunications systems, facilities, data-networking infrastructure,
commercial-off-the-shelf hardware, software and components used by its employees
and its outsourcing vendors. The Company's Year 2000 project is proceeding on
schedule. The project goal is to ensure that the Company's business is not
impacted by the date transitions associated with the Year 2000.
The Company's Year 2000 project plan is coordinated by a team that reports
directly to senior management. The project team is evaluating the Year 2000
compliance of the Company's business systems and processes, including the
Internet root servers under the Company's control, telecommunications systems,
facilities, data-networking infrastructure, commercial-off-the-shelf hardware,
software and components used by its employees and its outsourcing vendors whom
provide services relating to the Company's domain name registration business.
The Company's Year 2000 project is comprised of the following parallel phases:
- Phase 1 -- Inventory all of the Company's business systems and processes,
including the Internet root servers under the Company's control,
telecommunications systems, facilities, data-networking infrastruc-
30
<PAGE> 35
ture, commercial-off-the-shelf hardware, software and components used by
its employees in order to assign priorities to potentially impacted
systems and services. This phase has been completed;
- Phase 2 -- Assess the Year 2000 compliance of all inventoried business
systems and processes, including the Internet root servers under the
Company's control, telecommunications systems, facilities,
data-networking infrastructure, commercial-off-the-shelf hardware,
software and components used by its employees and determine whether to
renovate or replace any non-Year 2000 compliant systems and services. The
initial assessment of mission critical systems has been completed;
- Phase 3 -- Complete remediation, if any is required, of any non-Year 2000
compliant business systems and processes, including the Internet root
servers under the Company's control, telecommunications systems,
facilities, data-networking infrastructure, commercial-off-the-shelf
hardware, software and components used by its employees. Conduct
procurements to replace any other non-Year 2000 compliant business
systems and processes, telecommunications systems, facilities,
data-networking infrastructure, commercial-off-the-shelf hardware,
software and components used by its employees that won't be remediated.
All remediation efforts, if any are required, are expected to be
completed by April 30, 1999;
- Phase 4 -- Test and validate remediated and replacement systems, if any
such remediation or replacement is required, to ensure inter-system
compliance and mission critical system functionality. The testing and
validation efforts, if any are required, are expected to be completed by
May 31, 1999;
- Phase 5 -- Deploy and implement remediated and replacement systems, if
any deployment or implementation is required, after the completion of
successful testing and validation. The deployment and implementation of
the remediated or replacement systems, if any is required, are expected
to be completed by October 30, 1999; and
- Phase 6 -- Design contingency and business continuation plans in the
event of the failure of business systems and processes,
telecommunications systems, facilities, data-networking infrastructure,
commercial-off-the-shelf hardware, software and components used by the
Company's employees due to the Year 2000 millennium change. The initial
contingency and business continuation plan is expected to be in place by
February 28, 1999.
Based on its inventory and assessment to date, the Company has found no material
Year 2000 problems with its internal mission critical systems. However, the
Company, in its normal course of business, anticipates replacing or upgrading,
prior to the millennium change, portions of these systems with new systems which
will also be Year 2000 compliant. Currently, the Company is enhancing its
"back-office" and registration-related systems and the software relating to its
core domain name registration services business. When complete in 1999, this
enhancement effort will result in replacing portions of the existing
registration-related systems which will be procured from vendors as Year 2000
compliant and will be subjected to both component and end-to-end testing and
validation to determine the Year 2000 compliance of such systems prior to
acceptance and deployment in the Company's business. This enhancement effort is
a function of the Company's business growth and not a Year 2000 remediation
effort.
Based on its inventory and assessment to date, the Company has found no material
Year 2000 problems with its facilities and telecommunications systems. The
Company has conducted detailed assessments of the components of its
telecommunications infrastructure and is working to identify appropriate system
testing guidelines. In addition, the Company is seeking assurances from its
facilities' landlords and telecommunications equipment vendors and data circuit
providers regarding the Year 2000 compliance of their facilities and equipment.
In the event of electrical power interruption outside of the Company's control,
the Company has deployed back-up power systems capable of operating its core
business indefinitely.
The Company is now in the remediation and testing phases of its project cycle.
At this time, the Company believes that its incremental remediation costs, if
any, needed to make its current business systems and processes, including the
Internet root servers under the Company's control, telecommunications systems,
facilities, data-networking infrastructure, commercial-off-the-shelf hardware,
software and components used by its employees Year 2000 compliant are not
material. While the Company is incurring some incremental costs directly
relating to staff augmentation for the Year 2000 program management and
technical assessment, the
31
<PAGE> 36
costs expended by the Company through October 31, 1998 are less than $100,000.
The Company's expected total costs, including remediation and replacement costs,
if any, are estimated to be between $500,000 and $1,000,000 over the life of the
Year 2000 project. Since portions of the mission critical "back office" and
domain name registration-related systems will generally be replaced as a
function of business growth, the labor and capital costs associated with such
replacement systems are not directly attributed to achieving Year 2000
compliance.
The Company is contacting its other hardware and software vendors, other
significant suppliers, outsourcing service providers and other contracting
parties to determine the extent to which the Company is vulnerable to any such
third party's failure to achieve Year 2000 compliance for their own systems. At
the present time, the Company does not expect Year 2000 issues of any such third
parties to materially affect the Company's business. Furthermore, the Company's
business depends on the continued operation of, and widespread access to, the
Internet. This, in turn, depends to a large extent on the software and systems
of third parties on which the Company's systems rely or to which they are
connected. These third parties include, among others, Internet-related
companies, including Internet Web hosting companies, Internet access providers
and Internet root server operators. The Company can give no assurances that the
software or systems of such third parties will be Year 2000 compliant or that
the failure of such third parties to achieve Year 2000 compliance will not have
a material adverse effect on the Company. To the extent that the normal
operation of the Internet is disrupted by the Year 2000 millennium change, the
Company's business, financial condition or results of operations could be
materially and adversely affected.
Should the Company fail to solve a Year 2000 compliance problem to its mission
critical business systems and processes, including the Internet root servers
under the Company's control, telecommunications systems, facilities,
data-networking infrastructure, commercial-off-the-shelf hardware, software and
components used by its employees the result could be a failure or interruption
to normal business operations. The Company believes that, with the deployment of
the new "back office" and domain name registration related systems in 1999, the
potential for significant interruptions to normal operations should be
minimized. The Company's primary risks with regard to Year 2000 failures are
those which impact its domain name registration business. The reasonably likely
worst case risks inherent in the Company's business are as follows:
- Significant and protracted interruption of electrical power to data and
call-center operations in the Company's engineering facility could
materially and negatively impact the Company's ability to provide data
and call-center operations. To mitigate this risk, the Company has
deployed back-up power systems capable of operating indefinitely.
However, electrical power interruptions that impact Internet connectivity
providers could adversely impact the Company because of the Company's
reliance upon internet-based operations for its day to day business.
- Significant and protracted interruption of telecommunications and data
network services in either of the Company's headquarters or engineering
facilities could materially and negatively impact the Company's ability
to provide data and call-center operations. The Company has conducted
detailed assessments of the components of its telecommunications
infrastructure and is working to identify appropriate system testing
guidelines. As part of its technical assessment, the Company identified
the compliance status of its data networking infrastructure and developed
plans for remediation. Finally, the Company has plans to seek additional
assurances and a better understanding of the compliance programs of its
telecommunications and data circuit providers.
- The failure of components of the Company's current "back office" and
domain name registration related systems could materially and negatively
impact the Company's business. However, as a function of business growth,
these systems are planned to be retired before the end of 1999. As a
contingency planning measure, the Company is conducting a technical
assessment of the current systems and their software applications in the
event that the deployment of the new systems is delayed beyond December
1999.
- Despite the assurances of the Company's third-party suppliers, hardware
and software vendors, and outsourcing service providers regarding the
Year 2000 compliance of their products and services, the potential exists
that a Year 2000 problem relating to such third-party suppliers, vendors
and outsourcing
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service providers products and services could have a material impact on
the Company's business. The Company is conducting monthly discussions
with its mission critical outsourcing service providers to determine the
progress of their Year 2000 compliance programs.
Although the Company has found no material Year 2000 problems with its internal
mission critical systems and despite the Company's expectation that its
enhancement effort will result in Year 2000 compliant "back-office" and
registration-related systems and software relating to its core domain name
registration services business, the Company is currently developing a business
continuation contingency plan and is performing a test on the existing core
registration-related systems that are being replaced. The Company expects to
finalize its initial contingency plan and to complete the testing of all
existing systems by February 28, 1999.
Although the Company is taking appropriate steps so that the Company's business
is not impacted by the date transitions associated with the Year 2000, the
Company has no responsibility for, nor control over other Internet root server
operators or tens of thousands of lower level domain name system server
operators that are critical to the efficient operation of the Internet. The
Company has not determined whether such root server operators or other server
operators have hardware, software or firmware that is Year 2000 compliant. The
Company has notified the Department of Commerce of this issue.
Forward-Looking Statements
The foregoing Year 2000 discussion and the information contained herein is
provided as a "Year 2000 Readiness Disclosure" as defined in the Year 2000
Information and Readiness Disclosure Act of 1998 (Public Law 105-271, 112 Stat.
2386) enacted on October 19, 1998 and contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, including without limitation, anticipated costs and the dates by
which the Company expects to complete certain actions, are based on management's
best current estimates, which were derived utilizing numerous assumptions about
future events, including the continued availability of certain resources,
representations received from third parties and other factors. However, there
can be no guarantee that these estimates will be achieved, and actual results
could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the ability to
identify and remediate all relevant systems, results of Year 2000 testing,
adequate resolution of Year 2000 issues by governmental agencies, businesses and
other third parties who are outsourcing service providers, suppliers, and
vendors of the Company, unanticipated system costs, the adequacy of and ability
to implement contingency plans and similar uncertainties. The "forward-looking
statements" made in the foregoing Year 2000 discussion speak only as of the date
on which such statements are made, and the Company undertakes no obligation to
update any forward-looking statement to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events.
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BUSINESS
The following discussion contains forward-looking statements which involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements as a result of certain
factors including, but not limited to, those discussed in "Risk Factors" and
elsewhere in the Prospectus.
Network Solutions is the leading Internet domain name registration service
provider worldwide. The Company currently acts as the exclusive registry and
registrar for second level domain names within the .com, .org, .net and .edu
TLDs. The Company also facilitates global registration of domain names in other
existing TLDs including country code TLDs. By registering Internet domain names,
the Company enables businesses, other organizations and individuals to establish
a unique Internet presence from which to communicate and conduct commerce. Net
registrations within the TLDs maintained by the Company increased by 114% from
1,296,000 domain names registered at September 30, 1997 to 2,777,000 domain
names registered at September 30, 1998. The Company believes that commercial
enterprises and individual Internet users worldwide are increasingly recognizing
the .com TLD as a desirable address for commercial presence on the Internet. Net
registrations in the .com TLD represent 84.4% of the Company's total net
registrations at September 30, 1998. Net revenue from Internet domain name
registration subscriptions accounted for 92.5% of the Company's net revenue for
the nine months ended September 30, 1998. With over 10 million businesses in the
United States alone, the Company believes that the potential for continued
growth of domain name registrations by commercial entities and services related
to those registrations is substantial.
In 1998, the Company introduced a portfolio of Internet-based products and
services, which builds upon its position in the registration process. The
Company's products and services include RegistrationPlus, a Web-based domain
name registration process that allows customers to register or to reserve a
domain name on-line and in real time; dot com mail, a portable, personalized
e-mail service to help small businesses maximize their brand names on the
Internet; dot com toolkit, a small business resource center that provides access
to tools and services for building an Internet storefront and conducting
business on the Internet; and dot com promotions, a service that provides
customers with a broad range of services that enable Web site owners to get
listed on Internet search engines and to promote their Web sites. The Company
intends to continue to develop other Internet-based products and services, which
may include directory and other Internet identity services.
The Company also provides enterprise network consulting services to large
companies that desire to establish or enhance their Internet presence or
re-engineer legacy network infrastructures to accommodate the integration of
both Internet connectivity and Intranet network technology into their
information technology base. The Company's enterprise network consulting
services include network engineering, network and systems security and network
management. Net revenue from enterprise network consulting services accounted
for 7.5% of the Company's net revenue for the nine months ended September 30,
1998.
INDUSTRY BACKGROUND
The Internet is a global network of millions of interconnected computers and
computer networks that allow businesses, other organizations and individuals to
communicate. Historically, the Internet had been used by a limited number of
academic institutions, defense contractors and government agencies to facilitate
remote access to host computers and transmit electronic mail. Recently, however,
use of the Internet has increasingly become dominated by a broad range of
commercial organizations and individuals who utilize the Internet to communicate
electronically, to distribute and retrieve information and to conduct commerce.
Advances in technology, low-cost Internet access and an increasing corporate
reliance on distributed information environments have fueled the rapid growth of
the Internet.
The Internet has been and continues to be loosely administered by a number of
government agencies that were involved in the creation of its infrastructure
(initially the Advanced Research Projects Agency ("ARPA") and, more recently,
the NSF and NTIA) and a number of nonprofit groups formed to address specific
Internet governance issues. As no single organization has formal authority over
all aspects of the Internet, it continues to operate under a system of mutual
collaboration and cooperation. With the commercialization of the Internet, the
role of many of these entities in future Internet administration has become less
clear and private parties have
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begun to assume a larger role in the enhancement and maintenance of the
Internet's infrastructure. The NSF, for example, has completed a two-year phased
withdrawal of its funding for the Internet backbone and has transferred this
responsibility to a group of private telecommunications carriers that are
commercially funded and has transferred its responsibilities under the
Cooperative Agreement to the NTIA.
The Company believes that in order to support the demands placed on this
evolving and rapidly growing medium of commerce and information exchange, a wide
range of products and services will need to be developed and enhanced,
including: (i) domain name registration services; (ii) Internet-based products
and services; and (iii) enterprise network consulting services.
Domain Name Registration Services
All communication on the Internet requires a unique numerical electronic address
called an IP address. However, since IP addresses are hard to remember, the
Internet functions through the establishment of a unique Internet identity (a
"domain name") that correlates to an IP address and the proliferation of such
domain names in the global Internet root servers. Currently, there are 13 root
servers, ten of which are located in the United States, two of which are located
in Europe and one of which is located in Asia. See "Risk Factors -- Reliance on
Third Parties."
An Internet domain name is made up of a TLD and additional domain levels
consisting of at least one additional domain level, referred to as a second
level domain name. For example, in the domain name "companyX.com," "companyX" is
the second level domain name. With the increased commercialization of the
Internet, second level domain names are being utilized not only by large
corporations but also increasingly by other users, including small businesses,
organizations and individuals. Particularly within the .com TLD, users are also
registering domain names to establish Internet identities for other purposes
such as trademarks, brands, products and events. The most common TLDs include
.com, .org and .net as well as country code TLDs represented by "." followed by
two letter country codes (e.g., .us for the United States, .uk for the United
Kingdom and .de for Germany).
Because the Internet is not bound by geography or lines of business,
coordination and administration services are required for the registration,
allocation and use of TLDs and for the effective operation of the Internet. In
December 1992, the NSF entered into the Cooperative Agreement with the Company
for the performance of these functions for the .com, .org, .net, .edu and .gov
TLDs. The NSF transferred to the NTIA the NSF's responsibilities under the
Cooperative Agreement, the flexibility period of which was extended to September
30, 2000. The U.S. Government intends to transition certain responsibilities for
the DNS to a not-for-profit corporation as described in the Statement of Policy
and, as it does, corresponding obligations under the Cooperative Agreement may
be terminated and, as appropriate, covered in a contract between the Company and
the not-for-profit corporation. See "Risk Factors -- Status of Cooperative
Agreement" and "-- Ongoing Privatization of Internet Administration."
Internet-Based Products and Services
The proliferation of Internet users provides businesses, other organizations and
individuals with new means by which to conduct business. To facilitate
business-to-business and business-to-consumer transactions, Internet users are
seeking important Internet-based products and services, such as transaction
security services, electronic payment mechanisms and directory, communications,
data and research and identity promotion services. The Company believes there
will be opportunities for entities which can facilitate, develop and distribute
such products and services and make them more readily accessible and easy to
use.
Enterprise Network Consulting Services
Many businesses are developing enterprise networks that employ Internet data
formats and communications protocols. Internal enterprise networks ("Intranets")
enhance user productivity and connectivity allowing users controlled access to
internal information while also accessing and exchanging information on the
Internet. As more businesses, organizations and individuals establish an
Internet presence and begin to deploy Intranets, the Company believes there will
be an increasing demand for enterprise network consulting services. In addition,
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the Company believes that Intranets are becoming increasingly sophisticated and
are allowing users increased capabilities and improved access to information. As
a result, businesses are increasingly seeking experienced network consulting
firms to enable all of these services.
THE NSI SOLUTION
Network Solutions is the leading Internet domain name registration service
provider worldwide. The Company currently acts as the exclusive registry and
registrar of second level domain names within the .com, .org, .net and .edu
TLDs. In this capacity, the Company enables the efficient operation of the
Internet by making available to each of the Internet TLD servers located around
the world an identical copy of the file for all second level domain names in
these TLDs. We also facilitate global registration of domain names in other
existing TLDs including country code TLDs. By registering Internet domain names,
the Company enables businesses, other organizations and individuals to establish
a unique Internet presence from which to communicate and conduct commerce. The
Company believes that it has been at the forefront of the development,
administration and coordination of standards, policies and functions needed to
facilitate the registration process, including dissemination of domain name
database information to TLD servers throughout the world, development of a large
proven base of software unique to the domain name registration business and
administration of a domain name dispute policy.
The Company is working to expand its domain name registration business and to
continue to improve the registration process by: (i) promoting the use of the
.com TLD worldwide; (ii) expanding its relationships with Internet access
providers; (iii) establishing and expanding marketing and other strategic
relationships worldwide; (iv) stimulating demand for domain name registrations
in targeted customer segments; (v) facilitating the ease of use and access to
its registration service; (vi) establishing international alliances and
developing multilingual capabilities; and (vii) working with major platform
providers to embed the registration function into desktop and server software
applications. The Company has introduced a portfolio of Internet-based products
and services and intends to develop additional Internet-based products and
services, which may include directory and other Internet identity services, that
allow the Company to build upon its position in the registration process and
make use of the customer data that it collects.
The Company also provides enterprise network consulting services to large
companies that desire to establish or enhance their Internet presence or
re-engineer legacy network infrastructures to accommodate the integration of
both Internet connectivity and Intranet network technology into their
information technology base. The Company's enterprise network consulting
services have evolved from the Company's Internet pioneering efforts that date
back to 1979 and presently include network engineering, network and systems
security and network management.
THE NSI STRATEGY
The Company's goal is to maintain its position as the leader in Internet domain
name registration services and to build on this position to be a leading
provider of enterprise network consulting services and Internet-based products
and services. The Company's strategy includes the following key elements:
Maintain Position as the Leading Provider of Registration Services
Worldwide. The Company intends to maintain and enhance its position as the
leader in domain name registration by promoting the .com TLD as the accepted and
preferred Internet address for commercial presence on the Internet worldwide.
The Company has developed and intends to continue to develop and implement
standards, policies and functions designed to enhance the ease, speed and
security of the registration process by adding new capabilities to facilitate
the registration process and providing quality customer service and support.
Establish and Expand Marketing and Other Strategic Relationships. The Company
has established and intends to continue to expand relationships with companies
worldwide to promote its services, penetrate new customer bases and integrate
third party products and services. In December 1998, the Company entered into
two separate global marketing agreements with Yahoo! Inc. ("Yahoo!") and
Netscape Communications Corporation ("Netscape") under which the Company
purchased advertising to broadly promote its domain name registration services
and other services on certain Yahoo! and Netscape Web sites during 1999. Under
the agreements with
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Yahoo! and Netscape, the Company will expand its promotions for domain name
registration services in the .com, .org and .net TLDs globally and expects to
extend the reach of the Network Solutions brand to the global Internet
community.
Maintain Active Role in Establishment of Future Internet Standards and
Policies. The Company intends to continue to cooperate with organizations that
affect Internet standards and policies, including the not-for-profit corporation
provided for in the Statement of Policy. The Company intends to maintain an
active role in the global Internet community to ensure that the Internet
continues to flourish and that the Company remains at the forefront of
continuing change in the Internet. The Company believes that its expertise in
the Internet and its participation in the Internet community should enable it to
facilitate the proliferation of Internet usage worldwide and provide it with a
competitive advantage in the development of its service offerings.
Provide Complementary Internet-Based Products and Services. In 1998, the
Company introduced a portfolio of Internet-based products and services which
builds upon the Company's position in the registration process. Those products
and services include: RegistrationPlus, a Web-based domain name registration
process that allows customers to register or reserve a domain name on-line and
in real time; dot com mail, a portable, personalized e-mail service to help
small businesses maximize their brand names on the Internet; dot com toolkit, a
small business resource center that provides access to tools and services for
building an Internet storefront and conducting business on the Internet; and dot
com promotions, a service that provides customers with a broad range of services
that enable Web site owners to get listed on Internet search engines and to
promote their Web sites. The Company intends to continue to develop additional
Internet-based products and services which could include directory and other
Internet identity services to be developed by the Company and the distribution
of third party product and service offerings through on-line enrollment for such
products and services embedded within the Company's domain name registration
home page.
Build on Technology Leadership. The Company has assembled management and
engineering teams with extensive experience in the information technology
industry and specifically the Internet and intends to build on this experience
in the development of enabling technologies to support the continued enhancement
of infrastructure flexibility and scalability and customer ease of use. The
Company is committed to continuing to integrate state-of-the-art technology in
its service offerings and believes that service quality and reliability will be
a significant differentiating factor in its market.
Build and Strengthen Enterprise Network Consulting Services Business. The
Company intends to further develop its existing in-depth knowledge of and
experience in Internet technologies to develop a leading enterprise network
consulting services business. The Company believes that delivering dependable,
high-quality enterprise network solutions is critical to strengthening its
relationships with existing clients, gaining repeat business and generating new
business from referrals. Further, the Company intends to capitalize on its
expanded regional presence, its relationships with key product and services
vendors and its relationship with SAIC as additional sources of new business.
Pursue Strategic Acquisitions and Investments. The Company intends to continue
to identify and, where appropriate, pursue additional strategic acquisition and
investment opportunities which would provide the Company's customers with
products, services or technologies complementary to the Company's current
services, including, among others, those which enhance Internet identity and
communications and e-commerce. For example, during 1998, the Company acquired
Internet Domain Names, Inc. ("idNames") to expand the Company's registration
services to the country code TLDs and recently participated as the principal
investor in a Series B Preferred Stock financing in Centraal Corporation
("Centraal") which offers a service to drive traffic and to navigate to specific
Web site pages and is complementary to the Company's registration services.
NSI SERVICES
Registration Services
Registration services are the Company's core business. The Company registers
second level domain names in the .com, .org, .net and .edu TLDs, enabling
registrants to establish a unique identity on the Internet. The Company's
customers apply to register second level domain names either directly through
the Company's Web
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sites and e-mail-based registration templates or indirectly through Internet
access providers and others. Currently, the Company charges a two-year services
fee of $70 for initial registrations and $35 per year for re-registrations for
the Company's basic registration service. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Through its InterNIC web site, Network Solutions provides an e-mail based
registration template application process for the registration of second level
domain names. The Company's customers submit registration applications to the
Company via e-mail through the Internet. The Company processes the application
and either registers the requested domain name in the requested TLD or rejects
the application. Upon registration or rejection, the Company notifies the
customer via e-mail. For domain names which are registered, the Company invoices
the customers and permits them to pay the registration services fee after the
domain name is registered. The Company performs internally (i.e., it does not
outsource) its core proprietary automated registration process and associated
security functions.
On December 1, 1997, Network Solutions announced its new WorldNIC Services
brand, a suite of enhanced domain name registration services geared toward small
businesses building their online identities. On January 14, 1998, Network
Solutions introduced RegistrationPlus, the first service offering under the
WorldNIC Services brand. The RegistrationPlus service offering is a Web-based
transaction process that is intended to make the registration process easier,
more streamlined and more accessible. The RegistrationPlus five step
registration process minimizes technical and procedural barriers for new users
seeking to gain an entry point on the Internet. RegistrationPlus allows users to
register or reserve a second level domain name in real-time whether or not they
have a computer, either through the Company's Web site or by calling a toll-free
number. As part of RegistrationPlus, the Company offers the option of reserving
a name and activating it later by providing domain name record hosting.
RegistrationPlus customers currently pay a two-year service fee of $80 for the
Company's enhanced registration services or, if applicable, a two-year service
fee of $119 for reservation of a domain name. The Company believes that ease of
use is becoming increasingly important as the Internet is being more widely
adopted by users who are less technically sophisticated. The RegistrationPlus
service also simplifies the user payment process by validating and accepting
credit card payments in real-time, including a customer confirmation number, via
the Company's secure Web-based online payment system.
The Company, through its acquisition of idNames, expanded its registration
services to the country code TLDs. Through this acquisition, the Company offers
search and registration services for domain names in country code TLDs around
the world. With the idNames services, the Company makes it easier for companies
around the world to build their brands both globally and in local markets.
The Company has been registering domain names pursuant to the Cooperative
Agreement since 1993 and has made significant investments in its registration
services business. The Company believes that it currently possesses the
following competitive advantages in the domain name registration business:
- Large, Established Customer Base. The Company maintains over 3,000,000
individual contracts with customers for unique second level domain name
net registrations. As a result, the Company believes it has the
infrastructure required to realize significant scale efficiencies
throughout the registration process and believes that it has established
brand recognition in the Internet community. As customers invest in their
Web sites for advertising, branding and other business-critical
activities the Company believes that they will be inclined to re-register
at the end of the initial two-year subscription period.
- Global recognition of the .com TLD. The Company believes that the .com
TLD, for which the Company is currently the exclusive registry and
registrar, has perceived value on a global basis to commercial and other
users on the Internet. The Company believes that there is an emerging
trend among commercial and other entities outside of the United States to
establish an Internet presence within the .com TLD, rather than within or
in addition to a country code TLD.
- Strategic Agreements with Internet Access Providers. To strengthen the
Company's distribution channels, the Company has entered into agreements
to provide enhanced services to certain Internet access providers who
register a significant number of second-level domain names with the
Company on behalf of such providers' customers.
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- Customer Support Services. The Company believes that high quality
customer support is vital to client satisfaction. The Company has
improved customer service and account handling and expanded its capacity
to service larger volumes of registrants. Customer access to the
Company's customer support services includes a 24 hour 7 day a week
telephone help desk, an e-mail processing facility for account
information updates and other services.
- Technical Infrastructure Support. The Company is investing significant
technical and financial resources to improve and expand its domain name
registration business. A substantial portion of the Company's software is
custom-developed and proprietary. The Company's internally developed and
proprietary software includes an automated registration capability that
currently processes in excess of 90% of all new registration requests
without human intervention. The Company believes that significant
engineering talent is required to create a registration services
capability and that knowledge of DNS structures, Internet security, data
routing and routing protocols is critical to creating and enhancing
registration service capabilities. The Company believes that engineers
skilled in protocol development are difficult to identify, hire and
retain and thus its staff of engineers represents a valuable resource.
See "-- Operations" and "Risk Factors -- Dependence on Key Personnel."
- Domain Name Dispute Policy Administration. The Company's established
domain name dispute policy is an integral part of the maintenance and
administration of the Company's domain name registration business. This
policy seeks to take a neutral position with regard to domain name
disputes between trademark owners and domain name holders and is designed
to address claims that a domain name registered by the Company infringes
a third party's federal trademark. The Company expends considerable
management and legal resources in the development, refinement and
administration of its domain name dispute policy. See "-- Legal
Proceedings."
The Company believes that these competitive advantages are significant and that
existing and additional competing registries and registrars will need similar
capabilities.
In addition, the Company is continuing to expand its domain name registration
business and to continue to improve the registration process by:
- Promoting the Use of the .com TLD Worldwide. The Company believes that
it can continue to grow its Internet registration business by promoting
global recognition of the .com TLD. The Company has begun and intends to
continue to promote the use of the .com TLD and to establish .com as the
most recognized domain for individuals and organizations conducting
business on the Internet.
- Expanding Relationships With Internet Access Providers. Through its
Alliance Program, which had four members as of December 28, 1998, and
other programs, the Company has expanded, and intends to continue to
expand, its relationships with certain Internet access providers that are
participants in its Premier Program. The Alliance Program is designed to
enable the Company and its participating companies to provide reciprocal
links and referrals to the other party's distribution channels for each
other's complementary services. The Company, through its recently
launched Affiliate Program, is developing and expanding its relationships
with some of the smaller Internet access providers by providing a direct
link to its RegistrationPlus service and by providing such companies
additional revenues through the payment of referral fees for domain name
registrations that the Company receives through the program. Through
these relationships, the Company believes it will be able to deliver
enhanced registration services and identify additional opportunities to
expand its registration services business.
- Establishing and Expanding Marketing and Other Strategic
Relationships. The Company has established and intends to continue to
expand relationships with companies worldwide to promote its services,
penetrate new customer bases and integrate third party products and
services.
- Stimulating Demand for Domain Name Registrations in Targeted Customer
Segments. The Company is expanding and seeking to continue to expand the
number of registrations in targeted customer segments both domestically
and internationally. The Company believes that customer segments such as
small business users, individuals, holders of trademarks, service marks
and product marks and event sponsors
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will continue to offer significant potential for growth if the Company
continues to actively market its portfolio of registration services to
these segments.
- Facilitating Ease of Use and Access to Registration Services. The
Company introduced its RegistrationPlus service offering and has
undertaken a number of additional initiatives that are intended to make
the registration process easier, more streamlined and more accessible.
The Company believes that ease of use is becoming increasingly important
as the Internet is being more widely adopted by users who are less
technically sophisticated. The RegistrationPlus service also simplifies
the user payment process by validating and accepting credit card payments
in real-time, including a customer confirmation number, via the Company's
secure Internet based on-line payment system.
- Establishing International Alliances. The Company established a
strategic alliance with China's Internet Registry, Computer Network
Information Center, Chinese Academy of Sciences ("CNIC"), launched a
Japanese version of its RegistrationPlus service through an agreement
with Japan's ASCII Corporation ("ASCII"), and launched an international
version of its Premier Program to build a foundation for its
international operations. Through these relationships the Company is
offering "ease of use" solutions for entities worldwide for registration
in the .com, .org and .net TLDs. The Company established a multilingual
call center capability to further assist with international registrations
through its internal call center as well as through its outsourced call
center.
- Working with Major Platform Providers to Embed the Registration
Function. The Company is seeking to expand its domain name registration
business through agreements with major platform providers (i.e.,
operating system manufacturers or hardware vendors who provide bundled
operating system software) to embed an automated registration function
through a "point-and-click" interface directly into the installation
procedures. For example, in October 1998, the Company entered into an
agreement with Encompass, Inc. for the development and marketing of a
user interface to personal computer manufacturers that will provide
personal computer buyers with access to the Company's domain name
registration services upon initialization of the computer.
Internet-Based Products and Services
The Company has introduced a portfolio of Internet-based products and services
and intends to develop additional Internet-based products and services, which
may include directory and other Internet identity services, that allows the
Company to build upon its position in the registration process and make use of
the customer data that it collects. In 1998, the Company introduced the
following portfolio of Internet-based products and services:
- dot com mail service. In August 1998, the Company launched dot com mail,
a portable, personalized e-mail service, to help small businesses
maximize their brand names on the Internet. The dot com mail service is
hosted by the Company's outsourcing vendor, Critical Path, Inc., and
enables a business to use its unique domain name for its e-mail address
instead of the domain name of its Internet access provider. Currently,
the dot com mail service is available only to customers who reserve a
domain name which is hosted by the Company.
- dot com toolkit resource center. In September 1998, the Company launched
the dot com toolkit, a small business resource center that provides
access to tools and services for setting up a Web site and conducting
business on the Internet. The dot com toolkit resource center is
available on the Company's Web site and offers tools and services
categorized into four areas: starting a business on-line; setting up an
Internet presence; managing a business online; and promoting a business
online. Within each category, the resource center visitor has the ability
to purchase services from a select group of companies that have
contracted with the Company to be included in the resource center, such
as MindSpring Enterprises, Inc., EarthLink Network, Inc., Sage Networks
Inc. and Value Web, members of the Company's Alliance Program, and
others, such as Business Filings, Inc., infoUSA, Inc., LinkExchange,
Inc., Thomson & Thomson, Inc., VeriSign, Inc. and AtWeb, Inc. The Company
receives referral fees from certain purchases made by the Company's
customers from links in the dot com toolkit resource center.
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- dot com promotions service. In August 1998, the Company launched its dot
com promotions service through a joint marketing agreement with
LinkExchange, Inc., a provider of tools and services for Web site owners.
Through dot com promotions, a domain name registrant can link to and
subscribe to various LinkExchange services which include (i) registering
a Web site with over 400 Internet search engines by subscribing to the
Submit It! Service; (ii) monitoring its rank in the search engines
through the PositionAgent service; (iii) participating in a competitive
advertising network that allows users to promote their Web sites and
track success through the Banner Network service; and (iv) buying
targeted advertising space on affordable Web sites through the
LinkExchange Express service. The Company receives referral fees from
certain purchases made by the Company's customers from links from the dot
com promotions service.
See "Risk Factors -- Technological Change and Additional Technology, Products
and Services."
Enterprise Network Consulting Services
The Company delivers enterprise network consulting services to some of the
world's leading businesses that are utilizing Internet technologies for their
internal enterprise networks (i.e., Intranets). The Company's engineers have
extensive knowledge and experience in network engineering, network security and
network management. The engineers have a broad base of expertise in such areas
as local area network ("LAN")/wide area network ("WAN") protocols; routing,
switching and remote access technology; virtual private networks; firewalls; IP
addressing; domain name architecture; and UNIX, NT and other network operating
systems. By leveraging this knowledge and experience, the Company is able to
provide solutions to clients' complex network needs.
- Network Engineering. The Company offers a line of services to help
develop, optimize, and integrate enterprise network solutions in a manner
tailored to individual clients' needs. All of these services are focused
on building a strong network foundation for the enterprise. This includes
service level analysis of IP address space engineering; DNS and dynamic
host configuration protocol ("DHCP") architecture engineering; routing
and switching architecture engineering; Extranet architecture
engineering; virtual private network architecture engineering; and
electronic messaging and architecture engineering.
- Network and System Security. The Company provides a range of security
consulting services to allow clients to protect the integrity of their
data and systems. The enterprise network's security architecture
establishes the access and protection controls that will permit internal
and remote users to access computer systems, databases and applications
on the network, while protecting against unauthorized or inadvertent
access to information or misuse of systems services. The Company's
methods to secure the backbone, LAN-to-WAN access, remote access and
facilities can supplement or replace existing systems security measures.
The Company maintains resident expertise in emerging network protocols,
encryption and key technologies, firewalls, packet filters, proxy
servers, secure remote access strategies and secure Intranet servers.
- Network Management. The Company provides a range of services to allow
clients to control their mission-critical network performance. Such
services include developing network capacity plans and performance
management tools, conducting baseline assessments, performing network
optimization and tuning, integrating new technology, and implementing
complex network management centers. The Company also provides planning
and analysis to implement disaster recovery and contingencies for network
system failures.
The Company sells and markets its enterprise network consulting services
primarily to large companies that utilize their enterprise networks for a
strategic advantage. Through December 28, 1998, the Company had provided
enterprise network consulting services to more than 20 individual companies
during calendar year 1998. The Company's enterprise network consulting services
are generally provided to clients on a time and expense basis. The Company also
performs a limited number of engagements on a fixed-price basis. The Company is
continuing to enhance its new business acquisition capabilities by expanding its
sales and marketing team with senior account executives assigned to key clients
in regional territories.
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The majority of the Company's enterprise network consulting services are
provided to customers in the financial services industry. Bank America (formerly
NationsBanc) is currently the Company's largest consulting services client,
accounting for 49% of the Company's enterprise network consulting services
business net revenue and 3.7% of the Company's total net revenue in the nine
months ended September 30, 1998. NationsBanc originally contracted with the
Company in 1993 and the Company currently provides network design and
engineering services as well as a variety of project specific services under the
contract.
MARKETING AND DISTRIBUTION RELATIONSHIPS
The Company has established relationships with many companies and intends to
continue to establish and expand relationships with companies worldwide to
promote its services, penetrate new customer bases and integrate third party
products and services.
Strategic Programs with Internet Access Providers and Others
The Company has entered into agreements to provide enhanced services to certain
Internet access providers, including ISPs, both in the United States and in
other countries, who register a significant number of second-level domain names
with the Company on behalf of their customers.
- Premier Program. The Premier Domain Registration Service Program
("Premier Program") provides such Internet access providers with
personalized account management, customized billing and financial
reports, private e-mail boxes and other customized features. As of
December 28, 1998, the Company had entered into agreements with 140
companies under the Premier Program which include agreements with 65
companies located in the United States and 75 companies located in
Canada, Australia, New Zealand and the European, South American and
Asia-Pacific regions, including: America Online, Incorporated (PrimeHost
Division), Demon Internet Ltd., EarthLink Network, Inc., Hong Kong
Telecom, MCI, Inc., MindSpring Enterprises, Inc., Singapore
Telecommunications, Ltd. and Verio Inc. ("Verio"). In addition, beginning
with the 1998 Christmas holiday season, the Company and Verio launched a
bundled service offering which includes the Company's registration
services and Verio's Web hosting services. The bundled service offering,
the "dot com family special holiday offer," is the first bundled offering
in which the Company has participated and is targeted to consumers
seeking an easy, innovative way to communicate via the Internet.
- Alliance Program. The Company is expanding upon its current
relationships with certain Internet access providers that have agreed to
participate in the Premier Program by including them in the Alliance
Program. The Alliance Program is available to members of the Premier
Program who have participated in the program for a minimum of one year
and who have registered a significant number of second-level domain names
with the Company. The Alliance Program is designed to enable the Company
and its participating companies to provide reciprocal links and referrals
to the other party's distribution channels for each other's complementary
services. Through these relationships with EarthLink, MindSpring, Sage
Networks and ValueWeb, the Company seeks to deliver its enhanced
registration services and identify additional opportunities to expand its
registration services business.
- Affiliate Program. In September 1998, the Company launched its new
Affiliate Program. This program provides an easy way for small Internet
access providers and other companies and individuals to establish a link
to the Company's RegistrationPlus domain name registration process,
enabling them to earn additional revenue and add value for their Web site
visitors. The Affiliate Program is designed for participation by the
thousands of Internet access providers, Web hosting companies, and Web
site design companies that currently register their customers' domain
names through the Company, as well as other companies and individuals who
could benefit from providing this service to their customers. The program
offers Affiliates easy sign-up to the program, real-time domain name
lookup and registration for their customers, complete management reports
and referral fees for domain name registration through the Web site links
established under the program. As of December 28, 1998, approximately
1,900 Affiliates were part of the program.
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Distribution Channel Marketing Agreements
The Company has developed co-marketing programs with channel partners designed
to take advantage of their complementary marketing capabilities.
Domestic Agreements
In 1998, the Company entered into strategic agreements with Dun & Bradstreet
Corporation ("D&B"), Inc. Online ("Inc."), infoUSA, Inc. ("infoUSA") and
Centraal for the marketing and development of products and services to meet the
future needs of the business marketplace.
- The agreement with D&B makes it possible for businesses to register an
Internet domain name and apply for a D&B D-U-N-S Number from either the
D&B Web site or the Company's WorldNIC Services Web site. As part of the
agreement, the Company and D&B placed a hyperlink on each other's
Internet home page that will allow businesses and individuals registering
for a domain name to complete that task and then apply for their D&B
D-U-N-S Number or vice versa.
- The Company's agreement with Inc. is intended to help small businesses
establish a unique identity and grow a brand on the Internet. The Company
is sponsoring Inc.'s "Guide to the Internet" Web site. In the "Guide to
the Internet," Inc. helps small-to-midsize companies navigate through the
information and decisions needed to choose systems, tie them together,
get employees to embrace them and apply them to strategic goals. From
Inc.'s Web site, small businesses and individuals can hyperlink to the
Company's WorldNIC Services Web site where they can register or reserve a
domain name within minutes using the Company's RegistrationPlus services.
- Under the Company's agreement with infoUSA, the Company and infoUSA are
providing reciprocal links and referrals to each other's products and
services so that the Company's customers can purchase infoUSA's sales
leads and mailing lists services and receive instant information on any
business for marketing or credit purposes. InfoUSA's customers will be
able to register a domain name through the Company's RegistrationPlus
service from the infoUSA home page or purchase any other service offered
through the Company's Web site.
- Under the Company's agreement with Centraal, the Company will market,
sell and service Centraal's "RealName" subscription orders to domain name
holders, directly and through the Company's channels worldwide. The
RealName service is a Web navigation service that offers companies and
brand and trademark owners a way to enhance their identities on the
Internet and is complementary to the Company's domain name registration
services. As part of the agreement, Centraal will place a hyperlink on
its Web site that will allow Centraal customers to register a domain name
with the Company.
International Agreements
The Company has also established additional distribution channels in Beijing,
China through the CNIC, in Japan through ASCII and in Hong Kong through China
Internet Corporation ("CIC").
- Under the CNIC agreement, CNIC is promoting in China the benefit of
registering domain names in the Company's .com, .org and .net TLDs
through a joint marketing campaign with the Company in Chinese
publications, Web sites and other media, and by providing seminars in
China on registering domain names with the Company. Under the agreement,
the Company is promoting domain name registration in .cn, the China
country code top-level domain, under which CNIC is the registry.
- In October 1998, the Company launched a Japanese language version of the
Company's RegistrationPlus service, through a strategic agreement with
ASCII. Through this relationship, the Company will make its
RegistrationPlus service available to Japanese Internet users in the
Japanese language, with a Japanese call center customer support help desk
and through an advertising and marketing campaign in Japanese
publications, Japanese Web sites and through other media.
- Under the agreement with CIC, CIC is providing a link to the Company's
RegistrationPlus domain name registration process as well as actively
promoting domain name registrations in the .com, .org and .net
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TLDs with the Company through educational seminars, listings in Internet
directories, and print and media campaigns in Hong Kong, Taiwan and
China.
The Company intends to continue to establish additional distribution alliances
for its domain name registration services in other selected international
countries.
Agreements with Major Platform Providers to Provide the Registration Function
The Company intends to seek to expand its registration services business through
agreements with major platform providers (i.e., operating system manufacturers
or hardware vendors who provide bundled operating system software) to provide an
automated registration function through a "point-and-click" interface directly
into the software installation procedures. In October 1998, the Company entered
into an agreement with Encompass, Inc. for the development and marketing of a
user interface to personal computer manufacturers that will provide personal
computer buyers with access to the Company's domain name registration services
upon initialization of the computer.
Advertising
In December 1997, the Company launched its first significant marketing campaign,
a targeted print and on-line advertising campaign for its registration services.
This campaign was focused on small businesses and their need to establish their
own unique identity and to grow a brand on the Internet. The Company is
currently developing additional campaigns in this and other market segments. The
Company also has launched several major multi-piece direct mail, print and Web
site banner advertising campaigns announcing its new products and services, such
as RegistrationPlus and dot com mail. In addition, the Company has run two
national cable television ad campaigns for corporate branding to reinforce the
Company's image as a trusted and reliable source of Web-based products and
services.
In December 1998, the Company entered into two separate global marketing
agreements with Yahoo! and Netscape under which the Company purchased
advertising to broadly promote its domain name registration services and other
services on certain Yahoo! and Netscape Web sites during 1999. Under the
agreements with Yahoo! and Netscape, the Company will expand its promotions for
domain name registration services in the .com, .org and .net TLDs globally and
expects to extend the reach of the Network Solutions brand to the global
Internet community.
Direct Sales
The Company's services are marketed and distributed directly through its
Internet home pages. In addition, the Company is continuing to develop its
product management, marketing and sales force to target channel and distribution
partners to offer the Company's registration services electronically through
existing Web sites and through other direct channels, such as direct mail and
telemarketing. The Company is seeking to expand the number of registrations in
targeted customer segments both domestically and internationally. The Company is
targeting customer segments such as small business users, individuals, holders
of trademarks, service marks and product marks and event sponsors.
OPERATIONS
To register a domain name within the .com, .org, .net and .edu TLDs, the
Company's customer or the customer's Internet access provider on behalf of the
customer (i) completes a registration application which is submitted to the
Company via e-mail or (ii) submits a Web-based registration application through
the Company's WorldNIC Services Web site. Once the customer is registered, the
domain name is included in the TLD zone file that is updated nightly.
In September 1998, the Company launched a new top-level domain name server in
London to enhance the availability of .com, .org and .net domain name lookups.
The addition of this server in London will aid European customers by shortening
the electronic distance between them and their final Internet destination. The
worldwide DNS consists of a number of computers worldwide that translate all
.com, .org and .net domain names
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into the appropriate computer numerical sequence (i.e. IP number), which
uniquely identifies the target computer on the Internet. The addition of the new
name server in London is a technical and operational recognition of the growth
of .com, .org and .net usage in Europe and will benefit all Internet users who
access .com, .org and .net domain names. The Company intends to add additional
domain name servers in strategic locations throughout the world to enhance the
availability of .com, .org and .net lookups and to better service its customers.
Nine T1 and two T3 (high-speed data communications line) links connected to
eight ISPs support the Company's registration services. By connecting to eight
different ISPs, the Company seeks redundancy to maintain constant access to the
Internet should any given ISP or link develop complications. The Company
believes its current network is adequate and that any additional capacity will
be available in the future as needed.
Substantial portions of the Company's internally developed registration software
have been custom-developed and are proprietary. The Company's internally
developed registration software includes an automated registration capability
that currently processes in excess of 90% of all new registration requests
without human intervention.
The Company has an operating facility to support its current registration
operations and customer support needs as well as to provide expansion capability
for future business. The facility includes a call center, a training center
equipped for both computer and telephone training and a new computer room with
expanded systems and telecommunications services. The Company contracts for a
back-up facility to a third party's secure facility in California to provide
redundancy and enhanced reliability for its Internet root zone administration.
ONGOING PRIVATIZATION OF INTERNET ADMINISTRATION
The Internet is not bound by geography and neither the U.S. Government nor any
organization or entity currently has formal authority over all aspects of the
Internet. There is, however, a requirement for central policy decisions
surrounding the coordination of the administrative services required for the
registration, allocation and use of TLDs and IP numbers, and for the effective
global operation of the Internet. This role has been generally filled through
mutual cooperation and interrelated informal agreements, historical leadership
from an unincorporated entity called IANA and involvement from the U.S.
Government. With the onset of increased commercial growth of the Internet, the
U.S. Government initiated an activity directed at increased privatization of the
policy making and central administration of the Internet. Without authoritative
policy making it has become more difficult to achieve consensus in the
historical manner. Failure to achieve consensus among the various groups who now
informally administer the Internet could disrupt Internet operations or delay
infrastructure improvements or changes in operations needed to maintain and
expand the Internet.
Within the U.S. Government, leadership for the continued privatization of
Internet administration is currently provided by the NTIA. After a series of
draft proposals and public comment periods, on June 10, 1998, the NTIA published
in the Federal Register a plan referred to as the Statement of Policy or "White
Paper," calling for the formation of a not-for-profit corporation to assume
responsibilities relating to the DNS, but not to perform actual registration of
domain names either as a registrar or registry. The Statement of Policy invites
private sector Internet stakeholders to work together to form a new private,
not-for-profit corporation to oversee policy for the Internet name and address
system and provides that:
- the not-for-profit corporation should be headquartered and incorporated
in the United States and have a board of directors from around the world;
- in making a decision to devolve U.S. government oversight of the DNS to
the not-for-profit corporation, the U.S. government will be guided by,
and consider the entity's commitment to, the principles of stability,
competition, private bottom-up coordination and representation;
- to the extent that the not-for-profit corporation is established and
operationally stable, transition to the private sector of DNS
administration will be phased in by September 30, 2000; and
- the not-for-profit corporation ultimately should have the authority to:
-- set policy for and direct allocation of IP number blocks to regional
Internet number registries;
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-- oversee operation of the authoritative Internet root server system;
-- oversee policy for determining the circumstances under which any new
TLDs are added to the root system; and
-- coordinate the assignment of other Internet technical parameters as
needed to maintain universal connectivity on the Internet.
The Statement of Policy distinguishes between the registry and registrar
functions of the DNS, both of which functions are currently performed
exclusively by the Company in the .com, .org, .net and .edu TLDs, and calls for
increased competition. The registry maintains the database of information that
allows the Internet infrastructure to function securely and reliably. The
registry also is responsible for maintaining a TLD's zone files, which contain
the name and corresponding IP number of each second level domain name in that
TLD. The current technical structure of the Internet will permit only one
registry for each TLD. A registrar acts as the interface between the registry
and the end-user domain name holders. Registrars submit to the registry
information and other data for each of their customers that has a second level
domain name in that TLD. A registrar can provide value-added products and
services in addition to its basic registration service. Numerous registrars will
be able to operate within each TLD.
Prior to the publication of the Statement of Policy, several groups circulated
proposals on how the DNS should be administered. Following the publication of
the Statement of Policy, the International Forum for the White Paper (the
"IFWP") was established in an attempt to bring some order to the process. The
IFWP was a forum for discussion among Internet stakeholders including Internet
access providers, content developers, trademark owners, networkers,
intergovernmental groups, policy experts, end-users and others. The purpose of
the IFWP was to coordinate international meetings for stakeholders to discuss
the transition of DNS administration to the private sector as outlined in the
Statement of Policy. The IFWP has held four meetings, and the Company has been
an active participant in each.
As part of the process initiated by the Statement of Policy, several proposals
were put forward to the NTIA on the establishment and governance of the
not-for-profit corporation. The proposals differed in several respects
including, among others, their approaches to the following issues: place and
form of incorporation; method for selection of the interim and permanent Board
of Directors; who should be eligible to become a member and on what questions
should the members vote; what authority should be granted to the Board of
Directors and what authority should be reserved to the members, if any; and
whether there should be separate supporting organizations and, if so, what
authority these organizations should have. A newly-formed U.S. based private
not-for-profit corporation with an international board of directors, denoted the
Internet Corporation for Assigned Names and Numbers, submitted various proposals
which formed the basis of discussion at a number of public and private meetings.
As a result of these and other meetings and private negotiations, the process
initiated by the Statement of Policy has resulted in the entry by the U.S.
Government into a Memorandum of Understanding with ICANN. Under the MOU, the
parties will jointly design, develop and test the mechanisms, methods and
procedures that should be in place and the steps necessary to transition
management responsibility for certain DNS functions to a private-sector
not-for-profit entity. The MOU provides that once testing is successfully
completed, it is contemplated that management of certain DNS functions will be
transitioned to the mechanisms, methods and procedures designed and developed in
this joint project.
The NTIA plan calls for a phased transition of its responsibilities for the DNS
to the not-for-profit corporation over the period ending on September 30, 2000.
Despite the significant efforts undertaken to date, it is impossible to predict
at this time whether or when the process initiated by the Statement of Policy
will result in the transition of specific DNS responsibilities and, if it does,
the effect on the Company of such transition.
See "Risk Factors -- Ongoing Privatization of Internet Administration."
STATUS OF COOPERATIVE AGREEMENT
On January 1, 1993, the Company initiated phase-in of a Cooperative Agreement
with the NSF. The three-month phase-in was followed by a five-year operations
period (commencing April 1, 1993 and ending March 31, 1998) and a six-month
flexibility period through September 1998. Effective in September 1998, the
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responsibility for the Cooperative Agreement was transferred to the NTIA. In
October 1998, the Cooperative Agreement was amended to extend the flexibility
period through September 30, 2000. As the U.S. Government transitions certain
responsibilities for the DNS to the not-for-profit corporation, corresponding
obligations under the Cooperative Agreement may be terminated and, as
appropriate, covered in a contract between the not-for-profit corporation and
the Company.
In the October 1998 Amendment, the Company and the NTIA agreed to plan for the
transition to a shared registration system in a phased approach. The following
summarizes certain terms of the October 1998 Amendment:
- The Company will develop a protocol and associated software to support a
shared registration system which will permit multiple registrars to
provide registration services within the TLDs for which the Company now
acts as exclusive registry and registrar. Implementation of the shared
registration system will reflect an agreed-upon time line, which assumes
that the U.S. Government does not request changes in the specifications,
including the following dates:
-- By March 31, 1999, the Company will initially deploy the shared
registration system by establishing a test bed supporting actual
registrations in .com, .org and .net by five registrars accredited by
the not-for-profit corporation;
-- By June 1, 1999, the shared registration system will be deployed by
the Company and available to support multiple licensed and accredited
registrars within the TLDs for which the Company acts as registry;
-- By October 1, 1999, the Company will complete reengineering of its
registry/registrar interface and back end systems so as to assure
that the Company, acting as registry, will give all licensed and
accredited registrars (including the Company, acting as registrar)
equivalent access to registry services through the shared
registration system;
- The Company and other accredited entities will function as domain name
registrars through the shared registration system. The shared
registration system will, among other things, permit second level domain
name holders to change registrars within the same registry without
changing domain names;
- The Company will also continue in its role as the registry of .com, .org
and .net TLDs. Commencing upon the initial deployment of the shared
registration system, the Company's price for registry services in the
TLDs for which it now acts as registry will be no more than a dollar
amount per registration, per year, agreed upon with the U.S. Government
and reflecting the Company's costs and a reasonable return on its
investment;
- Commencing upon the initial deployment of the shared registration system,
and for 18 months thereafter, the Company will permit any customer with
whom it has an exclusive contract as registrar to obtain registration
services from other registrars;
- From the date of the October 1998 Amendment and for a period of 18 months
after initial deployment of the shared registration system, the Company
may not enter into any agreement that limits a party's ability to serve
as a registrar or operate a registry;
- The Company agreed to submit to the U.S. Government an electronic copy of
all software and data, and a copy of documentation therefor, generated
under the Cooperative Agreement through September 30, 1998. The U.S.
Government agreed to take appropriate measures to protect the security
and confidentiality of such data, software and documentation;
- As provided in the Statement of Policy, the U.S. Government will effect
the transition of certain DNS responsibilities through an agreement with
the not-for-profit corporation that will (i) require the not-for-profit
corporation to exercise the responsibilities delineated in the Statement
of Policy in a transparent, non-arbitrary, and reasonable manner, (ii)
prohibit the not-for-profit corporation from acting unjustifiably and
arbitrarily to injure particular persons or entities or particular
categories of persons or entities, and (iii) require the not-for-profit
corporation to subject registrars to consistent requirements designed to
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promote a stable and robustly competitive DNS. Following completion of
the U.S. Government's agreement with the not-for-profit corporation, the
Company will negotiate a contractual relationship with the not-for-profit
corporation; and
- The Company has agreed to continue to function as the administrator for
Root Server A and as a root zone administrator for Root Server J until
such time as the U.S. Government instructs the Company to transfer either
or both of those functions to the not-for-profit corporation or a
specific alternate entity.
See "Risk Factors -- Status of Cooperative Agreement."
COMPETITION
A principal objective expressed in the Statement of Policy is the introduction
of competition and global participation in the management of Internet names and
addresses including, among other things, competition among registrars within a
single TLD and competition among existing and new TLDs. This objective is
embodied, in part, in the October 1998 Amendment. Many aspects of how
competition will work in the DNS, however, remain unsettled and could be
impacted by, among other things, actions of the not-for-profit corporation. The
Company currently faces competition in the domain name registration business
from registries for country code TLDs, third level domain name providers such as
Internet access providers and registrars and registries of TLDs other than those
TLDs currently being administered by the Company. A number of entities have
already begun to offer competing registration services using other TLDs.
Future competition with the Company as a registry or registrar could come from
many different companies, including, but not limited to, domain name
registration resellers, Internet access providers, major telecommunications
firms and cable companies. Such 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. Other companies with some or all of these capabilities may also
enter the registration business. The Company's position as the leading registry
and registrar of domain names could be materially and adversely affected by the
emergence of any of the foregoing competitors and potential competitors, many of
which have longer operating histories and significantly greater name recognition
and greater financial, technical, marketing, distribution and other resources
than the Company. In addition, the Company's revenue and fees could be impacted
by increased competition, pricing pressures or a modification of billing
practices. For example, other entities may bundle domain name registrations with
other products or services. The Company believes that it is well positioned to
succeed in a more competitive environment. However, the introduction of
additional competition into the domain name registration business could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors -- Increased Competition in Domain Name
Registration Business."
In developing and distributing future products and services for the
Internet-based services markets, the Company faces intense competition and
expects to have multiple competitors for each of the products or services, if
any, which it develops or sells. Many of the Company's potential competitors
have longer operating histories, greater name recognition and significantly
greater financial, technical, marketing, distribution and other resources than
the Company. Furthermore, the industry in which the Company intends to compete
is characterized by rapid changes and frequent product and service
introductions. To the extent a competitor introduces a competitive product or
service prior to introduction of the same or similar product or service by the
Company, market acceptance of the competitor's product or service may adversely
affect the Company's competitive position. See "Risk Factors -- Competition in
Internet-Based Businesses and Enterprise Network Consulting Services."
Companies with Internet expertise are current or potential competitors to the
Company's enterprise network consulting services. Such companies include systems
integrators and consulting firms, such as Andersen Consulting, IBM Global
Services and International Network Services. The Company also competes with
certain companies that have developed products that automate the management of
IP addresses and name maps throughout enterprise-wide Intranets, and with
companies with internally-developed systems integration efforts. A number of
these competitors and potential competitors have longer operating histories and
greater name recognition and significantly greater financial, technical,
marketing, distribution and other resources than the
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Company. There can be no assurance that the Company will be able to successfully
compete in the enterprise network consulting services area. Failure by the
Company to successfully compete in the enterprise network consulting services
area could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors -- Competition in
Internet-Based Businesses and Enterprise Network Consulting Services."
EMPLOYEES
As of December 31, 1998, the Company had approximately 386 full-time employees.
None of the Company's employees are covered by collective bargaining agreements.
The Company believes that its relations with its employees are good.
LEGAL PROCEEDINGS
As of December 1, 1998, the Company was a defendant in three active lawsuits
involving domain name disputes between trademark owners and domain name holders.
The Company is drawn into such disputes, in part, as a result of claims by
trademark owners that the Company is legally required, upon request by a
trademark owner, to terminate the right the Company granted to a domain name
holder to register a domain name which is alleged to be similar to the trademark
in question. The holders of the domain name registrations in dispute have, in
turn, questioned the Company's right, absent a court order, to take any action
which suspends their use of the domain names in question. Although 46 out of
approximately 4,500 of these situations have resulted in suits actually naming
the Company as a defendant, as of December 1, 1998, no adverse judgment has been
rendered and no award of damages has ever been made against the Company. The
Company believes that it has meritorious defenses and vigorously defends itself
against these claims.
On March 20, 1997, PG Media, Inc., a New York-based corporation filed a lawsuit
against the Company in the United States District Court, Southern District of
New York alleging that the Company had restricted access to the Internet by not
adding PG Media's requested TLDs to the Internet root zone system in violation
of the Sherman Act. In its complaint, PG Media, in addition to requesting
damages, asked that the Company be ordered to include reference to PG Media's
TLDs and name servers in the root zone file administered by the Company under
the Cooperative Agreement. The Company answered the complaint. In June 1997, the
Company received written direction from the NSF not to take any action which
would create additional TLDs or to add any new TLDs to the Internet root zone
until the NSF provides further guidance. On September 17, 1997, PG Media filed a
Second Amended Complaint adding the NSF as a defendant. On May 14, 1998, PG
Media served the Company with a motion for a preliminary injunction against both
defendants to compel both defendants to add PG Media's TLDs to the Internet root
zone within 30 days. In response, both defendants filed cross-motions for
summary judgment against PG Media. On July 20, 1998, a hearing on all parties'
motions occurred. The basic issue before the court is the NSF's authority to
control the Internet's root zone system. The court has taken the issue under
advisement and no date has been indicated for the issuance of a decision. With
the transition of the Cooperative Agreement from the NSF to the Department of
Commerce, the Company is still required to request written direction from the
U.S. Government before making or rejecting any modifications, additions or
deletions to the root zone file, in accordance with the October 1998 Amendment.
On October 17, 1997, a group of six plaintiffs filed the Thomas suit against the
Company and the NSF in the United States District Court, District of Columbia,
challenging the legality of fees defendants charge for the registration of
domain names on the Internet and seeking restitution of fees collected from
domain name registrants in an amount in excess of $100 million, damages, and
injunctive and other relief. Plaintiffs originally alleged violations of the
Competition in Contracting Act ("CICA"), the Sherman Act and the U.S.
Constitution. Following the filing of motions to dismiss by the defendants, the
plaintiffs filed an amended complaint on January 30, 1998, dropping the cause of
action based upon CICA, but adding alleged violations of the Administrative
Procedures Act and the Independent Offices Appropriations Act. The plaintiffs
also filed a motion for preliminary injunctive relief against the NSF concerning
the "Intellectual Infrastructure Fund." On February 2, 1998, the United States
District Court, District of Columbia, issued an order granting the plaintiffs'
motion for a preliminary injunction, enjoining the NSF from spending any of the
money collected by the Company for the Intellectual Infrastructure Fund. On
February 10, 1998, the plaintiffs filed a motion for
49
<PAGE> 54
preliminary injunction against the Company seeking several items of relief. On
February 24, 1998, the Company and the NSF filed motions to dismiss the amended
complaint. Also on February 24, the plaintiffs filed a motion for partial
summary judgment concerning the Intellectual Infrastructure Fund. The
plaintiffs' motion for preliminary injunction against the Company and partial
summary judgment against the NSF, and both motions to dismiss were heard before
the Court on March 17, 1998. On April 6, 1998, the Court issued its opinion
granting summary judgment in favor of the plaintiffs on the Intellectual
Infrastructure Fund, ruling it an "unlawful tax." The court also granted the
Company's motion to dismiss all other counts (II through X) and simultaneously
denied the plaintiffs' preliminary injunction motion against the Company. On
April 30, 1998, Congress passed H.R. 3579 which was signed into law by the
President on May 1, 1998. Section 8003 of H.R. 3579 legalized, ratified and
confirmed the entire Intellectual Infrastructure Fund and authorized and
directed the NSF to deposit the entire fund into the U.S. Treasury. On May 5,
1998, the NSF filed a motion to vacate the preliminary injunction and to dismiss
the case. On August 28, 1998, the District Court dismissed the entire case,
issuing a final judgment in the matter. In October 1998, the plaintiffs appealed
the court's dismissal of their claims, with oral argument scheduled for February
25, 1999.
On October 20, 1998, the Company was included as a defendant in a suit brought
by the Pennsylvania Attorney General's office against a domain name holder who
was alleged to have used his domain name in connection with a Web site promoting
white supremacy and threatening certain state employees. The Pennsylvania
Attorney General named all of the communications companies in any way connected
with the domain name or Web site, including Internet access providers and Web
site hosting companies. The Pennsylvania Attorney General seeks to permanently
enjoin these entities, including the Company, from providing services to this
domain name holder in the event that the domain name holder fails to comply with
the order of the court. The Company has answered the complaint and denies any
knowledge or participation in the actions of the primary defendant. No motions
are pending and the Company expects to be dismissed from the matter.
While we cannot reasonably estimate the potential impact of the claims advanced
in the PG Media, Thomas or Pennsylvania Attorney General suits, a successful
claim against us in any of these proceedings could have a material adverse
effect on our business, financial condition and results of operations.
On June 27, 1997, SAIC received a Civil Investigative Demand ("CID") from the
U.S. Department of Justice ("DOJ") issued in connection with an investigation to
determine whether there is, has been, or may be any antitrust violation under
the Sherman Act relating to Internet registration products and services. The CID
seeks documents and information from SAIC and the Company relating to their
Internet registration business. The Company cannot reasonably estimate the
potential impact of the investigation nor can it predict whether a civil action
may ultimately be filed by the DOJ or the form of relief that might be sought.
Any such relief from such a suit could have a material adverse effect on the
Company's business, financial condition and results of operations.
On August 17, 1998, the Company received notice from the Commission of the
European Communities of an investigation concerning the Company's Premier
Program agreements in Europe. The EC requested production of these agreements
and related materials for review. The Company cannot reasonably estimate the
potential impact of the investigation nor can the Company predict whether an
action will ultimately be brought by the EC or the form of relief that might be
sought. Any such relief could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company is involved in various other investigations, claims and lawsuits
arising in the normal conduct of its business, none of which, in the opinion of
the Company's management, will have a material adverse effect on its financial
position, results of operations, cash flows or its ability to conduct business.
Legal proceedings in which the Company is involved have resulted and likely will
result in, and any future legal proceedings can be expected to result in,
substantial legal and other expenses to the Company and a diversion of the
efforts of the Company's personnel.
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<PAGE> 55
MANAGEMENT
The name, age and position held with the Company by each of the executive
officers and directors of the Company as of December 31, 1998 are set forth
below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
NAME AGE POSITION
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Michael A. Daniels (1).......... 52 Chairman of the Board and Acting Chief Executive Officer
Robert J. Korzeniewski.......... 41 Chief Financial Officer and Acting Chief Operating Officer
Bruce L. Chovnick............... 38 Senior Vice President and General Manager, Consulting Services
Jonathan W. Emery............... 46 Senior Vice President, General Counsel and Secretary
David H. Holtzman............... 42 Senior Vice President, Engineering
Donald N. Telage................ 53 Senior Vice President, Internet Relations and Special Programs
and Director
Douglas L. Wolford.............. 37 Senior Vice President, Marketing and Sales
Charles A. Gomes................ 52 Vice President, Customer Programs
Michael G. Voslow............... 39 Vice President, Finance and Treasurer
J. Robert Beyster (1)........... 73 Director
Craig I. Fields (2)............. 52 Director
John E. Glancy (2).............. 52 Director
J. Dennis Heipt (1)............. 56 Director
William A. Roper, Jr. (2)....... 52 Director
Stratton D. Sclavos (1)......... 37 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
MICHAEL A. DANIELS has served as Chairman of the Board of the Company since 1995
and as Acting Chief Executive Officer of the Company since November 1998. Since
1986, Mr. Daniels has served in various positions with Science Applications
International Corporation ("SAIC") and has served as a Sector Vice President and
Sector Manager for the Technology Applications Sector of SAIC since 1993. Prior
thereto, Mr. Daniels served as a Group Senior Vice President of SAIC from 1991
to 1993. Mr. Daniels received a B.S. and an M.A. from Northwestern University
and received a J.D. from the University of Missouri School of Law.
ROBERT J. KORZENIEWSKI has served as Chief Financial Officer of the Company
since March 1996 and as Acting Chief Operating Officer since November 1998. From
1987 until October 1997, Mr. Korzeniewski held a variety of senior financial
positions with SAIC and served as a Corporate Vice President for Administration
of SAIC from 1989 until 1997. Mr. Korzeniewski is a Certified Public Accountant
and received a B.S. in Business Administration from Salem State College.
BRUCE L. CHOVNICK has served as Senior Vice President and General Manager,
Consulting Services of the Company since September 1997. From October 1993 until
September 1997, Mr. Chovnick served in various executive leadership roles with
General Electric Information Services, Inc., an electronic commerce company,
and, most recently, he served as Vice President of its Global Internet Solutions
business. Prior to that he was a Senior Manager of IBM Corporation, a computer
systems, software, networking systems and storage devices manufacturer, from
January 1984 to September 1993. Mr. Chovnick received a B.S. in Computer Science
from the University of Florida.
JONATHAN W. EMERY has served as Senior Vice President, General Counsel and
Secretary of the Company since December 1997. From 1986 until 1997, Mr. Emery
held a variety of positions with Tambrands Inc., a consumer products company,
most recently as Vice President, Senior Counsel and Assistant Secretary. Prior
thereto, from 1977 until 1986, Mr. Emery was an Associate with the law firm of
Brown & Wood. Mr. Emery received a B.A. from Trinity College, Hartford,
Connecticut, and a J.D. from Boston University School of Law.
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<PAGE> 56
DAVID H. HOLTZMAN has served as Senior Vice President, Engineering of the
Company since February 1997. From September 1995 until January 1997, he served
as Business Development Manager, Development Manager and Chief Scientist,
Internet Information Technology (InfoMarket) group of IBM Corporation, a
computer systems, software, networking systems and storage devices manufacturer.
Prior thereto, from May 1992 to 1994, he served as a Senior Associate at
Booz-Allen & Hamilton, a management consulting firm. Mr. Holtzman received a
B.A. in Philosophy from the University of Pittsburgh and a B.S. in Computer
Science from the University of Maryland.
DONALD N. TELAGE has served as a director of the Company since May 1995 and as
Senior Vice President, Internet Relations and Special Programs of the Company
since February 1997. Dr. Telage also served as President and Chief Operating
Officer of the Company from May 1995 to February 1997. Since 1986, Dr. Telage
has served in various positions with SAIC and has served as a Group Senior Vice
President of SAIC since 1993. Prior thereto, Dr. Telage served as a Corporate
Vice President of SAIC from 1992 to 1993. Dr. Telage received his B.A. in
Psychology from the University of Connecticut and received an M.A. and a Ph.D.
in Mathematics from Clark University.
DOUGLAS L. WOLFORD has served as Senior Vice President, Marketing and Sales of
the Company since December 1997. From December 1994 to November 1997, Mr.
Wolford was employed by General Electric Information Services, Inc., an
electronic commerce company, during which tenure he progressed to the position
of General Manager -- Marketing (Americas). Prior thereto, he was employed from
March 1989 to December 1994 by the National Academy of Engineering, most
recently as Director, Development and Public Affairs. Mr. Wolford received a
B.S. in Mechanical Engineering from North Carolina State University, a
Certificat de Langue Francaise from Sorbonne University and an M.B.A. in
Marketing from the University of Maryland.
CHARLES A. GOMES has served as Vice President, Customer Programs since March
1998. Mr. Gomes has been part of the Company's management team since 1984. From
October 1995 to March 1998, Mr. Gomes served as Director of Customer Programs.
Prior to assuming his current responsibilities, Mr. Gomes managed various
programs and projects at the Company involving delivery of technical services to
various federal and state government agencies. Mr. Gomes received a B.A. in
Mathematics from the University of California, Davis, and a Master's of
Education from Boston University.
MICHAEL G. VOSLOW has served as Vice President, Finance and Treasurer since
March 1998 and as Treasurer of the Company since January 1997. From January 1995
to January 1997, Mr. Voslow was Vice President and Corporate Controller for MAXM
Systems Corporation ("MAXM"), a worldwide provider of computer software and
professional services. Prior to joining MAXM, Mr. Voslow was a Senior Manager at
Price Waterhouse where he served from August 1983 to January 1995. Mr. Voslow is
a Certified Public Accountant and received a B.S. in Business Administration
from Miami University (Ohio) and an M.B.A. in Finance from Duke University.
J. ROBERT BEYSTER has served as a director of the Company since 1996. Dr.
Beyster is the Chief Executive Officer and Chairman of the Board of SAIC, a
company he founded in 1969. Dr. Beyster is a Fellow of the American Nuclear
Society and a Fellow of the American Physical Society. Dr. Beyster is also the
founder, President and a member of the Board of Trustees of the Foundation for
Enterprise Development, a nonprofit organization that promotes employee
ownership.
CRAIG I. FIELDS has served as a director of the Company since 1997. Dr. Fields
has served as Chairman of the Defense Science Board since 1994. Dr. Fields has
served as a consultant to several companies, including as a consultant to SAIC
since 1994. Prior thereto, Dr. Fields served as Vice Chairman of Alliance Gaming
Corporation, a diversified entertainment company, from 1994 to 1997. From 1990
until 1994, Dr. Fields served as Chairman and Chief Executive Officer of the
Microelectronics and Computer-Technology Corporation, a privately held research
and development consortium. Dr. Fields serves as a director of ENSCO
International Incorporated, Projectavision, Inc., Muzak Incorporated, InterTech
Group, Inc. and Firearms Training Systems, Inc.
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<PAGE> 57
JOHN E. GLANCY has served as a director of the Company since 1996. Dr. Glancy
has held a number of senior positions with SAIC since 1980. Dr. Glancy has
served as a Corporate Executive Vice President of SAIC since 1994 and as a
director of SAIC since 1994. From 1991 until 1994, Dr. Glancy served as a Sector
Vice President of SAIC.
J. DENNIS HEIPT has served as a director of the Company since February 1998.
Since 1984, Mr. Heipt has served as Senior Vice President for Administration and
Secretary of SAIC. Mr. Heipt has held various positions with SAIC since 1979.
WILLIAM A. ROPER, JR. has served as a director of the Company since 1996. Since
1990, Mr. Roper has served as Senior Vice President and Chief Financial Officer
of SAIC. Mr. Roper also serves as a director of ODS Networks, Inc.
STRATTON D. SCLAVOS has served as a director of the Company since 1997. Mr.
Sclavos has served as President, Chief Executive Officer and director of
VeriSign, Inc., a provider of digital certificate services, since 1995. From
1993 until 1995, Mr. Sclavos served as Vice President of Worldwide Marketing and
Sales for Taligent, Inc., a joint venture of Apple Computer, Inc., IBM
Corporation and The Hewlett-Packard Company, Inc. From 1992 until 1993, Mr.
Sclavos served as Vice President of Worldwide Sales and Business Development for
GO Corporation, a mobile computing company. From 1988 until 1993, Mr. Sclavos
served in various executive positions with MIPS Computers Systems.
Several officers and employees of SAIC currently serve as directors of the
Company. It is anticipated that the Board of Directors of the Company will
change in connection with the decrease in SAIC's percentage ownership and voting
control of the Company.
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<PAGE> 58
SELLING STOCKHOLDERS
The following table sets forth certain information as of December 28, 1998
regarding the beneficial ownership of Common Stock by each of the Selling
Stockholders and the shares of Class A Common Stock offered hereby by such
Selling Stockholders. Prior to this offering, SAIC held approximately 96.3% of
the combined voting power and 72.3% of the economic interest of the outstanding
Common Stock. After this offering, SAIC will have approximately 89.0% of the
combined voting power and approximately 44.8% of the economic interest of the
outstanding Common Stock. Upon conversion of its remaining shares of Class B
Common Stock into Class A Common Stock, which is expected to occur by May 31,
1999, assuming completion of this offering, SAIC will have approximately 44.8%
of the combined voting power and economic interest of the outstanding Common
Stock. No share information has been adjusted to reflect a 2-for-1 stock split,
approved on December 31, 1998, to be effected in the form of a stock dividend on
the shares of Class A Common Stock and Class B Common Stock outstanding on
February 26, 1999 and to be distributed on March 23, 1999.
<TABLE>
<CAPTION>
----------------------------------------------------------------
CLASS B COMMON STOCK
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO NUMBER OF SHARES OWNED AFTER
OFFERING BEING OFFERED (1) OFFERING
-------------------- ------------------- -------------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
---------------- ---------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Science Applications International
Corporation...................... 11,925,000 100% 4,500,000 37.7% 7,425,000 100%
</TABLE>
- ---------------
(1) Concurrent with this offering, SAIC will convert 4,500,000 shares of Class B
Common Stock into 4,500,000 shares of Class A Common Stock to be sold in this
offering.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
CLASS A COMMON STOCK
SHARES BENEFICIALLY SHARES BENEFICIALLY SHARES SUBJECT
OWNED PRIOR TO NUMBER OF SHARES OWNED AFTER TO UNVESTED
OFFERING(1) BEING OFFERED OFFERING OPTIONS
----------------------- ---------------------- ---------------------- --------------
BENEFICIAL OWNER NUMBER PERCENT(2) NUMBER PERCENT(2) NUMBER PERCENT(3) NUMBER
---------------- ---------- ---------- --------- ---------- --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Science Applications
International
Corporation............. 11,925,000 72.3% 4,500,000 27.3% 7,425,000 44.8% --
Donald N. Telage (4)...... 49,721 1.1 30,236 * 19,485 * 73,500
Robert J. Korzeniewski
(5)..................... 37,671 * 24,978 * 12,693 * 64,120
David H. Holtzman (6)..... 23,050 * 16,413 * 6,637 * 42,600
Jonathan W. Emery (7)..... 9,490 * 8,373 * 1,117 * 24,000
</TABLE>
- ---------------
* Less than 1%.
(1) This table is based on information supplied by the Selling Stockholders.
Beneficial ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to securities. Except
as indicated by footnotes and subject to community property laws, where
applicable, the persons named above have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
Shares of Class A Common Stock that are issuable upon exercise of options that
are exercisable within 60 days of December 28, 1998, and shares of Class A
Common Stock that are issuable upon conversion of Class B Common Stock, are
deemed to be beneficially owned by the person holding such options or such
shares of Class B Common Stock, as the case may be, for the purpose of computing
the percentage ownership of such person, but are not treated as outstanding for
purposes of computing the percentage ownership of any other person.
(2) Applicable percentage of beneficial ownership is based on 4,559,835 shares
of Class A Common Stock outstanding as of December 28, 1998.
(3) Applicable percentage of beneficial ownership is based on 4,559,835 shares
of Class A Common Stock outstanding as of December 28, 1998 after giving effect
to the 4,500,000 shares of Class A Common Stock to be issued to and sold by SAIC
upon conversion of 4,500,000 shares of Class B Common Stock and 80,000 shares of
Class A Common Stock to be issued to and sold by the other Selling Stockholders
upon exercise of stock options simultaneously with the closing of this offering.
54
<PAGE> 59
(4) Includes 34,435 shares of Class A Common Stock issuable pursuant to options
exercisable within 60 days of December 28, 1998.
(5) Includes 26,730 shares of Class A Common Stock issuable pursuant to options
exercisable within 60 days of December 28, 1998.
(6) Includes 22,950 shares of Class A Common Stock issuable pursuant to options
exercisable within 60 days of December 28, 1998.
(7) Includes 9,000 shares of Class A Common Stock issuable pursuant to options
exercisable within 60 days of December 28, 1998.
55
<PAGE> 60
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares of
Class A Common Stock, par value $0.001 per share, 29,425,000 shares of Class B
Common Stock, par value $0.001 per share, and 10,000,000 shares of Preferred
Stock, par value $0.001 per share. No shares of Preferred Stock are outstanding
as of the date hereof. Of the 100,000,000 shares of Class A Common Stock
authorized, as of December 28, 1998, 4,559,835 shares were outstanding,
1,570,423 shares were issuable upon exercise of outstanding stock options (of
which options to purchase 129,983 shares were currently exercisable), 11,925,000
shares were reserved for issuance upon conversion of Class B Common Stock into
Class A Common Stock and 810,392 shares were reserved for issuance pursuant to
certain employee benefits plans (exclusive of the 1,570,423 shares reserved for
issuance upon exercise of outstanding stock options). Of the 29,425,000 shares
of Class B Common Stock authorized, 11,925,000 shares, or 100% of the
outstanding shares of Class B Common Stock, are held by SAIC. The following
summary description of the capital stock of the Company is qualified in its
entirety by reference to the form of Certificate of Incorporation of the Company
and the Second Amended and Restated Bylaws (the "Bylaws") of the Company, a copy
of each of which is filed as an exhibit to the Registration Statement of which
this Prospectus forms a part.
On December 31, 1998, the Board of Directors of the Company approved a 2-for-1
stock split of the shares of Class A Common Stock and Class B Common Stock, to
be effected in the form of a stock dividend on shares of Class A Common Stock
and Class B Common Stock outstanding on February 26, 1999. The stock dividend
will be distributed on March 23, 1999. SAIC intends to convert its remaining
shares of Class B Common Stock to Class A Common Stock by May 31, 1999, assuming
completion of this offering.
COMMON STOCK
Voting Rights
The holders of Class A Common Stock and Class B Common Stock generally have
identical rights except that holders of Class A Common Stock are entitled to one
vote per share while holders of Class B Common Stock are entitled to ten votes
per share on all matters to be voted on by stockholders. The holders of Common
Stock are not entitled to cumulative voting rights. Generally, all matters to be
voted on by stockholders must be approved by a majority (or, in the case of
election of directors, by a plurality) of the votes entitled to be cast by all
shares of Class A Common Stock and Class B Common Stock present in person or
represented by proxy, voting together as a single class. subject to any voting
rights granted to holders of any Preferred Stock. In the event of a voluntary or
involuntary liquidation, dissolution or winding up of the Company, the holders
of shares of Common Stock would be entitled to share ratably in all assets
remaining after payment of liabilities subject to prior distribution rights and
payment of any distributions owing to holders of shares of Preferred Stock then
outstanding, if any. Holders of the shares of Common Stock have no preemptive
rights, and the shares of Common Stock are not subject to further calls or
assessment by the Company. There are no redemption or sinking fund provisions
applicable to the shares of Common Stock.
Holders of Class A Common Stock and Class B Common Stock will share in an equal
amount per share in any dividend declared by the Board of Directors, subject to
any preferential rights of any outstanding Preferred Stock. Dividends consisting
of shares of Class A Common Stock and Class B Common Stock may be paid only as
follows: (i) shares of Class A Common Stock may be paid only to holders of Class
A Common Stock and shares of Class B Common Stock may be paid only to holders of
Class B Common Stock and (ii) shares shall be paid proportionally with respect
to each outstanding share of Class A Common Stock and Class B Common Stock.
Conversion Rights
Each outstanding share of Class B Common Stock is convertible at the holder's
option into one share of Class A Common Stock at any time prior to a Tax-Free
Spin-Off (as defined below). Additionally, each share of Class B
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<PAGE> 61
Common Stock shall automatically convert into one share of Class A Common Stock
if at any time prior to a Tax-Free Spin-Off the number of outstanding shares of
Class B Common Stock owned by SAIC or any of its subsidiaries (or a Class B
Transferee (as defined below) or any of its subsidiaries) represents less than
30% of the economic ownership represented by the aggregate number of shares of
Common Stock then outstanding. If a Tax-Free Spin-Off occurs, shares of Class B
Common Stock shall not be convertible into shares of Class A Common Stock at the
option of the holder thereof.
Except as provided below, any shares of Class B Common Stock transferred to a
person other than SAIC or any of its subsidiaries shall automatically convert to
shares of Class A Common Stock upon such disposition. Prior to a Tax-Free
Spin-Off, shares of Class B Common Stock representing more than a 50% economic
interest in the Company transferred in a single transaction to one unrelated
person (a "Class B Transferee") or among such Class B Transferee and its
subsidiaries shall not automatically convert to shares of Class A Common Stock
upon such disposition. Any shares of Class B Common Stock retained by SAIC
following any such transfer of shares of Class B Common Stock to a Class B
Transferee shall automatically convert into shares of Class A Common Stock upon
such transfer. Shares of Class B Common Stock transferred to stockholders of
SAIC or of a Class B Transferee in a transaction intended to be on a tax-free
basis (a "Tax-Free Spin-Off") under the Code shall not convert to shares of
Class A Common Stock upon the occurrence of such Tax-Free Spin-Off.
Following a Tax-Free Spin-Off, shares of Class B Common Stock shall be
transferred as Class B Common Stock; provided, however, that shares of Class B
Common Stock shall automatically convert into shares of Class A Common Stock on
the fifth anniversary of the Tax-Free Spin-Off, unless prior to such Tax-Free
Spin-Off, SAIC, or the Class B Transferee, as the case may be, delivers to the
Company written advice of counsel reasonably satisfactory to the Company to the
effect that (i) such conversion could adversely affect the ability of SAIC or
the Class B Transferee, as the case may be, to obtain a favorable ruling from
the Internal Revenue Service that the distribution would be a Tax-Free Spin-Off
or (ii) the Internal Revenue Service has adopted a general non-ruling policy on
tax-free spinoffs and that such conversion could adversely affect the status of
the transaction as a Tax-Free Spin-Off. If such written advice is received,
approval of such conversion shall be submitted to a vote of the holders of the
Common Stock as soon as practicable after the fifth anniversary of the Tax-Free
Spin-Off, unless SAIC or the Class B Transferee, as the case may be, delivers to
the Company written advice of counsel reasonably satisfactory to the Company
prior to such anniversary that such vote could adversely effect the status of
the distribution as a Tax-Free Spin-Off, including the ability to obtain a
favorable ruling from the Internal Revenue Service. If such written advice is
delivered, such vote shall not be held. Approval of such conversion will require
the affirmative vote of the holders of a majority of the shares of both Class A
Common Stock and Class B Common Stock present and voting, voting together as a
single class, with each share entitled to one vote for such purpose. No
assurance can be given that such conversion would be consummated. The foregoing
requirements are intended to ensure that tax-free treatment of a Tax-Free
Spin-Off is preserved should the Internal Revenue Service challenge such
automatic conversion as violating the 80% vote requirement currently required by
the Internal Revenue Code of 1986, as amended, for a Tax-Free Spin-Off.
PREFERRED STOCK
There are currently no shares of Preferred Stock outstanding. Under the
Company's Certificate of Incorporation, the Board of Directors has the
authority, without further action by the stockholders, to issue from time to
time up to 10,000,000 shares of the Preferred Stock in one or more series and to
fix the number of shares, designations, preferences, powers, and relative,
participating, optional or other special rights and the qualifications or
restrictions thereof. The preferences, powers, rights and restrictions of
different series of Preferred Stock may differ with respect to dividend rates,
amounts payable on liquidation, voting rights, conversion rights, redemption
provisions, sinking fund provisions, and purchase funds and other matters. The
issuance of Preferred Stock, while providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could decrease the
amount of earnings and assets available for distribution to holders of Common
Stock or affect adversely the rights and powers, including voting rights, of the
holders of Common Stock, and may have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no present plan
to issue any shares of Preferred Stock.
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<PAGE> 62
REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement between the Company and SAIC,
which holds 11,925,000 shares of Class B Common Stock, SAIC is entitled to
certain rights with respect to the registration under the Securities Act of the
shares of Class A Common Stock issuable upon conversion of the Class B Common
Stock owned by SAIC. If the Company proposes to register any of its securities
under the Securities Act, either for its own account or for the account of other
security holders, SAIC is entitled to notice of the registration and is entitled
to include, at the Company's expense, such shares therein, provided, among other
conditions, that the underwriters have the right to limit the number of such
shares included in the registration. In addition, SAIC may require the Company
on not more than two occasions, to file a registration statement under the
Securities Act with respect to its shares of Class A Common Stock, and the
Company is required to use its best efforts to effect the registration, subject
to certain conditions and limitations. The first such registration, which is the
registration being effected hereby, will be at the Company's expense and the
second such registration will be at SAIC's expense. The Company has agreed to
indemnify SAIC in connection with any such registration.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Certificate of Incorporation
The Company's Certificate of Incorporation provides that the Company's Bylaws
may be repealed or amended only by a two-thirds vote of the Board of Directors
or a two-thirds stockholder vote. In addition, those provisions of the
Certificate of Incorporation may only be amended or repealed by the holders of
at least two-thirds of the voting power of all the then-outstanding shares of
stock entitled to vote generally for the election of directors voting together
as a single class. The provisions described above, together with the ability of
the Board of Directors to issue Preferred Stock as described under "-- Preferred
Stock," may have the effect of deterring a hostile takeover or delaying a change
in control or management of the Company.
Delaware Takeover Statute
Section 203 of the Delaware General Corporation Law ("Section 203"), subject to
certain exceptions, prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder,
unless: (i) prior to such date, the board of directors of the corporation
approved either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder; (ii) upon consummation of the
transaction that resulted in the stockholder becoming an interested stockholder,
the interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares owned (x)
by persons who are directors and also officers and (y) by employee stock plans
in which employee participants do not have the right to determine-
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer; or (iii) on or subsequent to such date, the business
combination is approved by the board of directors and authorized at an annual or
special meeting of stockholders, and not by written consent, by the affirmative
vote of at least 66 2/3% of the outstanding voting stock that is not owned by
the interested stockholder.
Section 203 defines "business combination" to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially-owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an "interested stockholder" as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person. As permitted by Section 203, the Company
has elected not to be governed by the provisions of Section 203.
58
<PAGE> 63
CERTAIN CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
The Company's Certificate of Incorporation provides that any person purchasing
or acquiring an interest in shares of capital stock of the Company is deemed to
have consented to the following provisions relating to intercompany agreements
and to transactions with interested parties and corporate opportunities. The
corporate charter of SAIC does not include comparable provisions relating to
intercompany agreements, transactions with interested parties or corporate
opportunities.
Transactions with Interested Parties
The Company's Certificate of Incorporation provides that no contract, agreement,
arrangement or transaction (or any amendment, modification or termination
thereof) between the Company and SAIC or any Related Entity (as such terms are
defined below) or between the Company and any director or officer of the
Company, SAIC or any Related Entity shall be void or voidable solely for the
reason that SAIC, a Related Entity or any one or more of the officers or
directors of the Company, SAIC or any Related Entity are parties thereto, or
solely because any such directors or officers are present at, participate in or
vote with respect to the authorization of such contract, agreement, arrangement
or transaction (or any amendment, modification or termination thereof). Further,
the Company's Certificate of Incorporation provides that neither SAIC nor any
officer or director thereof or of any Related Entity shall be presumed liable to
the Company or its stockholders for breach of any fiduciary duty or duty of
loyalty or failure to act in (or not opposed to) the best interests of the
Company or the derivation of any improper personal benefit by reason of the fact
that SAIC or an officer or director thereof or of such Related Entity in good
faith takes any action or exercises any rights or gives or withholds any consent
in connection with any agreement or contract between SAIC or such Related Entity
and the Company. No vote cast or other action taken by any person who is an
officer, director or other representative of SAIC or such Related-Entity, which
vote is cast or action is taken by such person in his capacity as a director of
the Company, shall constitute an action of or the exercise of a right by or a
consent of SAIC, such subsidiary or Related Entity for the purpose of any such
agreement or contract. For purposes of the foregoing, the "Company" and "SAIC"
include all corporations and other entities in which the Company or SAIC, as the
case may be, owns fifty percent or more of the outstanding voting stock, and
"Related Entity" means one or more corporations or other entities in which one
or more of the directors of the Company have a direct or indirect financial
interest.
Competition by SAIC with the Company; Corporate Opportunities
The Company's Certificate of Incorporation provides that except as SAIC may
otherwise agree in writing: (i) neither SAIC nor any subsidiary of SAIC (other
than the Company) shall have a duty to refrain from engaging directly or
indirectly in the same or similar business activities or lines of business as
the Company; and (ii) neither SAIC nor any subsidiary (other than the Company),
officer or director thereof will be presumed liable to the Company or to its
stockholders for breach of any fiduciary duty by reason of any such activities
or of such person's participation therein.
The Company's Certificate of Incorporation also provides that if SAIC or any
subsidiary of SAIC (other than the Company) acquires knowledge of a potential
transaction or matter which may be a corporate opportunity both for SAIC or such
subsidiary and for the Company, SAIC shall be entitled to offer such corporate
opportunity to the Company or SAIC as SAIC deems appropriate under the
circumstances in its sole discretion and shall not be presumed liable to the
Company or its stockholders for breach of fiduciary duty as a stockholder of the
Company or controlling person of a stockholder by reason of the fact that SAIC
or such subsidiary pursues or acquires such opportunity for itself, directs such
corporate opportunity to another person, or does not communicate information
regarding such corporate opportunity to the Company.
Further, the Company's Certificate of Incorporation provides that in the event
that a director, officer or employee of the Company who is also a director,
officer or employee of SAIC acquires knowledge of a potential transaction or
matter that may be a corporate opportunity both for the Company and SAIC
(whether such potential transaction or matter is proposed by a third party or is
conceived by such director, officer or employee of the: Company), such director,
officer or employee shall be entitled to offer such corporate opportunity to the
Company or SAIC as such director, officer or employee deems appropriate under
the circumstances in his or her
59
<PAGE> 64
sole discretion, and no such director, officer or employee shall be presumed
liable to the Company or its stockholders for breach of any fiduciary duty or
duty of loyalty or failure to act in (or not opposed to) the best interests of
the Company or the derivation of any improper personal benefit by reason of the
fact that (i) such director, officer or employee offered such corporate
opportunity to SAIC (rather than the Company) or did not communicate information
regarding such corporate opportunity to the Company or (ii) SAIC pursues or
acquires such corporate opportunity for itself or directs such corporate
opportunity to another person or does not communicate information regarding such
corporate opportunity to the Company.
The enforceability of the provisions discussed above under Delaware corporate
law has not been established and, due to the absence of relevant judicial
authority, counsel to the Company is not able to deliver an opinion as to the
enforceability of such provisions. These provisions of the Company's Certificate
of Incorporation eliminate certain rights that might have been available to
stockholders under Delaware law had such provisions not been included in the
Certificate of Incorporation, although the enforceability of such provisions has
not been established.
The foregoing provisions of the Company's Certificate of Incorporation shall
expire on the date that SAIC ceases to own beneficially Common Stock
representing at least 20% of the number of outstanding shares of Common Stock
and no person who is a director or officer of the Company is also a director or
officer of SAIC or its subsidiaries.
Actions Under Intercompany Agreements
The Company's Certificate of Incorporation will also limit the liability of SAIC
and its subsidiaries for certain breaches of their fiduciary duties in
connection with action that may be taken or not taken in good faith under the
intercompany agreements.
Advance Notice Provision
The Company's Bylaws provide for an advance notice procedure for the nomination,
other than by or at the direction of the Board of Directors, of candidates for
election as directors as well as for other stockholder proposals to be
considered at annual meetings of stockholders. In general, notice of intent to
nominate a director or raise matters at such meetings will have to be received
by the Company not less than 120 days prior to any meeting of the stockholders
called for the election of directors, and must contain certain information
concerning the person to be nominated or the matters to be brought before the
meeting and concerning the stockholder submitting the proposal.
60
<PAGE> 65
UNDERWRITING
J.P. Morgan Securities Inc. is acting as book running lead manager for this
offering. J.P. Morgan Securities Inc. and Hambrecht & Quist LLC are acting as
joint lead managers.
The Underwriters named below (the "Underwriters"), for whom J.P. Morgan
Securities Inc., Hambrecht & Quist LLC, PaineWebber Incorporated and BancBoston
Robertson Stephens are acting as representatives (the "Representatives"), have
severally agreed, subject to the terms and conditions set forth in the
underwriting agreement among the Company, the Selling Stockholders and the
Underwriters (the "Underwriting Agreement"), to purchase from the Selling
Stockholders, and the Selling Stockholders have agreed to sell to the
Underwriters, the respective number of shares of Class A Common Stock set forth
opposite their names below:
<TABLE>
<CAPTION>
----------
NUMBER
OF SHARES
UNDERWRITERS ----------
<S> <C>
J.P. Morgan Securities Inc..................................
Hambrecht & Quist LLC.......................................
PaineWebber Incorporated....................................
BancBoston Robertson Stephens...............................
----------
Total....................................................... 4,580,000
==========
</TABLE>
The nature of the Underwriters' obligations under the Underwriting Agreement is
such that all of the Class A Common Stock being offered, excluding shares
covered by the over-allotment option granted to the Underwriters, must be
purchased if any are purchased.
The Representatives have advised the Company and the Selling Stockholders that
the several Underwriters propose to offer the Class A Common Stock to the public
initially at the public offering price set forth on the cover page of this
Prospectus and may offer the Class A Common Stock to selected dealers at such
price less a concession not to exceed $ per share. The Underwriters may
allow, and such dealers may reallow, a concession to other dealers not to exceed
$ per share. After the initial public offering of the Class A Common Stock,
the public offering price and other selling terms may be changed by the
Representatives.
SAIC has granted the Underwriters an option, exercisable for 30 days from the
date of this Prospectus, to purchase up to 687,000 additional shares of Class A
Common Stock at the same price per share to be paid by the Underwriters for the
other shares offered hereby. If the Underwriters purchase any such additional
shares pursuant to the option, each of the Underwriters will be committed to
purchase such additional shares in approximately the same proportion as set
forth in the above table. The Underwriters may exercise the option only to cover
over-allotments, if any, made in connection with the distribution of the Class A
Common Stock offered hereby.
The following table shows the per share and total underwriting discounts to be
paid to the Underwriters by the Selling Stockholders. Such amounts are shown
assuming both no exercise and full exercise of the Underwriters' option to
purchase up to an additional 687,000 shares. The Company will not pay any
underwriting discounts to the Underwriters in this offering.
<TABLE>
<CAPTION>
---------------------------
PAID BY THE SELLING
STOCKHOLDERS
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share................................................... $ $
Total....................................................... $ $
</TABLE>
61
<PAGE> 66
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriters may be required to
make in respect thereof.
The Company estimates that the total expenses of this offering, excluding
underwriting discounts, will be $ . The Selling Stockholders will not
be responsible for any such expenses.
In connection with this offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Class A Common
Stock. Specifically, the Underwriters may overallot this offering, creating a
syndicate short position. In addition, the Underwriters may bid for, and
purchase, shares of Class A Common Stock in the open market to cover syndicate
shorts or to stabilize the price of the Class A Common Stock. Finally, the
underwriting syndicate may reclaim selling concessions allowed for distributing
shares of Class A Common Stock in this offering, if the syndicate repurchases
previously distributed Class A Common Stock in syndicate covering transactions,
in stabilization transactions or otherwise. Any of these activities may
stabilize or maintain the market price of the shares of Class A Common Stock
above independent market levels. The Underwriters are not required to engage in
these activities, and may end any of these activities at any time.
The Company, the Selling Stockholders and certain of the Company's officers and
directors have agreed, with limited exceptions, that, during the period
beginning from the date of this Prospectus and continuing and including the date
180 days after the date of this Prospectus, they will not, directly or
indirectly, (i) offer, sell, offer to sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities of the Company which are
substantially similar to the Common Stock, including but not limited to any
securities that are convertible into or exchangeable for, or that represent the
right to receive, Common Stock or any such substantially similar securities or
(ii) enter into any swap, option, future, forward or other agreement that
transfers, in whole or in part, the economic consequence of ownership of Common
Stock or any securities substantially similar to the Common Stock (other than
pursuant to employee stock option and restricted stock plans existing on the
date of this Prospectus) without the prior written consent of J.P. Morgan
Securities Inc.
The Class A Common Stock is traded on the Nasdaq National Market under the
symbol "NSOL."
From time to time in the ordinary course of their respective businesses, certain
of the Underwriters and their affiliates have engaged in and may in the future
engage in commercial and/or investment banking transactions with SAIC, the
Company and their affiliates. Hambrecht & Quist LLC, J.P. Morgan Securities Inc.
and PaineWebber Incorporated acted as representatives in connection with the
Company's initial public offering which was consummated in October 1997.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Class A Common Stock
offered hereby are being passed upon for the Company and the Selling
Stockholders by Pillsbury Madison & Sutro LLP, Palo Alto, California and
Washington, D.C. Cahill Gordon & Reindel, a partnership including a professional
corporation, New York, New York, is acting as counsel to the Underwriters in
connection with certain legal matters relating to the shares of Class A Common
Stock offered hereby.
EXPERTS
The financial statements as of December 31, 1996 and 1997, and for the periods
from January 1, 1995 to March 10, 1995 and March 11, 1995 to December 31, 1995
and for the years ended December 31, 1996 and 1997, included in this Prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
62
<PAGE> 67
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file with
them, which means we can disclose important information to you by referring you
to those documents. The information included in the following documents is
incorporated by reference and is considered to be a part of this Prospectus. The
most recent information that we file with the SEC automatically updates and
supersedes more dated information. We have previously filed the following
documents with the SEC and incorporate them by reference into this Prospectus:
1. Our Annual Report on Form 10-K for the year ended December 31, 1997;
2. Our Quarterly Reports on Form 10-Q for the quarters ended March 31,
1998, June 30, 1998 and September 30, 1998;
3. Our Current Reports on Form 8-K filed on October 9, 1998 and November
16, 1998; and
4. The description of the Common Stock contained in Registration Statement
on Form 8-A, filed by us with the SEC on August 8, 1997.
We also incorporate by reference all documents subsequently filed by pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act until all of the shares
being offered in this Prospectus are sold.
We will provide without charge to each person to whom a Prospectus is delivered,
including any beneficial owner, a copy of any or all of the information that has
been incorporated by reference in this Prospectus. If you would like to obtain
this information from us, please direct your request, either in writing or by
telephone, to Jonathan W. Emery, Esq., Network Solutions, Inc. 505 Huntmar Park
Drive, Herndon, Virginia 20170, telephone (703) 742-0400.
63
<PAGE> 68
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
REFERENCE
<S> <C>
Report of Independent Accountants........................... F-2, F-3
Statements of Financial Position as of December 31, 1996 and
1997 and September 30, 1998 (Unaudited)................... F-4
Statements of Operations for the Periods from January 1,
1995 to March 10, 1995 and March 11, 1995 to December 31,
1995, and for the Years Ended December 31, 1996 and 1997
and for the Nine Months Ended September 30, 1997 and 1998
(Unaudited)............................................... F-5
Statements of Changes in Stockholders' Equity for the
Periods from January 1, 1995 to March 10, 1995 and March
11, 1995 to December 31, 1995, and for the Years Ended
December 31, 1996 and 1997 and for the Nine Months Ended
September 30, 1998 (Unaudited)............................ F-6
Statements of Cash Flows for the Periods from January 1,
1995 to March 10, 1995 and March 11, 1995 to December 31,
1995, and for the Years Ended December 31, 1996 and 1997
and for the Nine Months Ended September 30, 1997 and 1998
(Unaudited)............................................... F-8
Notes to Financial Statements............................... F-9
</TABLE>
F-1
<PAGE> 69
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Network Solutions, Inc.
In our opinion, the accompanying statements of operations, of changes in
stockholder's equity and of cash flows present fairly, in all material respects,
the results of operations and cash flows for Network Solutions, Inc.
("Predecessor") for the period from January 1, 1995 to March 10, 1995 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
As discussed in Note 1 to the financial statements, on March 10, 1995 Science
Applications International Corporation acquired the outstanding stock of the
Company. The financial statements for the periods subsequent to March 10, 1995
have been prepared on the basis of accounting arising from this acquisition. The
financial statements for the period from January 1, 1995 to March 10, 1995 are
presented on the Company's previous basis of accounting.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Falls Church, VA
March 17, 1997
F-2
<PAGE> 70
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Network Solutions, Inc.
In our opinion, the accompanying statements of financial position and the
related statements of operations, of changes in stockholder's equity and of cash
flows present fairly, in all material respects, the financial position of
Network Solutions, Inc. (a majority-owned subsidiary of Science Applications
International Corporation) at December 31, 1997 and 1996, and the results of its
operations and cash flows for the year ended December 31, 1997 and 1996 and for
the period from March 11, 1995 to December 31, 1995 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 1 to the financial statements, on March 10, 1995 Science
Applications International Corporation acquired the outstanding stock of the
Company. The financial statements for the periods subsequent to March 10, 1995
have been prepared on the basis of accounting arising from this acquisition. The
financial statements for the period from January 1, 1995 to March 10, 1995 are
presented on the Company's previous basis of accounting.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Falls Church, VA
February 6, 1998
F-3
<PAGE> 71
NETWORK SOLUTIONS, INC.
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C>
DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------
1996 1997 1998
----------- ------------ -------------
(UNAUDITED)
<CAPTION>
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $15,540,000 $ 41,146,000 $ 9,124,000
Short-term investments, marketable securities... -- 40,200,000 107,876,000
Accounts receivable, net........................ 12,587,000 5,792,000 13,922,000
Prepaids and other assets....................... 936,000 1,005,000 1,512,000
Deferred tax asset.............................. 10,087,000 20,153,000 30,941,000
Restricted assets............................... 17,453,000 25,873,000 627,000
----------- ------------ ------------
Total current assets.................. 56,603,000 134,169,000 164,002,000
Furniture and equipment, net.................... 2,266,000 6,146,000 9,579,000
Long-term investments, marketable securities.... -- -- 6,272,000
Deferred tax asset.............................. 4,968,000 8,128,000 11,292,000
Goodwill, net................................... 2,281,000 1,177,000 770,000
----------- ------------ ------------
Total assets.......................... $66,118,000 $149,620,000 $191,915,000
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities........ $ 2,581,000 $ 6,426,000 $ 15,565,000
Due to parent................................... 15,295,000 1,250,000 2,587,000
Income taxes payable............................ -- 5,042,000 3,090,000
Current portion of capital lease obligations.... -- 842,000 861,000
Deferred revenue, net........................... 19,912,000 43,789,000 77,766,000
Internet fund liability......................... 17,453,000 25,873,000 627,000
----------- ------------ ------------
Total current liabilities............. 55,241,000 83,222,000 100,496,000
Capital lease obligations....................... -- 1,081,000 436,000
Long-term deferred revenue, net................. 9,440,000 17,662,000 28,964,000
----------- ------------ ------------
Total liabilities..................... 64,681,000 101,965,000 129,896,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, authorized
10,000,000 shares; none issued and outstanding
in 1996, 1997 and 1998........................ -- -- --
Class A common stock, $.001 par value;
authorized 100,000,000 shares; 3,795,000 and
4,139,838 issued and outstanding in 1997 and
1998.......................................... -- 4,000 4,000
Class B common stock, $.001 par value;
authorized 30,000,000 shares; 12,500,000 and
11,925,000 issued and outstanding in 1996,
1997 and 1998................................. 12,000 12,000 12,000
Additional paid-in capital...................... 4,468,000 56,451,000 63,147,000
Accumulated deficit............................. (3,043,000) (8,812,000) (1,295,000)
Accumulated other comprehensive income.......... -- -- 151,000
----------- ------------ ------------
Total stockholders' equity............ 1,437,000 47,655,000 62,019,000
----------- ------------ ------------
Total liabilities and stockholders'
equity.............................. $66,118,000 $149,620,000 $191,915,000
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 72
NETWORK SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMPANY
-------------------------
PREDECESSOR COMPANY
--------------- --------------------------------------------- NINE MONTHS ENDED
JANUARY 1, 1995 MARCH 11, 1995 YEAR ENDED YEAR ENDED SEPTEMBER 30,
TO MARCH 10, TO DECEMBER 31, DECEMBER 31, DECEMBER 31, -------------------------
1995 1995 1996 1997 1997 1998
--------------- --------------- ------------ ------------ ----------- -----------
(UNAUDITED)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net revenue.............. $ 1,177,000 $ 5,309,000 $18,862,000 $45,326,000 $30,896,000 $62,395,000
Cost of revenue.......... 884,000 4,820,000 14,666,000 25,798,000 18,468,000 26,451,000
----------- ----------- ----------- ----------- ----------- -----------
Gross profit............. 293,000 489,000 4,196,000 19,528,000 12,428,000 35,944,000
Research and development
expenses............... -- -- 680,000 1,653,000 1,095,000 2,893,000
Selling, general and
administrative
expenses............... 280,000 2,114,000 6,280,000 12,268,000 7,893,000 24,438,000
Interest income.......... -- -- (496,000) (2,211,000) (1,054,000) (4,423,000)
Other expenses........... 9,000 52,000 -- 116,000 -- 93,000
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes........... 4,000 (1,677,000) (2,268,000) 7,702,000 4,494,000 12,943,000
Provision (benefit) for
income taxes........... 48,000 (287,000) (643,000) 3,471,000 2,006,000 5,426,000
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
continuing
operations............. (44,000) (1,390,000) (1,625,000) 4,231,000 2,488,000 7,517,000
Loss from discontinued
operations, net of
income taxes........... (1,375,000) (28,000) -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)........ $(1,419,000) $(1,418,000) $(1,625,000) $ 4,231,000 $ 2,488,000 $ 7,517,000
=========== =========== =========== =========== =========== ===========
BASIC EARNINGS PER SHARE:
Income (loss) from
continuing
operations............. $ (0.04) $ (0.11) $ (0.13) $ 0.32 $ 0.20 $ 0.47
Loss from discontinued
operations............. (1.32) -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)........ $ (1.36) $ (0.11) $ (0.13) $ 0.32 $ 0.20 $ 0.47
=========== =========== =========== =========== =========== ===========
DILUTED EARNINGS PER
SHARE:
Income (loss) from
continuing
operations............. $ (0.04) $ (0.11) $ (0.13) $ 0.31 $ 0.20 $ 0.45
Loss from discontinued
operations............. (1.32) -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)........ $ (1.36) $ (0.11) $ (0.13) $ 0.31 $ 0.20 $ 0.45
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 73
NETWORK SOLUTIONS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
CLASS A COMMON STOCK CLASS B COMMON STOCK TREASURY STOCK
----------------------- ------------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- ----------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR
Balance, December 31, 1994............. 1,159,000 $ 12,000 110,000 $(628,000)
Purchase of treasury stock............. -- -- 7,000 (30,000)
Net loss for the period from January 1
to March 10, 1995.................... -- -- -- --
--------- ---------- ------- ---------
Balance, March 10, 1995................ 1,159,000 $ 12,000 117,000 $(658,000)
========= ========== ======= =========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
COMPANY
Purchase of outstanding common stock by
SAIC on March 10, 1995............... -- -- 12,500,000 $ 12,000
Net loss for the period from March 11
to December 31, 1995................. -- -- -- --
--------- ---------- ---------- ----------
Balance, December 31, 1995............. -- -- 12,500,000 12,000
Net loss for the year ended December
31, 1996............................. -- -- -- --
--------- ---------- ---------- ----------
Balance, December 31, 1996............. -- -- 12,500,000 12,000
Declaration of Class B dividend........ -- -- -- --
Conversion of Class B Common Stock..... 575,000 -- (575,000) --
Issuance of Class A Common Stock....... 3,220,000 $ 4,000 -- --
Net income for the year ended
December 31, 1997.................... -- -- -- --
--------- ---------- ---------- ----------
Balance, December 31, 1997............. 3,795,000 4,000 11,925,000 12,000
Issuance of common stock pursuant to
stock plans.......................... 344,838 -- --
Tax benefit associated with stock
plans................................ -- -- -- --
Unrealized gain on securities.......... -- -- -- --
Net income for the nine months ended
September 30, 1998................... -- -- -- --
--------- ---------- ---------- ----------
Balance, September 30, 1998
(unaudited).......................... 4,139,838 $ 4,000 11,925,000 $ 12,000
========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 74
NETWORK SOLUTIONS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
-----------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER RETAINED TOTAL
PAID-IN COMPREHENSIVE EARNINGS STOCKHOLDERS'
CAPITAL INCOME (DEFICIT) EQUITY
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
PREDECESSOR
Balance, December 31, 1994........................... $ 1,241,000 $ (373,000) $ 252,000
Purchase of treasury stock........................... -- -- (30,000)
Net loss for the period from January 1 to
March 10, 1995..................................... -- (1,419,000) (1,419,000)
----------- ------------ ------------
Balance, March 10, 1995.............................. $ 1,241,000 $ (1,792,000) $ (1,197,000)
=========== ============ ============
- ------------------------------------------------------------------------------------------------------------------
COMPANY
Purchase of outstanding common stock by
SAIC on March 10, 1995............................. $ 4,468,000 -- $ 4,480,000
Net loss for the period from March 11 to
December 31, 1995.................................. $ (1,418,000) (1,418,000)
----------- ------------ ------------
Balance, December 31, 1995........................... 4,468,000 (1,418,000) 3,062,000
Net loss for the year ended December 31,
1996............................................... -- (1,625,000) (1,625,000)
----------- ------------ ------------
Balance, December 31, 1996........................... 4,468,000 (3,043,000) 1,437,000
Declaration of Class B dividend...................... -- (10,000,000) (10,000,000)
Conversion of Class B Common Stock................... -- -- --
Issuance of Class A Common Stock..................... 51,983,000 -- 51,987,000
Net income for the year ended
December 31, 1997.................................. -- 4,231,000 4,231,000
----------- ------------ ------------
Balance, December 31, 1997........................... 56,451,000 (8,812,000) 47,655,000
Issuance of common stock pursuant to stock
plans.............................................. 4,456,000 -- 4,456,000
Tax benefit associated with stock plans.............. 2,240,000 -- 2,240,000
Unrealized gain on securities........................ -- $ 151,000 -- 151,000
Net income for the nine months ended
September 30, 1998................................. -- -- 7,517,00 7,517,000
----------- ---------- ------------ ------------
Balance, September 30, 1998 (Unaudited).............. $63,147,000 $ 151,000 $ (1,295,000) $ 62,019,000
=========== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 75
NETWORK SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PREDECESSOR COMPANY
----------------- ------------------------------------------------------------
JANUARY 1, 1995 MARCH 11, 1995 YEAR ENDED YEAR ENDED
TO MARCH 10, 1995 TO DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -------------------- ----------------- -----------------
<CAPTION>
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................... $ (1,419,000) $ (1,418,000) $ (1,625,000) $ 4,231,000
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Net loss from discontinued
operations...................... 1,376,000 28,000 -- --
Depreciation and amortization..... 68,000 765,000 1,417,000 2,432,000
Provision for uncollectible
accounts receivable............. -- 124,000 3,597,000 8,082,000
Deferred income taxes............. -- (2,221,000) (12,834,000) (13,226,000)
Tax benefit associated with stock
plans........................... -- -- -- --
Change in operating assets and
liabilities:
(Increase) decrease in accounts
receivable...................... (161,000) (3,385,000) (12,144,000) (1,287,000)
(Increase) decrease in prepaids
and other assets................ (36,000) 45,000 (925,000) (69,000)
(Increase) decrease in deposits... (49,000) 1,053,000 -- --
Increase in accounts payable and
accrued liabilities............. 233,000 282,000 1,226,000 3,845,000
Increase (decrease) in other
liabilities..................... 8,000 (89,000) -- --
Increase in income taxes
payable......................... -- -- -- 5,042,000
Increase (decrease) in deferred
revenue......................... (30,000) 3,239,000 26,006,000 32,099,000
------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities.......... (10,000) (1,577,000) 4,718,000 41,149,000
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment... (134,000) (518,000) (1,901,000) (3,240,000)
Purchase of short-term investments,
net................................. -- -- -- (40,200,000)
Purchase of long-term investments..... -- -- -- --
Net investment in net assets of
discontinued
operations.......................... 331,000 563,000 (208,000) --
------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities.......... 197,000 45,000 (2,109,000) (43,440,000)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of bank borrowings.......... (293,000) (834,000) -- --
Dividend paid......................... -- -- -- (10,000,000)
Capital lease obligations............. -- -- -- (463,000)
Proceeds from issuance of common
stock............................... -- -- -- 52,405,000
Purchase of treasury stock............ (30,000) -- -- --
Net transactions with SAIC............ -- 2,371,000 12,926,000 (14,045,000)
------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities.......... (323,000) 1,537,000 12,926,000 27,897,000
------------ ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents.................... (136,000) 5,000 15,535,000 25,606,000
Cash and cash equivalents, beginning
of period........................... 136,000 -- 5,000 15,540,000
------------ ------------ ------------ ------------
Cash and cash equivalents, end of
period.............................. $ -- $ 5,000 $ 15,540,000 $ 41,146,000
============ ============ ============ ============
<CAPTION>
COMPANY
---------------------------
NINE MONTHS ENDED SEPTEMBER
30,
---------------------------
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................... $ 2,488,000 $ 7,517,000
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Net loss from discontinued
operations...................... -- --
Depreciation and amortization..... 1,635,000 2,613,000
Provision for uncollectible
accounts receivable............. 5,577,000 2,168,000
Deferred income taxes............. (9,649,000) (14,061,000)
Tax benefit associated with stock
plans........................... -- 2,240,000
Change in operating assets and
liabilities:
(Increase) decrease in accounts
receivable...................... 348,000 (10,298,000)
(Increase) decrease in prepaids
and other assets................ (896,000) (507,000)
(Increase) decrease in deposits... -- --
Increase in accounts payable and
accrued liabilities............. 1,811,000 9,139,000
Increase (decrease) in other
liabilities..................... -- --
Increase in income taxes
payable......................... -- (1,952,000)
Increase (decrease) in deferred
revenue......................... 25,156,000 45,279,000
------------ ------------
Net cash provided by (used in)
operating activities.......... 26,470,000 42,138,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment... (1,254,000) (5,639,000)
Purchase of short-term investments,
net................................. (28,321,000) (67,676,000)
Purchase of long-term investments..... -- (6,012,000)
Net investment in net assets of
discontinued
operations.......................... -- --
------------ ------------
Net cash provided by (used in)
investing activities.......... (29,575,000) (79,327,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of bank borrowings.......... -- --
Dividend paid......................... -- --
Capital lease obligations............. -- (626,000)
Proceeds from issuance of common
stock............................... -- 4,456,000
Purchase of treasury stock............ -- --
Net transactions with SAIC............ 6,627,000 1,337,000
------------ ------------
Net cash provided by (used in)
financing activities.......... 6,627,000 5,167,000
------------ ------------
Net increase (decrease) in cash and
cash equivalents.................... 3,522,000 (32,022,000)
Cash and cash equivalents, beginning
of period........................... 15,540,000 41,146,000
------------ ------------
Cash and cash equivalents, end of
period.............................. $ 19,062,000 $ 9,124,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 76
NETWORK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Network Solutions, Inc. (the "Company") currently acts as the exclusive
registrar of Internet domain names within the .com, .org, .net, and .edu top
level domains ("TLDs") pursuant to a Cooperative Agreement with the National
Science Foundation ("NSF") (Note 3). Domain names are used to identify a unique
site or presence on the Internet. As registry and registrar to these TLDs, the
Company registers new domain names and is responsible for the maintenance and
dissemination of the master file of domain names through daily updates to the
Internet. The Company also provides enterprise network consulting services,
focusing on network engineering, network and systems security and network
management solutions for commercial customers.
The Company was acquired by Science Applications International Corporation
("SAIC") on March 10, 1995 (the "acquisition"). Prior to the acquisition of the
Company by SAIC, the Company's business included commercial and government
contracts awarded to the Company on a competitive basis, including government
contracts that were awarded to the Company partially upon the Company's then
minority-owned status. The contracts which had been awarded to the Company based
partially on the Company's then minority-owned status were transferred into a
separately-owned entity prior to the acquisition of the Company by SAIC.
In November 1995, SAIC adopted a plan to transfer the Company's remaining
government-based business to SAIC in order to enable the Company to focus on the
growth of its commercial business, which includes registration and consulting
services. This transfer was effective as of February 1996. The operating results
of both the minority-based government contract business and the remaining
government-based business, are reflected as discontinued operations in the
financial statements of the Company for all periods presented (Note 13). The
commercial operations, as defined, are reflected as continuing operations in the
financial statements of the Company for all periods presented.
The financial statements for periods subsequent to March 10, 1995 are presented
on the new basis of accounting arising from the acquisition (Note 9). The
financial statements for the period from January 1, 1995 to March 10, 1995 are
presented on the Company's previous basis of accounting. Subsequent to the
acquisition, the results of continuing and discontinued operations include
allocations by SAIC of: (i) costs for administrative functions and services
performed on behalf of the continuing and discontinued operations of the Company
by centralized staff groups within SAIC, (ii) SAIC's general corporate expenses,
(iii) pension and other retirement benefit costs, and (iv) cost of capital
(Notes 8, 9 and 12). Only costs directly attributable to the Company's
government-based business that were not incurred by the Company subsequent to
the transfer of this business to SAIC have been included in discontinued
operations.
NOTE 2 -- RECAPITALIZATION AND INITIAL PUBLIC OFFERING
On June 26, 1997, the Board of Directors amended the Certificate of
Incorporation to provide for two classes of common stock, designated as Class A
and Class B. The holders of Class A and Class B common stock generally have
identical rights except that holders of Class A common stock are entitled to one
vote per share while holders of Class B common stock are entitled to ten votes
per share. Each share of Class B common stock is convertible at the holder's
option into one share of Class A common stock.
On October 1, 1997, the Company completed an initial public offering (the "IPO")
of 3,795,000 shares of its $.001 par value Class A common stock, including
495,000 shares resulting from the exercise of certain overallotment provisions.
The Company's net proceeds from the IPO, including overallotment, were $52.4
million based on the Company's direct sale of 3,220,000 shares of Class A common
stock.
Prior to the offering, the Company was a wholly-owned subsidiary of SAIC. In
conjunction with the IPO, SAIC converted 575,000 shares (including 75,000
overallotment shares) of Class B common stock into 575,000 shares of Class A
common stock and directly sold the shares as a selling stockholder. Upon
completion of the offering,
F-9
<PAGE> 77
NETWORK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SAIC owned 100% of the outstanding Class B common stock representing 75.9% of
the Company's equity and 96.9% of the combined voting power of the Company's
outstanding Class B and Class A common stock.
On August 21, 1997, the Company's Board of Directors declared a $10,000,000
dividend to be paid to SAIC upon consummation of the IPO. This dividend was paid
to SAIC on October 1, 1997.
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NSF Cooperative Agreement
In December 1992, the Company entered into the Cooperative Agreement with the
NSF under which the Company was to provide Internet domain name registration
services for five TLDs: .com, .org, .net, .edu and .gov. These "registration
services" include domain name registration and renewal, and throughout the
registration term, maintenance of and unlimited modifications to individual
domain name records and dissemination of records through updates to the
Internet. The Cooperative Agreement became effective January 1, 1993. It
includes a three-month phase-in period, a five-year operational period
(commencing April 1, 1993 and ending March 31, 1998), and a six-month
"flexibility period" through September 30, 1998. The Cooperative Agreement is
subject to review by the NSF and may be terminated by the NSF at any time at its
discretion or by mutual agreement. The NSF has stated that it will not be
re-awarding a cooperative agreement at the end of the flexibility period.
The original terms of the Cooperative Agreement provided for a cost
reimbursement plus fixed-fee contract (with a fee of 8%). Effective September
14, 1995, the NSF and the Company amended the Cooperative Agreement to require
the Company to begin charging end users a services fee of $50 per year for each
domain name in the .com, .org and .net TLDs. Registrants pay a services fee of
$100 for two years of domain name services upon each initial registration and an
annual renewal fee of $50 per year thereafter (collectively "registration
fees"). The NSF paid the registration fees to the Company for domain names
within the .edu and .gov TLDs through March 31, 1997. Commencing April 1, 1997,
the Company agreed with the NSF to provide domain name services within the .edu
and .gov TLDs free of charge. As of October 1, 1997, the Company no longer
registers or administers domain names in the .gov TLD.
Under the terms of the September 14, 1995 amendment to the Cooperative
Agreement, 30% of the registration fees collected by the Company is required to
be set aside for the enhancement of the intellectual infrastructure of the
Internet ("set aside funds") and, as such, is not recognized as revenue by the
Company. The Company has reflected these set aside funds, along with the
appropriate percentage of net accounts receivable (Note 4), as restricted assets
and has recorded an equivalent, related current liability. The Company maintains
the cash received relating to the set aside funds in a separate interest bearing
account. This restricted cash at December 31, 1996 and 1997 was approximately
$13,049,000 and $23,512,000, respectively. The set aside funds, plus any
interest earned, are intended to be disbursed at the direction of the NSF. In
November 1997, the Company disbursed $23 million out of this fund to the NSF at
its direction.
Future collection or disbursement of these set aside funds will have no
significant effect on the Company's business, net financial position, or results
of operations (Note 15). For purposes of the Company's statements of cash flows,
amounts relating to these restricted assets and the Internet fund liability have
been excluded in their entirety.
Revenue Recognition
Prior to September 14, 1995, net revenue was recognized under the Cooperative
Agreement on the basis of direct cost plus allowable indirect costs and the
earned portion of the fee. Since September 14, 1995, registration fees charged
to end users for registration services provided by the Company have been
recognized on a straight-line basis over the life of the registration term, two
years for initial registrations and one year for
F-10
<PAGE> 78
NETWORK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
renewals. The Company records revenue net of an estimated provision for
uncollectible accounts receivable (Note 4).
Substantially all of the Company's enterprise network consulting services
revenue is derived from professional services which are generally provided to
clients on a "time and expense" basis and is recognized as services are
performed.
Net revenue from two customers approximated 45% and 21% for the period from
January 1, 1995 to March 10, 1995; 40% and 21% for the period from March 11,
1995 to December 31, 1995, and 20% and 0% for the year ended December 31, 1996.
One of these customers was the NSF, whose impact on the above percentages of
revenue was reflective of activity prior to the September 14, 1995 amendment of
the Cooperative Agreement. During the year ended December 31, 1997, there were
no customers which individually represented more than 5% of net revenues.
Deferred Revenue
Deferred revenue primarily represents the unearned portion of revenue related to
the unexpired term of registration fees, net of an estimate for uncollectible
accounts receivable (Note 4).
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
ninety days or less to be cash equivalents.
Financial Instruments
The recorded value of the Company's financial instruments, which include
short-term investments, accounts receivable and accounts payable, approximates
market value. Concentration of credit risks with respect to registration
receivables is limited due to the wide variety and number of customers, as well
as their dispersion across geographic areas. The Company has no derivative
financial instruments.
Furniture and Equipment
Furniture and equipment are stated at cost. Depreciation on furniture, office
and computer equipment is calculated principally using a declining-balance
method over the useful lives of three to seven years. Equipment under capital
leases is amortized using a declining-balance method over the shorter of the
assets' useful lives or lease term, ranging from two to three years. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or the estimated useful lives of the assets, generally six years.
Goodwill
Goodwill represents the excess of the purchase cost over the fair value of net
assets acquired in the acquisition and is amortized over five years using the
straight-line method. Amortization expense of $580,000, $715,000 and $686,000
for the period from March 11, 1995 to December 31, 1995, and the years ended
December 31, 1996 and 1997, respectively, was included in selling, general and
administrative expenses.
Software Development Costs
Effective January 1, 1996, research and development costs are expensed as
incurred. Research and development costs incurred for all periods presented
prior to January 1, 1996 were reimbursed to the Company by direct charges to
contracts and are included in cost of revenue for those periods.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed", the Company has not capitalized any significant software development
costs as of December 31, 1997.
F-11
<PAGE> 79
NETWORK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
Deferred taxes are accounted for under SFAS No. 109 "Accounting for Income
Taxes," whereby deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between financial
statement reporting and income tax purposes. A valuation allowance is recorded
if it is "more likely than not" that some portion of or all of a deferred tax
asset will not be realized.
For the period from the acquisition until the IPO, the Company filed tax returns
as part of SAIC's consolidated tax group. Tax expense during this period has
been determined as if the Company was a separate taxpayer and was charged to the
Company by SAIC. Effective October 1, 1997, the Company is no longer part of
SAIC's consolidated tax group for federal income tax purposes and will prepare
its income tax returns as a separate entity.
Stock Based Compensation
The Company accounts for its stock option and employee stock purchase plans in
accordance with the provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees". No compensation cost has
been recognized by the Company for its employee stock plans. SFAS No. 123,
"Accounting for Stock-Based Compensation", provides an alternative accounting
method to APB No. 25 and requires additional pro forma disclosures (Note 12).
The Company expects to continue to account for its employee stock plans in
accordance with the provisions of APB No. 25.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make reasonable estimates and
assumptions, based upon all known facts and circumstances that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements. Actual results could
differ from those estimates.
Newly Issued Accounting Standards
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share", which replaces the presentation of primary earnings per share ("EPS")
with a presentation of basic EPS and necessitates the dual presentation of basic
and diluted EPS on the face of the statement of operations. In addition, during
February 1998, the Company adopted Securities and Exchange Staff Accounting
Bulletin ("SAB") No. 98, which, among other things, rescinded SAB No. 83 and
thus eliminates the impact of common share equivalents granted by the Company at
prices below the IPO offering price during the twelve months preceding the
initial IPO filing and through the filing's effective date. All prior period EPS
data have been restated as required by SFAS No. 128 and SAB No. 98. See Note 11
for the reconciliation of the numerator and denominator used in the basic and
diluted EPS computations.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" was issued. SFAS No. 131 establishes standards for
reporting information about operating segments in annual and interim financial
statements issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
SFAS No. 131 is effective for fiscal years beginning after December 15, 1997 and
will have no impact on the Company's results of operations, financial position
or cash flows.
INTERIM FINANCIAL STATEMENTS
The interim financial statements for the nine months ended September 30, 1997
and 1998 have been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. In the opinion of
management, these interim financial statements included in this report reflect
all normal recurring adjustments which the Company considers necessary for fair
presentation of the results of
F-12
<PAGE> 80
NETWORK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
operations for the interim periods covered and of the financial position of the
Company at the date of the interim balance sheet. Certain information and
footnote disclosures for the interim periods normally included in the annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate for
understanding the information presented. The operating results for interim
periods are not necessarily indicative of the operating results for the entire
year. Prior periods have been restated for comparative purposes.
NOTE 4 -- ACCOUNTS RECEIVABLE
Accounts receivable consist of the following amounts as of December 31:
<TABLE>
<CAPTION>
-------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Billed...................................................... $ 27,430,000 $ 24,483,000
Unbilled.................................................... 5,000,000 1,526,000
------------ ------------
Total accounts receivable before allowances............ 32,430,000 26,009,000
Less -- Allowance for doubtful accounts..................... (15,439,000) (17,856,000)
-- Accounts receivable allocable to 30% NSF set aside
(Note 3)............................................... (4,404,000) (2,361,000)
------------ ------------
Accounts receivable, net.................................... $ 12,587,000 $ 5,792,000
============ ============
</TABLE>
Unbilled receivables consist of registration fees and time and material contract
costs which have been incurred but which have not yet been billed. Under the
Cooperative Agreement, 30% of collected registration fees will be set aside for
disbursement at the direction of the NSF.
In accounting for registration fees, the Company initially records the gross
amount of the registration fee to accounts receivable and deferred revenue. The
allowance for estimated uncollectible accounts is recorded against both accounts
receivable and deferred revenue balances (see Note 3 for treatment of the 30%
NSF set aside). From the net deferred revenue balance, the Company records
revenue on a straight-line basis over the registration term.
The provision for uncollectible accounts receivable, which is recorded on a
straight-line basis over the registration term and deducted from gross
registration fees in determining net registration revenue, was $124,000 for the
period from March 11, 1995 to December 31, 1995 and $3,597,000 and $7,782,000,
respectively, for the years ended December 31, 1996 and 1997. An additional
$300,000 of bad debt expense was recorded in 1997 for the write-off of
consulting services receivables. The Company's allowance for uncollectible
accounts receivable is associated solely with its registration services
business. The Company believes it has been necessary to establish its provision
for uncollectible accounts receivable due to the large number of individuals and
corporations that have registered multiple domain names with the intention of
reselling such names at a profit. The Company's experience has been that, in
contrast to other registrants, such resellers have a higher tendency of default
on their registration fees.
F-13
<PAGE> 81
NETWORK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following amounts as of December 31:
<TABLE>
<CAPTION>
-----------------------------
1996 1997
----------- -----------
<S> <C> <C>
Furniture and office equipment.............................. $ 879,000 $ 476,000
Computer equipment.......................................... 4,033,000 8,619,000
Leasehold improvements...................................... 234,000 288,000
----------- -----------
Furniture and equipment, at cost....................... 5,146,000 9,383,000
Less: Accumulated depreciation and amortization............. (2,880,000) (3,237,000)
----------- -----------
Furniture and equipment, net................................ $ 2,266,000 $ 6,146,000
=========== ===========
</TABLE>
The above table includes $2,386,000 of computer equipment acquired during 1997
under capital lease agreements. Amortization expense related to capital leases
totaled $915,000 in 1997. Total depreciation and amortization expense for the
periods from January 1, 1995 to March 10, 1995 and March 11, 1995 to December
31, 1995 and the years ended December 31, 1996 and 1997 was $68,000, $185,000,
$702,000 and $1,746,000, respectively.
NOTE 6 -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following amounts as of
December 31:
<TABLE>
<CAPTION>
-----------------------------
1996 1997
----------- -----------
<S> <C> <C>
Accounts payable............................................ $ 1,054,000 $ 1,896,000
Accrued expenses............................................ 1,412,000 2,384,000
Accrued payroll............................................. 115,000 2,146,000
----------- -----------
Total accounts payable and accrued expenses................. $ 2,581,000 $ 6,426,000
=========== ===========
</TABLE>
NOTE 7 -- LEASES
Future minimum lease payments, including fixed escalation increases, for office
space and equipment under capital and operating leases with initial or remaining
noncancelable lease terms in excess of one year as of December 31, 1997 are:
<TABLE>
<CAPTION>
-----------------------------
CAPITAL OPERATING
YEAR ENDING DECEMBER 31: LEASES LEASES
------------------------ ----------- -----------
<S> <C> <C>
1998........................................................ $ 957,000 $ 3,437,000
1999........................................................ 885,000 3,438,000
2000........................................................ 252,000 2,806,000
2001........................................................ -- 1,818,000
2002........................................................ -- 1,427,000
----------- -----------
Total minimum lease payments................................ 2,094,000 $12,926,000
===========
Less: Amounts representing interest......................... (171,000)
-----------
Present value of minimum lease payments..................... 1,923,000
Less: Current portion....................................... (842,000)
-----------
Long-term portion of capital lease obligations.............. $ 1,081,000
===========
</TABLE>
F-14
<PAGE> 82
NETWORK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In December 1992, the Company entered into a lease agreement for the Company's
headquarters in Herndon, Virginia. Subsequent to the acquisition, SAIC
re-negotiated the lease with the landlord whereby SAIC posted a $1,000,000
letter of credit and then subleased the facilities to the Company under a lease
expiring November 2002. During 1997, the Company leased a second facility in
Herndon whose lease term expires in July 2002.
Lease expense related to the continuing operations for the periods from January
1, 1995 to March 10, 1995 and March 11, 1995 to December 31, 1995, and for the
years ended December 31, 1996 and 1997 was $36,000, $342,000, $924,000 and
$2,188,000, respectively. Lease expense incurred by the discontinued operations
for the periods from January 1, 1995 to March 10, 1995 and March 11, 1995 to
December 31, 1995 was $208,000 and $328,000, respectively. Subsequent to March
10, 1995, the Company generated rental income from subleases in 1995 of
$135,000, and $187,000 and $291,000 for the years ended December 31, 1996 and
1997, respectively.
NOTE 8 -- INTEREST EXPENSE AND INCOME
Interest expense reflected in continuing operations and discontinued operations
for the period January 1, 1995 to March 10, 1995 was $9,000 and $51,000,
respectively. Interest charges prior to the acquisition have been reflected in
continuing and discontinued operations based on the debt balances associated
with each of the continuing and discontinued operations. In addition, interest
expense of $52,000 and $164,000 for the period from March 11, 1995 to December
31, 1995 was allocated by SAIC to the Company's continuing operations and
discontinued operations, respectively, based upon SAIC's cost of capital
calculation. For the year ended December 31, 1996, interest income of $496,000
was allocated by SAIC based upon the cost of capital calculation. From its
acquisition by SAIC in March 1995 until December 1996, the Company participated
in SAIC's centralized cash management system whereby cash received from
operations was transferred to SAIC's centralized cash accounts and cash
disbursements were funded from such centralized cash accounts. Accordingly, the
SAIC cost of capital formula provided for charges and credits to the Company
based upon management of certain assets, including accounts receivable and fixed
assets. Such amounts are not necessarily indicative of the cost that would have
been incurred if the Company had been operated as a separate entity.
Effective January 1, 1997, the Company was no longer subject to SAIC's cost of
capital calculation in connection with the Company fulfilling its own treasury
function. Interest paid for the periods from January 1, 1995 to March 10, 1995
and March 11, 1995 to December 31, 1995 and for the years ended December 31,
1996 and 1997 was $0, $103,000, $0 and $116,000, respectively.
NOTE 9 -- TRANSACTIONS WITH SAIC
Under the terms of the acquisition agreement, the Company was acquired by SAIC
on March 10, 1995 in a stock-for-stock transaction accounted for as a purchase.
The fair market value of the SAIC stock exchanged for the outstanding stock of
the Company was approximately $3.9 million. The acquisition agreement provided
for certain purchase adjustments and related additional stock issuance payments
of approximately $600,000. After
F-15
<PAGE> 83
NETWORK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
reflecting certain purchase accounting adjustments, the net assets included on
the opening balance sheet were as follows:
<TABLE>
<S> <C>
----------
Current assets.............................................. $ 929,000
Furniture and equipment..................................... 734,000
Goodwill.................................................... 3,576,000
Other non-current assets.................................... 1,047,000
----------
6,286,000
Current liabilities......................................... 1,625,000
Net liabilities of discontinued operations.................. 181,000
----------
Net assets acquired at March 11, 1995....................... $4,480,000
==========
</TABLE>
The financial statements as of and for the period from March 11, 1995 to
December 31, 1995 and for the years ended December 31, 1996 and 1997 include
significant transactions with other SAIC business units involving functions and
services (such as cash management, tax administration, accounting, legal, data
processing and employee benefit plans) that were provided to the Company by
centralized SAIC organizations. The costs of these functions and services have
been directly charged and/or allocated to the Company using methods that SAIC
management believes are reasonable; primarily a percentage of budgeted
administrative and overhead costs. Such charges and allocations are not
necessarily indicative of the costs that would have been incurred if the Company
had been a separate entity. Through August 9, 1996, the amounts allocated by
SAIC to the Company included both administrative and overhead costs which are
included in selling, general and administrative expenses and cost of revenue,
respectively. Effective August 10, 1996, SAIC stopped allocating costs based
generally upon pro rata labor and began assessing the Company for corporate
services provided by SAIC at a fee equal to 2.5% of annual net revenue. The
agreement may be terminated by either party upon 180 days prior written notice.
Amounts charged and allocated to the Company for these functions and services
for the period from March 11, 1995 to December 31, 1995 and the years ended
December 31, 1996 and 1997 were $516,000, $1,196,000 and $1,126,000,
respectively, and are principally included in selling, general and
administrative expenses. Additionally, certain interest charges/credits were
allocated by SAIC to the Company (Note 8).
Sales as a subcontractor to SAIC for the period from March 11, 1995 to December
31, 1995 and the years ended December 31, 1996 and 1997 were $509,000,
$1,505,000 and $2,445,000, respectively. In addition, because the Company was
included in SAIC's consolidated tax returns for periods from acquisition until
the IPO, the Company was obligated to make payment for its tax liability to SAIC
in accordance with the tax sharing arrangement (Note 10). The due to parent
balance represents the cumulative net activity of all transactions between the
Company and SAIC. The Company reflects this activity in the statement of cash
flows on a net basis because of the quick turnover, the large amounts and the
short maturities of these related party cash transactions.
NOTE 10 -- PROVISION FOR INCOME TAXES
The results of the Company since its acquisition by SAIC until its IPO are to be
included in SAIC's consolidated tax returns. The tax expense allocation is set
forth in Note 3. Subsequent to the IPO, the Company is no longer part of SAIC's
consolidated tax group for federal income tax purposes and will prepare its
income tax returns as a separate entity.
F-16
<PAGE> 84
NETWORK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The provision for (benefit) from income taxes charged to continuing operations
consists of the following:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
FOR THE PERIOD 1995
------------------------------ YEAR ENDED YEAR ENDED
JANUARY 1 TO MARCH 11 TO DECEMBER 31, DECEMBER 31,
MARCH 10 DECEMBER 31 1996 1997
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Current:
Federal.......................... $40,000 $1,521,000 $ 10,171,000 $ 13,931,000
State............................ 8,000 311,000 2,020,000 2,766,000
------- ----------- ------------ ------------
Total current
provision.............. 48,000 1,832,000 12,191,000 16,697,000
------- ----------- ------------ ------------
Deferred:
Federal.......................... -- (1,759,000) (10,716,000) (11,035,000)
State............................ -- (360,000) (2,118,000) (2,191,000)
------- ----------- ------------ ------------
Total deferred
(benefit).............. -- (2,119,000) (12,834,000) (13,226,000)
------- ----------- ------------ ------------
Provision for (benefit) from income
taxes............................ $48,000 $ (287,000) $ (643,000) $ 3,471,000
======= =========== ============ ============
</TABLE>
Deferred tax assets are comprised of the following temporary differences as of
December 31:
<TABLE>
<CAPTION>
-----------------------------
1996 1997
----------- -----------
<S> <C> <C>
Deferred Revenue....................................... $13,846,000 $26,295,000
Provision for uncollectible accounts receivable........ 1,091,000 1,841,000
Other.................................................. 118,000 145,000
----------- -----------
Total deferred tax asset............................... $15,055,000 $28,281,000
=========== ===========
</TABLE>
Tax valuation allowances were provided through March 10, 1995 against the net
deferred tax assets of both continuing operations and discontinued operations.
In connection with the acquisition purchase accounting, a determination was made
that tax valuation allowances were no longer required.
Although the Company had a past history of net losses, it has not established a
current valuation allowance for its deferred tax assets since, in the opinion of
management, it is more likely than not that all of the deferred tax assets will
be realized. The deferred tax assets relate primarily to registration fees which
are taxable upon initial registration but are recognized in the financial
statements over the next 12 to 24 months, the registration term.
A reconciliation of the provision for income taxes to the amount computed by
applying the statutory federal income tax rate to income before income taxes is
provided below. The statutory federal income tax rate used was 34% for the
periods during 1995 and 35% for the years ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
-----------------------------------------------------------------
FOR THE PERIOD 1995
----------------------------- YEAR ENDED YEAR ENDED
JANUARY 1 TO MARCH 11 TO DECEMBER 31, DECEMBER 31,
MARCH 10 DECEMBER 31 1996 1997
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Federal tax at statutory rate............ $ 1,000 $(570,000) $(794,000) $2,696,000
State income taxes, net of Federal tax
benefit................................ -- (68,000) (96,000) 374,000
Nondeductible goodwill amortization...... -- 348,000 281,000 240,000
Other.................................... 1,000 3,000 (34,000) 161,000
Valuation allowance...................... 46,000 -- -- --
------- --------- --------- ----------
Provision for (benefit) from income
taxes.................................. $48,000 $(287,000) $(643,000) $3,471,000
======= ========= ========= ==========
</TABLE>
The Company paid income taxes of $119,000 for the period from January 1, to
March 10, 1995.
F-17
<PAGE> 85
NETWORK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- COMPUTATION OF EARNINGS (LOSS) PER SHARE
The following is a reconciliation of the numerator and denominator used in the
basic and diluted EPS computations for continuing operations:
<TABLE>
<CAPTION>
-----------------------------------------------
INCOME PER
(LOSS) SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
January 1, 1995 to March 10, 1995 Loss Per Share:
Basic............................................... $ (44,000) 1,046,000 $(0.04)
======
Dilutive securities:
Outstanding options............................... -- --
----------- ----------
Diluted............................................. $ (44,000) 1,046,000 $(0.04)
=========== ========== ======
March 11, 1995 to December 31, 1995 Loss Per Share:
Basic............................................... $(1,390,000) 12,500,000 $(0.11)
======
Dilutive securities:
Outstanding options............................... -- --
----------- ----------
Diluted............................................. $(1,390,000) 12,500,000 $(0.11)
=========== ========== ======
1996 Loss Per Share:
Basic............................................... $(1,625,000) 12,500,000 $(0.13)
======
Dilutive securities:
Outstanding options............................... -- --
----------- ----------
Diluted............................................. $(1,625,000) 12,500,000 $(0.13)
=========== ========== ======
1997 Earnings Per Share:
Basic............................................... $ 4,231,000 13,305,000 $ 0.32
======
Dilutive securities:
Outstanding options............................... -- 178,000
----------- ----------
Diluted............................................. $ 4,231,000 13,483,000 $ .031
=========== ========== ======
Nine Months Ended September 30, 1998 (Unaudited):
Basic............................................... $ 7,517,000 15,888,000 $ 0.47
======
Dilutive securities:
Outstanding options............................... -- 656,000
----------- ----------
Diluted............................................. $ 7,517,000 16,544,000 $ 0.45
=========== ========== ======
Nine Months Ended September 30, 1997 (Unaudited):
Basic............................................... $ 2,488,000 12,501,000 $ 0.20
======
Dilutive securities:
Outstanding options............................... -- 99,000
----------- ----------
Diluted............................................. $ 2,488,000 12,600,000 $ 0.20
=========== ========== ======
</TABLE>
F-18
<PAGE> 86
NETWORK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Common shares issued are weighted for the period the shares were outstanding and
incremental shares assumed issued under the treasury stock method for dilutive
EPS are weighted for the period the underlying options were outstanding. Options
outstanding in 1995 and 1996 are not reflected in the computation of diluted EPS
because the effects are antidilutive and would increase diluted EPS.
NOTE 12 -- EMPLOYEE BENEFIT PLANS
1996 Stock Incentive Plan
The 1996 Stock Incentive Plan (the "Incentive Plan") of the Company was adopted
by the Board of Directors on September 18, 1996. The Incentive Plan provides for
awards in the form of restricted shares, stock units, stock appreciation rights,
and stock options (including incentive stock options ("ISOs") and nonstatutory
stock options ("NSOs")). A total of 2,306,250 shares of Class A Common Stock
have been initially reserved for issuance under the Incentive Plan. The number
of shares are increased by 2% of the total number of common shares of the
Company outstanding at the end of the most recent calendar year, subject to a
cumulative limit of 1,000,000 shares. Through December 31, 1997, an additional
564,400 shares were eligible for issuance and have subsequently been reserved
for a combined total of 2,870,650 eligible shares under the Incentive Plan.
Following is a summary of activity pursuant to the Company's Incentive Plan:
<TABLE>
<CAPTION>
--------------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance at December 31, 1995................................ -- --
Granted..................................................... 1,225,725 $12.97
Exercised................................................... -- --
Cancelled................................................... -- --
---------
Balance at December 31, 1996................................ 1,225,725 $12.97
Granted..................................................... 600,500 $14.21
Exercised................................................... -- --
Cancelled................................................... (36,500) $14.00
---------
Balance at December 31, 1997................................ 1,789,725 $13.36
=========
</TABLE>
Granted stock options generally become exercisable one year after the date of
the grant, vest 30%, 30%, 20% and 20% on each anniversary date of the grant and
have a term of five years. The number of options exercisable at December 31,
1997 are 360,821 with an exercise price range of $11.25 to $14.00 and a weighted
average exercise price of $12.95. The weighted average contractual life of all
options outstanding at December 31, 1997 is 4.10 years. All options granted to
date have been NSOs except for 100,900 ISOs granted in 1996. No restricted
shares, stock units or SARs have been granted to date.
Employee Stock Purchase Plan
Effective January 7, 1998, the Company adopted an Employee Stock Purchase Plan
to provide substantially all full time employees an opportunity to purchase
shares of its Class A common stock through payroll deductions of up to 10% of
eligible compensation. Semiannually, on June 30 and December 31, participant
account balances are used to purchase stock at the lesser of 85 percent of the
fair market value on the trading day before the participation period starts or
the trading day preceding the day on which the participation period ends. A
total of 250,000 shares are available for purchase under the plan.
SAIC Benefit Plans
Employees of the Company participate in various SAIC benefit plans, including
stock, bonus and retirement plans, subject to the applicable eligibility
requirements. SAIC charges the Company directly for the costs of
F-19
<PAGE> 87
NETWORK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
such employee benefit plans. Charges related to the administration of the SAIC
benefit plans in which employees of the Company participate are included within
SAIC general corporate allocations (Notes 1 and 9).
SAIC has one principal Cash or Deferred Arrangement ("CODA") which allows
eligible participants to defer a portion of their income through payroll
contributions. Such deferrals are fully vested, are not taxable to the
participant until distributed from the CODA upon termination, retirement,
permanent disability or death and may be matched by SAIC. SAIC also has an SAIC
Employee Stock Purchase Plan which allows eligible employees to purchase shares
of SAIC's Class A common stock, with SAIC currently contributing 10% of the
existing fair market value.
SAIC has a Bonus Compensation Plan which provides for bonuses to reward
outstanding performance. Bonuses are paid in the form of cash, fully vested
shares of SAIC Class A common stock or vesting shares of SAIC Class A common
stock. The Company participated in this plan during the period from acquisition
until December 31, 1996.
During the period from March 11, 1995 to December 31, 1995 and during the years
ended December 31, 1996 and 1997, a total of 24,450, 53,040 and 11,450 SAIC
options were granted to the Company's employees, respectively, with exercise
prices ranging from $15.72 to $17.79, $19.33 to $22.83 and $25.96 to $34.78 per
share, respectively, with a weighted average price of $16.17, $20.51 and $28.13,
respectively. These options were granted under the SAIC 1995 Stock Option Plan
to purchase SAIC Class A common stock and vest 20%, 20%, 20% and 40% on each
anniversary date of grant and have a term of five years.
Pro Forma Disclosures
The weighted average fair value of the options granted during the period from
March 11, 1995 to December 31, 1995 and during the years ended December 31, 1996
and 1997 under the SAIC Bonus Compensation Plan were estimated at $3.66, $4.30
and $7.56, respectively, and $2.76 and $4.68, respectively, for the options
granted during the years ended December 31, 1996 and 1997 under the Company's
Incentive Plan using the Black-Scholes model. The following weighted average
assumptions were used in calculating the option fair values:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SAIC STOCK OPTIONS
------------------------------------------ COMPANY STOCK OPTIONS
MARCH 11, ---------------------------
1995 TO YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997 1996 1997
------------ ------------ ------------ ------------ ------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
Expected life (years)....... 4.0 4.0 5.0 4.0 4.0
Risk-free interest rate..... 6.45% 5.91% 6.30% 5.98% 6.25%
Volatility.................. 0.00% 0.00% 0.00% 0.00% 20.79%
Dividend yield.............. 0.00% 0.00% 0.00% 0.00% 0.00%
</TABLE>
Under the above models, the total value of SAIC stock options granted during
1995, 1996 and 1997 was approximately $89,000, $228,000 and $87,000,
respectively, and $3,379,000 and $2,809,000, respectively, for the Company's
stock options granted in 1996 and 1997, all of which would be amortized ratably
on a pro forma basis over their respective option terms. Had the Company
recorded compensation costs for these plans in accordance with SFAS No. 123, the
Company's pro forma income (loss) would have been ($1,430,000) for the period
March 11, 1995 to December 31, 1995 and ($1,763,000) and $3,510,000,
respectively for the years ended December 31, 1996 and 1997. Pro forma basic
earnings (loss) per share would have been ($0.14) and $0.26, respectively, for
the years ended December 31, 1996 and 1997.
F-20
<PAGE> 88
NETWORK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- DISCONTINUED OPERATIONS
As discussed in Note 1, in November 1995 SAIC adopted a plan to transfer the
Company's government-based business to SAIC in order for the Company to focus on
the growth of the commercial business. Such transfer was substantially completed
as of February 1996. Prior to SAIC's acquisition of the Company, the portion of
the Company's business relating to the minority-based government business had
been transferred into a separately-owned entity. The activities of both the
minority-based government business and the government-based business are
reflected as discontinued operations in the financial statements of the Company
for all periods presented. Net income (loss) from discontinued operations
exclude general corporate overhead of the Company. No gain or loss was incurred
as a consequence of the transfer of these businesses.
Summary operating results of the discontinued operations were as follows:
<TABLE>
<CAPTION>
-----------------------------
<S> <C> <C>
FOR THE PERIOD 1995
-----------------------------
JANUARY 1 MARCH 11 TO
TO MARCH 10 DECEMBER 31
----------- -----------
<CAPTION>
<S> <C> <C>
Revenues................................................. $ 4,270,000 $ 7,882,000
Costs and expenses....................................... (5,478,000) (7,773,000)
----------- -----------
(Loss) income from discontinued operations before income
taxes.................................................. (1,208,000) 109,000
Provision for income taxes............................... 167,000 137,000
----------- -----------
Loss from discontinued operations, net of income taxes... $(1,375,000) $ (28,000)
=========== ===========
</TABLE>
NOTE 14 -- COMMITMENTS AND CONTINGENCIES
As of December 31, 1997, the Company was a defendant in 5 lawsuits involving
domain name disputes between trademark owners and domain name holders. The
Company is drawn into such disputes, in part, as a result of claims by trademark
owners that the Company is legally required, upon request by a trademark owner,
to terminate the right the Company granted to an alleged trademark infringer to
register the domain name in question. Further, trademark owners have also
alleged that the Company should be required to monitor future domain name
registrations and reject registrations of domain names which are identical or
similar to their federally registered trademark. The holders of the domain name
registrations in dispute have, in turn, questioned the Company's right, absent a
court order, to take any action which suspends their registration or use of the
domain names in question. Although 41 of these objections have resulted in
litigation involving the Company, as of December 31, 1997, no damages have been
awarded against the Company to any plaintiff in the 36 cases that have been
resolved. The Company believes that it has meritorious defenses and intends to
vigorously defend itself against these claims.
On October 17, 1997, a group of six plaintiffs filed a lawsuit (the "Thomas
suit") against the Company and the NSF in the United States District Court,
District of Columbia, challenging the legality of fees defendants charge for the
registration and renewal of domain names on the Internet and seeking restitution
of fees collected from domain name registrants in an amount in excess of $100
million, damages, and injunctive and other relief. Plaintiffs originally alleged
violations of the Competition in Contracting Act ("CICA"), the Sherman Act and
the U.S. Constitution. Following the filing of motions to dismiss by the
defendants, the plaintiffs filed an amended complaint on January 30, 1998,
dropping the cause of action based upon CICA, but adding alleged violations of
the Administrative Procedures Act and the Independent Offices Appropriations
Act. The plaintiffs also filed a motion for preliminary injunctive relief
against the NSF concerning the "Intellectual Infrastructure Fund." On February
2, 1998, the United States District Court, District of Columbia, issued an order
granting the plaintiffs' motion for a preliminary injunction, enjoining the NSF
from spending any of the money collected by the Company for the Intellectual
Infrastructure Fund. The Company believes that it has meritorious defenses and
F-21
<PAGE> 89
NETWORK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
intends to vigorously defend itself against the claims in the Thomas suit. While
the Company cannot reasonably estimate the potential impact of such claims, a
successful claim under the plaintiffs' theories could have a material adverse
effect on the Company's business, financial condition and results of operations.
See Note 15.
On June 27, 1997, SAIC received a Civil Investigative Demand ("CID") from the
U.S. Department of Justice ("DOJ") issued in connection with an investigation to
determine whether there is, has been, or may be an antitrust violation under the
Sherman Act relating to Internet registration products and services. The CID
seeks documents and information from SAIC and the Company relating to their
Internet registration business. The Company cannot reasonably estimate the
potential impact of the investigation nor can it predict whether a civil action
will ultimately be filed by the DOJ. The Company is unable to predict the form
of relief that might be sought in such an action or that might be awarded by a
court or imposed as a result of any settlement. Any such relief could have a
material adverse effect on the Company's business, financial condition and
results of operations.
On March 20, 1997, PG Media, Inc., a New York-based corporation ("PG Media"),
filed a lawsuit against the Company in the United States District Court,
Southern District of New York alleging that the Company had restricted access to
the Internet by not adding PG Media's requested TLDs in violation of the Sherman
Act. In its complaint, PG Media has, in addition to requesting damages, asked
that the Company be ordered to include reference to PG Media's TLDs and name
servers in the root zone file administered by the Company under the Cooperative
Agreement. The Company has answered the complaint. In addition, in June 1997,
the Company received written direction from the NSF not to take any action to
create additional TLDs or to add any new TLDs to the Internet root zone until
the NSF provides further guidance. On September 17, 1997, PG Media filed a
Second Amended Complaint adding the NSF as a defendant. No motions are pending
as of December 31, 1997. The Company believes that it has meritorious defenses
and intends to vigorously defend itself against the claims of PG Media. Although
the Company cannot reasonably estimate the potential impact of such claims, a
successful claim under the plaintiff's theory could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company is involved in various other investigations, claims and lawsuits
arising in the normal conduct of its business, none of which, in the opinion of
the Company's management, will have a material adverse effect on its financial
position, results of operations, cash flows or its ability to conduct business.
NOTE 15 -- SUBSEQUENT EVENTS (UNAUDITED)
NSF Cooperative Agreement
Pursuant to an amendment to the Cooperative Agreement, on March 12, 1998, the
NSF directed the Company to begin charging end users $70 upon each initial
registration for domain names registered April 1, 1998 or later and $35 for each
renewal with an anniversary date of April 1, 1998 or later. In conjunction with
this amendment to the Cooperative Agreement, the Company will no longer set
aside 30% of the collected registration fees for the enhancement of the
intellectual infrastructure of the Internet. This amendment does not alter the
Company's existing revenue per net registration since the 30% set aside funds
were previously not recognized as revenue. The set aside funds plus any interest
earned, are intended to be disbursed at the direction of the NSF. In September
1998, the Company disbursed $39.2 million of this fund to the NSF at its
direction. In December 1998, the Company disbursed the remaining monies due to
the NSF of approximately $150,000, bringing the cumulative disbursements since
September 14, 1995 to approximately $62.4 million.
Effective in September 1998, the responsibility for the Cooperative Agreement
was transferred to the NTIA. In October 1998, the Cooperative Agreement was
amended (the "October 1998 Amendment") to extend the flexibility period through
September 30, 2000. As the U.S. Government transitions certain responsibilities
for the DNS to the not-for-profit corporation, corresponding obligations under
the Cooperative Agreement may be terminated and, as appropriate, covered in a
contract between the not-for-profit corporation and the Company. In
F-22
<PAGE> 90
NETWORK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the October 1998 Amendment, the Company agreed with the NTIA to plan for the
transition to a shared registration system, in which multiple registrars may
register domain names with the single registry for each TLD administered by the
Company, in a phased approach, the first phase of which is scheduled to be
completed by March 31, 1999. The Cooperative Agreement by its terms expires in
September 2000, although it may be terminated earlier.
Litigation
In August 1998, the court dismissed all of the plaintiffs' claims against the
Company in the Thomas suit. In October 1998, the plaintiffs appealed the court's
dismissal of their claims, with the oral argument scheduled for February 25,
1999.
Stock Split
On December 31, 1998, the Board of Directors of the Company approved a 2-for-1
stock split of the shares of Class A Common Stock and Class B Common Stock, to
be effected in the form of a stock dividend on shares of Class A Common Stock
and Class B Common Stock outstanding on February 26, 1999. The stock dividend
will be distributed on March 23, 1999. After giving effect to this stock split,
pro forma earnings (loss) per share for all periods presented would be as
follows:
[CAPTION]
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY
----------------- --------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
JANUARY 1, 1995 MARCH 11, 1995 YEAR ENDED YEAR ENDED -----------------
TO MARCH 10, 1995 TO DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997 1997 1998
----------------- -------------------- ----------------- ----------------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Basic................ $(0.68) $(0.06) $(0.07) $0.16 $0.10 $0.24
====== ====== ====== ===== ===== =====
Diluted.............. $(0.68) $(0.06) $(0.07) $0.16 $0.10 $0.23
====== ====== ====== ===== ===== =====
</TABLE>
F-23
<PAGE> 91
[INSIDE BACK COVER]
ENTERPRISE NETWORK
CONSULTING SERVICES
<TABLE>
<CAPTION>
NETWORK ENGINEERING NETWORK SYSTEM SECURITY
<S> <C>
- - Network Architecture Design - Expertise in Security Strategy Development
Review and Assessment - Backbone, LAN/WAN Remote Access and Facilities
- - DNS and Dynamic Host Configuration Protocol Security
Engineering - Virtual Private Network Design and Implementation
- - Intranet and Extranet Infrastructure Engineering
- - Routing and Switching Architecture Implementation
</TABLE>
[NETWORK SOLUTIONS LOGO]
NETWORK MANAGEMENT
- Mission Critical Performance and Remote Monitoring
- Network Capacity and Performance Management Services
- New Technology Integration and Management
- Disaster Recovery and Network System Failure Contingency
Planning
<PAGE> 92
[OUTSIDE BACK COVER]
[NETWORK SOLUTIONS LOGO]
<PAGE> 93
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses payable by the Registrant in
connection with the sale and distribution of the securities being registered
hereby. Normal commission expenses and brokerage fees are payable individually
by the Selling Stockholders. All amounts are estimated except the SEC
registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
SEC registration fee........................................ $203,527
NASD filing fee............................................. 30,500
Accounting fees and expenses................................ *
Printing and engraving...................................... *
Legal fees and expenses..................................... *
Miscellaneous fees and expenses............................. *
--------
Total............................................. $ *
========
</TABLE>
--------------------
* To be filed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides for the
indemnification of officers, directors, and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act. Article IX of the Registrant's Second Amended and Restated
Certificate of Incorporation (Exhibit 3(i) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997) limits the liability of the
Registrant's directors to the extent and under the circumstances permitted by
the Delaware General Corporation Law. Certain provisions of the Company's Bylaws
provide for indemnification of the Registrant's directors and officers. In
addition, the Company has entered into indemnification agreements with its
directors and officers that will require the Registrant, among other things, to
indemnify them against certain liabilities that may arise by reason of their
status or service as directors or officers to the fullest extent permitted by
law.
The Underwriting Agreement (Exhibit 1.1 to this Registration Statement) provides
for indemnification by the Underwriters of the Registrant, its directors and
officers, and by the Registrant of the Underwriters, for certain liabilities,
including liabilities arising under the Securities Act, and affords certain
rights of contribution with respect thereto.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
4.1 Form of Common Stock Certificate, filed as Exhibit 4.1 to
Company's Registration Statement on Form S-1, File No.
333-30705, and incorporated herein by this reference.
4.2 Second Amended and Restated Certificate of Incorporation,
filed as Exhibit 3(i) to Company's Annual Report on Form
10-K for the year ended December 31, 1997, and incorporated
herein by this reference.
4.3 Second Amended and Restated Bylaws of Registrant, as amended
February 9, 1998, filed as Exhibit 3(ii) to Company's Annual
Report on Form 10-K for the year ended December 31, 1997,
and incorporated herein by this reference.
5.1* Opinion of Pillsbury Madison & Sutro LLP.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2* Consent of Pillsbury Madison & Sutro LLP (included in its
opinion filed as Exhibit 5.1 to this Registration
Statement).
24.1 Power of Attorney (see Page II-3).
</TABLE>
- ---------------
* To be filed by amendment.
II-1
<PAGE> 94
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) and
497(h) under the Act shall be deemed part of this Registration Statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) That, for purposes of determining any liability under the Act,
each filing of the Registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Exchange Act that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-2
<PAGE> 95
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3, and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Washington, District of Columbia, on January 4, 1999.
NETWORK SOLUTIONS, INC.
By: /s/ MICHAEL A. DANIELS
------------------------------------
Name: Michael A. Daniels
Title: Acting Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Michael A. Daniels, Robert J. Korzeniewski and Jonathan
W. Emery, and each of them, his true and lawful attorneys-in-fact and agents,
each with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments, including post-effective amendments, to this Registration Statement,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each of said attorneys-in-fact and agents or
their substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ MICHAEL A. DANIELS Chairman of the Board and Acting January 4, 1999
- ------------------------------------- Chief Executive Officer
Michael A. Daniels
/s/ ROBERT J. KORZENIEWSKI Chief Financial Officer and Acting January 4, 1999
- ------------------------------------- Chief Operating Officer (Principal
Robert J. Korzeniewski Financial Officer)
/s/ MICHAEL G. VOSLOW Vice President, Finance and Treasurer January 4, 1999
- ------------------------------------- (Principal Accounting Officer)
Michael G. Voslow
/s/ J. ROBERT BEYSTER Director January 4, 1999
- -------------------------------------
J. Robert Beyster
/s/ CRAIG I. FIELDS Director January 4, 1999
- -------------------------------------
Craig I. Fields
/s/ JOHN E. GLANCY Director January 4, 1999
- -------------------------------------
John E. Glancy
</TABLE>
II-3
<PAGE> 96
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ J. DENNIS HEIPT Director January 4, 1999
- -------------------------------------
J. Dennis Heipt
/s/ WILLIAM A. ROPER, JR. Director January 4, 1999
- -------------------------------------
William A. Roper, Jr.
/s/ STRATTON D. SCLAVOS Director January 4, 1999
- -------------------------------------
Stratton D. Sclavos
/s/ DONALD N. TELAGE Director January 4, 1999
- -------------------------------------
Donald N. Telage
</TABLE>
II-4
<PAGE> 97
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S> <C>
1.1 Form of Underwriting Agreement..............................
4.1 Form of Common Stock Certificate, filed as Exhibit 4.1 to
Company's Registration Statement on Form S-1, File No.
333-30705, and incorporated herein by this reference........
4.2 Second Amended and Restated Certificate of Incorporation,
filed as Exhibit 3(i) to Company's Annual Report on Form
10-K for the year ended December 31, 1997, and incorporated
herein by this reference....................................
4.3 Second Amended and Restated Bylaws of Registrant, as amended
February 9, 1998, filed as Exhibit 3(ii) to Company's Annual
Report on Form 10-K for the year ended December 31, 1997,
and incorporated herein by this reference...................
5.1* Opinion of Pillsbury Madison & Sutro LLP....................
23.1 Consent of PricewaterhouseCoopers LLP.......................
23.2* Consent of Pillsbury Madison & Sutro LLP (included in its
opinion filed as Exhibit 5.1 to this Registration
Statement)..................................................
24.1 Power of Attorney (see Page II-3)...........................
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 1.1
NETWORK SOLUTIONS, INC.
4,580,000 Shares of Class A Common Stock
Underwriting Agreement
, 1999
J.P. Morgan Securities Inc.
Hambrecht & Quist LLC
PaineWebber Incorporated
BancBoston Robertson Stephens
As Representatives of the several Underwriters
listed in Schedule I hereto
c/o J.P. Morgan Securities Inc.
60 Wall Street
New York, New York 10260
Ladies and Gentlemen:
Certain stockholders named in Schedule II hereto (the "Selling
Stockholders") of Network Solutions, Inc., a Delaware corporation (the
"Company"), propose to sell to the several Underwriters listed in Schedule I
hereto (the "Underwriters"), for whom you are acting as representatives (the
"Representatives"), an aggregate of 4,580,000 shares (the "Underwritten Shares")
of Class A Common Stock, par value $.001 per share, of the Company (the "Class A
Common Stock") and, for the sole purpose of covering over-allotments in
connection with the sale of the Underwritten Shares, at the option of the
Underwriters, up to an additional 687,000 shares (the "Option Shares") of Class
A Common Stock. The Underwritten Shares and the Option Shares are herein
referred to as the "Shares."
Science Applications International Corporation, a Delaware
corporation ("SAIC") and holder of all of the Company's outstanding Class B
Common Stock, par value $.001 per share (the "Class B Common Stock" and,
together with the Class A Common Stock, the "Common Stock"), is herein referred
to as the "Principal Stockholder," and the other Selling Stockholders set forth
on Schedule II are herein referred to as the "Management Stockholders."
<PAGE> 2
-2-
The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") in accordance with the provisions of the
Securities Act of 1933, as amended, and the rules and regulations of the
Commission thereunder (collectively, the "Securities Act"), a registration
statement, including a prospectus, relating to the Shares. The registration
statement as amended at the time when it became or shall become effective,
including information (if any) deemed to be part of the registration statement
at the time of effectiveness pursuant to Rule 430A under the Securities Act, is
referred to in this Agreement as the "Registration Statement," and the
prospectus in the form first used to confirm sales of Shares is referred to in
this Agreement as the "Prospectus." If the Company has filed an abbreviated
registration statement pursuant to Rule 462(b) under the Securities Act (the
"Rule 462 Registration Statement"), then any reference herein to the term
"Registration Statement" shall be deemed to include such Rule 462 Registration
Statement. Any reference in this Agreement to the Registration Statement, any
preliminary prospectus or the Prospectus shall be deemed to refer to and include
the documents incorporated by reference therein pursuant to Item 12 of Form S-3
under the Securities Act, as of the effective date of the Registration Statement
or the date of such preliminary prospectus or the Prospectus, as the case may
be, and any reference to "amend," "amendment" or "supplement" with respect to
the Registration Statement, any preliminary prospectus or the Prospectus shall
be deemed to refer to and include any documents filed after such date under the
Securities Exchange Act of 1934, as amended, and the rules and regulations of
the Commission thereunder (collectively, the "Exchange Act") that are deemed to
be incorporated by reference therein.
1. Each of the Selling Stockholders agrees, severally and not
jointly, to sell the Underwritten Shares to the several Underwriters as
hereinafter provided, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees to purchase, severally and not jointly, from each of
the Selling Stockholders at a purchase price per share of $ (the "Purchase
Price") the number of Underwritten Shares (to be adjusted by you so as to
eliminate fractional shares) determined by multiplying the aggregate number of
Underwritten Shares to be sold by each of the Selling Stockholders as set forth
opposite their respective names under the heading "Number of Underwritten
Shares" in Schedule II hereto by a fraction, the numerator of which is the
aggregate number of Underwritten Shares to be purchased by such Underwriter as
set forth opposite the name of such Underwriter in Schedule I hereto and the
denominator of which is the aggregate number of Underwritten Shares to be
purchased by all the Underwriters from all the Selling Stockholders hereunder.
In addition, the Principal Stockholder agrees to sell the Option
Shares to the several Underwriters as hereinafter provided, and the
Underwriters, upon the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter
<PAGE> 3
-3-
stated, shall have the option to purchase, severally and not jointly, from the
Principal Stockholder at the Purchase Price that portion of the number of Option
Shares as to which such election shall have been exercised (to be adjusted by
you so as to eliminate fractional shares) determined by multiplying such number
of Option Shares by a fraction, the numerator of which is the maximum number of
Option Shares which such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in Schedule I hereto and the denominator
of which is the maximum number of Option Shares which all of the Underwriters
are entitled to purchase hereunder, for the sole purpose of covering
over-allotments (if any) in the sale of Underwritten Shares by the several
Underwriters.
The Underwriters may exercise the option to purchase the Option
Shares at any time (but not more than once) on or before the thirtieth day
following the date of this Agreement, by written notice from the Representatives
to the Principal Stockholder. Such notice shall set forth the aggregate number
of Option Shares as to which the option is being exercised and the date and time
when the Option Shares are to be delivered and paid for, which may be the same
date and time as the Closing Date (as hereinafter defined) but shall not be
earlier than the Closing Date nor later than the tenth full Business Day (as
hereinafter defined) after the date of such notice (unless such time and date
are postponed in accordance with the provisions of Section 9 hereof). Any such
notice shall be given at least two Business Days prior to the date and time of
delivery specified therein.
2. The Selling Stockholders understand that the Underwriters
intend (i) to make a public offering of the Shares as soon after (A) the
Registration Statement has become effective and (B) the parties hereto have
executed and delivered this Agreement as in the judgment of the Representatives
is advisable and (ii) initially to offer the Shares upon the terms set forth in
the Prospectus.
3. Payment for the Shares shall be made by wire transfer in
immediately available funds to the accounts specified by the Principal
Stockholder and the Attorneys-in-Fact to the Representatives in the case of the
Underwritten Shares, on , 1999, or at such other time on the same or such
other date, not later than the fifth Business Day thereafter, as the
Representatives, the Principal Stockholder and the Attorneys-in-Fact may agree
upon in writing or, in the case of the Option Shares, on the date and time
specified by the Representatives in the written notice of the Underwriters'
election to purchase such Option Shares. The time and date of such payment for
the Underwritten Shares is referred to herein as the "Closing Date," and the
time and date for such payment for the Option Shares, if other than the Closing
Date, are herein referred to as the "Additional Closing Date." As used herein,
the term "Business Day" means any day other than a day on which banks are
permitted or required to be closed in New York City.
<PAGE> 4
-4-
Payment for the Shares to be purchased on the Closing Date or the
Additional Closing Date, as the case may be, shall be made against delivery to
the Representatives for the respective accounts of the several Underwriters of
the Shares to be purchased on such date registered in such names and in such
denominations as the Representatives shall request in writing not later than two
full Business Days prior to the Closing Date or the Additional Closing Date, as
the case may be, with any transfer taxes payable in connection with the transfer
to the Underwriters of the Shares duly paid by the Selling Stockholders. The
certificates for the Shares will be made available for inspection and packaging
by the Representatives at the office of J.P. Morgan Securities Inc. set forth
above not later than 1:00 P.M., New York City time, on the Business Day prior to
the Closing Date or the Additional Closing Date, as the case may be.
4. (A) The Company represents and warrants to each Underwriter
and the Selling Stockholders that:
(a) each preliminary prospectus filed as part of the Registration
Statement as originally filed or as part of any amendment thereto, or
filed pursuant to Rule 424 under the Securities Act, complied when so
filed in all material respects with the Securities Act, and did not
contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; provided, that this representation and
warranty shall not apply to any statements in, or omissions from, the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information furnished to the Company in writing by or
on behalf of the Underwriters expressly for use therein;
(b) the Registration Statement and Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto) comply, or will comply, as the case may be, in all
material respects with the Securities Act and do not and will not, as of
the applicable effective date as to the Registration Statement and any
amendment thereto and as of the date of the Prospectus and any amendment
or supplement thereto, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and the
Prospectus, as amended or supplemented, if applicable, at the Closing
Date or Additional Closing Date, as the case may be, will not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, except that the foregoing
representations and warranties shall not apply to statements or omissions
in the Registration Statement or the Prospectus made in reliance upon and
in conformity with information fur-
<PAGE> 5
-5-
nished to the Company in writing by or on behalf of the Underwriters
through the Representatives expressly for use therein;
(c) the documents incorporated by reference in the Prospectus,
when they became effective or were filed with the Commission, as the case
may be, conformed in all material respects to the requirements of the
Securities Act or the Exchange Act, as applicable, and none of such
documents contained an untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading; any
further documents so filed and incorporated by reference in the
Prospectus, when such documents are filed with the Commission, will
conform in all material respects to the requirements of the Exchange Act,
and will not contain an untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading;
(d) the financial statements, and the related notes thereto,
included or incorporated by reference in the Registration Statement and
the Prospectus present fairly the financial position of the Company as of
the dates indicated and the results of its operations and changes in cash
flows for the periods specified; said financial statements have been
prepared in conformity with generally accepted accounting principles
applied on a consistent basis, and the supporting schedules included or
incorporated by reference in the Registration Statement present fairly
the information required to be stated therein;
(e) since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any
change in the capital stock or long-term debt of the Company, or any
material adverse change, or any development involving a prospective
material adverse change, in or affecting the general affairs, business,
prospects, management, financial position, stockholders' equity or
results of operations of the Company (a "Material Adverse Change"),
otherwise than as set forth or contemplated in the Prospectus; and except
as set forth or contemplated in the Prospectus, the Company has not
entered into any transaction or agreement (whether or not in the ordinary
course of business) material to the Company;
(f) the Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of
Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus, and
has been duly qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
ju-
<PAGE> 6
-6-
risdiction in which it owns or leases properties, or conducts any
business, so as to require such qualification, other than where the
failure to be so qualified or in good standing would not have a material
adverse effect on the general affairs, business, prospects, management,
financial position, stockholders' equity or results of operations of the
Company (a "Material Adverse Effect");
(g) the Company has no subsidiaries;
(h) this Agreement has been duly authorized, executed and
delivered by the Company;
(i) the Company has an authorized capitalization as set forth in
the Prospectus and such authorized capital stock conforms as to legal
matters to the description thereof set forth in the Prospectus, and all
of the outstanding shares of capital stock of the Company (including the
Shares) have been duly authorized and validly issued, are fully paid and
non-assessable and are not subject to any pre-emptive or similar rights;
and, except as described in or expressly contemplated by the Prospectus,
there are no outstanding rights (including, without limitation,
pre-emptive rights), warrants or options to acquire, or instruments
convertible into or exchangeable for, any shares of capital stock or
other equity interest in the Company, or any contract, commitment,
agreement, understanding or arrangement of any kind relating to the
issuance of any capital stock of the Company, any such convertible or
exchangeable securities or any such rights, warrants or options;
(j) the Company is not, and with the giving of notice or lapse of
time or both would not be, in violation of or in default under its
certificate of incorporation (the "Certificate of Incorporation") or
by-laws (the "By-Laws") or any indenture, mortgage, deed of trust, loan
agreement or other agreement (including, without limitation, the
Cooperative Agreement between the National Science Foundation and the
Company dated as of January 1, 1993, as amended to date (the "Cooperative
Agreement")) or instrument to which the Company is a party or by which it
or any of its properties is bound, except for violations and defaults
which individually and in the aggregate are not material to the Company;
the performance by the Company of its obligations under this Agreement
and the consummation of the transactions contemplated herein will not
conflict with or result in a breach of any of the terms or provisions of,
or constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Company is a
party or by which the Company is bound or to which any of the property or
assets of the Company is subject, nor will any such action result in any
violation of the provisions of the Certificate of Incorporation or the
By-Laws of the Company or any applicable law or statute or any order,
rule or regulation of any court or govern-
<PAGE> 7
-7-
mental agency or body having jurisdiction over the Company or any of its
properties; no consent, approval, authorization, order, license,
registration or qualification of or with any such court or governmental
agency or body is required for the consummation by the Company of the
transactions contemplated by this Agreement, except such consents,
approvals, authorizations, orders, licenses, registrations or
qualifications as have been obtained under the Securities Act and as may
be required under state securities or blue sky laws in connection with
the purchase and distribution of the Shares by the Underwriters;
(k) other than as set forth in the Prospectus, there are no legal
or governmental investigations, actions, suits or proceedings pending or,
to the knowledge of the Company, threatened against or affecting the
Company or any of its properties or to which the Company is or may be a
party or to which any property of the Company is or may be subject which,
if determined adversely to the Company, could individually or in the
aggregate have, or reasonably be expected to have, a Material Adverse
Effect, and, to the Company's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened by
others; and there are no statutes, regulations, contracts or other
documents that are required to be described in the Registration Statement
or Prospectus or to be filed as exhibits to the Registration Statement
that are not described or filed as required;
(l) no relationship, direct or indirect, exists between or among
the Company, on the one hand, and the directors, officers, stockholders,
customers or suppliers of the Company, on the other hand, which is
required by the Securities Act to be described in the Registration
Statement and the Prospectus which is not so described;
(m) except as set forth in the Prospectus, no person has the right
to require the Company to register any securities for offering and sale
under the Securities Act by reason of the filing of the Registration
Statement with the Commission or, to the knowledge of the Company, the
sale of the Shares by the Selling Stockholders pursuant hereto;
(n) the Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the
Investment Company Act of 1940, as amended (the "Investment Company
Act");
(o) PricewaterhouseCoopers LLP ("PricewaterhouseCoopers"), who
have certified certain financial statements of the Company, are
independent public accountants as required by the Securities Act;
<PAGE> 8
-8-
(p) the Company, or the Principal Stockholder on its behalf, has
filed all federal, state, local and foreign tax returns which have been
required to be filed and has paid all taxes shown thereon and all
assessments received by them or either of them to the extent that such
taxes have become due and are not being contested in good faith; and,
except as disclosed in the Registration Statement and the Prospectus, no
tax deficiency has been determined adversely to the Company which has
had, nor does the Company have any knowledge of any tax deficiency, which
if determined adversely to the Company might have, a Material Adverse
Effect;
(q) the Company has not taken nor will it take, directly or
indirectly, any action designed to, or that might be reasonably expected
to, cause or result in stabilization or manipulation of the price of the
Common Stock;
(r) the unissued Shares issuable upon the exercise of options (the
"Options") to be exercised by certain of the Management Stockholders (the
"Optionholders") have been duly and validly authorized and reserved for
issuance, and at the time of delivery to the Underwriters with respect to
such Shares, such Shares will be issued and delivered in accordance with
the provisions of the applicable stock option agreements between the
Company and such Selling Stockholders pursuant to which such Options were
granted (the "Option Agreements") and will be duly and validly issued,
fully paid and non-assessable and will conform to the description thereof
in the Prospectus;
(s) the Options were duly authorized and issued pursuant to the
Option Agreements and constitute valid and binding obligations of the
Company, and the Optionholders are entitled to the benefits provided by
the Option Agreements; the Option Agreements were duly authorized,
executed and delivered and constitute valid and binding instruments
enforceable in accordance with their terms subject, as to enforcement, to
bankruptcy, insolvency, reorganization and other laws of general
applicability relating to or affecting creditors' rights and to general
equity principles; and the Options and the Option Agreements conform to
the descriptions thereof in the Prospectus;
(t) the statistical and market-related data included in the
Registration Statement and the Prospectus are based on or derived from
sources which are believed by the Company to be reliable;
(u) except as set forth in the Prospectus, the Company owns or
possesses the patents, patent rights, licenses, inventions, trademarks,
service marks, trade names, copyrights and know-how, including trade
secrets and other unpatented and/or unpatentable proprietary or
confidential information, databases, computer applications,
<PAGE> 9
-9-
programs and other software and other intellectual property
(collectively, the "Intellectual Property"), reasonably necessary to
carry on the business conducted by it, except to the extent that the
failure to own or possess such Intellectual Property would not have a
Material Adverse Effect, and, except as described in the Registration
Statement and the Prospectus, the Company has no knowledge of
infringement of or conflict with asserted rights of others with respect
to any Intellectual Property, except for notices the content of which if
accurate would not have a Material Adverse Effect;
(v) there are no existing or, to the knowledge of the Company,
threatened labor disputes with the employees of the Company which are
likely to have a Material Adverse Effect;
(w) the Company carries, or is covered by, insurance in such
amounts and covering such risks as is adequate for the conduct of its
business and the value of its properties and as is customary for
companies engaged in similar businesses in similar industries;
(x) the Company (i) is in compliance with any and all applicable
foreign, federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants ("Environmental
Laws"), (ii) has received all permits, licenses or other approvals
required of it under applicable Environmental Laws to conduct its
businesses and (iii) is in compliance with all terms and conditions of
any such permit, license or approval, except where such noncompliance
with Environmental Laws, failure to receive required permits, licenses or
other approvals or failure to comply with the terms and conditions of
such permits, licenses or approvals would not, singly or in the
aggregate, have a Material Adverse Effect; and
(y) each employee benefit plan, within the meaning of Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), that is maintained, administered or contributed to by the
Company or any of its affiliates for employees or former employees of the
Company and its affiliates has been maintained in material compliance
with its terms and the requirements of any applicable statutes, orders,
rules and regulations, including but not limited to ERISA and the
Internal Revenue Code of 1986, as amended ("Code"). No prohibited
transaction, within the meaning of Section 406 of ERISA or Section 4975
of the Code, has occurred with respect to any such plan excluding
transactions effected pursuant to a statutory or administrative
exemption. For each such plan which is subject to the funding rules of
Section 412 of the Code or Section 302 of ERISA, no "accumulated funding
deficiency," as defined in Section 412 of the Code, has been incurred,
<PAGE> 10
-10-
whether or not waived, and the fair market value of the assets of each
such plan (excluding for these purposes accrued but unpaid contributions)
exceed the present value of all benefits accrued under such plan
determined using reasonable actuarial assumptions.
(B) The Principal Stockholder hereby represents and warrants to
each of the Underwriters, the Company and the Management Stockholders that:
(a) the Principal Stockholder has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
State of Delaware;
(b) the Principal Stockholder has good and marketable title to
all the shares of Class B Common Stock to be converted into Shares to be
sold by the Principal Stockholder hereunder, and upon conversion of such
Class B Common Stock, will have good and marketable title to all the
Shares to be sold by the Principal Stockholder hereunder, in each case
free and clear of all liens, encumbrances, equities, security interests
and claims whatsoever, with full right and authority to deliver the same
hereunder, and upon the delivery of and payment for such Shares
hereunder, the several Underwriters will receive good and marketable
title thereto, free and clear of all liens, encumbrances, equities,
security interests or claims whatsoever;
(c) the Principal Stockholder: (i) has taken all actions required
under the Company's Certificate of Incorporation to convert shares of
Class B Common Stock into the Underwritten Shares to be delivered by the
Principal Stockholder hereunder on the Closing Date; (ii) will take such
action with respect to the shares of Class B Common Stock to be
converted into Option Shares to be delivered by the Principal
Stockholder hereunder prior to the Additional Closing Date; and (iii)
will take such action with respect to the conversion of the shares of
Class B Common Stock outstanding thereafter into shares of Class A
Common Stock on or prior to May 31, 1999;
(d) the Principal Stockholder has not taken nor will it take,
directly or indirectly, any action which is designed to, or that might
reasonably be expected to, cause or result in stabilization or
manipulation of the price of the Common Stock;
(e) the Principal Stockholder has no actual knowledge that the
representations and warranties of the Company contained in Section 4(A)
of this Agreement are not true and correct, is familiar with the
Registration Statement and has no knowledge of any material fact,
condition or information not disclosed in the Registration Statement
which has had or may have a Material Adverse Effect; the sale of
<PAGE> 11
-11-
the Shares by the Principal Stockholder pursuant to this Agreement is
not prompted by any information concerning the Company which is not set
forth in the Registration Statement; and the information pertaining to
such Principal Stockholder under the caption "Selling Stockholders" in
the Prospectus is complete and accurate in all material respects;
(f) the Registration Statement and the Prospectus (as amended or
supplemented) comply, or will comply, as the case may be, in all
material respects with the Securities Act and do not and will not, as of
the applicable effective date of the Registration Statement and any
amendment thereto and as of the date of the Prospectus and any amendment
or supplement thereto, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and the
Prospectus, as amended or supplemented, if applicable, at the Closing
Date or Additional Closing Date, as the case may be, will not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, except that the foregoing
representations and warranties shall not apply to statements or
omissions in the Registration Statement or the Prospectus made in
reliance upon and in conformity with information furnished to the
Company in writing by or on behalf of the Underwriters through the
Representatives expressly for use therein;
(g) this Agreement has been duly authorized, executed and
delivered by the Principal Stockholder; and
(h) the sale of the Shares by the Principal Stockholder
hereunder, the compliance by the Principal Stockholder with all of the
provisions of this Agreement and the consummation of the transactions
contemplated herein will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
under (in each case material to the Principal Stockholder and its
subsidiaries, considered as a whole), any indenture, mortgage, deed of
trust, loan agreement, lease or other agreement or instrument to which
the Principal Stockholder is a party or by which the Principal
Stockholder is bound or to which any of the property or assets of the
Principal Stockholder is subject, nor will such action result in any
violation of the provisions of the certificate of incorporation or
by-laws of the Principal Stockholder, nor will such action result in any
violation (in each case material to the Principal Stockholder and its
subsidiaries, considered as a whole) of any applicable statute or any
applicable order, rule or regulation of any court or governmental agency
or body having jurisdiction over the Principal Stockholder or any of its
properties; no consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body
is required for the sale of
<PAGE> 12
-12-
the Shares or the consummation by the Principal Stockholder of the
transactions contemplated by this Agreement, except such consents,
approvals, authorizations, orders, licenses, registrations or
qualifications as have been obtained or made under the Securities Act or
the Exchange Act and as may be required under state securities or blue
sky laws in connection with the purchase and distribution of the Shares
by the Underwriters; the Principal Stockholder has full right, power and
authority to enter into this Agreement and to sell, assign, transfer and
deliver the Shares to be sold by it; each agreement between the Company
and the Principal Stockholder referred to in the Prospectus has been
duly executed and delivered by the Principal Stockholder and constitutes
a valid and binding obligation of the Principal Stockholder enforceable
against the Principal Stockholder in accordance with its terms.
(C) Each of the Management Stockholders severally represents and
warrants to each of the Underwriters that:
(a) all consents, approvals, authorizations and orders necessary
for the execution and delivery by such Management Stockholder of this
Agreement and the Power of Attorney (the "Power of Attorney") and the
Custody Agreement (the "Custody Agreement") hereinafter referred to, and
for the sale and delivery of the Shares to be sold by such Management
Stockholder hereunder, have been obtained; and such Management
Stockholder has full right, power and authority to enter into this
Agreement, the Power of Attorney and the Custody Agreement and to sell,
assign, transfer and deliver the Shares to be sold by such Management
Stockholder hereunder; and this Agreement, the Power of Attorney and the
Custody Agreement have each been duly, executed and delivered by such
Management Stockholder;
(b) the sale of the Shares to be sold by such Management
Stockholder hereunder and the compliance by such Management Stockholder
with all of the provisions of this Agreement, the Power of Attorney and
the Custody Agreement and the consummation of the transactions herein
and therein contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, any statute or any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which such Management
Stockholder is a party or by which such Management Stockholder is bound
or to which any of the property or assets of such Management Stockholder
is subject, nor will such action result in any violation of any statute
or any order, rule or regulation of any court or governmental agency or
body having jurisdiction over such Management Stockholder or the
property of such Management Stockholder; and
(c) such Management Stockholder has good and valid title to the
Shares to be sold at the Closing Date by such Management Stockholder
hereunder (other
<PAGE> 13
-13-
than the Shares to be issued upon exercise of Options), free and clear
of all liens, encumbrances, equities or adverse claims; such Management
Stockholder will have, immediately prior to the Closing Date, assuming
due issuance of any Shares to be issued upon exercise of Options, good
and valid title to the Shares to be sold at the Closing Date by such
Management Stockholder, free and clear of all liens, encumbrances,
equities or adverse claims; and, upon delivery of the certificates
representing such Shares and payment therefor pursuant hereto, good and
valid title to such Shares, free and clear of all liens, encumbrances,
equities, security interests or claims, will pass to the several
Underwriters.
(d) such Management Stockholder has not taken nor will such
Management Stockholder take, directly or indirectly, any action which is
designed to, or that might reasonably be expected to cause or result in
stabilization or manipulation of the price of the Common Stock;
(e) the information pertaining to such Management Stockholder
under the caption "Selling Stockholders" in the Prospectus is complete
and accurate in all material respects;
(f) when the Registration Statement becomes effective and at all
times subsequent thereto through the latest of the Closing Date, the
Additional Closing Date or the termination of the offering of the
Shares, such parts of the Registration Statement and Prospectus, and any
supplements or amendments thereto, as they relate to such Management
Stockholder will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading; and
(g) the lock-up letter previously delivered to the Underwriters
by such Management Stockholder is in full force and effect on the date
of this Agreement.
(D) Each of Robert J. Korzeniewski and Donald N. Telage
(collectively, the "Senior Management Stockholders") represents and warrants to
each of the Underwriters that such Senior Management Stockholder has no reason
to believe that the representations and warranties of the Company contained in
Section 4(A) of this Agreement are not true and correct in all material
respects.
Each of the Management Stockholders severally represents and
warrants to each of the Underwriters that certificates in negotiable form
representing all of the Shares to be sold by such Management Stockholders
hereunder, other than any such Shares to be issued upon the exercise of Options,
have been, and each of the Management Stockholders who is selling Shares upon
the exercise of Options to each of the Underwriters represents
<PAGE> 14
-14-
and warrants that duly completed and executed irrevocable Option exercise
notices, in the forms specified by the relevant Option Agreement, with respect
to all of the Shares to be sold by such Management Stockholder to law of the
Underwriters hereunder have been, placed in custody under a Custody Agreement
relating to such Shares, in the form heretofore furnished to you, duly executed
and delivered by such Management Stockholder to the Company, as custodian (the
"Custodian"), and that such Management Stockholder has duly executed and
delivered Powers of Attorney, in the form heretofore furnished to you,
appointing the person or persons indicated in such Power of Attorney, and each
of them, as such Management Stockholder's Attorneys-in-Fact (the
"Attorneys-in-Fact" or any one of them the "Attorney-in Fact") with authority to
execute and deliver this Agreement on behalf of such Management Stockholder, to
determine the purchase price to be paid by the Underwriters to the Management
Stockholders as provided herein, to authorize the delivery of the Shares to be
sold by such Management Stockholder hereunder, to effect (if applicable) the
exercise of the Options to be exercised with respect to the Shares to be sold by
such Management Stockholder hereunder and otherwise to act on behalf of such
Management Stockholder in connection with the transactions contemplated by this
Agreement and the Custody Agreement.
Each of the Management Stockholders specifically agrees that the
Shares represented by the certificates or the irrevocable Option exercise
notice, in either case held in custody for such Management Stockholder under the
Custody Agreement, are subject to the interests of the Underwriters hereunder,
and that the arrangements made by such Management Stockholder for such custody,
and the appointment by such Management Stockholder of the Attorneys-in-Fact by
the Power of Attorney, are to that extent irrevocable. Each of the Management
Stockholders specifically agrees that the obligations of such Management
Stockholder hereunder shall not be terminated by operation of law, whether by
the death or incapacity of any individual Management Stockholder, or, in the
case of an estate or trust, by the death or incapacity of any executor or
trustee or the termination of such estate or trust, or in the case of a
partnership or corporation, by the dissolution of such partnership or
corporation, or by the occurrence of any other event. If any individual
Management Stockholder or any such executor or trustee should die or become
incapacitated, or if any such estate or trust should be terminated, or if any
such partnership or corporation should be dissolved, or if any other such event
should occur, before the delivery of the Shares by it hereunder, certificates
representing such Shares shall be delivered by or on behalf of such Management
Stockholder in accordance with their terms and conditions of this Agreement and
the Custody Agreement, and actions taken by the Attorneys-in-Fact pursuant to
the Powers of Attorney shall be as valid as if such death, incapacity,
termination, dissolution or other event had not occurred, regardless of whether
or not the Custodian, the Attorneys-in-Fact, or any of them, shall have received
notice of such death, incapacity, termination, dissolution or other event.
<PAGE> 15
-15-
5. (A) The Company covenants and agrees with each of the several
Underwriters as follows:
(a) to use its best efforts to cause the Registration Statement
to become effective at the earliest possible time and, if required, to
file the final Prospectus with the Commission within the time periods
specified by Rule 424(b) and Rule 430A under the Securities Act and to
file promptly all reports and any definitive proxy or information
statements required to be filed by the Company with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of the Prospectus and for so long as the delivery
of a prospectus is required in connection with the offering or sale of
the Shares; and to furnish copies of the Prospectus to the Underwriters
in New York City prior to 10:00 a.m., New York City time, on the
Business Day next succeeding the date of this Agreement in such
quantities as the Representatives may reasonably request;
(b) to deliver, at the expense of the Company, to the
Representatives five signed copies of the Registration Statement (as
originally filed) and each amendment thereto, in each case including
exhibits and documents incorporated by reference therein, and to each
other Underwriter a conformed copy of the Registration Statement (as
originally filed) and each amendment thereto, in each case without
exhibits but including the documents incorporated by reference therein
and, during the period in which a prospectus is required by law to be
delivered by an Underwriter or a dealer, to each of the Underwriters as
many copies of the Prospectus (including all amendments and supplements
thereto) and documents incorporated by reference therein as the
Representatives may reasonably request for the purposes contemplated by
the Securities Act;
(c) before filing any amendment or supplement to the
Registration Statement or the Prospectus, whether before or after the
time the Registration Statement becomes effective, to furnish to the
Representatives a copy of the proposed amendment or supplement for
review and not to file any such proposed amendment or supplement to
which the Representatives reasonably object;
(d) to advise the Representatives promptly, and to confirm such
advice in writing (i) when the Registration Statement has become
effective, (ii) when any amendment to the Registration Statement has
been filed or becomes effective, (iii) when any supplement to the
Prospectus or any amended Prospectus has been filed and to furnish the
Representatives with copies thereof, (iv) of any request by the
Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for any additional
information, (v) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registra-
<PAGE> 16
-16-
tion Statement or of any order preventing or suspending the use of any
preliminary prospectus or the Prospectus or the initiation or
threatening of any proceeding for that purpose, (vi) of the occurrence
of any event, within the period referenced in paragraph (e) below, as a
result of which the Prospectus as then amended or supplemented would
include an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, and (vii) of the receipt by the Company of
any notification with respect to any suspension of the qualification of
the Shares for offer and sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; and to use its best
efforts to prevent the issuance of any such stop order, or of any order
preventing or suspending the use of any preliminary prospectus or the
Prospectus, or of any order suspending any such qualification of the
shares, or notification of any such order thereof and, if issued, to
obtain as soon as possible the withdrawal thereof;
(e) if, during such period of time after the first date of the
public offering of the Shares as in the opinion of counsel for the
Underwriters a prospectus relating to the Shares is required by law to
be delivered in connection with sales by the Underwriters or any dealer,
any event shall occur as a result of which it is necessary to amend or
supplement the Prospectus in order to make the statements therein, in
light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, or if it is necessary to amend or supplement
the Prospectus to comply with law, forthwith to prepare and furnish, at
the expense of the Company, to the Underwriters and to the dealers
(whose names and addresses the Representatives will furnish to the
Company) to which Shares may have been sold by the Representatives on
behalf of the Underwriters and to any other dealers upon request, such
amendments or supplements to the Prospectus as may be necessary so that
the statements in the Prospectus as so amended or supplemented will not,
in the light of the circumstances when the Prospectus is delivered to a
purchaser, be misleading or so that the Prospectus will comply with law;
(f) to endeavor to qualify the Shares for offer and sale under
the securities or blue sky laws of such jurisdictions as the
Representatives shall reasonably request and to continue such
qualification in effect so long as reasonably required for distribution
of the Shares; provided that the Company shall not be required to file a
general consent to service of process in any jurisdiction;
(g) to make generally available to its security holders and to
the Representatives as soon as practicable an earnings statement
covering a period of at least twelve months beginning with the first
fiscal quarter of the Company occurring after the effective date of the
Registration Statement, which shall satisfy the provisions of
<PAGE> 17
-17-
Section 11(a) of the Securities Act and Rule 158 of the Commission
promulgated thereunder;
(h) during a period of five years commencing with the date
hereof, to furnish to the Representatives copies of all reports or other
communications (financial or other) furnished to holders of the Shares,
and copies of any reports and financial statements furnished to or filed
with the Commission;
(i) for a period of 180 days after the date of the initial
public offering of the Shares not to, (i) directly or indirectly, offer,
pledge, announce the intention to sell, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer or
dispose of any shares of Common Stock or any securities of the Company
which are substantially similar to the Common Stock, including but not
limited to any securities convertible into or exercisable or
exchangeable for, or that represent the right to receive, Common Stock
or any such substantially similar securities or (ii) enter into any
swap, option, future, forward or other agreement that transfers, in
whole or in part, any of the economic consequences of ownership of the
Common Stock or any such substantially similar securities, whether any
such transaction described in clause (i) or (ii) above is to be settled
by delivery of Common Stock or such other securities, in cash or
otherwise without the prior written consent of the Representatives,
other than any shares of Common Stock of the Company issued upon the
exercise of options granted under the Company's 1996 Stock Incentive
Plan or as otherwise set forth in the Prospectus;
(j) to list for quotation the Shares on the National Market
System of the Nasdaq Stock Market, Inc. (the "Nasdaq National Market");
and
(k) whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, to pay or
cause to be paid all costs and expenses incident to the performance of
its obligations hereunder, including without limiting the generality of
the foregoing, all costs and expenses (i) incident to the preparation,
reregistration, transfer, execution and delivery of the Shares, (ii)
incident to the preparation, printing and filing under the Securities
Act of the Registration Statement, the Prospectus and any preliminary
prospectus (including in each case all exhibits, amendments and
supplements thereto) (but not after nine (9) months after the date
hereof), (iii) incurred in connection with the registration or
qualification of the Shares under the laws of such jurisdictions as the
Representatives may designate (including fees of counsel for the
Underwriters and its disbursements), (iv) in connection with the listing
of the Shares on the Nasdaq National Market, (v) related to the filing
with, and clearance of the offering by, the National
<PAGE> 18
-18-
Association of Securities Dealers, Inc., (vi) in connection with the
printing (including word processing and duplication costs) and delivery
of this Agreement, any blue sky memoranda and the furnishing to the
Underwriters and dealers of copies of the Registration Statement and the
Prospectus, including mailing and shipping, as herein provided, (vii)
any expenses incurred by the Company in connection with a "road show"
presentation to potential investors, (viii) the cost of preparing stock
certificates and (ix) the cost and charges of any transfer agent and any
registrar.
(B) The Principal Stockholder covenants and agrees with the
several Underwriters as follows:
(a) on or prior to May 31, 1999, to take all actions required
under the Company's Certificate of Incorporation to convert all the
shares of Class B Common Stock held by it into shares of Class A Common
Stock; and
(b) for a period of 180 days after the date of the initial public
offering of the Shares not to, (i) offer, pledge, announce the intention
to sell, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any
shares of Common Stock or any securities of the Company which are
substantially similar to the Common Stock, including but not limited to
any securities convertible into or exercisable or exchangeable for, or
that represent the right to receive, Common Stock or any such
substantially similar securities or (ii) enter into any swap or other
agreement that transfers, in whole or in part, any of the economic
consequences of ownership of the Common Stock or any such substantially
similar securities, whether any such transaction described in clause (i)
or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise or (iii) make any demand for or
exercise any right with respect to the registration of any shares of
Common Stock or any such substantially similar securities without the
prior written consent of the Representatives, in each case other than
the Shares to be sold by such Selling Stockholder hereunder.
(C) Each of the Management Stockholders covenants and agrees with
each of the several Underwriters to deliver to the Representatives prior to or
at the Closing Date a properly completed and executed United States Treasury
Department Form W-9 (or other applicable form or statement specified by the
Treasury Department regulations in lieu thereof) in order to facilitate the
Underwriters' documentation of their compliance with the reporting and
withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982
with respect to the transactions herein contemplated.
<PAGE> 19
-19-
6. The several obligations of the Underwriters hereunder to
purchase the Shares on the Closing Date or the Additional Closing Date, as the
case may be, are subject to the performance by the Company and each of the
Selling Stockholders of their respective obligations hereunder and to the
following additional conditions:
(a) the Registration Statement shall have become effective (or
if a post-effective amendment is required to be filed under the
Securities Act, such post-effective amendment shall have become
effective) not later than 5:00 P.M., New York City time, on the date
hereof; and no stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment shall be in
effect, and no proceedings for such purpose shall be pending before or
threatened by the Commission; the Prospectus shall have been filed with
the Commission pursuant to Rule 424(b) within the applicable time period
prescribed for such filing by the rules and regulations under the
Securities Act and in accordance with Section 5(a) hereof; and all
requests for additional information shall have been complied with to the
satisfaction of the Representatives;
(b) subsequent to the execution and delivery of this Agreement
and prior to the Closing Date or the Additional Closing Date, as the
case may be, there shall not have occurred any downgrading, nor shall
any notice have been given of (i) any downgrading, (ii) any intended or
potential downgrading or (iii) any review or possible change that does
not indicate an improvement, in the rating accorded any securities of or
guaranteed by the Company by any "nationally recognized statistical
rating organization", as such term is defined for purposes of Rule
436(g)(2) under the Securities Act;
(c) since the respective dates as of which information is given
in the Prospectus, there shall not have been any change in the capital
stock or long-term debt of the Company or any Material Adverse Change,
or any development involving a prospective Material Adverse Change
otherwise than as set forth or contemplated in the Prospectus, the
effect of which in the judgment of the Representatives makes it
impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares on the Closing Date or the Additional Closing
Date, as the case may be, on the terms and in the manner contemplated in
the Prospectus; and the Company has not sustained since the date of the
latest audited financial statements included or incorporated by
reference in the Prospectus any material loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated in
the Prospectus;
<PAGE> 20
-20-
(d) the Representatives shall have received on and as of the
Closing Date or the Additional Closing Date, as the case may be, (1) a
certificate of the Chief Executive Officer and Chief Financial Officer
of the Company, satisfactory to the Representatives, to the effect set
forth in subsections (a) through (c) (with respect to the respective
representations, warranties, agreements and conditions of the Company)
of this Section 6 and to the further effect that there has not occurred
any Material Adverse Change, or any development involving a prospective
Material Adverse Change from that set forth or contemplated in the
Registration Statement and (2) a certificate from each of the Principal
Stockholder and the Management Stockholders, satisfactory to the
Representatives to the effect set forth in subsection (b) of this
Section 6 (with respect to the respective representations, warranties,
agreements and conditions of such Selling Stockholders);
(e) Pillsbury, Madison & Sutro LLP, counsel for the Company and
the Selling Stockholders, shall have furnished to the Representatives
their written opinion, dated the Closing Date or the Additional Closing
Date, as the case may be, in form and substance satisfactory to the
Representatives, to the effect that:
(i) each of the Company and the Principal Stockholder
has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction
of its incorporation. The Company is duly qualified as a foreign
corporation and in good standing in each state of the United
States of America in which its ownership or leasing of property
requires such qualification (except where the failure to be so
qualified would not have a Material Adverse Effect) and has full
corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement;
(ii) the authorized capital stock of the Company
consists of 10,000,000 shares of Preferred Stock, par value
$.001 per share, of which there are no outstanding shares,
30,000,000 shares of Class B Common Stock, of which there are
outstanding shares (excluding the shares of Class B Common
Stock converted into Underwritten Shares and the Option Shares,
if any, issued on the date hereof), and 100,000,000 shares of
Class A Common Stock, of which there are outstanding shares
(including the Underwritten Shares and the Option Shares, if
any, issued); proper corporate proceedings have been taken
validly to authorized such authorized capital stock; all of the
outstanding shares of such capital stock (including the
Underwritten Shares and the Option Shares, if any, issued) have
been duly and validly issued and are fully paid and
nonassessable; and no preemptive rights of, or rights of refusal
in favor of, stockholders exist with respect to the Shares, or
<PAGE> 21
-21-
the issue and sale thereof, and no restrictions on transfer or
voting exist with respect to the Shares in each case pursuant to
the Certificate of Incorporation or Bylaws of the Company or
under law and, to the knowledge of such counsel, there are no
contractual preemptive rights that have not been waived, rights
of first refusal or rights of co-sale which exist with respect
to the issue and sale of the Shares and there are no contractual
restrictions on transfer or voting which exist with respect to
the Shares;
(iii) the Registration Statement has become effective
under the Securities Act and, to the best of such counsel's
knowledge, no stop order suspending the effectiveness of the
Registration Statement or suspending or preventing the use of
the Prospectus is in effect and no proceedings for that purpose
have been instituted or are pending or contemplated by the
Commission;
(iv) the Registration Statement and the Prospectus
(except as to the financial statements and schedules and other
financial data contained therein, as to which such counsel need
express no opinion) comply as to form in all material respects
with the requirements of the Securities Act and with the rules
and regulations of the Commission thereunder;
(v) such counsel have no reason to believe that the
Registration Statement (except as to the financial statements
and schedules and other financial data contained therein, as to
which such counsel need not express any opinion or belief) at
the Effective Date contained any untrue statement of a material
fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading, or that the Prospectus (except as to the financial
statements and schedules and other financial data contained
therein, as to which such counsel need not express any opinion
or belief), as of its date or at the Closing Date or the
Additional Closing Date, as the case may be, contained or
contains any untrue statement of a material fact or omitted or
omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which
they were made, not misleading;
(vi) the information required to be set forth in the
Registration Statement in answer to Items 9, 10 (insofar as it
relates to such counsel), 11 (insofar as it relates to legal
proceedings or security ownership of beneficial owners and
management) and 15 of Form S-3 is to the best of such counsel's
knowledge accurately and adequately set forth therein in all
material respects or no response is required with respect to
such Items, and the description of the stock option plan and the
options granted and which may be granted
<PAGE> 22
-22-
thereunder set forth in the Prospectus accurately and fairly
presents the information required to be shown with respect to
said plans and options to the extent required by the Securities
Act and the rules and regulations of the Commission thereunder;
(vii) the documents incorporated by reference in the
Prospectus or any further amendment or supplement thereto made
by the Company prior to the Closing Date or the Additional
Closing Date, as the case may be (except as to the financial
statements and schedules and other financial data contained
therein, as to which such counsel need not express any opinion),
when they became effective or were filed with the Commission, as
the case may be, complied as to form in all material respects
with the requirements of the Securities Act or the Exchange Act,
as applicable, and the rules and regulations of the Commission
thereunder; and they have no reason to believe that any of such
documents, when such documents became effective or were so
filed, as the case may be, contained, in the case of a
registration statement which became effective under the
Securities Act, an untrue statement of a material fact or
omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, or,
in the case of other documents which were filed under the
Exchange Act with the Commission, an untrue statement of a
material fact or omitted to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made when such documents
were so filed, not misleading;
(viii) such counsel do not know of any franchises,
contracts, leases, documents or legal or governmental
proceedings, pending or threatened, which in the opinion of such
counsel are of a character required to be described in the
Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement, which are not described
and filed as required;
(ix) the Underwriting Agreement has been duly
authorized, executed and delivered on or behalf of by the
Company and the Selling Stockholders;
(x) a Power of Attorney and a Custody Agreement have
been duly authorized, executed and delivered by each Management
Stockholder and constitute valid and binding agreements of each
Management Stockholder in accordance with their terms; the
Attorneys-in-Fact have been duly authorized by the Management
Stockholders to execute and deliver on their behalf this
Agreement and any other document necessary or desirable in
connection with
<PAGE> 23
-23-
the transactions contemplated hereby and to deliver the Shares
to be sold by the Management Stockholders and receive payment
therefor pursuant hereto;
(xi) each of the intercompany agreements referred to in
the Prospectus has been duly authorized, executed and delivered
by the Company and the Principal Stockholder;
(xii) the execution, delivery and performance by the
Company and the Selling Stockholders of the Underwriting
Agreement and the sale by the Selling Stockholders of the Shares
as contemplated by the Underwriting Agreement have been duly
authorized on the part of the Company and each of the Selling
Stockholders and will not conflict with, or result in a breach
of, the Certificate of Incorporation or Bylaws of the Company or
the Principal Stockholder or any agreement (including, without
limitation, the Cooperative Agreement) or instrument known to
such counsel to which the Company or any Selling Stockholder is
a party or any applicable law or regulation, or so far as is
known to such counsel, any order, writ, injunction or decree, or
any jurisdiction, court or governmental instrumentality;
(xiii) all holders of securities of the Company having
rights to the registration of shares of Common Stock, or other
securities, because of the filing of the Registration Statement
by the Company have waived such rights or such rights have
expired by reason of lapse of time following notification of the
Company's intent to file the Registration Statement;
(xiv) no consent, approval, authorization or order of
any court or governmental agency or body is required for the
consummation of the transactions contemplated in the
Underwriting Agreement, except such as have been obtained under
the Securities Act and such as may be required under state
securities or blue sky laws in connection with the purchase and
distribution of the Shares by the Underwriters;
(xv) each Selling Stockholder is the sole registered
owner of the Shares to be sold by such Selling Stockholder under
the Underwriting Agreement; the Principal Stockholder has full
corporate power, right and authority to sell the Shares sold by
it; and
(xvi) good and marketable title to the Shares sold by
each Selling Stockholder under the Underwriting Agreement, free
and clear of all liens, encumbrances, equities, security
interests and claims, has been transferred to the Underwriters,
who have severally purchased such Shares under the Un-
<PAGE> 24
-24-
derwriting Agreement, assuming for the purpose of this opinion
that the Underwriters purchased the same in good faith without
notice of any adverse claims.
In rendering such opinions, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the
United States and the States of New York, Delaware and California, to
the extent such counsel deems proper and to the extent specified in such
opinion, if at all, upon an opinion or opinions (in form and substance
reasonably satisfactory to Underwriters' counsel) of other counsel
reasonably acceptable to the Underwriters' counsel, familiar with the
applicable laws; (B) as to matters of fact, to the extent such counsel
deems proper, on certificates of responsible officers of the Company and
certificates or other written statements of officials of jurisdictions
having custody of documents respecting the corporate existence or good
standing of the Company. The opinion of such counsel for the Company
shall state that the opinion of any such other counsel upon which they
relied is in form satisfactory to such counsel and, in such counsel's
opinion, the Underwriters and they are justified in relying thereon.
With respect to the matters to be covered in subparagraph (v) above
counsel may state their opinion and belief is based upon their
participation in the preparation of the Registration Statement and the
Prospectus and any amendment or supplement thereto (other than the
documents incorporated by reference therein) and review and discussion
of the contents thereof (including the documents incorporated by
reference therein) but is without independent check or verification
except as specified.
The opinion of Pillsbury, Madison & Sutro LLP described above
shall be rendered to the Underwriters at the request of the Company and
shall so state therein.
(f) on the effective date of the Registration Statement and the
effective date of the most recently filed post-effective amendment to
the Registration Statement and also on the Closing Date or Additional
Closing Date, as the case may be, PricewaterhouseCoopers shall have
furnished to you letters, dated the respective dates of delivery
thereof, in form and substance satisfactory to you, containing
statements and information of the type customarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained or
incorporated by reference in the Registration Statement and the
Prospectus;
(g) the Representatives shall have received on and as of the
Closing Date or Additional Closing Date, as the case may be, an opinion
of Cahill Gordon & Reindel, counsel to the Underwriters, with respect to
the due authorization and valid is-
<PAGE> 25
-25-
suance of the Shares, the Registration Statement, the Prospectus and
other related matters as the Representatives may reasonably request, and
such counsel shall have received such papers and information as they may
reasonably request to enable them to pass upon such matters;
(h) the Shares to be delivered on the Closing Date or Additional
Closing Date, as the case may be, shall have been approved for listing
on the Nasdaq National Market, subject to official notice of issuance;
(i) on or prior to the Closing Date or Additional Closing Date,
as the case may be, the Company and the Selling Stockholders shall have
furnished to the Representatives such further certificates and documents
as the Representatives shall reasonably request; and
(j) the lock-up agreements of each of the Company's executive
officers and directors, delivered to you on or before the date hereof,
shall be in full force and effect on the Closing Date or Additional
Closing Date, as the case may be.
7. Each of the Company, the Principal Stockholder and each Senior
Management Stockholder agrees, jointly and severally, to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act, from and against any and all losses, claims, damages and
liabilities (including, without limitation, the legal fees and other expenses
incurred in connection with any suit, action or proceeding or any claim
asserted) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or the Prospectus (as
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto) or any preliminary prospectus, or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages or liabilities are caused by any untrue statement
or omission or alleged untrue statement or omission made in reliance upon and in
conformity with information relating to any Underwriter furnished to the Company
in writing by such Underwriter through the Representatives expressly for use
therein; provided, however, that the obligations of each of the Principal
Stockholder and each such Senior Management Stockholder under the foregoing
indemnity shall not exceed the net proceeds received by such Selling Stockholder
from the sale of Shares sold by such Selling Stockholder hereunder (which net
proceeds shall not include the Underwriters' discount and, in the case of a
Senior Management Stockholder who sells Shares upon the exercise of Options,
shall not include the amount remitted to the Company to effect the exercise
thereof); and provided, further, that the foregoing indemnity shall not inure to
the benefit of any Underwriter from whom the person asserting such losses,
claims, damages, liabilities
<PAGE> 26
-26-
and judgments purchased Shares, or any person controlling such Underwriter, if a
copy of the Prospectus (including any amendment or supplement thereto) was not
sent or given by or on behalf of such Underwriter to such person at or prior to
the written confirmation of the sale of the Shares to such person, and if the
Prospectus (including any amendment or supplement thereto) would have cured the
defect giving rise to such losses, claims, damages, liabilities or judgments,
unless such failure to deliver a copy of the Prospectus was a result of the
failure of the Company to provide as many copies of such Prospectus as such
Underwriter may reasonably request in a timely manner.
Each of David H. Holtzman and Jonathan W. Emery (collectively,
the "Other Management Stockholders") agrees, severally and not jointly, to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act to the same extent as the
foregoing indemnity from the Company, the Principal Stockholders and the Senior
Management Stockholders to each Underwriter, but only with reference to
information furnished to the Company in writing by or on behalf of such Other
Management Stockholder expressly for use in the Registration Statement, the
Prospectus, any amendment and supplement thereto, or any preliminary prospectus;
provided, however, that the obligations of each of the Other Management
Stockholders under the foregoing indemnity shall not exceed the net proceeds
received by such Other Management Stockholder from the sale of Shares sold by
such Other Management Stockholder hereunder (which net proceeds shall not
include the Underwriters' discount and, in the case of an Other Management
Stockholder who sells Shares upon the exercise of Options, shall not include the
amount remitted to the Company to effect the exercise thereof).
Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement and each person who controls the Company within the
meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act
and each of the Selling Stockholders to the same extent as the foregoing
indemnities from the Company and the Selling Stockholders to each Underwriter,
but only with reference to information furnished to the Company in writing by or
on behalf of the Underwriters through the Representatives expressly for use in
the Registration Statement, the Prospectus, any amendment or supplement thereto,
or any preliminary prospectus.
If any suit, action, proceeding (including any governmental or
regulatory investigation), claim or demand shall be brought or asserted against
any person in respect of which indemnity may be sought pursuant to the preceding
paragraphs of this Section 7, such person (the "Indemnified Person") shall
promptly notify the person or persons against whom such indemnity may be sought
(each an "Indemnifying Person") in writing, and such
<PAGE> 27
-27-
Indemnifying Persons, upon request of the Indemnified Person, shall retain
counsel reasonably satisfactory to the Indemnified Person to represent the
Indemnified Person and any others the Indemnifying Persons may designate in
such proceeding and shall pay the fees and expenses of such counsel related to
such proceeding. In any such proceeding, any Indemnified Person shall have the
right to retain its own counsel, but the fees and expenses of such counsel
shall be at the expense of such Indemnified Person and not the Indemnifying
Persons unless (i) the Indemnifying Persons and the Indemnified Person shall
have mutually agreed to the contrary, (ii) the Indemnifying Persons has failed
within a reasonable time to retain counsel reasonably satisfactory to the
Indemnified Person or (iii) the named parties in any such proceeding (including
any impleaded parties) include both an Indemnifying Person and the Indemnified
Person and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them. It
is understood that no Indemnifying Person shall, in connection with any
proceeding or related proceeding in the same jurisdiction, be liable for the
fees and expenses of more than one separate firm (in addition to any local
counsel) for all Indemnified Persons, and that all such fees and expenses shall
be reimbursed as they are incurred. Any such separate firm for the Underwriters
and such control persons of Underwriters shall be designated in writing by J.P.
Morgan Securities Inc. and any such separate firm for the Company, its
directors, its officers who sign the Registration Statement and such control
persons of the Company shall be designated in writing by the Company and any
such separate firm for the Selling Stockholders shall be designated in writing
by the Attorney-in-Fact. No Indemnifying Person shall be liable for any
settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the plaintiff,
each Indemnifying Person agrees to indemnify any Indemnified Person from and
against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an Indemnified Person
shall have requested an Indemnifying Person to reimburse the Indemnified Person
for fees and expenses of counsel as contemplated by the second and third
sentences of this paragraph, such Indemnifying Person agrees that it shall be
liable for any settlement of any proceeding effected without its written
consent if (i) such settlement is entered into more than 30 days after receipt
by such Indemnifying Person of the aforesaid request and (ii) such Indemnifying
Person shall not have reimbursed the Indemnified Person in accordance with such
request prior to the date of such settlement. No Indemnifying Person shall,
without the prior written consent of the Indemnified Person, effect any
settlement of any pending or threatened proceeding in respect of which any
Indemnified Person is or could have been a party and indemnity could have been
sought hereunder by such Indemnified Person, unless such settlement includes an
unconditional release of such Indemnified Person from all liability on claims
that are the subject matter of such proceeding.
If the indemnification provided for in the first four paragraphs
of this Section 7 is unavailable to an Indemnified Person or insufficient in
respect of any losses, claims,
<PAGE> 28
-28-
damages or liabilities referred to therein, then each Indemnifying Person under
such paragraph, in lieu of indemnifying such Indemnified Person thereunder,
shall contribute to the amount paid or payable by such Indemnified Person as a
result of such losses, claims, damages or liabilities (i) in such proportion as
is appropriate to reflect the relative benefits received by the Company and the
Selling Stockholders on the one hand and the Underwriters on the other hand
from the offering of the Shares or (ii) if the allocation provided by clause
(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the Selling Stockholders
on the one hand and the Underwriters on the other hand in connection with the
statements or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Selling Stockholders on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same respective proportions as the net proceeds from the offering (before
deducting expenses) received by the Selling Stockholders and the total
underwriting discounts and the commissions received by the Underwriters, in
each case as set forth in the table on the cover of the Prospectus, bear to the
aggregate public offering price of the Shares. The relative fault of the
Company and the Selling Stockholders on the one hand and the Underwriters on
the other hand shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company and the Selling Stockholders and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company, the Selling Stockholders and the Underwriters agree
that it would not be just and equitable if contribution pursuant to this Section
7 were determined by pro rata allocation (even if the Selling Stockholders or
the Underwriters were treated as one entity for such purposes) or by any other
method of allocation that does not take account of the equitable considerations
referred to in the immediately preceding paragraph. The amount paid or payable
by an Indemnified Person as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses incurred by such Indemnified Person in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of this
Section 7, (i) in no event shall an Underwriter be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission and (ii) in no event shall a Selling Stockholder be required
to contribute any amount in excess of the amount by which the net proceeds
received by it through the sale of its shares to
<PAGE> 29
-29-
the Underwriters exceeds the amount of any damages that such Selling
Stockholder has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission (which net proceeds,
in the case of a Management Stockholder who sell Shares upon the exercise of
Options, shall not include the amount remitted to the Company to effect the
exercise thereof). No person guilty of fraudulent misrepresentation (within
the meaning of Section ll(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to
this Section 7 are several in proportion to the respective number of Shares
set forth opposite their names in Schedule I hereto, and not joint.
The remedies provided for in this Section 7 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
The indemnity and contribution agreements contained in this
Section 7 and the representations and warranties of the Company and the Selling
Stockholders set forth in this Agreement shall remain operative and in full
force and effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter or by or on behalf of the Company, its officers or directors or
any other person controlling the Company or the Selling Stockholders and (iii)
acceptance of and payment for any of the Shares.
8. Notwithstanding anything herein contained, this Agreement (or
the obligations of the several Underwriters with respect to the Option Shares)
may be terminated in the absolute discretion of the Representatives, by notice
given to the Selling Stockholders, if after the execution and delivery of this
Agreement and prior to the Closing Date (or, in the case of the Option Shares,
prior to the Additional Closing Date) (i) trading generally shall have been
suspended or materially limited on or by, as the case may be, any of the New
York Stock Exchange or the American Stock Exchange, the National Association of
Securities Dealers, Inc., the Chicago Board Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of or guaranteed by the Company shall have been suspended on any
exchange or in any over-the-counter market, (iii) a general moratorium on
commercial banking activities in New York shall have been declared by either
Federal or New York State authorities, or (iv) there shall have occurred any
outbreak or escalation of hostilities or any change in financial markets or any
calamity or crisis that, in the judgment of the Representatives, is material and
adverse and which, in the judgment of the Representatives, makes it
impracticable to market the Shares being delivered at the Closing Date or the
Additional Closing Date, as the case may be, on the terms and in the manner
contemplated in the Prospectus.
<PAGE> 30
-30-
9. This Agreement shall become effective upon the later of (x)
execution and delivery hereof by the parties hereto and (y) release of
notification of the effectiveness of the Registration Statement (or, if
applicable, any post-effective amendment) by the Commission.
If on the Closing Date or the Additional Closing Date, as the
case may be, any one or more of the Underwriters shall fail or refuse to
purchase Shares which it or they have agreed to purchase hereunder on such date,
and the aggregate number of Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than one-tenth
of the aggregate number of Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Shares set forth opposite their respective names in Schedule I bears to the
aggregate number of Underwritten Shares set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as the Representatives
may specify, to purchase the Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date; provided
that in no event shall the number of Shares that any Underwriter has agreed to
purchase pursuant to Section 1 be increased pursuant to this Section 9 by an
amount in excess of one-ninth of such number of Shares without the written
consent of such Underwriter. If on the Closing Date or the Additional Closing
Date, as the case may be, any Underwriter or Underwriters shall fail or refuse
to purchase Shares which it or they have agreed to purchase hereunder on such
date, and the aggregate number of Shares with respect to which such default
occurs is more than one-tenth of the aggregate number of Shares to be purchased
on such date, and arrangements satisfactory to the Representatives and the
Selling Stockholders for the purchase of such Shares are not made within 36
hours after such default, this Agreement (or the obligations of the several
Underwriters to purchase the Option Shares, as the case may be) shall terminate
without liability on the part of any non-defaulting Underwriter or the Selling
Stockholder. In any such case either you or the Selling Stockholders shall have
the right to postpone the Closing Date (or, in the case of the Option Shares,
the Additional Closing Date), but in no event for longer than seven days, in
order that the required changes, if any, in the Registration Statement and in
the Prospectus or in any other documents or arrangements may be effected. Any
action taken under this paragraph shall not relieve any defaulting Underwriter
from liability in respect of any default of such Underwriter under this
Agreement.
10. If this Agreement shall be terminated by the Underwriters, or
any of them, because of any failure or refusal on the part of the Company or the
Selling Stockholders to comply with the terms or to fulfill any of the
conditions of this Agreement, or if for any reason any of the Company or the
Selling Stockholders shall be unable to perform its obligations under this
Agreement or any condition of the Underwriters' obligations cannot be fulfilled,
the Company and the Selling Stockholders agree to reimburse the Under-
<PAGE> 31
-31-
writers or such Underwriters as have so terminated this Agreement with respect
to themselves, severally, for all out-of-pocket expenses (including the fees
and expenses of its counsel) reasonably incurred by the Underwriter in
connection with this Agreement or the offering contemplated hereunder.
11. This Agreement shall inure to the benefit of and be binding
upon the Company, the Selling Stockholders and the Underwriters any controlling
persons referred to herein and their respective successors and assigns. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any other person, firm or corporation any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein
contained. No purchaser of Shares from any Underwriter shall be deemed to be a
successor by reason merely of such purchase.
12. Any action by the Underwriters hereunder may be taken by the
Representatives jointly or by J.P. Morgan Securities Inc. alone on behalf of the
Underwriters, and any such action taken by the Representatives jointly or by
J.P. Morgan Securities Inc. alone shall be binding upon the Underwriters. All
notices and other communications hereunder shall be in writing and shall be
deemed to have been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be given to the
Representatives, c/o J.P. Morgan Securities Inc., 60 Wall Street, New York, New
York 10260 (telefax: 212-648-5705), Attention: Syndicate Department, copy to
Cahill Gordon & Reindel, 80 Pine Street, New York, New York 10005 (telefax:
212-269-5420), Attention: Gerald S. Tanenbaum, Esq. Notices to the Company shall
be given to it at its office, 505 Huntmar Park Drive, Herndon, Virginia 20170,
(telefax: 703-742-3386), Attention: Chief Executive Officer. Notices to the
Principal Stockholder shall be given to it at its office, 10260 Campus Point
Drive, San Diego, California 92121 (telefax: 619-535-7992), Attention: General
Counsel. Notices to the Management Stockholders shall be given to the
Attorneys-in-Fact, c/o the Company, 505 Huntman Park Drive, Herndon, Virginia
20170, (telefax: 703-742-3386), Attention: Chief Executive Officer. Copies of
notices to any of the Company or the Selling Stockholders should be given to
Pillsbury Madison & Sutro LLP, 2700 Sand Hill Road, Menlo Park, California 94025
(telefax: 650-233-4545), Attention: Jorge A. del Calvo, Esq.
13. This Agreement may be signed in counterparts, each of which
shall be an original and all of which together shall constitute one and the same
instrument.
14. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE
CONFLICTS OF LAWS PROVISIONS THEREOF.
<PAGE> 32
-32-
If the foregoing is in accordance with your understanding, please
sign and return five counterparts hereof.
Very truly yours,
NETWORK SOLUTIONS, INC.
By:
---------------------------------
Name:
Title:
SCIENCE APPLICATIONS
INTERNATIONAL CORPORATION
By:
---------------------------------
Name:
Title:
MANAGEMENT STOCKHOLDERS
By:
---------------------------------
Name:
Title:
As Attorney-in-Fact acting on behalf of
each of the Management Stockholders
named in Schedule II to this Agreement.
<PAGE> 33
-33-
Accepted: , 1999
J.P. MORGAN SECURITIES INC.
HAMBRECHT & QUIST LLC
PAINEWEBBER INCORPORATED
BANCBOSTON ROBERTSON STEPHENS
Acting severally on behalf of themselves
and the several Underwriters listed
in Schedule I hereto.
By: J.P. MORGAN SECURITIES INC.
By:
-------------------------------
Name:
Title:
<PAGE> 34
SCHEDULE I
<TABLE>
<CAPTION>
Number of Underwritten
Underwriter Shares To Be Purchased
- ----------- ----------------------
<S> <C>
J.P. Morgan Securities Inc. ..............................
Hambrecht & Quist LLC.....................................
BancBoston Robertson Stephens.............................
PaineWebber Incorporated..................................
----------------------
Total
======================
</TABLE>
<PAGE> 35
SCHEDULE II
<TABLE>
<CAPTION>
Number of Number of
Selling Stockholders Underwritten Shares Option Shares
- -------------------- ------------------- -------------
<S> <C> <C>
Science Applications International 4,500,000 687,000
Corporation
David H. Holtzman 16,413 0
Robert J. Korzeniewski 24,978 0
Donald N. Telage 30,236 0
Jonathan W. Emery 8,373 0
--------- -------
Total 4,580,000 687,000
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-3 of our report dated February 6, 1998,
relating to the financial statements of Network Solutions, Inc., for the years
ended December 31, 1996 and 1997 and for the period from March 11, 1995 to
December 31, 1995 and of our report dated March 17, 1997, relating to the
financial statements of Network Solutions, Inc., for the period from January 1,
1995 to March 10, 1995, which appear in such Prospectus. We also consent to the
application of such reports to the Financial Statement Schedule for the years
ended December 31, 1996 and 1997, the period from March 11, 1995 to December 31,
1995 and the period from January 1, 1995 to March 10, 1995 listed under Item
14(a) of Network Solutions, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1997 when such schedule is read in conjunction with the financial
statements referred to in our reports. The audits referred to in such reports
also included this schedule. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
/S/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
McLean, VA
January 4, 1999
