================================================================================UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------FORM 10-K
(Mark(Mark One)
[X]
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31,
20012002OR
[_]
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from
__________to__________Commission File Number: 000-23593
-----------------VERISIGN, INC.
(Exact(Exact name of registrant as specified in its charter)
Delaware 94-3221585 (State or other (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 487 E. Middlefield Road, 94043 Mountain View, CA (Zip Code) (Address of principal executive offices) Registrant's
Delaware
(State or other jurisdiction of
incorporation or organization)
487 E. Middlefield Road, Mountain View, CA
(Address of principal executive offices)
94-3221585
(I.R.S. Employer
Identification No.)
94043
(Zip Code)
Registrant’s telephone number, including area code: (650) 961-7500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
-----------------$0.001 Par Value Per Share, and the Associated Stock Purchase RightsIndicate by check mark whether the
registrant:registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days. YES[X]þ NO[_]¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the
registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[_]¨Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES þ NO ¨
The aggregate market value of the common stock held by non-affiliates of the registrant, computed by reference to the closing price as of
Februarythe close of business on June 28, 2002 was approximately$5,582,440,000. The number$1,701,185,000.Number of shares of Common Stock, $0.001 par value, outstanding as of the
registrant's common stock asclose of business on February 28,2002 was 236,009,529.2003: 238,384,643 shares.DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to stockholders in connection with the
20022003 Annual Meeting of Stockholders are incorporated by reference into Part III.================================================================================2PART I
Overview
VeriSign, Inc. is a leading provider of
digital trustcritical infrastructure services that enable Web site owners, enterprises, communications service providers, electronic commerce, or e-commerce, service providers and individuals to engage in secure digital commerce and communications. Ourdigital trustservices include three core offerings:managedInternet security andnetworkregistry services,registry andtelecommunications services, and Web presenceand trustservices. We market our products and services through our direct sales force, telesales operations, member organizations in our global affiliate network,value addedvalue-added resellers, service providers, and our Web sites.WeBeginning in 2003, we are organized into
two customer-focusedthree service-based lines of business: theEnterpriseInternet Services Group, the Telecommunication Services Group, andService Provider Division and the Mass Markets Division.Network Solutions, Inc., or Network Solutions. TheEnterprise and Service Provider Division deliversInternet Services Group consists of two business units: Security Services, which provides products and servicesto largerthat enable enterprises and service providersthat wantto establish and deliver secure Internet-basedand telecommunications-basedservices tocustomers.customers, and Registry Services, which acts as the exclusive registry of domain names in the.comand .net generictop-level domains, or gTLDs, and certain country code top-level domains, or ccTLDs. TheMass Markets Division delivers productsTelecommunication Services Group provides Signaling System 7, or SS7, network services, intelligent network services and wireless billing and customer care solutions to telecommunications carriers. Through our wholly-owned subsidiary, Network Solutions, we provide domain name registration and value-added services tosmallenterprises andmedium size enterprises, as well as to consumersindividuals who wish to establish an online presence.VeriSign was incorporated in Delaware on April 12, 1995. Our principal executive offices are located at 487 E. Middlefield Road, Mountain View, California 94043. Our telephone number at that address is (650) 961-7500 and our common stock is traded on
the NasdaqThe NASDAQ National Market under the ticker symbol VRSN.VeriSign'sVeriSign’s primary Web site iswww.verisign.com.www.verisign.com. The information on our Web sites is not incorporated by reference into this annual report. VeriSign,is athe VeriSign logo, Network Solutions, Illuminet, Thawte and certain other product names are trademarks or registeredtrademarktrademarks of VeriSign, Inc., and/or its subsidiaries in the United States and other countries. Other names used in this report may be trademarks of their respective owners.Recent Acquisitions During 2001, we acquired several companies that expandedOur Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
enhanced our product and service offerings and expanded our marketing reach. In particular, on December 12, 2001, we completed our acquisition of Illuminet Holdings, Inc.,amendments to those reports filed orIlluminet, a leading provider of specialized servicesfurnished pursuant totelecommunications carriers. We issued a total of approximately 30.6 million shares of our common stock for allSection 13(a) or 15(d) of theoutstanding capital stockExchange Act, are available, free ofIlluminet. We also assumed all of Illuminet's outstanding employee stock options. In addition, on February 8, 2002 we completedcharge, through ouracquisition of H.O. Systems, Inc., a leading provider of billing and customer services to wireless carriers, for approximately $350 million in cash. We plan to combine H.O. Systems' billing platformWeb site atwww.verisign.com as soon as reasonably practicable after filing such reports with thesignaling, intelligent networkSecurities andclearinghouse servicesExchange Commission.Internet Services Group
The Internet Services Group consists of
Illuminet to enable us to offer wireless carriers a comprehensive package of essential services. Enterprisetwo business units: Security Services andService Provider DivisionRegistry Services. TheEnterprise and Service Provider DivisionSecurity Services business unit provides products and services to organizations who want to establish and deliver secure Internet-basedand telecommunications-basedservices for theircustomers. The services offered by the Enterprise and Service Provider Division consist ofcustomers including the following types of services: managed security and network services, Web trust services and payment services. The Registry Services business unit acts as the exclusive registry of domain names in the.comand .netgTLDs andtelecommunications services. 3certain ccTLDs. Security Services
Managed Security and Network Services
Managed Security and Network Services include our
traditionalpublic key infrastructureor PKI,(“PKI”) services for enterprises or members of our VeriSign Affiliate program,enterprise consultingmanaged security services andmanagement services,digital brand managementservices and managed domain name services, or DNS.services.VeriSign PKI Services. VeriSign offers the Managed PKI
Services are sold under the VeriSign OnSiteService and VeriSign Go Secure!brands, andServices that can be tailored to meet the specific needs of enterprises that wish to issue digital certificates to employees, customers or trading partners.. OnSite Services. OnSite is a managed service that allows an organization to use our trusted data processing infrastructure to develop and deploy customized digital certificate services for its user communities. OnSite can be used by our customers to provide digital certificates for a variety of applications, including, but not limited to: controlling access to sensitive data and account information, enabling digitally-signed e-mail, encryption of e-mail, or secure socket layer sessions. OnSite services can help customers create an online electronic trading community, manage supply chain interaction or facilitate and protect online credit card transactions. . Go Secure! Services. Go Secure! Services are a set of managed application services that enable enterprises to quickly build digital certificate-based security into their off-the-shelf transaction and communication applications. Go Secure! Services complement our OnSite services and are designed to incorporate digital certificates into existing applications such as e-mail, browser, directory and virtual private network devices as well as other devices.
• Managed PKI Service. The Managed PKI Service is a managed service that allows an organization to use our trusted data processing infrastructure to develop and deploy customized digital certificate services for its user communities. The Managed PKI Service can be used by our customers to provide digital certificates for a variety of applications, including, but not limited to: controlling access to sensitive data and account information, enabling digitally-signed e-mail, encryption of e-mail, or Secure Socket Layer (“SSL”) sessions. The Managed PKI Service can help customers create an online electronic trading community, manage supply chain interaction or facilitate and protect online credit card transactions or enable access to virtual private networks.
• Go Secure! Services. Go Secure! is a set of software modules that enable enterprises to quickly build digital certificate-based security into their off-the-shelf transaction and communication applications. Go Secure! Services complements our Managed PKI Service and is designed to incorporate digital certificates into existing applications such as e-mail, browser, directory and virtual private network devices as well as other devices. VeriSign Affiliate PKI Software and Services. VeriSign Affiliate PKI Software and Services are sold to a wide variety of entities
which are unaffiliated with VeriSign,that provide large-scale electronic commerce and communications services over wired and wireless Internet Protocol, or IP, networks. We designate these types of organizations as"VeriSign Affiliates"“VeriSign Affiliates” and provide them with a combination of technology, support and marketing services to facilitate their initial deployment andon-goingongoing delivery of digital certificate services. In some instances, we have invested in VeriSign Affiliates and hold a minority interest of less than 20%.VeriSign Affiliates can license either our Service Center or Processing Center offerings. The Service Center and Processing Center offerings are based on our software platform and enable a VeriSign Affiliate to offer one or more types of digital certificate services.
.The Service Centerprovides aofferings provide VeriSignAffiliateAffiliates with all of the capabilities needed to perform subscriber enrollment and authentication, digital certificate application approval, directory hosting, customer support, billing integration and report generation from within their facilities or act as an outsource provider ofOnSite Services,the Managed PKI Service, while utilizing our secure data centers for back-end processing..The Processing Center provides a VeriSign Affiliate with all of the capabilities of the Service Center plus the software modules required to perform all certificate life cycle services of issuance, management, revocation and renewal from within its own secure data center.We also provide each VeriSign Affiliate with services to facilitate the efficient and timely rollout of their digital certificate offerings. These services may include
Service Center or Processing Centerinstallation and integration services, facility and network design consulting, technical and customer support documentation, training and sales and marketing support. VeriSign and the VeriSign Affiliates make up the VeriSign Trust Network, a global network of digital certificate service providers that operate with common technology, infrastructure and practices to enable digital certificate interoperability on a worldwide basis. The VeriSign4Trust Network now consists of approximately 4846 member organizationsincluding British Telecommunications plc in the United Kingdom, Soltrus in Canada, Certplus in France, eSign in Australia, HiTrust in Taiwan, Eurotrust in Europe, Firstream in Europe, Netsecure Holdings in Asia and Telia in Sweden.of which 23 generate revenues.VeriSign Affiliates typically enter into a
five yearfive-year technology licensing and revenue sharing agreement with us whereby we receive up-front licensing fees for the Service Center or Processing Center technology, as well as ongoing royalties from each digital certificate orOnSite servicethe Managed PKI Service sold by the VeriSign Affiliate.Enterprise Consulting and ManagementManaged Security Services.
VeriSign ConsultingVeriSign’s Managed Security Services include services related topublic key infrastructure,PKI, network infrastructure and information security services. To complement ourEnterprisePKI services for enterprises, we also provide consulting for integrating our PKI services with existing applications and databases and consulting on policies and procedures related to the management and deployment of digitalcertificates, and training classes on the latest developments in security technology.certificates. In addition, we resellthird partya nominal amount of third-party hardware and softwareeither related toas part of the delivery of our consultingservices or as stand-alone products.services. Our management services also include, among others, managed DNSservicesand DNS hosting, which are delivered through our registry operations infrastructure.EnterpriseDigital Brand Management Services. We offer a range of services that we refer to as Digital Brand Management Services to help information technology professionals, brand marketers,
attorneysand other enterprise customers monitor, protect and build digital brand equity. Some of these services include our domain name registration services for bothglobal top level domains,gTLDs, such as.com, andcountry code top level domains,ccTLDs, such as.de or.tv, our domain name recovery services, and our digital brand surveillance services.Revenues fromWeb Trust Services
Our Web trust services include our
Digital Brand ManagementWeb server digital certificate services, which enable Internet merchants to implement and operate secure Web sites that utilize SSL, or Wireless Transport Layer Security (“WTLS”) protocols. These services provide Internet merchants with the means to identify themselves to consumers and to encrypt communications between consumers and their Web site.We currently offer the following Web server digital certificate services and content signing certificates. Each is differentiated by the target application of the server that hosts the digital certificate.
• Secure Site and Secure Site Plus. Secure Site is our standard service offering that enables Web sites to implement basic SSL security features between their sites and individual end-user browsers. We also offer an upgraded version of this service, called Secure Site Plus, which enables U.S. and international enterprises to offer stronger, 128-bit encrypted, SSL sessions between their Web sites and end-user browsers from Netscape and Microsoft. Secure Site Plus also includes security monitoring, security assessment, site performance monitoring, and additional warranty protection.
• Commerce Site and Commerce Site Plus. Our Commerce Site and Commerce Site Plus offerings combine the features and functionality of our Secure Site offerings with our payment services offerings, providing existing sites that want to offer e-commerce solutions with a comprehensive suite of services to secure and process online payments.
• Thawte Branded Digital Certificates. We offer entry-level SSL security services under the Thawte brand. These services generally offer lower encryption and customer service features than our other VeriSign branded products, but use the same underlying infrastructure, and are produced using the same standards for authentication, as VeriSign branded certificates. Payment Services
have not been significantUsing our payment gateway, Internet merchants are able to
date.securely and digitally authorize, capture and settle a variety of payment types, including credit, debit and purchase cards, Internet checks, and automated clearing house transactions over the Internet.Registry
and TelecommunicationsServicesRegistry Services.We are the exclusive registry of domain names within the.comand .net
and .org global top-level domainsgTLDs under agreements with the Internet Corporation for Assigned Names and Numbers, or ICANN, and the Department of Commerce, or DOC. As a registry, we maintain the master directory of all second-level domain names in these top-level domains. We own and maintain the shared registration system that allows all registrars to enter new second-level domain names into the master directory and to submit modifications, transfers, re-registrations and deletions for existing second-level domain names.Through our acquisitions of the .TV International Corporation and eNIC Corporation in 2001, weWe are also
becamethe exclusive registry for domain names within the.tv and.cccountry code top-level domains, orccTLDs. These top-level domains arealsosupported by our global name server constellation and shared registration system. In addition, we have made.nu and.bz domain name registration services available through our outsourced hosting environment, which enables domain name registrars and resellers to simultaneously accessthe .nu and.bz registries.Telecommunications Services. Through our Illuminet subsidiary, we provideTelecommunication Services Group
The Telecommunication Services Group provides specialized services to telecommunications carriers.
The majority of these services are directly related to Illuminet's Signaling System 7, orService offerings include the SS7 network, as either part of the connectivity, switching and transport function of the SS7 network or as intelligent network services delivered over the SS7 network. SS7 is an industry-standard5system of protocols and procedures that is used to control telephone communications and provide routing information in association with vertical calling features, such as calling card validation, advanced intelligent network services, local number portability, wireless services, toll-free number database access and caller identification. In addition, through Illuminet we provide clearinghouseThe Telecommunication Services Group also offers advanced billing and customer care servicesSS7 network reporting services, and we license specially designed software for measuring SS7 network usage.to wireless carriers. Brief descriptions of some of these services are set forth below:Connectivity, Switching and Transport Services . SS7 Connectivity, Switching and Transport. These are component parts of our basic SS7 trunk signaling service. Trunk signaling reduces post-dial delay, allowing call connection almost as soon as dialing is completed. This enables telecommunications carriers to deploy a full range of intelligent network services more quickly and cost effectively. By using our trunk-signaling service, carriers simplify SS7 link provisioning, and reach all local interexchange carriers, or IXC, and wireless carriers' networks though our access to hundreds of carriers. . Database Access Messaging. We provide the SS7 functions that enable carriers to find and interact with network databases and conduct the database queries that are essential for many advanced services, such as call waiting, call forwarding, and three-way calling.
• SS7 Connectivity, Switching and Transport. These are component parts of our basic SS7 trunk signaling service. Trunk signaling reduces post-dial delay, allowing call connection almost as soon as dialing is completed. This enables telecommunications carriers to deploy a full range of intelligent network services more quickly and cost effectively. By using our trunk-signaling service, carriers simplify SS7 link provisioning, and reach all local interexchange carriers, and wireless carriers’ networks though our access to hundreds of carriers.
• Intelligent Network Services. We provide the SS7 functions that enable carriers to find and interact with network databases and conduct database queries that are essential for many advanced services. Such advanced services include Local Number Portability (“LNP”) that allows a telephone subscriber to switch local service providers while keeping the same telephone number. We also offer Calling Name (“CNAM”) Delivery service that enables carriers to query regional Bell operating companies and major independent carriers and reduce “name not available” messages that customers receive when a caller’s phone number is not identifiable when using a carrier’s caller identification service.
• Wireless Services. We offer wireless carriers a package of essential services including (a) seamless roaming using the ANSI-41 signaling protocol allowing carriers to provide support for roamers visiting their service area, and for their customers when they roam outside their service area, (b) prepaid wireless which is a real-time account management platform, administered via a Web interface, that makes prepaid wireless plans as flexible and convenient as traditional postpaid plans, (c) postpaid billing which provides advanced billing and customer care solutions, and (d) clearing which provides wireless fraud management, SS7 monitoring, and roamer clearinghouse services, in which we settle telephone traffic charges between carriers throughout the Western Hemisphere.
• Mediation Services. We offer a third-party independent solution to wireline and wireless operators for services such as: (a) toll clearinghouse which includes wireline billing and collections, where we serve as a distribution and collection point for billing information and payment collection for services provided by one carrier to customers billed by another, and (b) Metcalf SMS Interoperability which is a text messaging interoperability service that connects to wireless carriers’ messaging systems, and routes messages from carrier to carrier. Network
Services . Local Number Portability ("LNP"). In 1996, the Federal Communications Commission, or FCC, mandated that incumbent local exchange carriers implement wireline number portability in all major U.S. markets beginning in 1999. Wireless carriers are required to provide routing information for calls completed to ported numbers. LNP allows a telephone subscriber to switch local service providers while keeping the same telephone number. . Line Information Database ("LIDB") Access and Transport. LIDBs are developed and maintained by telecommunications carriers to store information about their subscribers necessary to provide enhanced services such as validating telephone numbers and billing information.SolutionsThrough our
SS7 networkNetwork Solutions subsidiary, weoffer access to all LIDBs in the United States. The service also includes validating calling cards, collect and third-party calls, as well as fraud protection features. . Calling Name ("CNAM") Delivery Access and Transport. We offer CNAM database access, allowing carriers to query regional Bell operating companies and major independent carriers and reduce "name not available" messages that customers receive when a caller's phone number is not identifiable when using a carrier's caller identification, or caller id, service. Wireless Services . Seamless Roaming. We provide nationwide seamless roaming support using the ANSI-41 signaling protocol. ANSI-41 allows carriers to provide support for roamers visiting their service area, and for their customers when they roam outside their service area. It enables number validation inside and outside carriers' service areas by accessing our SS7 network. . Prepaid Wireless Services. Our SmartPay prepaid wireless service is a real-time account management platform, administered via a Web interface, that makes prepaid wireless plans as flexible and convenient as traditional postpaid plans. Debit card systems can include added costs for inventory needs, loss, theft, PIN administration and retail commissions. 6Clearinghouse Services. Our Clearinghouse services include wireline billing and collections, where we serve as a distribution and collection point for billing information and payment collection for services provided by one carrier to customers billed by another. Using our clearinghouse services, carriers can bill and collect messages in a simple consolidated invoice that other providers may otherwise bill separately to the local carrier's customers; bill and collect operator-assisted and calling card calls made through WorldCom, Sprint and other interexchange carriers; and bill and collect direct-dialed long distance calls for selected interexchange carriers. Mass Markets Division The Mass Markets Division provides three general types of Web related service offerings. The first is Web Presence Services, whichprovide digital identity through domain name registration services, andvalue addedvalue-added services, such asemail,e-mail, Web site creation tools, Web site hosting and othere-commerce enabling offerings.
The second is Web Trust Services, which includes Web site digital certificates for use by businesses and professionals. The third is payment services, which provide Internet merchants with the ability to securely and digitally authorize, capture and settle a variety of payment types using our Internet payment gateway. Web Presence Services Domain Name Registration Services.We register second-level domain names in the.com, .net,.org, .bizand .infoglobal top-level domains,gTLDs, as well as selectedcountry code top-level domains,ccTLDs, such as.de.uk and.tv,.tv, around the world, enabling individuals, companies and organizations to establish a unique identity on the Internet. Our customers apply to register second-level domain names either directly through our Web sites or indirectly through our channel partner wholesalers, Internet service providers, telecommunications companies and others. We accept registrations and re-registrations inone-yearannual or multi-year increments for periods up to ten years.Secondary Market Name Services. Our secondary market domain name service offering, GreatDomains.com, a is marketplace where customers can transfer and appraise domain names. Other Value-Added Products and Services.We also provide other digital identity and Web presence value-added products and services through our Web site storefront, such as
VeriSign-hostedNetwork Solutions-hosted domain names, Web sites fromVeriSign,Network Solutions, Web forwarding (which allows a customer to forward Internet traffic from one Web site to another) andVeriSign mail. Web Trust Services Our Web Trust services include our Web server digital certificate services, which enable merchants to implement and operate secure Web sites that utilize the Secure Sockets Layer, or SSL, or Wireless Transport Layer Security, or WTLS, protocols. These services provide merchants with the means to identify themselves to consumers and to encrypt communications between consumers and their Web site. We currently offer the following Web server digital certificate services and content signing certificates. Each is differentiated by the target application of the server that hosts the digital certificate. . Secure Site and Secure Site Plus. Secure Site is our standard service offering that enables Web sites to implement basic SSL security features between their sites and individual end-user browsers. We also offer an upgraded version of this service, called Secure Site Plus, which enables U.S. and international enterprises to offer stronger, 128-bit encrypted, SSL sessions between their Web sites 7and end-user browsers from Netscape and Microsoft. Secure Site Plus also includes security monitoring, security assessment, site performance monitoring and additional warranty protection. . Commerce Site and Commerce Site Plus. Our Commerce Site and Commerce Site Plus offerings combine the features and functionality of our Secure Site offerings with our Payment Services offerings, providing existing sites that want to offer e-commerce solutions with a comprehensive suite of services to secure and process online payments. . Thawte Branded Digital Certificates. We offer entry-level SSL security services under the Thawte brand. These services generally offer lower encryption and customer service features than our other VeriSign branded products, but use the same underlying infrastructure, and are produced using the same standards for authentication, as VeriSign branded certificates. Payment Services Using our payment gateway, VeriSign Payment Services, online merchants are able to process payment types, including credit, debit and purchase cards, Internet checks, and automated clearing house transactions over the Internet.Network Solutions e-mail.Operations Infrastructure
Our operations infrastructure consists of secure data centers in Mountain View, California; Dulles and Leesburg, Virginia; Lacey, Washington; Overland Park, Kansas; and Kawasaki, Japan. Many of our VeriSign Affiliates also operate secure data centers in their geographic areas. Most of these secure data centers operate on a 24-hour a day, 7 days per week basis,
and support all aspects ofsupporting ourenterprisebusiness units and services. Key features of our operations infrastructure include:. Distributed Servers. We deploy a large number of high-speed servers to support capacity and availability demands that in conjunction with our proprietary software offers automatic failover, global and local load balancing and threshold monitoring on critical servers. . Advanced Telecommunications. We deploy and maintain redundant telecommunications and routing hardware and maintain high-speed connections to multiple Internet service providers, or ISPs, and throughout our internal network to ensure that our mission critical services are readily accessible to customers at all times. . Network Security. We incorporate architectural concepts such as protected domains, restricted nodes and distributed access control in our system architecture. We have also developed proprietary communications protocols within and between software modules that are designed to prevent most known forms of electronic attacks. In addition, we employ firewalls and intrusion detection software, and contract with security consultants who perform periodic attacks and security risk assessments.
• Distributed Servers. We deploy a large number of high-speed servers to support capacity and availability demands that in conjunction with our proprietary software offers automatic failover, global and local load balancing and threshold monitoring on critical servers.
• Advanced Telecommunications. We deploy and maintain redundant telecommunications and routing hardware and maintain high-speed connections to multiple Internet service providers (“ISPs”) throughout our internal network to ensure that our mission critical services are readily accessible to customers at all times.
• Network Security. We incorporate architectural concepts such as protected domains, restricted nodes and distributed access control in our system architecture. We have also developed proprietary communications protocols within and between software modules that are designed to prevent most known forms of electronic attacks. In addition, we employ firewalls and intrusion detection software, and contract with security consultants who perform periodic attacks and security risk assessments. As part of our operations infrastructure for our domain name registry services, we operate all thirteen
global top-level domain namegTLD servers that answer domain name lookups for the.comand .netand .orgzones. We also operate two of the thirteen root zone servers, including the"A"“A” root, which is the authoritative root zone server of theInternet'sInternet’s domain name systemor DNS.(“DNS”). The domain name servers provide the associated name server andInternet protocol, orIP address for every.comand .netor .orgdomain name on the Internet and a large number of other top-level domain queries, resulting in an average of over57.5 billion responses perday.day during 2002. These name servers are located around the world, providing local domain name service throughout North America, in Europe, and in Asia. Each server facility is a controlled and monitored8environment, incorporating security and system maintenance features. This network of name servers is one of the cornerstones of the Internet'sInternet’s DNS infrastructure.To provide our telecommunications services, we operate an SS7 network composed of specialized
SS7switches, computers and databases strategically located across the United States. These elements interconnect our customers and U.S. telecommunications carriers through leased lines. Our network currently consists of 14 mated pairs of SS7 signal transfer points that are specialized switches that manage SS7 signaling, and into which our customers connect. We ownseveneight pairs and lease capacity onsevensix pairs of SS7 signal transfer points from regional partners. Our SS7 network control, located in Overland Park, Kansas, is staffed 24 hours a day, seven daysaper week. As part of our operations infrastructure for network services, we also have several SS7 network signal transfer pointor STP,sites. These sites are maintained at1114 locations throughout the United States.Call Center and Help Desk. We provide customer support services through our phone-based call centers, e-mail help desks and Web-based self-help systems. Our California call center is staffed from 5 a.m. to 6 p.m.
PSTPacific time and employs an automated call directory system to support ourEnterpriseSecurity Services Group. Our Virginia andService Provider Division services. Our VirginiaPennsylvania call centers are staffed from68 a.m. to68 p.m. Eastern time to support ourMass Markets DivisionNetwork Solutions services andGlobalRegistry Services. All call centers also have Web-based support services which are available on a 24-hour a day, 7 days per week basis, utilizing customized automatic response systems to provide self-help recommendations and a staff of trained customer support agents.Operations Support and
Monitoring.Monitoring. We have an extensive monitoring capability that enables us to track the status and performance of our critical database systems at 60-second intervals, and our global resolution systems at four-second intervals. Our distributed Network Operations Centers are staffed 24 hours a day, 7 daysaper week.Disaster Recovery
Plans.Plans. We have disaster recovery and business continuity capabilities that are designed to deal with the loss of entire data centers and other facilities. OurGlobalRegistry Services business maintains dual mirrored data centers that allow rapid failover with no data loss and no loss of function or capacity. Our PKI andPayment Servicespayment services businesses are similarly protected by having service capabilities that exist in both of our East and West Coast data center facilities.All of ourOur critical data services (including digital certificates, domain name registration, telecommunications services and global resolution) use advanced storage systems that provide data protection through techniques such as mirroring and replication.Marketing, Sales and Distribution
We market our services worldwide through multiple distribution channels, including the Internet, direct sales, telesales, direct marketing through all media, mass merchandisers, value-added resellers, systems integrators and our VeriSign Affiliates. A significant portion of our
Mass Markets DivisionNetwork Solutions revenues to date has been generated through sales from our Web sites. We intend tocontinue increasingincrease our direct sales force in theEnterpriseInternet Services Group andService Divisionthe Telecommunication Services Group both in the United States and abroad, and tocontinue toexpand our other distribution channels in bothdivisions.businesses.Our direct sales and marketing organization at December 31,
20012002 consisted of approximately900700 individuals, including managers, sales representatives, marketing and technical and customer support personnel. We have field sales offices throughout the world. Additionally, our sales are currently being made through multiple channels including wholesale and retail distributors, resellers and direct sales throughout the world.9We continue to build an international network of VeriSign Affiliates who provide our digital trust services under licensed co-branding relationships using our proprietary technology and business practices.We believe our customer base is diversified and is not concentrated in any particular industry. In each of the past three fiscal years, no single customer has accounted for 10 percent or more of our revenues.
Research and Development
As of December 31,
2001,2002, we had approximately350400 employees dedicated to research and development. Research and development expenses were $48.4 million in 2002, $78.1 million in 2001 and $41.3 million in2000 and $13.3 million in 1999.2000. To date, all development costs have been expensed as incurred. We believe that timely development of new and enhanced Internet-based trust services and technology are necessary to remain competitive in the marketplace. Accordingly, we intend to continue recruiting and hiring experienced research and development personnel and to make additional investments in research and development.Our future success will depend in large part on the ability to continue to maintain and enhance our current technologies and services. In the past, we have developed our services both independently and through efforts with leading application developers and major customers. We have also, in certain circumstances, acquired or licensed technology from third parties, including public key cryptography technology from RSA Security Inc.
, or RSA.(“RSA”). Although we will continue to work closely with developers and major customers in our developmentefforts, we expect that most of the future enhancements to existing services and new
digital trustservices will be developed internally.The markets for
digital trust services and telecommunicationsour services are dynamic,marketscharacterized by rapid technological developments, frequent new product introductions and evolving industry standards. The constantly changing nature of these markets and their rapid evolution will require us to continually improve the performance, features and reliability of ourdigital trust services and telecommunicationsservices, particularly in response to competitive offerings, andthat weto introduce both new and enhanced services as quickly as possible and prior to our competitors.Competition
Competition in
Digital Trust Services.Security Services. Ourdigital trustsecurity services are targeted at the new and rapidly evolving market for trusted services, including authentication, validation and payment, that enable secure electronic commerce and communications over wired and wireless IP networks. Although the competitive environment in this market has yet to develop fully, we anticipate that it will be intensely competitive, subject to rapid change and significantly affected by new product and service introductions and other market activities of industry participants.Principal competitors generally fall within one of
threethe following categories: (1) companies such as Baltimore Technologies and Entrust Technologies, which offer software applications and related digital certificate products that customers operate themselves; (2) companies such as Geo Trust and Digital Signature Trust Company (a subsidiary of Zions Bancorporation) that primarily offer digital certificate and certificate authority, or CA, related services; and (3) companies focused on providing a bundled offering of products and services such as Baltimore Technologies, which acquired GTE CyberTrust. We also experience competition from a number of smaller companies, and we believe that our primary long-term competitors may not yet have entered the market. Furthermore, Netscape and Microsoft have introduced software products that enable10the issuance and management of digital certificates, and we believe that other companies could introduce similar products. Additionally, RSA has entered into the digital certificate market, and our business could be harmed by RSA’s competition. In addition, browser companies that embed our interface technologies or otherwise feature them as a provider of digital certificate products and services in their Web browsers or on their Web sites could also promote our competitors or charge us substantial fees for promotions in the future. New technologies and the expansion of existing technologies may increase
thecompetitive pressure. Wecan notcannot assure that competing technologies developed by others or the emergence of new industry standards will not adversely affect our competitive position or render ourdigitalsecurity services or technologies noncompetitive or obsolete. In addition, the market for digital certificates is emerging and is characterized by announcements of collaborative relationships involving our competitors. The existence or announcement of any such relationships could adversely affect our ability to attract and retain customers. As a result of the foregoing and other factors, we may not be able to compete effectively with current or future competitors, and competitive pressures that we face could materially harm our business.Competition in Managed Security Services. We face competition from companies providing managed security services, including Guardent and Ubizen, as well as competition from network security product companies like Symantec, Internet Security Systems, TruSecure, and RedSiren. In
connection with our first round of financing in 1995, RSA contributed certain technology to usaddition, we also compete against large systems integrators andentered into a non-competition agreement under which RSA agreed that it would not compete with our certificate authority business for a period of five years. This non-competition agreement expired in April 2000. RSA has recently entered into the digital certificate market,consulting firms, such as IBM Global Services andour business could be materially harmed by their potential competition.EDS.Competition in Digital Brand Management Services. We face competition from companies providing services similar to some of our Digital Brand Management Services. In the registration and domain name asset management area of our business, our competition comes from Register.com among other companies. In
themonitoringservice,services, competition comes from various smaller companies providing similar services.Competition in Web Presence Services. The Web Presence Service market is extremely competitive and subject to significant pricing pressure. We currently face competition among registrars within the global top-level domains, or gTLDs, like .com, and in the future will face competition among registrars within all new top-level domains. As of February 28, 2002, there were over 145 ICANN-accredited registrars, of which approximately 100 are active competitors, including us, BulkRegister.com, Deutsche Telekom, France Telecom/Transpac, Go-Daddy Software, Melbourne IT, Register.com and Tucows.com, Inc. that register second-level domain names in .com, .net, .org and the other global top level domains, or gTLDs. We also face competition from third-level domain name providers such as Internet access providers and registrars of country code TLDs. We face substantial competition from other providers of value-added Web presence services such as e-mail providers, Web site designers, Internet service providers and others.Competition in Registry Services. In November 2000, ICANN announced selections for several new gTLDs that, once launched, will directly compete with the.com and .net
and .org TLDs,gTLDs, as well as the ccTLDs offered by us.Two of the newThe gTLDs,.biz and.info, were launched in2001, while other2001. The latest gTLDsare scheduled to launchlaunched in 2002includingor expected to be launched in 2003 include.name, .pro, .aero, .museum and.coop..coop. These gTLDs areor will beavailable for registration through ICANN accreditedregistrars, in addition to our own registrar.registrars. In addition, we currently face competition from the over 240country code top-level domainccTLD registry operators who compete directly for the business of entities and individuals that are seeking to establish a Web presence.We also face competition from registry service providers that offer outsourced DNS and registration services to organizations that require a reliable and scalable infrastructure. Among the competitors are NeuLevel, Affilias, Register.com and Tucows.com.
11Our primary competitors for managed DNS services fall within two service/product categories: DNS hosting service providers and DNS software and appliance vendors. DNS hosting competitors include UltraDNS, Nominum, and EasyDNS. In addition, the majority of the domain name registrars, ISPs, and Web hosting companies offer basic DNS hosting as a part of their services. DNS software or appliance competitors include major network and telecommunication product vendors including Lucent, Cisco and Nortel, which focus on IP address management services.Competition in Telecommunications Services. The market for telecommunications services is extremely competitive and subject to significant pricing pressure. Competition in this area arises from two primary sources. Large incumbent carriers provide competing services in their regions as a result of regulatory requirements to promote competition. In addition, we face direct competition on a nationwide basis from unregulated carriers, including Telecommunications Services, Inc., or TSI, and Southern New England Telephone, a unit of SBC Communications. Our prepaid wireless services also compete with services offered by Boston Communications Group,
Priority Call, InterVoice-BriteAmdocs, Convergys Corporation and TSI.Competition in
Enterprise ConsultingDomain Name Registration andManagementValue-Added Services.Consulting companies or professional services groupsThe domain name registration service market is extremely competitive and subject to significant pricing pressure. We currently face competition among registrars within the gTLDs like .com, .netand ..org and in the future will face competition among registrars within all new top-level domains. As of February 28, 2003, there were over 180 ICANN-accredited registrars. Our competitors include BulkRegister.com, Deutsche Telekom, France Telecom/Transpac, Go-Daddy Software, Melbourne IT, Register.com and Tucows.com, Inc. that register second-level domain names in.com,.net, .organd the othercompanies with Internet expertise are current or potential competitors to our enterprise consulting services. These companies include large systems integrators and consulting firms,gTLDs. We also face competition from third-level domain name providers such asAccenture, formerly Andersen Consulting, IBM Global ServicesInternet access providers andLucent NetCare. We also compete with someregistrars of ccTLDs. The market for ccTLDs is largely dominated by other providers, especially providers domiciled in the home country of major ccTLDs such as .de and .uk. In addition, we face substantial competition from other providers of value-added Web presence services such as e-mail providers, Web site designers, Internet service providers, Web hosting companiesthat have developed products that automate the management of IP addressesandname maps throughout enterprise-wide intranets, and with companies with internally-developed systems integration efforts.others.Several of our current and potential competitors have longer operating histories and significantly greater financial, technical, marketing and other resources than we do and therefore may be able to respond more quickly than we can to new or changing opportunities, technologies, standards and customer requirements. Many of these competitors also have broader and more established distribution channels that may be used to deliver competing products or services directly to customers through bundling or other means. If such competitors were to bundle competing products or services for their customers, the demand for our products and services might be substantially reduced and the ability to distribute our products successfully and the utilization of our services would be substantially diminished. New technologies and the expansion of existing technologies may increase the competitive pressure.
Industry Regulation
Domain Name Registration. The cooperative agreement, which
our wholly-owned subsidiaryNetwork SolutionsInc.entered into with the National Science Foundation in December 1992, provided that we would perform Internet domain name registration services for the top-level domains, or TLDs,.com, .net, .org, .edu and.gov..gov. With the onset of increased commercial growth of the Internet, the U.S. Government initiated activity directed at increased privatization of the policy-making and central administration of the Internet. Within the U.S. Government, leadership for the continued privatization of Internet administration is currently provided by the Department of Commerce.On November 10, 1999, we entered into a series of wide-ranging agreements. These agreements
includeincluded the following:. a registry agreement between us and ICANN under which we will continue to act as the exclusive registry for the .com, .net and .org TLDs for at least four years from that date. This agreement was subsequently replaced with three new registry agreements on May 25, 2001; 12. a revised registrar accreditation agreement between ICANN and all registrars registering names in the .com, .net and .org domains; . a revised registrar license and agreement between us as registry and all registrars registering names in the .com, .net and .org domains using our proprietary shared registration system; .
• a registry agreement between us and ICANN under which we will continue to act as the exclusive registry for the.comand .netTLDs for at least four years from that date. This agreement was subsequently replaced with three new registry agreements on May 25, 2001;
• a revised registrar accreditation agreement between ICANN and all registrars registering names in the .com, .netand.orgdomains;
• a revised registrar license and agreement between us as registry and all registrars registering names in the.com, .netand.orgdomains using our proprietary shared registration system; an amendment to the cooperative agreement; and.an amendment to the Memorandum of Understanding between the U.S. Government and ICANN.TheOur registry agreement with ICANN
executed on November 10, 1999was replaced by three new agreements on May 25, 2001, one for.com, one for.net and one for.org..org. The term of the.com registry agreement extends until November 10, 2007 with a 4-year renewaloption, the terms of which are outlined in the agreement.option. The term of the.net registry agreement extends at least until November 10, 2003 and possibly until June 30, 2005depending onprovided certain specified criteriaset forth in the agreement,are met, at which time the.net registry services will be put out for competitive bid by ICANN, a process in which we will be allowed to participate.The term ofBy its terms, the.org registry agreementextends untilwas terminated on December 31, 2002, at which time weare responsible for transitioningbegan to transition the.org registry services to a new registry operator selected by ICANN.The description of these agreements are qualified in their entirety by the text of the complete agreements that are filed as exhibits to the periodic reports indicated in the index to the exhibits contained in Part IV of this
report.Annual Report on Form 10-K.PKI Services. Some of our security services incorporate encryption technology. Exports of software products utilizing encryption technology are generally restricted by the United States and various non-United States governments. Although we have obtained approval to export our server digital certificate service, and none of our other digital trust services are currently subject to export controls under United States law, the list of products and countries for which export approval is required could be revised in the future to include more digital certificate products and related services. It is possible that the terrorist acts of September 11, 2001 and subsequent events will increase the scrutiny of, and further government restrictions on, exportation of software products utilizing encryption technology. If we do not obtain required approvals, we may not be able to sell some of our digital trust services in international markets.
There are currently no federal laws or regulations that specifically control certificate authorities, but a limited number of states have enacted legislation or regulations with respect to certificate authorities. If we do not comply with these state laws and regulations, we will lose the statutory benefits and protections that would be otherwise afforded to us. Moreover, if our market for digital certificates grows, the United States federal,
orstate, ornon-United Statesforeign governments may choose to enact further regulations governing certificate authorities or other providers of digital certificate products and related services. These regulations or the costs of complying with these regulations could harm our business.Telecommunications Services. One service provided by
Illuminet's National Telemanagement Corporation subsidiarythe Telecommunication Services Group is currently subject to Federal Communications Commission (“FCC”) regulation. This service allows wireless users who are"roaming"“roaming” in areas where their home carrier has not made arrangements for automatic roaming service to complete calls to domestic and international destinations.National Telemanagement CorporationThe Telecommunication Services Group hasa license frombeen authorized by the FCC to provide this service. Further,Illuminet'sour telecommunications customers are subject to FCC regulation, which indirectly affectsIlluminet'sour telecommunications services business. We cannot predict when, or upon what terms and conditions, further regulation or deregulation might occur or the effect of regulation orderegulation on our business. Several services that we offer may be indirectly affected by regulations imposed upon potential users of those services, which may increase our costs of operations. In addition, future services we may provide could be subject to direct government regulation.
13Intellectual Property
We rely primarily on a combination of copyrights, trademarks, service marks, patents, restrictions on disclosure and other methods to protect our intellectual property. We also enter into confidentiality and/or assignment agreements with our employees, consultants and current and potential affiliates, customers and business partners. We also generally control access to and distribution of documentation and other proprietary information.
We have been issued
approximately tennumerous patents in the United States and abroad, covering a wide range of our technology. Additionally, we have filedmore than sixtynumerous patent applicationsfor patentswith respect to certain of ourtechnology. However,technology in the U.S. Patent and Trademark Office and foreign patent offices. The national or international patent offices may not award any patents with respect to these applications.We have obtained U.S. and foreign trademark registrations for various VeriSign marks. We have also filed numerous applications to register VeriSign trademarks and claims, and have common law rights in many other proprietary names. We take steps to enforce and police VeriSign’s marks.
With regard to our
digital trustsecurity services, we also rely on certain licensed third-party technology, such as public key cryptography technology licensed from RSA and other technology that is used in ourdigital trustsecurity services to perform key functions.In particular,RSA has granted us a perpetual,royalty free,royalty-free, nonexclusive, worldwide license todistribute Internet-based trust services.use RSA’s products relating to certificate issuing, management and processing functionality. We develop services that contain or incorporate the RSA BSAFEand TIPEMproducts and that relate to digital certificate-issuing software, software for the management of private keys and for digitally signing computer files on behalf of others, software for customers to preview and forward digital certificate requests tothem, or such other services that, in RSA's reasonable discretion, are reasonably necessary for the implementation of a digital certificate business. RSA'sthem. RSA’s BSAFE product is a software tool kit that allows for the integration of encryption and authentication features into software applications.TIPEM is a secure e-mail development tool kit that allows for secure e-mail messages to be sent using one vendor's e-mail product and read by another vendor's e-mail product.With regard to our domain name registration services, our principal intellectual property consists of, and our success is dependent upon, proprietary software used in our registration service business and certain methodologies and technical expertise we use in both the design and implementation of our current and future registration services and Internet-based products and services
businesses.businesses, including the conversion of internationalized domain names. We own our proprietary shared registration system through which competing registrars, including our registrars, submit.com and.netand .orgsecond-level domain name registrations. Some of the software and protocols used in our registration services are in the public domain or are otherwise available to our competitors.With regard to our payment services business, we rely on proprietary software and technology covering many aspects of e-commerce transactions such as electronic funds transfers, stored value cards, and multi-currency transactions. In addition, we have strategic relationships with third parties involved in e-commerce transactions, such as issuing banks. Our strategic relationships are governed by agreements that set out our intellectual property rights.
With regard to our telecommunication services, we offer a wide variety of services, including networking, database, and billing services, each of which are protected by trade secret, patents and/or patent applications. We have
compiled a database of information relatingentered into agreements with third-party providers and licensors tocustomers inprovide full services to ourregistration business. While some of this data is available to the public in the form of a directory service, we believe that we have certain ownership rights in this database, and we intend to protect these rights.customers.Employees
As of December 31,
2001,2002, we had approximately3,2703,200 full-time employees. Of the total, approximately1,3501,500 were employed in operations, approximately900700 in sales and marketing, approximately350400 in researchand development and approximately
650600 in finance and administration, including information services personnel. We have never had a work stoppage, and no employees are represented under collective bargaining agreements. We consider our relations with our employees to be good. Our ability to achieve our financial and operational objectives depends in large part upon our continued ability to attract, integrate, train, retain and motivate highly qualified sales, technical and14managerial personnel, and upon the continued service of our senior management and key sales and technical personnel, none of whom is bound by an employment agreement. Competition for qualified personnel in our industry and in some of our geographical locations is intense, particularly infor software development personnel.Segment Information
Historically, we have operated our business in two segments: the Enterprise and Service Provider Division and the Mass Markets Division. Beginning in the first quarter of 2003, VeriSign realigned its business segments. The new service-based business segments consist of the Internet Services Group, the Telecommunication Services Group and Network Solutions described above. Segment information based on our previous structure that was in effect throughout 2002, 2001 and 2000 is set forth in Note
1213 oftheNotes to Consolidated Financial Statements referred to in Item 8 below and is incorporated herein by reference.15RISK FACTORS Our business faces significant risks. The risks described below may notFactors That May Affect Future Results of Operations
In addition to other information in this Form 10-K, the following risk factors should be
the only risks we face. Additional risks that we do not yet know of or that we currently think are immaterial may also impaircarefully considered in evaluating us and our businessoperations. If any of the eventsbecause these factors currently have a significant impact orcircumstances describedmay have a significant impact on our business, operating results or financial condition. Actual results could differ materially from those projected in thefollowing risks actually occur, our business, financial condition or results of operations could suffer, and the trading price of our common stock could decline. Our limited operating history under our current business structure may resultforward-looking statements contained insignificant fluctuations of our financial results. We were incorporated in April 1995, and began introducing our digital trust services in June 1995. In addition, we completed several acquisitions in 2000 and 2001, including our acquisitions of Network Solutions and Illuminet, both of which companies operated in different businesses from our then current business. Therefore, we have only a limited operating history on which to base an evaluation of our consolidated business and prospects. Our success will depend on many factors, including, but not limited to, the following: . the successful integration of the acquired companies; . the rate and timing of the growth and use of Internet protocol, or IP, networks for electronic commerce and communications; . the timing and execution of individual customer contracts, particularly large contracts; . the extent to which digital certificates and domain names are used for electronic commerce or communications; . the continued growth in the number of Web sites; . the growth in demand for our services; . the continued evolution of electronic commerce as a viable means of conducting business; . the competition for any of our services; . the perceived security of electronic commerce and communications over IP networks; . the perceived security of our services, technology, infrastructure and practices; . the significant lead times before a product or service begins generating revenues; . the varying rates at which telecommunications companies, telephony resellers and Internet service providers use our services; . the loss of customers through industry consolidation, or customer decisions to deploy in-house technology; and . our continued ability to maintain our current, and enter into additional, strategic relationships. To address these risks we must, among other things: . successfully market our digital trust services to new and existing customers; . attract, integrate, train, retain and motivate qualified personnel; . respond to competitive developments; 16. successfully introduce new digital trust services; and . successfully introduce enhancements to our digital trust services to address new technologies and standards and changing market conditions. Our business depends on the future growth of the Internet and adoption and continued use of IP networks. Our future success substantially depends on the continued growth in the use of the Internet and IP networks. If the use of and interest in the Internet and IP networks does not continue to grow, our business would be harmed. To date, many businesses and consumers have been deterred from utilizing the Internet and IP networks for a number of reasons, including, but not limited to: . potentially inadequate development of network infrastructure; . security concerns, particularly for online payments, including the potential for merchant or user impersonation and fraud or theft of stored data and information communicated over IP networks; . privacy concerns, including the potential for third parties to obtain personally identifiable information about users or to disclose or sell data without notice to or the consent of such users; . other security concerns such as attacks on popular Web sites by "hackers;" . inconsistent quality of service; . lack of availability of cost-effective, high-speed systems and services; . limited number of local access points for corporate users; . inability to integrate business applications on IP networks; . the need to operate with multiple and frequently incompatible products; . government regulation; and . a lack of tools to simplify access to and use of IP networks. The widespread acceptance of the Internet and IP networks will require a broad acceptance of new methods of conducting business and exchanging information. Organizations that already have invested substantial resources in other methods of conducting business may be reluctant to adopt new methods. Also, individuals with established patterns of purchasing goods and services and effecting payments may be reluctant to change. We have sold our products to companies as part of broader business relationships and revenues from these contracts may not be indicative of future revenues. We have purchased products and services from companies and participated in financings of companies with whom we have entered into separate contractual arrangements for the distribution and sale of our products and services. We derived approximately 3.8% of our total revenues in 2001 from reciprocal arrangements. Typically in these relationships, under separate agreements, we sell our products and services to a company and that company sells to us their products and services or we, under a separate agreement, participate with other investors in a private equity round financing of the company. We derived no revenues from customers from reciprocal arrangements in 2000 and 1999. We also derived approximately 6.5% in 2001, 2.8% in 2000 and 1.1% in 1999 of our total revenues from customers with 17whom we have participated in a private equity round of financing, including several of the VeriSign Affiliates, as well as various technology companies in a variety of related market areas. We may not be able to sustain the revenue growth we have experienced in recent periods if we do not continue to participate in business relationships ofthisnature. In addition, past revenue growth may not be indicative of future operating results. We may not be able to sustain the revenue growth we have experienced in the past from our Web presence services, which depends in part upon our ability to renew domain name registrations. In 2000, the demand for new domain name registrations in our Web presence business increased substantiallyForm 10-K as a result ofour promotional programs,the risk factors discussed below and elsewhere inwhich we accepted domain name registrations at significant discounts, and from registrations by entities who registered domain names with the hopes of reselling them. Many of those domain names have not been renewed as of their two-year anniversary date. Further, many of the entrepreneurial and start-up businesses, begun in 2000, have declined. The future success of our Web presence services business will depend, among other things, upon our customers' renewal of their domain name registrations and upon our ability to obtain new domain name registrations and to successfully market our value-added product and services to our domain mane registrants. Registrants may choose to renew their domain names with other registrars or they may choose not to renew and pay for renewal of their domain names. Since we deactivate and delete domain name registrations that are not paid for, our inability to obtain domain name registration renewals from our customers could have an adverse effect on our revenue growth and our business. Our failure to achieve or sustain market acceptance of our signaling and intelligent network services at desired pricing levels could impact our ability to maintain profitability or positive cash flow. The telecommunications industry is characterized by significant price competition. Competition and industry consolidation in our telecommunications services could result in significant pricing pressure and an erosion in our market share. Pricing pressure from competition could cause large reductions in the selling price of our services. For example, our competitors may provide customers with reduced communications costs for Internet access or private network services, reducing the overall cost of services and significantly increasing pricing pressures on us. We may not be able to offset the effects of any price reductions by increasing the number of our customers, generating higher revenues from enhanced services or reducing our costs. We believe that the business of providing network connectivity and related network services will likely see increased consolidation in the future. Consolidation could decrease selling prices and increase competition in these industries, which could erode our market share, revenues and operating margins. Issues arising from implementing agreements with ICANN and the Department of Commerce could harm our domain name registration business. The Department of Commerce, or DOC, has adopted a plan for a phased transition of the DOC's responsibilities for the domain name system to the Internet Corporation for Assigned Names and Numbers, or ICANN. We face risks fromthistransition, including the following: . ICANN could adopt or promote policies, procedures or programs that are unfavorable to our role in the registration of domain names or that are inconsistent with our current or future plans; . the DOC or ICANN could terminate our agreements to be the registry or a registrar in the .com, .net and .org top-level domains if they find that we are in violation of our agreements with them; 18. if our agreements to be the registry for the .com, .org or .net top-level domains, or a registrar for existing and new top-level domains are terminated, we may not be able to sustain the revenue growth we experienced in recent periods; . the terms of the registrar accreditation contract could change, as a result of an ICANN-adopted policy, in a manner that is unfavorable to us; . the DOC's or ICANN's interpretation of provisions of our agreements with either of them could differ from ours; . the DOC could revoke its recognition of ICANN, as a result of which the DOC would take the place of ICANN for purposes of the various agreements described above, and could take actions that are harmful to us; . ICANN has approved new top-level domains and we may not be permitted to act as a registrar with respect to some of those top-level domains; . the U.S. Government could refuse to transfer certain responsibilities for domain name system administration to ICANN due to security, stability or other reasons, resulting in fragmentation or other instability in domain name system administration; and . our registry business could face legal or other challenges resulting from the activities of registrars. Challenges to ongoing privatization of Internet administration could harm our Web presence services business. Risks we face from challenges by third parties, including other domestic and foreign governmental authorities, to our role in the ongoing privatization of the Internet include: . legal, regulatory or other challenges could be brought, including challenges to the agreements governing our relationship with the DOC or ICANN, or to the legal authority underlying the roles and actions of the DOC, ICANN or us; . Congress has held several hearings in which various issues about the domain name system and ICANN's practices have been raised and Congress could take action that is unfavorable to us; . ICANN could fail to maintain its role, potentially resulting in instability in domain name system administration; and . some foreign governments and governmental authorities have in the past disagreed with, and may in the future disagree with, the actions, policies or programs of ICANN, the U.S. Government and us relating to the domain name system. These foreign governments or governmental authorities may take actions or adopt policies or programs that are harmful to our business. Our quarterly operating results may fluctuate and our future revenues and profitability are uncertain. Our quarterly operating results have varied and may fluctuate significantly in the future as a result of a variety of factors, many of which are outside our control. These factors include the following: . the long sales and implementation cycles for, and potentially large order sizes of, some of our digital trust services and the timing and execution of individual customer contracts; . volume of domain name registrations and customer renewal rates through our Web presence services business and our Global Registry Service business; 19. competition in the domain name registration services business from competing registrars and registries; . the mix of all our offered services sold during a quarter; . our success in marketing and market acceptance of our enterprise services, network services, Web presence services and Web trust services by our existing customers and by new customers; . continued development of our direct and indirect distribution channels, both in the U.S. and abroad; . a decrease in the level of spending for information technology related products and services by enterprise customers; . our success in assimilating the operations and personnel of any acquired businesses; . the seasonal fluctuations in consumer use of telecommunications services; . the impact of price changes in our enterprise services, network services, Web presence services, Web trust services or our competitors' products and services; and . general economic and market conditions as well as economic and market conditions specific to IP network, telecommunications and Internet industries. We expect an increase in our operating expenses. If the increase in our expenses is not accompanied by a corresponding increase in our revenues, our operating results will suffer, particularly as revenues from many of our services are recognized ratably over the term of the service, rather than immediately when the customer pays for them, unlike our sales and marketing expenditures, which are expensed in full when incurred. Due to all of the above factors, our quarterly revenues and operating results are difficult to forecast. Therefore, we believe that period-to-period comparisons of our operating results will not necessarily be meaningful, and you should not rely upon them as an indication of future performance. Also, operating results may fall below our expectations and the expectations of securities analysts or investors in one or more future quarters. If this were to occur, the market price of our common stock would likely decline. In addition, the terrorist acts of September 11, 2001 have created an uncertain economic environment and we cannot predict the impact of these events, any subsequent terrorist acts or of any related military action, on our customers or business. We believe that, in light of these events, some businesses may curtail spending on information technology, which could also affect our quarterly results in the future. Our industry is highly competitive and, if we do not compete effectively, we may suffer price reductions, reduced gross margins and loss of market share. We anticipate that the market for services that enable trusted and secure electronic commerce and communications over IP networks will remain intensely competitive. We compete with larger and smaller companies that provide products and services that are similar to some aspects of our digital trust services. Our competitors may develop new technologies in the future that are perceived as being more secure, effective or cost efficient than the technology underlying our digital trust services. We expect that competition will increase in the near term, and that our primary long-term competitors may not yet have entered the market. Increased competition could result in pricing pressures, reduced margins or the failure of our digital trust services to achieve or maintain market acceptance, any of which could harm our business. Several of 20our current and potential competitors have longer operating histories and significantly greater financial, technical, marketing and other resources. As a result, we may not be able to compete effectively. We face competition from large, well-funded regional providers of SS7 network services and related products, such as regional Bell operating companies, TSI and Southern New England Telephone, a unit of SBC Communication. The prepaid wireless account management and unregistered user services of National Telemanagement Corporation, a subsidiary of ours, faces competition from Boston Communications Group, Priority Call, InterVoice-Brite and TSI. We are also aware of major Internet service providers, software developers and smaller entrepreneurial companies that are focusing significant resources on developing and marketing products and services that will compete directly with ours. In connection with our first round of financing, RSA contributed certain technology to us and entered into a non-competition agreement with us under which RSA agreed that it would not compete with our certificate authority business for a period of five years. This non-competition agreement expired in April 2000. RSA has recently entered the digital certificate market and our business could be materially harmed. Seven new global top-level domain registries, .aero, .biz, .coop, .info, .museum, .name and .pro, have begun or are expected to begin accepting domain name registrations in the near future. Since we will not serve as a registry for these new top-level domains, we will not receive the annual registry fee for domain name registrations under these top-level domains. The commencement of registrations in these new top-level domains could have the effect of reduced demand for .com and .net domain name registrations. If the new top-level domains reduce the demand for domain name registrations in .com and .net, our business could be materially harmed. The agreements among ICANN, the DOC, us and other registrars permit flexibility in pricing for and term of registrations. Our revenues, therefore, could be reduced due to pricing pressures, bundled service offerings and variable terms from our competitors. Some registrars and resellers in the .com, .net and .org top-level domains are already charging lower prices for registration services in those domains. In addition, other entities are bundling, and may in the future bundle, domain name registrations with other products or services at reduced rates or for free. We may face difficulties assimilating and may incur costs associated with our acquisition of Illuminet Holdings, Inc. and any other future acquisitions. We made several acquisitions in 2000 and 2001. We recently acquired Illuminet Holdings, Inc., which recently completed several acquisitions of its own, and H.O. Systems, Inc. We could experience difficulty in integrating the personnel, products, technologies or operations of these companies. Assimilating acquired businesses involves a number of other risks, including, but not limited to: . the potential disruption of our ongoing business; . the potential impairment of relationships with our employees, customers and strategic partners; . unanticipated costs or the incurrence of unknown liabilities; . the need to manage more geographically-dispersed operations, such as our offices in Virginia, North Carolina, Washington, Kansas, South Carolina, South Africa and Europe; . greater than expected costs and the diversion of management's resources from other business concerns involved in identifying, completing and integrating acquisitions; 21. the inability to retain the employees of the acquired businesses; . adverse effects on the existing customer relationships of acquired companies; . the difficulty of assimilating the operations and personnel of the acquired businesses; . the potential incompatibility of business cultures; . any perceived adverse changes in business focus; . entering into markets and acquiring technologies in areas in which we have little experience; . our inability to incorporate acquired technologies successfully into our operations infrastructure; . the need to incur debt, which may reduce our cash available for operations and other uses, or issue equity securities, which may dilute the ownership interests of our existing stockholders; and . the inability to maintain uniform standards, controls, procedures and policies. If we are unable to successfully address any of these risks for future acquisitions, our business could be harmed. Additionally, there is risk that we may incur additional expenses associated with a write-off of a portion of goodwill and other intangible assets, as was the case when we recorded a non-cash charge of $9.9 billion in the second quarter of 2001 related to write downs of goodwill due to changes in market conditions for acquisitions made with our common stock. Under generally accepted accounting principles, we are required to evaluate goodwill for impairment on an annual basis and to evaluate other intangible assets as events or circumstances indicate that such assets may be impaired. These evaluations could result in further write downs of goodwill or other intangible assets.Form 10-K.Our telecommunications services business depends on the acceptance of our SS7 network and the telecommunications
market'smarket’s continuing use of SS7 technology.Our future growth depends, in part, on the commercial success and reliability of our SS7
network, which we recently acquired through our merger with Illuminet Holdings, Inc.network. Our SS7 network is a vital component of our intelligent network services, which had been an increasing source of revenues forIlluminet.our Illuminet Holdings subsidiary. Our network services business will suffer if our target customers do not use our SS7 network. Our future financial performance will also depend on the successful development, introduction and customer acceptance of new and enhanced SS7-based services. We are not certain that our target customers will choose our particular SS7 network solution or continue to use our SS7 network. In the future, we may not be successful in marketing our SS7 network or any new or enhanced services. Rapid changes in the telecommunications industry have led to the merging of many companies. Our business could be harmed if these mergers result in the loss of customers by our Telecommunication Services Group.The inability of our customers to successfully implement our signaling and network services with their existing systems could adversely affect our business.
Significant technical challenges exist in our signaling and network services business because many of our customers:
purchase and implement SS7 network services in phases;deploy SS7 connectivity across a variety of telecommunication switches and routes; andintegrate our SS7 network with a number of legacy systems, third-party software applications and engineering tools.Customer implementation currently requires participation by our order management and our engineering and operations groups, each of which has limited resources. Some customers may also require us to develop
costly customized features or capabilities, which increase our costs and consume a disproportionate share of our limited customer service and support resources. Also, we typically charge one-time flat rate fees for initially connecting a customer to our SS7 network and a monthly recurring flat rate fee after the connection is established. If new or existing customers have difficulty deploying our products or require significant amounts of our engineering service support, we may experience reduced operating margins. Our customers’ ability to deploy our network services to their own customers and integrate them successfully within their systems depends on our customers’ capabilities and the complexity involved. Difficulty in deploying those services could reduce our operating margins due to increased customer support and could cause potential delays in recognizing revenues until the services are implemented.
Our failure to achieve or sustain market acceptance of our signaling and intelligent network services at desired pricing levels could impact our ability to maintain profitability or positive cash flow.
The telecommunications industry is characterized by significant price competition. Competition and industry consolidation in our telecommunications services could result in significant pricing pressure and an erosion in our market share. Pricing pressure from competition could cause large reductions in the selling price of our services. For example, our competitors may provide customers with reduced communications costs for Internet access or private network services, reducing the overall cost of services and significantly increasing pricing pressures on us. We would need to offset the effects of any price reductions by increasing the number of our customers, generating higher revenues from enhanced services or reducing our costs, and we may not be able to do so successfully. We believe that the business of providing network connectivity and related network services will see increased consolidation in the future. Consolidation could decrease selling prices and increase competition in these industries, which could erode our market share, revenues and operating margins in our Telecommunication Services Group.
Our business depends on the future growth of the Internet and adoption and continued use of IP networks.
Our future success substantially depends on growth in the use of the Internet and IP networks. If the use of and interest in the Internet and IP networks does not grow, our business would be harmed. To date, many businesses and consumers have been deterred from utilizing the Internet and IP networks for a number of reasons, including, but not limited to:
potentially inadequate development of network infrastructure;security concerns, particularly for online payments, including the potential for merchant or user impersonation and fraud or theft of stored data and information communicated over IP networks;privacy concerns, including the potential for third parties to obtain personally identifiable information about users or to disclose or sell data without notice to or the consent of such users;other security concerns such as attacks on popular Web sites by “hackers;”inconsistent quality of service;lack of availability of cost-effective, high-speed systems and services;limited number of local access points for corporate users;inability to integrate business applications on IP networks;the need to operate with multiple and frequently incompatible products;limited bandwidth access;government regulation; anda lack of tools to simplify access to and use of IP networks.The widespread acceptance of the Internet and IP networks will require a broad acceptance of new methods of conducting business and exchanging information. Organizations that already have invested substantial resources in other methods of conducting business may be reluctant to adopt new methods. Also, individuals with established patterns of purchasing goods and services and effecting payments may be reluctant to change.
We have not been and in the future may not be able to sustain the revenue growth we experienced in the past from our Network Solutions services, which revenue depends in part upon our ability to renew domain name registrations.
In 2000, the demand for new domain name registrations in our Network Solutions Web presence business increased substantially, in part as a result of our promotional programs, in which we accepted domain name registrations at significant discounts or without charge, and from registrations by entities who registered domain names with the hopes of reselling them. Many of those domain names have not been renewed after their two-year anniversary date. Further, many of the entrepreneurial and start-up businesses, begun in 2000 and earlier, have declined or failed. The future success of our Network Solutions business will depend, among other things, upon our customers’ renewal of their domain name registrations and upon our ability to obtain new domain name registrations and to successfully market our value-added product and services to our domain name registrants. Registrants may choose to renew their domain names with other registrars or they may choose not to renew and pay for renewal of their domain names. Since we deactivate and delete domain name registrations that are not paid for, the inability to obtain domain name registration renewals or new registrations from customers could have an adverse effect on our revenues, deferred revenue and our Network Solutions business.
Issues arising from implementing agreements with ICANN and the Department of Commerce could harm our domain name registration business.
The Department of Commerce, or DOC, has adopted a plan for a phased transition of the DOC’s responsibilities for the domain name system to the Internet Corporation for Assigned Names and Numbers, or ICANN. We face risks from this transition, including the following:
ICANN could adopt or promote policies, procedures or programs that are unfavorable to our role in the registration of domain names or that are inconsistent with our current or future plans;
• the DOC or ICANN could terminate our agreements to be the registry for the.com or.net gTLDs, or a registrar for existing and new gTLDs if they find that we are in violation of our agreements with them;
• if our agreements to be the registry for the.com or.net top-level domains, or a registrar for existing and new top-level domains are terminated, we may not be able to sustain the revenue growth we experienced in recent periods; the terms of the registrar accreditation contract could change, as a result of an ICANN-adopted policy, in a manner that is unfavorable to us;the DOC’s or ICANN’s interpretation of provisions of our agreements with either of them could differ from ours;the DOC could revoke its recognition of ICANN, as a result of which the DOC would take the place of ICANN for purposes of the various agreements described above, and could take actions that are harmful to us;the U.S. Government could refuse to transfer certain responsibilities for domain name system administration to ICANN due to security, stability or other reasons, resulting in fragmentation or other instability in domain name system administration; andour registry or registrar businesses could face legal or other challenges resulting from our activities or the activities of other registrars.Challenges to ongoing privatization of Internet administration could harm our domain name registration business.
Risks we face from challenges by third parties, including other domestic and foreign governmental authorities, to our role in the ongoing privatization of the Internet include:
legal, regulatory or other challenges could be brought, including challenges to the agreements governing our relationship with the DOC or ICANN, or to the legal authority underlying the roles and actions of the DOC, ICANN or us;Congress has held several hearings in which various issues about the domain name system and ICANN’s practices have been raised and Congress could take action that is unfavorable to us;ICANN could fail to maintain its role, potentially resulting in instability in domain name system administration; andsome foreign governments and governmental authorities have in the past disagreed with, and may in the future disagree with, the actions, policies or programs of ICANN, the U.S. Government and us relating to the domain name system. These foreign governments or governmental authorities may take actions or adopt policies or programs that are harmful to our business.Our operating results may fluctuate and our future revenues and profitability are uncertain.
Our operating results have varied and may fluctuate significantly in the future as a result of a variety of factors, many of which are outside our control. These factors include the following:
the long sales and implementation cycles for, and potentially large order sizes of, some of our digital trust services and the timing and execution of individual customer contracts;volume of domain name registrations and customer renewals through our Network Solutions business and our Registry Services business;competition in the domain name registration services business from competing registrars and registries;the mix of all our services sold during a period;our success in marketing and market acceptance of our managed security and network services, domain name registration and value added services, Web trust services, payment services and telecommunications services by our existing customers and by new customers;continued development of our direct and indirect distribution channels, both in the U.S. and abroad;a decrease in the level of spending for information technology related products and services by enterprise customers;our success in assimilating the operations and personnel of any acquired businesses;the seasonal fluctuations in consumer use of telecommunications services;the impact of price changes in our managed security and network services, domain name registration and value added services, Web trust services, payment services and telecommunications services or our competitors’ products and services; andgeneral economic and market conditions as well as economic and market conditions specific to IP network, telecommunications and Internet industries.Our operating expenses may increase. If an increase in our expenses is not accompanied by a corresponding increase in our revenues, our operating results will suffer, particularly as revenues from many of our services are recognized ratably over the term of the service, rather than immediately when the customer pays for them, unlike our sales and marketing expenditures, which are expensed in full when incurred.
Due to all of the above factors, our revenues and operating results are difficult to forecast. Therefore, we believe that period-to-period comparisons of our operating results will not necessarily be meaningful, and you should not rely upon them as an indication of future performance. Also, operating results may fall below our expectations and the expectations of securities analysts or investors in one or more future periods. If this were to occur, the market price of our common stock would likely decline.
Our operating results may be adversely affected by the uncertain geopolitical environment and unfavorable economic and market conditions.
Adverse economic conditions worldwide have contributed to downturns in the telecommunications and technology industries and may continue to impact our business, resulting in:
reduced demand for our products as a result of a decrease in information technology and telecommunications spending by our customers;increased price competition for our products; andhigher overhead costs as a percentage of revenues.Recent political turmoil in many parts of the world, including terrorist and military actions, may continue to put pressure on global economic conditions. If the economic and market conditions in the United States and globally do not improve, or if they deteriorate further, we may continue to experience material adverse impacts on our business, operating results, and financial condition as a consequence of the above factors or otherwise. We do not expect the trend of lower information technology and telecommunications spending among service providers to reverse itself in the near term.
Our limited operating history under our current business structure may result in significant fluctuations of our financial results.
We were incorporated in April 1995, and began introducing our services in June 1995. In addition, we completed several acquisitions in 2000 and 2001, including our acquisitions of Network Solutions and Illuminet Holdings, and in February 2002 we completed our acquisition of H.O. Systems. Network Solutions, Illuminet Holdings and H.O. Systems operated in different businesses from our then current business. Therefore, we have only a limited operating history on which to base an evaluation of our consolidated business and prospects. Our success will depend on many factors, including, but not limited to, the following:
the successful integration of the acquired companies;the use of IP networks for electronic commerce and communications;the timing and execution of individual customer contracts, particularly large contracts;the extent to which digital certificates and domain names are used for electronic commerce or communications;growth in the number of Web sites;growth in demand for our services;the continued evolution of electronic commerce as a viable means of conducting business;the competition for any of our services;the perceived security of electronic commerce and communications over IP networks;the perceived security of our services, technology, infrastructure and practices;the significant lead times before a product or service begins generating revenues;the varying rates at which telecommunications companies, telephony resellers and Internet service providers use our services;the loss of customers through industry consolidation, or customer decisions to deploy in-house technology; andour continued ability to maintain our current, and enter into additional, strategic relationships.To address these risks we must, among other things:
successfully market our services to new and existing customers;attract, integrate, train, retain and motivate qualified personnel;respond to competitive developments;successfully introduce new services; andsuccessfully introduce enhancements to our services to address new technologies and standards and changing market conditions.We have sold our products to companies as part of broader business relationships and revenues from these contracts may not be indicative of future revenues.
We have purchased products and services from companies and participated in financings of companies with whom we have entered into separate contractual arrangements for the distribution and sale of our products and services. We derived approximately 1.1% of our total revenues in 2002, approximately 3.8% of our total revenues in 2001 and no revenues in 2000 from reciprocal arrangements. Typically in these relationships, under separate agreements, we sell our products and services to a company and that company sells to us their products and services. We also derived approximately 2.2% of our total revenues in 2002, approximately 6.5% of our total revenues in 2001 and approximately 2.8% of our revenues in 2000 from customers with whom we have participated in a private equity round of financing, including several of the VeriSign Affiliates, as well as various technology companies in a variety of related market areas. We may not be able to sustain the revenue growth we have experienced in recent periods if we do not continue to participate in business relationships of this nature. In addition, past revenue growth may not be indicative of future operating results.
We may face difficulties assimilating and may incur costs associated with acquisitions.
We made several acquisitions in 2002, 2001 and 2000 and may pursue acquisitions in the future. We could experience difficulty in integrating the personnel, products, technologies or operations of companies we acquire. Assimilating acquired businesses involves a number of other risks, including, but not limited to:
the potential disruption of our ongoing business;the potential impairment of relationships with our employees, customers and strategic partners;unanticipated costs or the incurrence of unknown liabilities;the need to manage more geographically-dispersed operations, such as our offices in the states of Kansas, Illinois, Pennsylvania, Texas, Virginia, and Washington, and in Europe and South Africa;greater than expected costs and the diversion of management’s resources from other business concerns involved in identifying, completing and integrating acquisitions;the inability to retain the employees of the acquired businesses;adverse effects on the existing customer relationships of acquired companies;the difficulty of assimilating the operations and personnel of the acquired businesses;the potential incompatibility of business cultures;any perceived adverse changes in business focus;entering into markets and acquiring technologies in areas in which we have little experience;our inability to incorporate acquired technologies successfully into our operations infrastructure;the need to incur debt, which may reduce our cash available for operations and other uses, or issue equity securities, which may dilute the ownership interests of our existing stockholders; andthe inability to maintain uniform standards, controls, procedures and policies.If we are unable to successfully address any of these risks for future acquisitions, our business could be harmed.
Additionally, there is risk that we may incur additional expenses associated with a write-off of a portion of goodwill and other intangible assets, as was the case when we recorded a charge of approximately $4.6 billion in the second quarter of 2002 and $9.9 billion in the second quarter of 2001 related to write-downs of goodwill due to changes in market conditions for acquisitions. Under generally accepted accounting principles, we are required to evaluate goodwill for impairment on an annual basis and to evaluate other intangible assets as events or circumstances indicate that such assets may be impaired. These evaluations could result in further write-downs of goodwill or other intangible assets.
Our failure to manage past and future growth in our business could harm our business.
Between December 31, 1995 and December 31, 2002, we grew from 26 to almost 3,200 employees. This was achieved through internal growth, as well as acquisitions. During this time period, we opened new sales offices and significantly expanded our U.S. and non-U.S. operations. To successfully manage past growth and any future growth, we will need to continue to implement additional management information systems, continue the development of our operating, administrative, financial and accounting systems and controls and maintain close coordination among our executive, engineering, accounting, finance, marketing, sales and operations organizations. Any failure to manage growth effectively could harm our business.
Some of our investments in other companies have resulted in losses and may result in losses in the future.
We have investments in a number of companies. In most instances, these investments are in the form of equity and debt securities of private companies for which there is no public market. These companies are typically in the early stage of development and may be expected to incur substantial losses. Therefore, these companies may never become publicly traded. Even if they do, an active trading market for their securities may never develop and we may never realize any return on these investments. Further, if these companies are not successful, we could incur charges related to write-downs or write-offs of these types of assets. During 2002, we recorded losses due to investment write-downs of $170.9 million, and as of December 31, 2002, we held investments totaling $158.4 million, which included both publicly and non-publicly traded securities. During 2001, we determined that the decline in value of some of our public and private equity security investments was other-than-temporary and recognized a loss of $89.1 million related to the decline in value of these investments. Due to the inherent risk associated with some of our investments, and in light of current stock market conditions, we may incur future losses on the sales, write-downs or write-offs of our investments.
Our industry is highly competitive and, if we do not compete effectively, we may suffer price reductions, reduced gross margins and loss of market share.
Security services. We anticipate that the market for services that enable trusted and secure electronic commerce and communications over IP networks will remain intensely competitive. We compete with larger and
smaller companies that provide products and services that are similar to some aspects of our security services. Our competitors may develop new technologies in the future that are perceived as being more secure, effective or cost efficient than the technology underlying our security services. We expect that competition will increase in the near term, and that our primary long-term competitors may not yet have entered the market.
Increased competition could result in pricing pressures, reduced margins or the failure of our security services to achieve or maintain market acceptance, any of which could harm our business. Several of our current and potential competitors have longer operating histories and significantly greater financial, technical, marketing and other resources. As a result, we may not be able to compete effectively.
Telecommunications services. We face competition from large, well-funded regional providers of SS7 network services and related products, such as regional Bell operating companies, TSI and Southern New England Telephone, a unit of SBC Communication. The prepaid wireless account management and unregistered user services of National Telemanagement Corporation, a subsidiary of ours, faces competition from Boston Communications Group, Amdocs, Convergys Corporation and TSI. We are also aware of major Internet service providers, software developers and smaller entrepreneurial companies that are focusing significant resources on developing and marketing products and services that will compete directly with ours.
Registry Services and Network Solutions. Seven new generic top-level domain registries,.aero, .biz, ..coop, .info, .museum, .name and.pro, recently began, or soon are expected to begin, accepting domain name registrations. Since we do not act as a registry for these new top-level domains, we do not receive the annual registry fee for domain name registrations under these top-level domains. The commencement of registrations in these new top-level domains could have the effect of reduced demand for.com and.net domain name registrations. If the new top-level domains reduce the demand for domain name registrations in.com and.net, our business could be materially harmed.
The domain name registration service market is extremely competitive and subject to significant pricing pressure. We currently face competition among registrars within the gTLDs like .com, .net and .org and in the future will face competition among registrars within all new top-level domains. Our competitors include BulkRegister.com, Deutsche Telekom, France Telecom/Transpac, Go-Daddy Software, Melbourne IT, Register.com and Tucows.com, Inc. that register second-level domain names in.com,.net, .organd the other gTLDs. We also face competition from third-level domain name providers such as Internet access providers and registrars of ccTLDs. We face substantial competition from other providers of value-added Web presence services such as e-mail providers, Web site designers, Internet service providers, Web site hosting companies and others. If Network Solutions is not able to compete effectively, our registrar business could be materially harmed.
The agreements among ICANN, the DOC, us and other registrars permit flexibility in pricing for and term of registrations. Our revenues, therefore, could be reduced due to pricing pressures, bundled service offerings and variable terms from our competitors. Some registrars and resellers in the.comand .net top-level domains charge lower prices for registration services in those domains. In addition, other entities are bundling, and may in the future bundle, domain name registrations with other products or services at reduced rates or for free.
Our industry markets are evolving, and if these markets fail to develop or if our products are not widely accepted in these markets, our business could suffer.
We target our
digital trustsecurity services at the market for trusted and secure electronic commerce and communications over IP networks. This is a rapidly evolving market that may not continue to grow.Accordingly, the demand for our
digital trustsecurity services is very uncertain. Even if the market for electronic commerce and communications over IP networks grows, ourdigital trustsecurity services may not be widely accepted. Thefactors that may affect the level of market acceptance of digital certificates and, consequently, our
digital trustsecurity services include the following:.market acceptance of products and services based upon authentication technologies other than those we use;22.public perception of the security of digital certificates and IP networks;.the ability of the Internet infrastructure to accommodate increased levels of usage; and.government regulations affecting electronic commerce and communications over IP networks.Even if digital certificates achieveIf the market
acceptance,for electronic commerce and communications over IP networks does not grow or ourdigital trustsecurity servicesmay fail to address the market's requirements adequately. If digital certificates doare notsustain or increase their acceptance, or if our digital trust serviceswidely accepted inparticular do not achieve or sustainmarket,acceptance,our business would be materially harmed.Our inability to introduce and implement technological changes in our industry could harm our business.
The emerging nature of the Internet, digital certificate business, the domain name registration business and payment services business, and their rapid evolution, require us continually to improve the performance, features and reliability of our services, particularly in response to competitive offerings. We must also introduce any new services, as quickly as possible. The success of new services depends on several factors, including proper new service definition and timely completion, introduction and market acceptance. We may not succeed in developing and marketing new services that respond to competitive and technological developments and changing customer needs. This could harm our business.
The telecommunications network services industry is also characterized by rapid technological change and frequent new product and service announcements. Significant technological changes could make our technology obsolete. We must adapt to our rapidly changing market by continually improving the responsiveness, reliability and features of our network and by developing new network features, services and applications to meet changing customer needs. We cannot assure that we will be able to adapt to these challenges or respond successfully or in a cost-effective way to adequately meet them. Our failure to do so would adversely affect our ability to compete and retain customers or market share. We sell our SS7 network services primarily to traditional telecommunications companies that rely on traditional voice networks. Many emerging companies are providing convergent Internet protocol-based network services. Our future revenues and profits, if any, could depend upon our ability to provide products and services to these Internet protocol-based telephony providers.
If we encounter system interruptions,
or security breaches,we could be exposed to liability and our reputation and business could suffer.We depend on the uninterrupted operation of our various domain name registration systems, secure data centers and other computer and communication networks. Our systems and operations are vulnerable to damage or interruption from:
.power loss, transmission cable cuts and other telecommunications failures;.damage or interruption caused by fire, earthquake, and other natural disasters;.computer viruses or software defects; and.physical or electronic break-ins, sabotage, intentional acts of vandalism, terrorist attacks and other events beyond our control.Most of our systems are located at, and most of our customer information is stored in, our facilities in Mountain View, California and Kawasaki, Japan, both of which are susceptible to earthquakes, Dulles and
Herndon,Leesburg, Virginia, Lacey, Washington and Overland Park, Kansas. Though we have back-up power resources, our California locations are susceptible to electric power shortages similar to those experienced during 2001.All of our domain name registration services systems, including those used in our domain name registry and registrar business are located at our Dulles and
Herndon,Leesburg, Virginia facilities. Any damage or failure that causes interruptions in any of these facilities or our other computer and communications systems could materially harm our business.In addition, our ability to issue digital certificates and register domain names depends on the efficient operation of the Internet connections from customers to our secure data centers and our various registration systems as well as from customers to our registrar and from our registrar and other registrars to the shared
23registration system. These connections depend upon the efficient operation of Web browsers, Internet service providers and Internet backbone service providers, all of which have had periodic operational problems or experienced outages in the past. Any of these problems or outages could decrease customer satisfaction, which could harm our business. A failure in the operation of our various registration systems, our domain name zone servers, the domain name root servers, or other events could result in the deletion of one or more domain names from the Internet for a period of time. A failure in the operation of our shared registration system could result in the inability of one or more other registrars to register and maintain domain names for a period of time. A failure in the operation or update of the master database that we maintain could result in the deletion of one or more top-level domains from the Internet and the discontinuation of second-level domain names in those top-level domains for a period of time. The inability of our registrar systems, including our back office billing and collections infrastructure, and telecommunications systems to meet the demands of a large number of domain name registration requests and corresponding customer e-mails and telephone calls, including speculative, otherwise abusive and repetitive e-mail domain name registration and modification requests, could result in substantial degradation in our customer support service and our ability to process, bill and collect registration requests in a timely manner.
If we experience security breaches, we could be exposed to liability and our reputation and business could suffer.
We retain certain confidential customer information in our secure data centers and various registration systems. It is critical to our business strategy that our facilities and infrastructure remain secure and are perceived by the marketplace to be secure. Our domain name registry operations also depend on our ability to maintain our computer and telecommunications equipment in effective working order and to reasonably protect our systems against interruption, and potentially
dependsdepend on protection by other registrars in the shared registration system. The root zone servers and top-level domain name zone servers that we operate are critical hardware to our registry services operations. Therefore, we may have to expend significant time and money to maintain or increase the security of our facilities and infrastructure.Despite our security measures, our infrastructure may be vulnerable to physical break-ins, computer viruses, and attacks by hackers or similar disruptive problems. It is possible that we may have to expend additional financial and other resources to address such problems. Any physical or electronic break-in or other security breach or compromise of the information stored at our secure data centers and domain name registration systems may jeopardize the security of information stored on our premises or in the computer systems and networks of our customers. In such an event, we could face significant liability and customers could be reluctant to use our
digital trustsecurity services. Such an occurrence could also result in adverse publicity and therefore, adversely affect themarket'smarket’s perception of the security of electronic commerce and communications over IP networks as well as of the security or reliability of our services.We rely on a continuous power supply to conduct our operations, and California's recent energy crisis could disrupt our operations and increase our expenses. One of our secure data centers and one of our customer support call centers are located in Mountain View, California. In the summer of 2001, California experienced an energy crisis and could again face an energy crisis that could disrupt our operations and increase our expenses. In the event of an acute power shortage, that is, when power reserves for the State of California fall below 1.5%, California has on some occasions implemented, and may in the future continue to implement, rolling blackouts throughout the state. If blackouts interrupt our power supply, we may be temporarily unable to operate. Any such interruption in our ability to continue operations could delay the development of our products. Future interruptions could damage our reputation, harm our ability to retain existing customers and to obtain new 24customers, and could result in lost revenue, any of which could substantially harm our business and results of operations. Furthermore, the deregulation of the energy industry instituted in 1996 by the California government and shortages in wholesale electricity supplies have caused power prices to increase. If wholesale prices continue to increase, our operating expenses will likely increase, as our headquarters and many of our employees are based in California. Some of our investments in other companies have resulted in losses and may result in losses in the future. We have investments in a number of companies. In most instances, these investments are in the form of equity and debt securities of private companies for which there is no public market. These companies are typically in the early stage of development and may be expected to incur substantial losses. Therefore, these companies may never become publicly traded companies. Even if they do, an active trading market for their securities may never develop and we may never realize any return on these investments. Further, if these companies are not successful, we could incur charges related to write-downs or write-offs of these types of assets. Due to the recent volatility in the stock market in general, and the market prices of securities of technology companies in particular, during 2001 we determined that the decline in value of some of our public and private equity security investments was other than temporary and recognized a loss of $89.1 million related to the decline in value of these investments. Due to the inherent risk associated with some of our investments, and in light of current stock market conditions, we may incur future losses on the sales, write-downs or write-offs of our investments. The inability of our customers to successfully implement our signaling and network services with their existing systems could adversely affect our business. Significant technical challenges exist in our signaling and network services business because many of our customers: . purchase and implement SS7 network services in phases; . deploy SS7 connectivity across a variety of telecommunication switches and routes; and . integrate our SS7 network with a number of legacy systems, third-party software applications and engineering tools. Customer implementation currently requires participation by our order management and our engineering and operations groups, each of which has limited resources. Some customers may also require us to develop costly customized features or capabilities, which increase our costs and consume a disproportionate share of our limited customer service and support resources. Also, we typically charge one-time flat rate fees for initially connecting a customer to our SS7 network and a monthly recurring flat rate fee after the connection is established. If new or existing customers have difficulty deploying our products or require significant amounts of our engineering service support, we may experience reduced operating margins. Our customers' ability to deploy our network services to their own customers and integrate them successfully within their systems depends on our customers' capabilities and the complexity involved. Difficulty in deploying those services could reduce our operating margins due to increased customer support and could cause potential delays in recognizing revenues until the services are implemented. 25Our inability to introduce and implement technological changes in our industry could harm our business. The emerging nature of the Internet, digital certificate business, the domain name registration business and payment services business, and their rapid evolution, require us continually to improve the performance, features and reliability of our digital trust services, particularly in response to competitive offerings. We must also introduce any new digital trust services, as quickly as possible. The success of new digital trust services depends on several factors, including proper new service definition and timely completion, introduction and market acceptance. We may not succeed in developing and marketing new digital trust services that respond to competitive and technological developments and changing customer needs. This could harm our business.Capacity limits on our technology and network hardware and software may be difficult to project and we may not be able to expand and upgrade our systems to meet increased use.
As traffic from our telecommunication customers through our network increases, we will need to expand and upgrade our technology and network hardware and software. We may not be able to accurately project the
rate of increase in usage on our network. In addition, we may not be able to expand and upgrade, in a timely manner, our systems and network hardware and software capabilities to accommodate increased traffic on our network. If we do not appropriately expand and upgrade our systems and network hardware and software, we may lose customers and revenues.
We have experienced significant growth in our business and our failure to manage this growth or any future growth could harm our business. Our historical growth has placed, and any further growth is likely to continue to place, a significant strain on our resources. We have grown from 26 employees at December 31, 1995 to over 3,200 employees at December 31, 2001. In addition to internal growth, our employee base grew through acquisitions. We have also opened additional sales offices and have significantly expanded our operations, both in the U.S. and abroad, during this time period. To be successful, we will need to implement additional management information systems, continue the development of our operating, administrative, financial and accounting systems and controls and maintain close coordination among our executive, engineering, accounting, finance, marketing, sales and operations organizations. Any failure to manage growth effectively could harm our business.We depend on key personnel to manage our business effectively.
We depend on the performance of our senior management team and other key employees. Our success will also depend on our ability to attract, integrate, train, retain and motivate these individuals and additional highly skilled technical and sales and marketing personnel, both in the U.S. and abroad. In addition, our stringent hiring practices for some of our key personnel, which consist of background checks into prospective
employees'employees’ criminal and financial histories, further limit the number of qualified persons for these positions.We have no employment agreements with any of our key executives that prevent them from leaving VeriSign at any time. In addition, we do not maintain key person life insurance for any of our officers or key employees. The loss of the services of any of our senior management team or other key employees or failure to attract, integrate, train, retain and motivate additional key employees could harm our business.
26We rely on third parties who maintain and control root zone servers and route Internet communications.
We currently administer and operate only two of the 13 root zone servers. The others are administered and operated by independent operators on a volunteer basis. Because of the importance to the functioning of the Internet of these root zone servers, our
globalregistry services business could be harmed if these volunteer operators fail to maintain these servers properly or abandon these servers, which would place additional capacity demands on the two root zone servers we operate.Further, our
globalregistry services business could be harmed if any of these volunteer operators fails to include or provide accessibility to the data that it maintains in the root zone servers that it controls. In the event and to the extent that ICANN is authorized to set policy with regard to an authoritative root server system, as provided in our registry agreement with ICANN, it is required to ensure that the authoritative root will point to the top-level domain zone servers designated by us. If ICANN does not do this, our business could be harmed.Our Web presence services and registry services businesses also could be harmed if a significant number of Internet service providers decided not to route Internet communications to or from domain names registered by us or if a significant number of Internet service providers decided to provide routing to a set of domain name servers that did not point to our domain name zone servers.
Our signaling and network services reliance on
third partythird-party communications infrastructure, hardware and software exposes us to a variety of risks we cannot control.Our signaling and network services success will depend on our network infrastructure, including the capacity leased from telecommunications suppliers. In particular, we rely on AT&T, WorldCom, Sprint and other telecommunications providers for leased long-haul and local loop transmission capacity. These companies provide the dedicated links that connect our network components to each other and to our customers. Our business also depends upon the capacity, reliability and security of the infrastructure owned by third parties that is used to connect telephone calls. Specifically, we currently lease capacity from regional partners on seven of the fourteen mated pairs of SS7 signal transfer points that comprise our network. We have no control over the operation, quality or maintenance of a significant portion of that infrastructure or whether or not those third parties will upgrade or improve their equipment. We depend on these companies to maintain the operational integrity of our connections. If one or more of these companies is unable or unwilling to supply or expand its levels of service to us in the future, our operations could be severely interrupted. In addition, rapid changes in the telecommunications industry have led to the merging of many companies. These mergers may cause the
availability, pricing and quality of the services we use to vary and could cause the length of time it takes to deliver the services that we use to increase significantly. We rely on links, equipment and software provided to us from our vendors, the most important of which are gateway equipment and software from Tekelec and Agilent Technologies, Inc. We cannot assure you that we will be able to continue to purchase equipment from these vendors on acceptable terms, if at all. If we are unable to maintain current purchasing terms or ensure product availability with these vendors, we may lose customers and experience an increase in costs in seeking alternative suppliers of products and services.
We must establish and maintain strategic and other relationships.
One of our significant business strategies has been to enter into strategic or other similar collaborative relationships in order to reach a larger customer base than we could reach through our direct sales and
27marketing efforts. We may need to enter into additional relationships to execute our business plan. We may not be able to enter into additional, or maintain our existing, strategic relationships on commercially reasonable terms. If we fail to enter into additional relationships, we would have to devote substantially more resources to the distribution, sale and marketing of our enterprisesecurity services, telecommunications services andWeb presenceNetwork Solutions services than we would otherwise.Our success in obtaining results from these relationships will depend both on the ultimate success of the other parties to these relationships, particularly in the use and promotion of IP networks for trusted and secure electronic commerce and communications, and on the ability of these parties to market our
enterpriseInternet Services Group services successfully.Furthermore, our ability to achieve future growth will also depend on our ability to continue to establish direct seller channels and to develop multiple distribution channels, particularly with respect to our
Web presence servicesNetwork Solutions business. To do this we must maintain relationships with Internet access providers and other third parties. Failure of one or more of our strategic relationships to result in the development and maintenance of a market for ourWeb presencedomain name registration and value-added services could harm our business. Many of our existing relationships do not, and any future relationships may not, afford us any exclusive marketing or distribution rights. In addition, the other parties may not view their relationships with us as significant for their own businesses. Therefore, they could reduce their commitment to us at any time in the future. These parties could also pursue alternative technologies or develop alternative products and services either on their own or in collaboration with others, including our competitors. If we are unable to maintain our relationships or to enter into additional relationships, this could harm our business.Some of our
enterpriseservices have lengthy sales and implementation cycles.We market many of our
enterpriseInternet Services Group services directly to large companies and government agencies. The sale and implementation of our services to these entities typically involves a lengthy education process and a significant technical evaluation and commitment of capital and other resources. This process is also subject to the risk of delays associated withcustomers'customers’ internal budgeting and other procedures for approving large capital expenditures, deploying new technologies within their networks and testing and accepting new technologies that affect key operations. As a result, the sales and implementation cycles associated with certain of ourenterpriseInternet Services Group services can be lengthy, potentially lasting from three to six months. Our quarterly and annual operating results could be materially harmed if orders forecasted for a specific customer for a particular quarter are not realized.Undetected or unknown defects in our services could harm our business and future operating results.
Services as complex as those we offer or develop frequently contain undetected defects or errors. Despite testing, defects or errors may occur in our existing or new services, which could result in loss of or delay in revenues, loss of market share, failure to achieve market acceptance, diversion of development resources, injury
to our reputation, tort or warranty claims, increased insurance costs or increased service and warranty costs, any of which could harm our business. Furthermore, we often provide implementation, customization, consulting and other technical services in connection with the implementation and ongoing maintenance of our services, which typically involves working with sophisticated software, computing and communications systems. Our failure or inability to meet customer expectations in a timely manner could also result in loss of or delay in revenues, loss of market share, failure to achieve market acceptance, injury to our reputation and increased costs.
28Our enterprise and affiliate PKI services and Web trust servicesServices offered by our Internet Services Group rely on public key cryptography technology that may compromise our
system'ssystem’s security.Our enterprise and affiliate PKI servicesServices offered by our Internet Services Group depend on public key cryptography technology. With public key cryptography technology, a user is given a public key and a private key, both of which are required to perform encryption and decryption operations. The security afforded by this technology depends on the integrity of a
user'suser’s private key and that it is not lost, stolen or otherwise compromised. The integrity of private keys also depends in part on the application of specific mathematical principles known as"factoring."“factoring.” This integrity is predicated on the assumption that the factoring of large numbers into their prime number components is difficult. Should an easy factoring method be developed, the security of encryption products utilizing public key cryptography technology would be reduced or eliminated. Furthermore, any significant advance in techniques for attacking cryptographic systems could also render some or all of our existing PKI services obsolete or unmarketable. If improved techniques for attacking cryptographic systems were ever developed, we would likely have to reissue digital certificates to some or all of our customers, which could damage our reputation and brand or otherwise harm our business. In the past there have been public announcements of the successful attack upon cryptographic keys of certain kinds and lengths and of the potential misappropriation of private keys and other activation data. This type of publicity could also hurt the public perception as to the safety of the public key cryptography technology included in our digital certificates. This negative public perception could harm our business.The expansion of our international operations subjects our business to additional economic risks that could have an adverse impact on our revenues and business.
Revenues from international subsidiaries and
affiliatesVeriSign Affiliates accounted for approximately13%9% of our revenues in 2002, 13% in 2001 and 14% in2000 and 27% in 1999.2000. We intend to expand our international operations and international sales and marketing activities. For example, in addition to our past acquisitions of THAWTE with operations in South Africa and Network Solutions with operations in Asia and Europe, we have continued to focus on expanding our operations and marketing activities throughout Asia, Europe and Latin America. Expansion into these markets has required and will continue to require significant management attention and resources. We may also need to tailor ourdigital trustservices for a particular market and to enter into international distribution and operating relationships. We have limited experience in localizing our services and in developing international distribution or operating relationships. We may not succeed in expanding our services into international markets. Failure to do so could harm our business. In addition, there are risks inherent in doing business on an international basis, including, among others:.competition with foreign companies or other domestic companies entering the foreign markets in which we operate;.regulatory requirements;.legal uncertainty regarding liability and compliance with foreign laws;.export and import restrictions on cryptographic technology and products incorporating that technology;.tariffs and other trade barriers and restrictions;.difficulties in staffing and managing foreign operations;.longer sales and payment cycles;.problems in collecting accounts receivable;29.currency fluctuations, as all of our international revenues from VeriSign Japan, K.K. and VeriSign Australia Limited and ourwholly ownedwholly-owned subsidiaries in South Africa and Europe are not denominated in U.S.dollars; .Dollars;difficulty of authenticating customer information;.political instability;.failure of foreign laws to protect our U.S. proprietary rights adequately;.more stringent privacy policies in foreign countries;.additional vulnerability from terrorist groups targeting American interests abroad;.seasonal reductions in business activity; and.potentially adverse tax consequences.Failure of VeriSign Affiliates to follow our security and trust practices or to maintain the privacy or security of confidential customer information could have an adverse impact on our revenues and business.
We have licensed to VeriSign Affiliates our Processing Center platform, which is designed to replicate our own secure data centers and allows the affiliate to offer back-end processing of
enterprisePKIservices.services for enterprises. The VeriSign Processing Center platform provides a VeriSign Affiliate with the knowledge and technology to offerenterprisePKI services similar to those offered by us. It is critical to our business strategy that the facilities and infrastructure used in issuing and marketing digital certificates remain secure and we are perceived by the marketplace to be secure. Although we provide the VeriSign Affiliate with training in security and trust practices, network management and customer service and support, these practices are performed by the affiliate and are outside of our control.Any failure of a VeriSign Affiliate to maintain the privacy or security of confidential customer information could result in negative publicity and therefore, adversely affect the
market'smarket’s perception of the security of our services as well as the security of electronic commerce and communication over IP networks generally.We cannot assure you that the European Union Directive on electronic signatures will stimulate acceptance of our security services or will not be amended in ways which may have an adverse impact on our revenues and business.
In July 2001, we enhanced our managed public key infrastructure services processes in order to satisfy the European
Union's directiveUnion Directive ondigitalelectronic signatures, which we hope will stimulate the acceptance of digital signatures in Europe. We cannot guarantee that our enhancements to the services will be accepted by, or introduced and marketed successfully in, the European markets. Nor can we guarantee that member nations of the European Union will implement the Directive in a manner that furthers acceptance of our services. In addition, we cannot predict whether the European Union Commission will amend or alter the directive or introduce new legislation, nor can we predict the impact such a change in legislation could have on our international business and operations.We rely on our intellectual property, and any failure by us to protect, or any misappropriation of, our intellectual property could harm our business.
Our success depends on our internally developed technologies and other intellectual property. Despite our precautions, it may be possible for a
third partythird-party to copy or otherwise obtain and use our trade secrets orother forms of our intellectual property without authorization. Furthermore, the laws of foreign countries may not protect our proprietary rights in those countries to the same extent U.S. law protects these rights in the United States. In addition, it is possible that others may independently develop substantially equivalent intellectual property. If we do not effectively protect our intellectual property, our business could suffer. In the future, we may have to resort to litigation to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. This type of litigation, regardless of its outcome, could result in substantial costs and diversion of management and technical resources.
30We also license third-party technology, such as public key cryptography technology licensed from RSA and other technology that is used in our products, to perform key functions. These third-party technology licenses may not continue to be available to us on commercially reasonable terms or at all. Our business could suffer if we lost the rights to use these technologies. A
third partythird-party could claim that the licensed software infringes a patent or other proprietary right. Litigation between the licensor and athird partythird-party or between us and athird partythird-party could lead to royalty obligations for which we are not indemnified or for which indemnification is insufficient, or we may not be able to obtain any additional license on commercially reasonable terms or at all. The loss of, or our inability to obtain or maintain, any of these technology licenses could delay the introduction of our Internet infrastructure services until equivalent technology, if available, is identified, licensed and integrated. This could harm our business.Our services employ technology that may infringe the proprietary rights of others, and we may be liable for significant damages as a result.
Infringement or other claims could be made against us in the future. Any claims, with or without merit, could be time-consuming, result in costly litigation and diversion of technical and management personnel, cause delays or require us to develop non-infringing technology or enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on acceptable terms or at all. If a successful claim of infringement were made against us and we could not develop non-infringing technology or license the infringed or similar technology on a timely and cost-effective basis, our business could be harmed.
In addition, legal standards relating to the validity, enforceability, and scope of protection of intellectual property rights in Internet-related businesses are uncertain and still evolving. Because of the growth of the Internet and Internet-related businesses, patent applications are continuously and simultaneously being filed in connection with Internet-related technology. There are a significant number of U.S. and foreign patents and patent applications in our areas of interest, and we believe that there has been, and is likely to continue to be, significant litigation in the industry regarding patent and other intellectual property rights. For example, we have had two complaints filed against us in February 2001 and
February 2002September 2001 alleging patent infringement. (See Part I, Item 3,"Legal“Legal Proceedings."”)Compliance with new rules and regulations concerning corporate governance may be costly and could harm our business.
The Sarbanes-Oxley Act, which was signed into law in July 2002, mandates, among other things, that companies adopt new corporate governance measures and imposes comprehensive reporting and disclosure requirements, sets stricter independence and financial expertise standards for audit committee members and imposes increased civil and criminal penalties for companies, their chief executive officers and chief financial officers and directors for securities law violations. In addition, The NASDAQ National Market, on which our common stock is traded, is also considering the adoption of additional comprehensive rules and regulations relating to corporate governance. These laws, rules and regulations will increase the scope, complexity and cost of our corporate governance, reporting and disclosure practices, which could harm our results of operations and divert management’s attention from business operations. We also expect these developments to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. Further, our board members,
Chief Executive Officer and Chief Financial Officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified board members and executive officers, which could harm our business.
Proposed regulations related to equity compensation could adversely affect our ability to attract and retain key personnel.
Since our inception, we have used stock options and other long-term equity incentives as a fundamental component of our employee compensation packages. We believe that stock options and other long-term equity incentives directly motivate our employees to maximize long-term stockholder value and, through the use of vesting, encourage employees to remain with VeriSign. The Financial Accounting Standards Board (“FASB”), among other agencies and entities, is currently considering changes to US GAAP that, if implemented, would require us to record a charge to earnings for employee stock option grants. This proposal would negatively impact our earnings. For example, recording a charge for employee stock options under Statement of Financial Accounting Standards No. 123,“Accounting for Stock-Based Compensation,” would have increased after tax loss by approximately $241 million, $264 million and $131 million for fiscal years 2002, 2001 and 2000, respectively. In addition, new regulations like those proposed by The NASDAQ Stock Market requiring shareholder approval for all stock option plans could make it more difficult for us to grant options to employees in the future. To the extent that new regulations make it more difficult or expensive to grant options to employees, we may incur increased cash compensation costs or find it difficult to attract, retain and motivate employees, either of which could materially harm our business.
We have anti-takeover protections that may delay or prevent a change in control that could benefit our stockholders.
Our amended and restated certificate of incorporation and bylaws contain provisions that could make it more difficult for a
third partythird-party to acquire us without the consent of our board of directors. These provisions include:.our stockholders may take action only at a meeting and not by written consent;.our board must be given advance notice regarding stockholder-sponsored proposals for consideration at annual meetings and for stockholder nominations for the election of directors;.we have a classified board of directors, with the board being divided into three classes that serve staggered three-year terms;.vacancies on our board may be filled until the next annual meeting of stockholders only by majority vote of the directors then in office; and.special meetings of our stockholders may be called only by the chairman of the board, the president or the board, and not by our stockholders.31VeriSign has also adopted a stockholder rights plan that may discourage, delay or prevent a change of control and make any future unsolicited acquisition attempt more difficult. Under the rights plan:
The rights will become exercisable only upon the occurrence of certain events specified in the plan, including the acquisition of 20% of VeriSign’s outstanding common stock by a person or group.Each right entitles the holder, other than an “acquiring person,” to acquire shares of VeriSign’s common stock at a 50% discount to the then prevailing market price.VeriSign’s Board of Directors may redeem outstanding rights at any time prior to a person becoming an “acquiring person,” at a price of $0.001 per right. Prior to such time, the terms of the rights may be amended by VeriSign’s Board of Directors without the approval of the holders of the rights.
VeriSign’s principal administrative, sales, marketing, research and development and operations facilities are located in Mountain View, California, Herndon and Dulles, Virginia and Lacey, Washington.
In October 2001, we purchased the land and buildings related toWe own our headquarters complex in Mountain View,California for a purchase price of approximately $285 million.California. This complex includes five buildings with a combined area of approximately 395,000 square feet. We also own ourIlluminettelecommunication services headquarters facility in Lacey, Washington. The remainder of our significant facilities are leased under agreements that expire at various dates through2011.2014.VeriSign also leases other space for sales and support, and training offices in various locations throughout the United States. Internationally, we lease space in a number of different locations, including Tokyo, Japan; Kawasaki, Japan; Durbanville, South Africa; Sunderland, United Kingdom; Geneva, Switzerland; Woluwe-St. Pierre, Belgium; Oslo, Norway; Buenos Aires, Argentina; Sao Paulo, Brazil; and Malmo, Sweden. The significant sites are listed below, including approximate square footage.
Our success is largely dependent on the uninterrupted operation of our secure data centers and computer and communications systems. See
"Risk Factors--IfItem 1 “Business—Factors That May Affect Future Results of Operations.” If we encounter system interruptions or security breaches, we could be exposed to liability and our reputation and business could suffer."
Major Locations
Approximate Square
Major LocationsFootageUse
--------------- ----------- ---United States:
455-685 East Middlefield Road............... 395,00013200 VeriSign Way
Herndon, VA
405,000
Engineering, Sales and Marketing, Finance and Administration, Network Solutions
455-685 East Middlefield Road
Mountain View, CA (owned)
395,000
Corporate Headquarters, Engineering, Sales and Marketing, Customer Service, Finance and Administration, Production Services
21355 Ridgetop
Circle.......................CircleDulles, VA
160,000
VeriSign GlobalRegistry Services
Dulles, VA 625 Herndon Parkway......................... 61,0004501 Intelco Loop S.E.
Lacey, Washington (owned)
67,000
Telecommunication Services Group Headquarters
7400 West 129th Street
Overland Park, Kansas
31,000
SS7 Network Control
Europe:
Sunderland Solar Building
Phase VI, Sunderland
United Kingdom
38,750
Sales and Marketing,
Engineering Herndon, VA 365 Herndon Parkway......................... 41,000 Engineering, Sales and Marketing Herndon, VA 4501 Intelco Loop S.E....................... 67,000 Iluminet, Inc. headquarters Lacey, Washington (owned) 7400 West 129th Street...................... 28,000 SS7Networkcontrol Overland Park, Kansas Europe: Sunderland Solar Building................... 38,750 VeriSign DomainNames.com Phase VI, Sunderland United KingdomSolutionsBlandonnet International Business Center
8, Chemin De Blandonnet
CH-1217 Vernier / Geneva
Switzerland17,000
European Headquarters
Japan:
Nittobo
Buildings........................... 19,400 Japan HeadquartersBuildings13F, 8-1 Yaesu, 2-chome
Chuo-ku, Tokyo, 104-0028
Japan
15,200
Japan Headquarters
We believe that our current facilities are sufficient for our needs for the foreseeable future.
32As of
February 11, 2002, through ourMarch 7, 2003, VeriSign and its subsidiary Network Solutions,subsidiary, weInc., werea defendantdefendants innineapproximately 14 active lawsuits involvingdomain namecustomer contractual disputesbetween trademark owners and domain name holders. We are drawn into such disputes, in part, as a result of claims by trademark owners that we are legally required, upon request by a trademark owner, to terminate the contractual right we granted to a domain name holder to register a domain name which is alleged to be similar to the trademark in question. On October 25, 1999, however, the Ninth Circuit Court of Appeals ruled in our favor and against Lockheed Corporation, holding that our services do not make us liable for contributory infringement to trademark owners. Since that time, the frequency of this type of suit has continued to decline. The holders of theover domain name registrationsin disputeand related services. These matters, either alone or collectively, are not expected to havein turn, questioneda material impact on ourright, absent a court order, to take any action that affects their contractual rights to thedomainnames in question. Although 87 of these kinds of situations have resulted in suits actually naming Network Solutions as a defendant, as of February 11, 2002, no adverse judgment has been rendered and no award of damages has ever been made. We believe that we have meritorious defenses and we intend to vigorously defend ourselves against these claims.name registration business or our financial statements.On February 2, 2001, Leon Stambler filed a complaint against
us alleging patent infringementVeriSign in the United States District Court for the District of Delaware.The other co-defendants named in the complaint wereMr. Stambler alleged that VeriSign, and RSA Security, Inc.,First Data Corporation, Openwave Systems Inc., and Omnisky Corporation. The complaint alleges that our Secure Site service infringes claim 12infringed various claims ofMr. Stambler'shis patents, U.S. PatentNo.Nos. 5,793,302, 5,974,148 andthat our Payflow products infringe claims 1, 28 and 34 of5,936,541. Mr.Stambler's U.S. Patent No. 5,974,148. The complaint seeksStambler sought a judgment declaring that the defendantshavehad infringed the asserted claims of the patents-in-suit,preliminary and permanent injunctions against the defendants from infringing the asserted claims,anorder requiring the defendants to payinjunction, damagesto compensate Mr. Stamblerfor the alleged infringement,and an order awarding Mr. Stamblertreble damages foranywillful infringement,as well asand attorney fees and costs.On September 24, 2001,Mr. Stambleramended his complaint, addingsettled the case against three other defendants: Openwave Systems, Inc., Certicom Corp. and First Data Corporationasbefore trial. The trial began on February 24 and concluded with adefendantjury verdict on March 7, 2003. On March 7, 2003, the jury returned a unanimous verdict for RSA Security Inc. andasserting that our Payflow products also infringe claims 25VeriSign and27 of Mr. Stambler's U.S. Patent No. 5,936,541. Subsequently, the parties to the litigation engaged in extensive discovery. On December 21, 2001,against Mr. Stamblersupplemented his discovery responses, significantly expanding his allegations. Through these supplemental responses, Mr. Stambler contends that we infringe claims 12 and 34 ofon the'302four remaining patent claims1, 16, 28in suit. The court had ruled earlier in the case on two other claims, also finding in favor of VeriSign and35 of the '148 patent, and claims 25 and 27 of the '541 patent. Additionally, Mr. Stambler significantly expanded the list of accused products to include the following products, services and protocols: Authentication Service Bureau, B2B Payment Services, Certificate Validation, Cybercash Products and Services, Enterprise Service Center, GO Secure!, Healthcare Personal Trust Agent, Payment Net, SoftTerminal, Onsite, CommerSite, Processing Center, Secure Site, 128-bit SSL Global Server, 40 bit SSL Secure Server, Authentic Document ID, Digital Ids for Securing Email, Code Signing Digital Ids, WebTrust, WAP related products, Electronic Data Interchange and Financial Server Ids. Mr. Stambler also contends that our use of products in connection with certain third party technology infringes his patents, including Intershop Cartridges and QualysGuard SSL. While we cannot predict the outcome of this matter presently, we believe that the claims against us are without merit and we intend to vigorously defend ourselves against these claims.RSA Security, Inc.On September 7, 2001, NetMoneyIN, an Arizona corporation, filed a complaint alleging patent infringement against us in the United States District Court for the District of Arizona. NetMoneyIN named
thirty-twothirty-three other defendants, including Mellon Financial Corporation, Bankcard Center Inc., FMT Corp., American Express Financial Advisors, Inc., Bank One Corp., Citibank, N.A. and Wells Fargo & Co. NetMoneyIN filed a second amended complaint on October 15, 2002, and motions to dismiss are likely to follow. The complaint alleges thatour "activities related topart of VeriSign’s credit card approval process for purchases made on the Internetat 33an Internet Web site operated by a merchant"infringeclaim 13certain claims ofNetMoneyIN'sNetMoneyIN’s patents, U.S. PatentNo.Nos. 5,822,737 andclaim 1 of NetMoneyIN's U.S. Patent No.5,963,917. The complaint requests the Court to enter judgment in favor of NetMoneyIN, a permanent injunction against the defendants from infringing the asserted claims, an order requiring the defendants to provide an accounting forNetMoneyIN'sNetMoneyIN’s damages, to pay NetMoneyIN such damages and three times that amount, and an order awarding NetMoneyIN attorney fees and costs.NetMoneyIN did not properly serve the complaint on VeriSign. However, NetMoneyIN filed an amended complaint adding International Business Machines Corporation as a defendant and served it on VeriSign in February 2002.While we cannot predict the outcome of this matter,presently,we believe that theclaims against usallegations are withoutmeritmerit.Beginning in May of 2002, several class action complaints were filed against VeriSign and
we intend to vigorously defend ourselves against these claims. On June 15, 2000, plaintiff David Moran filed a putative stockholder derivative complaint on behalf of himself and others similarly situated against Charles Stuckey, Jr., James Bidzos, Richard L. Earnest, Dr. Taher Elgamal, James K. Sims, Joseph B. Lassiter III, Robert P. Badavas, and against us as a nominal defendant. The case was captioned Moran v. Stuckey, et.al., No. 1810 NC (Del. Ch. 2000). The complaint alleges, among other things, that the directors of RSA Security mismanaged RSA's business, failed to protect its intellectual property or enforce the termscertain of itslicense agreement with us,current andthat we violated the terms of the licensing agreementformer officers andcompeted against RSA. On August 2, 2000, a second stockholder complaint was filed against us and the aforementioneddirectorsof RSA Security, Inc. by plaintiff James V. Biglan. That case was captioned Biglan v. Stuckey, et al. Civ. Action No. 18190NC (Del. Ch. 2000). On September 25, 2000 the Court ordered the cases consolidated under the Moran caption. We filed a Motion to Dismiss on November 20, 2000. On November 19, 2001, the parties submitted a stipulated settlement Agreement to the Court for approval. VeriSign has no financial obligations under the Agreement. On January 17, 2002, the Court approved the settlement Agreement. The order is final as of February 16, 2002. On March 15, 2000, a group of eight plaintiffs filed suit against the U.S. Department of Commerce, the National Science Foundation and usin the United States District Court for the Northern District of California. These actions were consolidated under the heading In re VeriSign, Inc. Securities Litigation, Case No. C-02-2270 JW(HRL), on July 26, 2002. Thecase, entitled William Hoefer et al. v. U.S. Departmentconsolidated action seeks unspecified damages for alleged violations ofCommerce, et al., Civil Action No. 000918-VRW, challenges the lawfulnessSections 10(b) and 20(a) of theregistration fees that we were authorized to charge for domain name registrations from September 1995 to November 1999. The suit purports to be broughtSecurities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, on behalf ofall domain name registrantsa class of persons whopaid registration fees during that periodpurchased VeriSign stock from January 25, 2001 through April 25, 2002. An amended consolidated complaint was filed on November 8, 2002. Parallel derivative actions have also been filed against certain of VeriSign’s current and former officers and directors in state courts in California and Delaware. VeriSign is named as a nominal defendant in these actions. Several of these derivative actions were filed in Santa Clara County Superior Court of California, and these actions have since been consolidated under the heading In re VeriSign, Inc. Derivative Litigation, Case No. CV 807719. The consolidated derivative action seeksapproximately $1.7 billion in damages. On June 19, 2000, the plaintiffs filed their first amended complaint, adding two additional plaintiffs. Allunspecified damages for alleged breaches ofthe defendants filed motions to transfer the suit to Federal District Court in the District of Columbiafiduciary duty andthe court granted those motions on June 28, 2000. The same attorney who unsuccessfully challenged us in a similar action, known as Thomas, et al. v. Network Solutions, et al., has filed this new action on behalf of eight former and current domain name registrants. The suit contains eight causes of action against the defendants based on alleged violations of Art. I, (S) 8 and the Fifth Amendment of the U.S. Constitution, the Independent Offices Appropriations Act (31 U.S.C. (S) 9701), the Administrative Procedures Act, the Sherman Act, and the California Unfair Competition Act, (S) 17200. The case was docketed with the Federal District Court in the District of Columbia on July 28, 2000 and on August 4, 2000 the plaintiffs dismissed the case. Four days later, the same attorney refiled the same case in the United States District Court for the Eastern District of Virginia. We filed a motion to dismiss the case and the plaintiffs responded by filing a First Amended Complaint on September 7, 2000. The current suit contains fourteen causes of action allegingviolations of theAppropriations Act (31 U.S.C. 9701),California Corporations Code. Defendants’ demurrer to these claims was granted with leave to amend on February 4, 2003 and proceedings in theAdministrative Procedures Act,action are temporarily stayed. Another derivative action was filed in theSherman Act,Court of Chancery New Castle County, Delaware, Case No. 19700-NC, alleging similar breaches of fiduciary duty. Defendants moved to dismiss these claims on November 4, 2002. VeriSign and theChief Financial Officer's Act (31 U.S.C. 902). On October 10, 2000, we filed another motion to dismiss the case. On October 24, 2000, the National 34Science Foundation filed a motion to transfer the case back to the Federal District Court in the Districtindividual defendants dispute all ofColumbia. A hearing on the motion to transfer the case back to the Federal District Court for the District of Columbia was held on November 17, 2000. The Court ruled from the bench that the case should be transferred back to the District of Columbia. Our pending motion to dismiss the complaint also was transferred under the Order. No judge has been appointed to the matter,these claims, andno hearing date has yet been set on our motion to dismiss. While we cannot predict the outcome of this matter presently, we believe that the claims against us are without merit and weintend to vigorously defendourselvesthemselves against the allegations outlined herein.We were a defendant in eleven lawsuits filed since April 2, 2002, related to a direct mail offer sent by our Internet domain name registrar to registrant-customers of other domain name registrars. Seven of these
claims.lawsuits were brought by or on behalf of domain name registrants. These seven domain name registrant cases were resolved in part through a settlement that received final approval on March 14, 2003. The remaining four were brought by or on behalf of domain name registrars or domain name registration intermediaries. Three of theseregistrar actions have been settled and dismissed,BulkRegister, Inc. v. VeriSign, Inc.,Go Daddy Software, Inc. v. VeriSign, Inc., andIntercosmos, Inc. v. VeriSign, Inc. The remaining issues are not material.
On
January 13, 2000,July 31, 2002, theDepartment of Justice Antitrust Division issuedcompany received a Civil Investigative Demand (CID) from the U.S. Federal Trade Commission (FTC) for information to determine whether orCID, seeking information and documents concerningnot thethen-pending acquisition by us of THAWTE. We provided certain information and documents to the Department of Justice, and closed the THAWTE transaction on February 1, 2000. We completed our initial response to the CID on March 1, 2000, and a supplemental production of documents was completed May 9, 2000. On September 14, 2000, we were notified that senior officials at the Department of Justice had reviewed a report by the investigatory staff regarding the transaction, and that the Department had concerns about the potential competitive effectscompany’s domain name registration business may have violated Section 5 of thetransaction. Our representatives metFTC Act. The CID requests information on the company’s registrar’s relationship with Interland, Inc., the registrar’s direct mail offer which began in April 2002, the registrar’s transfer practices, andprovided additional information totheDepartmentdeletion ofJustice during October 2000. On March 11, 2002, we were notified by the Department of Justice that the matter has been closed and no further action will be taken.domain names.We are involved in various other investigations, claims and lawsuits arising in the normal conduct of our business, none of which, in our opinion will harm our business. We cannot assure that we will prevail in any litigation. Regardless of the outcome, any litigation may require us to incur significant litigation expense and may result in significant diversion of management attention.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended December 31,
2001. 352002. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive officers of VeriSign as of February 28,
2002.2003:
Name
Age
Position
- ---- --- --------Stratton D.
Sclavos.......... 40Sclavos41
President, Chief Executive Officer and Chairman of the Board of Directors
Dana L.
Evan................. 42Evan43
Executive Vice President, Finance and Administration and Chief Financial Officer
Quentin P.
Gallivan.......... 44Gallivan45
Executive Vice President, Worldwide Sales and Services
Robert J.
Korzeniewski....... 44Korzeniewski45
Executive Vice President, Corporate and Business Development
F. Terry
Kremian............. 54 Executive Vice President, Illuminet Russell S. Lewis............. 47Kremian55
Executive Vice President and General Manager,
VeriSign Global RegistryTelecommunication ServicesW.G. Champ Mitchell.......... 55GroupRussell S. Lewis
48
Executive Vice President and
GroupGeneral Manager,Mass Markets Division Anil H.P. Pereira............Registry ServicesJudy Lin
38
Executive Vice President and
GroupGeneral Manager,EnterpriseSecurity ServicesW. G. Champion Mitchell
56
Executive Vice President, and
Service Provider DivisionPresident, Network SolutionsAristotle Balogh
38
Senior Vice President, Operations and Infrastructure
William P.
Fasig............. 38Fasig39
Senior Vice President, Corporate Marketing
Servicesand Corporate AffairsJames M.
Ulam................ 45Ulam46
Senior Vice President, General Counsel and Secretary
Stratton D. Sclavos has served as President and Chief Executive Officer and as a director of VeriSign since he joined VeriSign in July 1995. In December 2001, he was named Chairman of the Board of Directors. From October 1993 to June 1995, he was Vice President, Worldwide Marketing and Sales of Taligent, Inc., a software development company that was a joint venture among Apple Computer, Inc., IBM and Hewlett-Packard. From May 1992 to September 1993, Mr. Sclavos was Vice President of Worldwide Sales and Business Development of GO Corporation, a pen-based computer company. Prior to that time, he served in various sales and marketing capacities for MIPS Computer Systems, Inc. and Megatest Corporation. Mr. Sclavos serves as a director of Juniper Networks, Inc., Keynote Systems, Inc., Intuit, Inc. and Marimba, Inc. Mr. Sclavos holds a B.S. degree in Electrical and Computer Engineering from the University of California at Davis.
Dana L. Evan has served as Executive Vice President of Finance and Administration and Chief Financial Officer
of VeriSignsince January 1, 2001. From June 1996 until December 31, 2000 she served as Vice President of Finance and Administration and Chief Financial Officer of VeriSign. From 1988 to June 1996,sheMs. Evan worked as a financial consultant in the capacity of chief financial officer, vice president of finance or corporate controller forvarious public and private companies and partnerships, including VeriSign from November 1995 to June 1996. Prior to 1988, she was employed by KPMG LLP, most recently as a senior manager. Ms. Evan serves as a director of Liberate Technologies. Ms. Evan is a certified public accountant and holds a B.S. degree in Commerce with a concentration in Accounting and Finance from the University of Santa Clara.
Quentin P. Gallivan has served as Executive Vice President, Worldwide Sales and Services since April 1, 1999. From October 1997 to April 1, 1999, he served as Vice President of Worldwide Sales of VeriSign. From April 1996 to October 1997, he was Vice President for Asia Pacific and Latin America of Netscape, a software company. Prior to that time, from 1983 to March 1996, Mr. Gallivan was with
36General Electric Information Services, an electronic commerce services company, in several general management roles most recently as Vice President, Sales and Services for the Americas. Robert J. Korzeniewskihas served as Executive Vice President, Corporate and Business Development since joining VeriSign upon its acquisition of Network Solutions
Inc.in June 2000. He served as Chief Financial Officer of Network Solutions from March 1996 to June 2000. Prior to joining Network Solutions,heMr. Korzeniewski held various senior financial positions at SAIC, the largest employee owned research and engineering company in the United States, from 1987 to March 1996. Mr. Korzeniewski is a certified public accountant andreceivedholds a B.S. degree in Business Administration from Salem State College.F. Terry Kremian has served as Executive Vice President and General Manager, Telecommunication Services Group since joining VeriSign upon its acquisition of
VeriSign sinceIlluminet Holdings in December 2001. Hewasserved as Executive Vice President and Chief Operating Officer of Illuminet HoldingsInc.from September 1998 until December2001 when Illuminet was acquired by VeriSign.2001. Prior to that,Mr. Kremianhe was VicePresident--MarketingPresident—Marketing and Sales from November 1997. Mr. Kremianis also the President ofjoined IlluminetInc. since March 1, 2001. He joined IlluminetHoldings from MCI, where he was employed since 1982, most recently asdirectorDirector of CarrierSales, National Accounts.Sales. Mr. Kremian holds aB.A.B.S. degree from the U.S. Naval Academy and a J.D.degreefrom the University of Maryland School of Law.Russell S. Lewis has served as Executive Vice President and General Manager,
VeriSign GlobalRegistry Services since February 2002. From March 2000 to February 2002, he served as Senior Vice President, Corporate Development of VeriSign. Since August 1999, he has served as President of Lewis Capital Group, LLC, an investment firm providing general business and merger and acquisition consulting services to growth-oriented firms. From 1994 to August 1999, he was President and Chief Executive Officer of TransCore, a supplier of electronic toll collections systems and advanced traffic management systems. Mr. Lewisisserves as a director of Castle Energy Corporationa companyand Delta Petroleum Corporation, companies engaged in oil and gas exploration andproduction.production, as well as the boards of several private companies. Mr. Lewis holds an M.B.A. degree with a concentration in finance and marketing from Harvard School of Business and a B.A. degree in Economics from Haverford College.W. G. Champ MitchellJudy Lin has served as Executive Vice President and
GroupGeneral Manager, Security Services since January 2003. Since joining VeriSign in February 1996, Ms. Lin has served in a variety of management positions from Director of Core Technology to Vice President of Product Development. Prior to joining VeriSign, Ms. Lin served in a variety of software development and management roles at Taligent, Apple Computer and Hewlett-Packard. Ms. Lin holds dual B.A. degrees in Computer Science and European History from the University of California, Berkeley.W. G. Champion Mitchell has served as Executive Vice President and General Manager, Mass Markets Division of VeriSign since
JulyAugust 2001. In January 2003, he was named President of Network Solutions. From 1999 until March 2000, he served as Chairman of the Board andCEOChief Executive Officer of Convergence Equipment Company, a high technology telephone equipment manufacturer, and President of Global Communication Technologies, Inc., an Internet-based telecommunication carrier. From 1997 until early 1999, he served as Chairman and Chief Executive Officer of GXC, Inc., the first entity to carry voice and facsimile telecommunications over the Internet using regular telephones. From 1996 to 1997, he served as the Special Counselor to the Board of Directors and Chairman of True North Communications, a holding company foradvertising
agenciesand other marketing companies. Mr. Mitchell holdsa B.A.an A.B. degree in English and a J.D.degreefrom the University of North Carolina.Anil H.P. PereiraAristotle Balogh has
served as Executive Vice President and General Manager, Enterprise and Service Provider Division since January 2002. From October 2000 to January 2002, heserved as Senior Vice President, Operations andGroup General Manager of the Enterprise and Service Provider Division; from August 2000 to October 2000 he served as Senior Vice President of the Internet Services Group and Worldwide Corporate Marketing; from FebruaryInfrastructure since March 2002. From 1999 toAugust 2000, he2002, Mr. Balogh served as Vice President ofthe Internet Services GroupEngineering of VeriSign. Prior to that, he headed System Architecture, Infrastructure, Quality Assurance andWorldwide Corporate Marketing; and from March 1997 to February 1999, he served as Director of Corporate Marketing.Operations for Network Solutions. Prior to joiningVeriSign, from May 1990 to March 1997, heNetwork Solutions, Mr. Balogh held a variety ofmarketing positionssenior engineer and management roles atAmerican ExpressSRA Corporation,a diversified financialUPS’s Roadnet Technologies, andtravel services company, most recently as Vice President of the Affinity Card Group. HeWestinghouse Electric Corporation. Mr. Balogh holds aB. Mgt. DegreeB.S. in Electrical Engineering and Computer Science and an M.S.E. in Electrical and Computer Engineering from theUniversity of Lethbridge in Alberta and a MBA degree from the WhartonWhiting School ofthe University of Pennsylvania. 37Engineering at Johns Hopkins University. William P. Fasig has served as Senior Vice President, Corporate Marketing and Corporate Affairs of VeriSign since January 2003. From April 2001 to December 2002, he served as Senior Vice President, Corporate Marketing Services
since April 2001.of VeriSign. From July 2000 to October 2000 he served as Vice President, Corporate Communications of Compaq Computer Corporation, a leading global provider of information technology products, services and solutions for enterprise customers. From November 1996 to July 2000 he was with Young & Rubicam, Inc., adiversivieddiversified global marketing and communications organization, in several general management roles most recently as Chairman and Managing Director, Burston-Marsteller Technology Practice, a division of Young & Rubicam. Mr. Fasig holds an M.A. degree in Government/National Securities Studies from Georgetown University and a B.A. degree in Political Science from Wheaton College.James M. Ulam has served as Senior Vice President and General Counsel since October 2001, and as Vice President and General Counsel since joining VeriSign upon its acquisition of Network Solutions
Inc.in June 2000, and as Secretary of VeriSign since November 2000. From October 1996 to June 2000, he served in a variety of positions for Network Solutions, including Corporate Counsel and Assistant General Counsel. Prior to joining Network Solutions, he was a Contracts Attorney for SAIC, the largest employee owned research and engineering company in the United States, from April 1995 until October 1996. Prior to that he was in the private practice of law at Wells, Moore, Stubblefield and Neeld from March 1994 to March 1995 and at Ott & Purdy from March 1992 until March 1994. Mr. Ulam holds a B.S. degree in Business Administration from the University of Maryland and a J.D.degreefrom the Mississippi College School of Law.38PART II
ITEM 5. MARKET FOR
REGISTRANT'SREGISTRANT’S COMMON STOCK AND RELATED SHAREHOLDERMATTERS
VeriSign'sPrice Range of Common Stock
VeriSign’s common stock is traded on
the NasdaqThe NASDAQ National Market under the symbol"VRSN."“VRSN.” The following table sets forth, for the periods indicated, the high and low closing prices per share for our common stock as reported bythe NasdaqThe NASDAQ NationalMarket.Market:
Price Range --------------- High Low ------- -------Year ended December 31, 2002: First Quarter (through February 28, 2002)............... $ 38.06 $ 22.71 Year ended December 31, 2001: First Quarter........................................... $ 91.94 $ 32.00 Second Quarter.......................................... 67.66 28.00 Third Quarter........................................... 60.50 34.16 Fourth Quarter.......................................... 53.34 36.73 Year ended December 31, 2000: First Quarter........................................... $253.00 $149.50 Second Quarter.......................................... 196.19 97.80 Third Quarter........................................... 208.38 140.31 Fourth Quarter.......................................... 195.38 68.13
Price Range
High
Low
Year ended December 31, 2003:
First Quarter (through February 28, 2003)
$
10.67
$
7.09
Year ended December 31, 2002:
Fourth Quarter
$
10.59
$
4.13
Third Quarter
8.79
4.83
Second Quarter
27.00
7.19
First Quarter
38.06
22.71
Year ended December 31, 2001:
Fourth Quarter
$
53.34
$
36.73
Third Quarter
60.50
34.16
Second Quarter
67.66
28.00
First Quarter
91.94
32.00
On February 28,
2002,2003, there were9931,021 holders of record of our common stock although we believe there are in excess of160,000100,000 beneficial owners. On February 28,2002,2003, the reported last sale price of our common stock was$23.73$7.71 per share.The market price of our common stock has been and is likely to continue to be highly volatile and significantly affected by factors such as:
.general market and economic conditions and market conditions affecting technology and Internet stocks generally;.announcements of technological innovations, acquisitions or investments, developments in Internet governance or corporate actions such as stock splits; and.industry conditions and trends.The market price of our common stock also has been and is likely to continue to be significantly affected by expectations of analysts and investors. Reports and statements of analysts do not necessarily reflect our views. The fact that we have in the past met or exceeded analyst or investor expectations does not necessarily mean that we will do so in the future.
In the past, securities class action lawsuits have often followed periods of volatility in the market price of a particular
company'scompany’s securities. This type of litigation could result in substantial costs and a diversion of ourmanagement'smanagement’s attention and resources.We have never declared or paid any cash dividends on our common stock or other securities and we do not anticipate paying cash dividends in the foreseeable future. We currently intend to retain our earnings, if any, for future growth.
39ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data are derived from our consolidated financial statements. This data should be read in conjunction with the consolidated financial statements and notes thereto, and with Item 7,
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations. We madeseveralacquisitions in 2002, 2001, 2000 and2000,1999, each of which was accounted for as a purchase. Accordingly, the results of the acquiredcompanies'companies’ operations are included in our consolidated financial statements from their respective dates of acquisition.
Five Years Ended December 31,
2002
2001
2000
1999
1998
(In thousands, except per share data)
Consolidated Statement of Operations Data:
Revenues
$
1,221,668
$
983,564
$
474,766
$
84,776
$
38,930
Net income (loss) (1)
(4,961,297
)
(13,355,952
)
(3,115,474
)
3,955
(19,743
)
Basic net income (loss) per share(1)
(20.97
)
(65.64
)
(19.57
)
.04
(.24
)
Diluted net income (loss) per share(1)
(20.97
)
(65.64
)
(19.57
)
.03
(.24
)
Consolidated Balance Sheet Data:
Total assets(1)
2,391,318
7,537,508
19,195,222
341,166
64,295
Long-term debt(2)
13,044
800
—
—
—
Stockholders’ equity(1)
1,579,425
6,506,074
18,470,608
298,359
40,728
Year Ended December 31, ------------------------------------------------------- 2001 2000 1999 1998 1997 ------------ ----------- -------- -------- -------- (In thousands, except per share data)Consolidated(1) We adopted Statement of Operations Data: Revenues............................... $ 983,564 $ 474,766 $ 84,776 $ 38,930 $ 13,356 Total costsFinancial Accounting Standards (“SFAS”) No. 142, “Goodwill andexpenses............... 14,394,390 3,675,075 88,086 62,075 34,657 Operating loss......................... (13,410,826) (3,200,309) (3,310) (23,145) (21,301) Minority interestOther Intangible Assets,” and as a result, $5.0 billion of goodwill, net of accumulated amortization, including workforce innet (income) lossplace that was subsumed into goodwill on the date ofsubsidiary........................ (579) (1,334) 836 1,282 1,538 Net income (loss)...................... (13,355,952) (3,115,474) 3,955 (19,743) (18,589) Basic net income (loss) per share...... (65.64) (19.57) .04 (.24) (.65) Diluted net income (loss) per share.... (65.64) (19.57) .03 (.24) (.65) December 31, -------------------------------------------------------adoption, ceased to be amortized. The 1998 to 20012000consolidated financial data include amortization of goodwill and workforce in place totaling $3.4 billion in 2001 and $3.0 billion in 2000. We recorded no amortization of goodwill and workforce in place in 19991998 1997 ------------ ----------- -------- -------- -------- (In thousands) Consolidated Balance Sheet Data: Cash, cash equivalentsor 1998.
(2) The current portion of long-term debt payable is included in accounts payable and short-term investments.......................... $ 726,697 $ 1,026,275 $156,480 $ 41,745 $ 12,893 Working capital........................ 256,714 520,953 140,163 31,085 6,160 Long-term investments.................. 201,781 209,145 144,751 436 -- Total assets........................... 7,537,508 19,195,222 341,166 64,295 26,904 Long-term debt*........................ 800 -- -- -- -- Stockholders' equity................... 6,506,074 18,470,608 298,359 40,728 13,541accrued liabilities and the non-current portion is included in other long-term liabilities in the accompanying consolidated balance sheets.- -------- * Included in other long-term liabilities in the accompanying consolidated balance sheets. 40ITEM 7.
MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Except for historical information, this Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements involve risks and uncertainties, including, among other things, statements regarding our anticipated costs and expenses and revenue mix. Forward-looking statements include, among others, those statements including the words
"expects," "anticipates," "intends," "believes"“expects,” “anticipates,” “intends,” “believes” and similar language. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed inthe section "Business--Risk Factors."Item 1 “Business—Factors That May Affect Future Results of Operations.” You should carefully review the risks described in other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q or Current Reports on Form 8-K that wewillfile in2002.2003. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.Overview
VeriSign, Inc. is a leading provider of
digital trustcritical infrastructure services that enable Web site owners, enterprises, communications service providers,electronic commercee-commerce service providers and individuals to engage in secure digital commerce and communications. Ourdigital trustservices include three core offerings: Internet security and registry services, telecommunications services, and Web presence services. We market our products and services through our direct sales force, telesales operations, member organizations in our global affiliate network, value-added resellers, service providers, and our Web sites.Beginning in the first quarter of 2003, we realigned our business segments. We are organized into three service-based lines of business: the Internet Services Group, the Telecommunication Services Group, and Network Solutions. The Internet Services Group consists of two business units: Security Services and Registry Services. Our Security Services business unit provides products and services to organizations who want to establish and deliver secure Internet-based services for their customers including: managed security and network services, Web trust services and payment services. Our Registry Services business unit acts as the exclusive registry of domain names in the.comand .netgTLDs and certain ccTLDs.
The Telecommunication Services Group provides specialized services to telecommunications carriers. Service offerings include the Signaling System 7, or SS7, network, as either part of the connectivity, switching and transport function of the SS7 network or as intelligent network services delivered over the SS7 network. SS7 is an industry-standard system of protocols and procedures that is used to control telephone communications and provide routing information in association with vertical calling features, such as calling card validation, advanced intelligent network services, local number portability, wireless services, toll-free number database access and caller identification. The Telecommunication Services Group also offers advanced billing and customer care services to wireless carriers.
Through our Network Solutions subsidiary, we provide digital identity through domain name registration services, and value-added services, such as e-mail, Web site creation tools, Web site hosting and other e-commerce enabling offerings. We register second-level domain names in the.com, .net, .org, .bizand .infogTLDs, as well as selected ccTLDs, such as.uk and .tv,around the world, enabling individuals, companies and organizations to establish a unique identity on the Internet. Our customers apply to register second-level domain names either directly through our Web sites or indirectly through our channel partner wholesalers, Internet service providers, telecommunications companies and others. We accept registrations and re-registrations in annual or multi-year increments for periods up to ten years.
We also provide other digital identity and Web presence value-added products and services through our Web site storefront, such as Network Solutions-hosted domain names, Web sites from Network Solutions, Web forwarding (which allows a customer to forward Internet traffic from one Web site to another) and Network Solutions mail.
The management’s discussion and analysis that follows is based on our previous structure that was in effect throughout 2002, 2001 and 2000. For more information on both our previous structure and our new service-based business segments, please refer to Note 13 of our Notes to Consolidated Financial Statements.
Enterprise and Service Provider Division
The Enterprise and Service Provider Division provides the following types of services: managed security and network services, registry services and telecommunications services.
Managed security and network services include our traditional public key infrastructure, or PKI, services for enterprises or members of our VeriSign Affiliate program, enterprise consulting and management services, digital brand management services and
Web presencemanaged domain name services.We are the exclusive registry of domain names within the .com and
trust services. Our core Web Trust.net gTLDs under agreements with the Internet Corporation for Assigned Names and Numbers, or ICANN, and the Department of Commerce, or DOC. We maintain the master directory of all second-level domain names in these top-level domains. We own and maintain the shared registration system that allows all registrars to enter new second-level domain names into the master directory and to submit modifications, transfers, re-registrations and deletions for existing second-level domain names.We provide specialized services to telecommunications carriers through our Illuminet Holdings and H.O. Systems subsidiaries. Illuminet Holdings’ service offerings
were establishedinclude the Signaling System 7, or SS7, network asthe cornerstoneeither part of thebusinessconnectivity, switching and transport function of the SS7 network or as intelligent network services delivered over the SS7 network. SS7 is an industry-standard system of protocols and procedures that is used to control telephone communications and provide routing information in1995association withthe introduction of Web site digital certificates. Through our secure online infrastructure we sell our Web site digital certificatesvertical calling features, such as calling card validation, advanced intelligent network services, local number portability, wireless services, toll-free number database access and caller identification. H.O. Systems offers advanced billing and customer care services toonline businesses, large enterprises, government agencies and other organizations. We also sell enterprise PKI services that allow organizations to leverage our trusted data processing infrastructure to develop and deploy customized digital certificate services for use by employees, customers and business partners. We market our digital trust services worldwide through multiple distribution channels, including Internet Web sites, our direct sales force, telesales operations, value added resellers, service providers and member organizations in our global affiliate network. A portion of our digital trust services revenues to date have been generated through sales from our Web site, but we intend to continue increasing our direct sales force, both in the United States and abroad, and to continue to expand our other distribution channels. We have established strategic relationships to enable widespread utilization of our digital trust services and to assure interoperability with a wide variety of applications and network equipment. We are organized into two customer-focused lines of business: the Enterprise and Service Provider Division and thewireless carriers.Mass Markets
Division. The Enterprise and Service ProviderDivisiondelivers products and services to organizations that want to establish and deliver Internet-based and telecommunications-based services to customers in the business-to-consumer and business-to-business environments.The Mass Markets Division
delivers productsprovides the following types of Web-related services: Web presence services, Web trust services and payment services.Through our Web presence services,
to smallwe provide digital identity through domain name registration services andmedium size enterprises,value-added services, such as e-mail, Web site creation tools and other e-commerce enabling offerings. We register second-level domain names in the.com, .net, .org, .bizand .info generic top-level domains, as well as selected country code top-level domains, such as.uk and .tv, around the world, enabling individuals, companies and organizations to establish a unique identity on the Internet.Web trust services include our Web server digital certificate services, which enable merchants to implement and operate secure Web sites that utilize the Secure Sockets Layer, or SSL, or Wireless Transport Layer Security, or WTLS, protocols. These services provide merchants with the means to identify themselves to consumers
who wishand toestablish an online presence. 41encrypt communications between consumers and their Web site. Our payment services provide Internet merchants with the ability to securely and digitally authorize, capture and settle a variety of payment types using our Internet payment gateway.
Acquisitions
In February 2002, we completed our acquisition of H.O. Systems, Inc., a provider of billing and customer care solutions to wireless carriers. We paid approximately $350 million in cash for all of the outstanding stock of H.O. Systems. The total purchase price
will bewas allocated to the tangible and intangible assets acquired and the liabilities assumed based on their respective fair values on the acquisition date. H.O.System'sSystem’s results of operationswill bewere included in the consolidated financial statements from its date of acquisition.In December 2001, we completed our acquisition of Illuminet Holdings, Inc., a provider of intelligent network and signaling services to telecommunications carriers. We issued approximately 30.6 million shares of our common stock for all of the outstanding shares of Illuminet Holdings and we also assumed all of
Illuminet'sIlluminet Holdings’ outstanding stock options. The acquisition has been accounted for as a purchase and, accordingly, the total purchase price of approximately $1.4 billionhas been preliminarilywas allocated to the tangible and intangible assets acquired and the liabilities assumed based on their respective fair values on the acquisition date.Illuminet'sAs a result of our acquisition of Illuminet Holdings, we recorded goodwill of approximately $1.0 billion and other intangible assets of approximately $281 million. Illuminet Holdings’ results of operations have been included in the consolidated financial statements from its date of acquisition.As a result of our acquisition of Illuminet, we recorded goodwill of approximately $1.0 billion and other intangible assets of approximately $281 million. The other intangible assets will be amortized over a four year period. In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," goodwill related to this acquisition will not be amortized but will be tested for impairment at least annually.In addition, during 2001, we completed acquisitions of eleven privately held companies or acquired certain assets of privately held companies, which were not significant, either individually or in the aggregate. We issued approximately 939,000 shares of our common stock and paid approximately $151 million in cash in exchange for all of the outstanding shares of these companies. We also assumed certain of the
companies'companies’ outstanding stock options. Each of these transactions has been accounted for as a purchase and, accordingly, the results of the acquiredcompanies'companies’ operations are included in our consolidated financial statements from their respective dates of acquisition. As a result of these acquisitions, we recorded goodwill of approximately $252 million and unearned compensation of approximately $19 million.The unearned compensation will be amortized over the remaining vesting period for stock options assumed. In accordance with the provisions SFAS No. 142, goodwill related to acquisitions that were completed after June 30, 2001 will not be amortized but will be tested for impairment at least annually. Goodwill related to acquisitions that were completed prior to July 1, 2001 will be amortized based on a three-year life until December 31, 2001 at which time amortization will cease and the remaining goodwill balance will be subject to testing for impairment at least annually.During 2000, we completed our acquisitions of THAWTE Consulting (Pty) Ltd and Signio, Inc. in February and our acquisition of Network Solutions, Inc. in June. In addition, we completed acquisitions of several other privately held companies, which were not significant, either individually or in the aggregate. Each of these transactions has been accounted for as a purchase and, accordingly, the results of the acquired
companies'companies’ operations are included in our consolidated financial statements from their respective dates of acquisition.Critical accounting policies and significant management estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management
42to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, allowance for doubtful accounts, investments and long-lived assets. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying valuevalues of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions.We believe the following critical accounting policies affect our more significant judgments and estimates used in preparing our consolidated financial statements.
Revenue recognition
We derive revenues from three primary
categories: Web presence and trustcategories of services: (i) security services, which includedomain name registrationmanaged security and network services, Web trust services and paymentservices; managed security and network services, which include enterprise and affiliate PKIservices, andenterprise consultingregistry services;and registry and(ii) telecommunications services, which include
registry services,connectivity, intelligent networks, wireless and clearinghouse services; and (iii) domain name registration services. The revenue recognition policy for each of theseareascategories is as follows:Domain Name Registration Services
Domain name registration revenues consist primarily of registration fees charged to customers and registrars for domain name registration services. Revenues from the
saleinitial registration or renewal of domain name registration services are deferred and recognized ratably over the registration term, generally one to two years and up to ten years.Domain name registration renewal fees are estimated and recorded based on
recentrenewal and collection rates. Customers are notified of the expiration of their registration in advance, and we record the receivables for estimated renewal fees in the month preceding the anniversary date of their registration when we have a right to bill under the terms of our domain name registration agreements. The variance between the actual collections and the rate used to estimate the renewal fees is reflected in the setting of renewal rates for prospectiverenewal rates.periods. Fees for renewals and advance extensions to the existing term are deferred until the new incremental period commences. These fees are then recognized ratably over the new registration term, ranging from one to ten years.Security Services and Registry Services
Revenues from the licensing of digital certificate technology and business process technology are derived from arrangements involving multiple elements including post-contract customer support, or PCS, training and other services. These licenses, which do not provide for right of return, are primarily perpetual licenses for which revenues are recognized
up frontup-front once all criteria for revenue recognition have been met.Revenues from the sale or renewal of digital certificates are deferred and recognized ratably over the life of the digital certificate, generally 12 months. Revenues from the sale of
OnSitemanaged PKI services are deferred and recognized ratably over the term of the license, generally 12 to 36 months.MaintenancePCS is bundled withOnSitemanaged PKI services licenses and recognized over the license term.We recognize revenues from issuances of digital certificates and business process licensing to VeriSign Affiliates in accordance with SOP 97-2,
"Software“Software Revenue Recognition,"” as amended by SOP 98-9, and generally recognize revenues when all of the following criteria aremet as set forth in paragraph 8 of SOP 97-2:met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred,43(3) the fee is fixed or determinable and (4) collectibility is probable. We define each of these four criteria as follows: Persuasive evidence of an arrangement exists. It is our customary practice to have a written contract, which is signed by both the customer and us, or a purchase order from those customers who have previously negotiated a standard license arrangement with us.
Delivery has occurred. Our software may be either physically or electronically delivered to the customer. Electronic delivery is deemed to have occurred upon download by the customer from an FTP server. If an arrangement includes undelivered products or services that are essential to the functionality of the delivered product, delivery is not considered to have occurred until these products or services are delivered.
The fee is fixed or determinable. It is our policy to not provide customers the right to a refund of any portion of its license fees paid. We may agree to
extendedpayment terms with a foreign customer based on local customs. Generally, at least 80% of the arrangement fees are due within one year or less. Arrangements with payment terms extending beyond these customary payment terms are considered not to be fixed or determinable, and revenues from such arrangements are recognized as payments become due and payable.Collectibility is probable. Collectibility is assessed on a customer-by-customer basis. We typically sell to customers for whom there is a history of successful collection. New customers are subjected to a credit review process that evaluates the
customers'customer’s financial position and ultimately their ability to pay.If we determine from the outset of an arrangement that collectibility is not probable based upon our credit review process, revenues are recognized as cash is collected.
We allocate revenues on software arrangements involving multiple elements to each element based on the relative fair
valuesvalue of each element. Our determination of fair value of each element in multiple element arrangements is based on vendor-specific objective evidence of fair value, or VSOE. We limit our assessment of VSOE for each element to the price charged when the same element is sold separately. We have analyzed all of the elements included in our multiple-element arrangements and determined that we have sufficient VSOE to allocate revenues tomaintenance and support service,PCS, professional services and training components of our perpetual license arrangements. We sell our professional services and training separately, and have established VSOE on this basis. VSOE formaintenance and supportPCS is determined based upon thecustomer'scustomer’s annual renewal rates for these elements. Accordingly, assuming all other revenue recognition criteria are met, revenues from perpetual licenses are recognized upon delivery using the residual method in accordance with SOP 98-9.We recognize revenues from licenses in which maintenance is bundled with the software license, such as for digital certificates, digital certificate provisioning and OnSite managed services ratably over the license term of one to three years.Our consulting services generally are not essential to the functionality of the software. Our software products are fully functional upon delivery
and implementationand do not require any significant modification or alteration. Customers purchase these consulting services to facilitate the adoption of our technology and dedicate personnel to participate in the services being performed, but they may also decide to use their own resources or appoint other consulting service organizations to provide these services. Software products are billed separately and independently from consulting services, which are generally billed on a time-and-materials or milestone-achieved basis.We generally recognize revenues from consulting services as the services are performed.Revenues from consulting
and trainingservices are recognized using either the percentage-of-completion method or on a time-and-materials basis as work is performed. Percentage-of-completion is based upon the ratio of hours incurred to total hours estimated to be incurred forfixed-fee development arrangements orthe project. We have a history of accurately estimating project status and the hours required to complete projects. If different conditions were to prevail such that accurate estimates could not be made, then the use of the completed contract method would be required and all revenue and costs would be deferred until the project was completed. Revenues from training are recognized asthe services are provided for time-and-materials 44arrangements.training is performed.Revenues from third-party product sales are recognized when title to the products sold passes to the customer. Our shipping terms generally dictate that the passage of title occurs upon shipment of the products to the customer.
Revenues from payment services primarily consist of a set-up fee and a monthly service fee for the transaction processing services. In accordance with SEC Staff Accounting Bulletin
("SAB"(“SAB”) No. 101,"Revenue“Revenue Recognition in Financial Statements,"” revenues fromtheset-upfeefees are deferred and recognized ratably over the period that the fees are earned. Revenues from the service fees are recognized ratably over the periods in which the services are provided. Advance customer deposits received are deferred and allocated ratably to revenue over the periods the services are provided.Telecommunications Services
Revenues from telecommunications services are comprised of network connectivity revenues and intelligent network services
revenues.revenues, and wireless billing and customer care services. Network connectivity revenues are derived from establishing and maintaining connection to our SS7 network and trunk signaling services. Revenues from network connectivity consist primarily of monthly recurring fees, and trunk signaling service revenues are charged monthly based on the number of switches to which a customer signals. The initial connection fee and related costs are deferred and recognized over the term of the arrangement. Intelligent network services, which include calling card validation, local number portability, wireless services, toll-free database access and caller identification are derived primarily from database administration and database query services and are charged on a per-use or per-query basis.PrepaidRevenues from prepaid wireless account management services and unregistered wireless roaming services are based on the revenuewe retainretained by us and recognized in the period in whichwe processsuchcalls are processed on a per-minute or per-call basis. Revenues from wireless billing and customer care services primarily represent a monthly recurring fee for every subscriber activated by our wireless carrier customers.
Clearinghouse services revenues are derived primarily from serving as a distribution and collection point for billing information and payment collection for services provided by one carrier to customers billed by another. Clearinghouse revenues are earned based on the number of messages processed. Included in prepaid expenses and other current assets are amounts from customers that are related to our telecommunications services for third-party network access, data base charges and clearinghouse toll amounts that have been invoiced and remitted to the customer.
Reciprocal Arrangements
On occasion, we have purchased goods or services for our operations from organizations
such as IBM, Oracle, Phoenix Technologies and Infospaceat or about the same time that we licensed our software to these organizations. These transactions are recorded at terms we consider to be fair value. For these reciprocal arrangements, we consider Accounting Principles Board("ABP"(“APB”) Opinion No. 29,"Accounting“Accounting for Nonmonetary Transactions,"” and Emerging Issues Task Force("EITF"(“EITF”) Issue No. 01-02,"Interpretation“Interpretation of APB Opinion No. 29,"” to determine whether the arrangement is a monetary or nonmonetary transaction. Transactions involving the exchange of boot representing 25% or greater of the fair value of the reciprocal arrangement are considered monetary transactions within the context of APB Opinion No. 29 and EITF Issue No. 01-02. Monetary transactions and nonmonetary transactions that represent the culmination of an earnings process are recorded at the fair value of the products delivered or products or services received, whichever is more readily determinable,providing theprovided that fair values are determinable within reasonable limits. In determiningthefairvalues,value, we consider the recent history of cash sales of the same products or services in similar sized transactions. Revenues from such transactions may be recognized over a period of time as the products or services are received. For nonmonetary reciprocal arrangements that do not represent the culmination of the earnings process, the exchange is recorded based on the carrying value of the products delivered, which is generally zero.In 2002, we recognized revenues under reciprocal arrangements of approximately $14.0 million, of which $9.7 million involved nonmonetary transactions, as defined above. In 2001, we recognized revenues under reciprocal arrangements of approximately $37.5 million, of which $27.0 million involved nonmonetary transactions, as defined above. We did not recognize any revenues under reciprocal arrangements
as defined abovein2000 and 1999. 452000. Allowance for doubtful accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We regularly review the adequacy of our accounts receivable allowance after considering the size of the accounts receivable balance, each
customer'scustomer’s expected ability to pay and our collection history with each customer. We review significant invoices that are past due to determine if an allowance is appropriate based on the risk category using the factors described above. In addition, we maintain a general reserve for all invoices by applying a percentage based on the age category. We also monitor our accounts receivable forany build up ofconcentration to any one customer, industry or geographic region. To date our receivables have not had any particular concentrations that, if not collected, would have a significant impact on our operating income. We require all acquired companies to adopt our credit policies. The allowance for doubtful accounts represents our best estimate, but changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future.Investments
We invest in debt and equity securities of technology companies for business and strategic purposes. Some of these companies are publicly traded and have highly volatile share prices. However, in most instances, these investments are in the form of equity and debt securities of private companies for which there is no public market. These companies are typically in the early stage of development and
may beare expected to incur substantiallosses.losses in the near-term. Therefore, these companies may never become publicly
traded companies.traded. Even if they do, an active trading market for their securities may never develop and we may never realize any return on these investments. Further, if these companies are not successful, we could incur charges related to write-downs or write-offs of thesetypes of assets.investments.We review our marketable equity holdings in
publicly-tradedpublicly traded companies on a regular basis to determine if any security has experienced an other-than-temporary decline in fair value. We consider the investeecompany'scompany’s cash position, earnings and revenue outlook, stock price performance over thepastpreceding six months, liquidity andmanagementchanges in management’s ownership, among other factors, in our review. If we determine that another-than-temporaryother-than temporary decline exists in a marketable equity security that is classified as available-for-sale, wewrite down the investment to its market value andrecordthe related write-down asan investment loss in our consolidatedstatementsstatement of operations. For non-public companies, weregularlyreview, on a quarterly basis, the assumptions underlying the operating performance and cash flow forecasts based on information requested from these privately heldcompanies. Generally, thiscompanies on at least a quarterly basis. This information may be more limited, may not be as timely and may be less accurate than information available from publicly traded companies. Assessing eachinvestment'sinvestment’s carrying value requires significant judgment by management. Generally, if cash balances are insufficient to sustain a company’s operations for a six-month period, we consider the decline in it’s fair value to be other-than-temporary. If we determine that an other-than-temporary decline in fair value exists in a non-public equity security, wewrite downwrite-down the investment to its fair value and record the related write-down as an investment loss in our consolidatedstatementsstatement of operations.Generally, if cash balances are insufficient to sustain the company's operations for a six-month period, we consider the decline in fair value to be other than temporary.During 2002 and 2001, we determined that the decline in value of certain of our public and non-public equity investments was
other than temporaryother-than-temporary and recordeda write-downwrite-downs of these investments totaling $170.9 million and $89.1million. Long-livedmillion, respectively. During 2000 we recorded no investment write-downs.Valuation of long-lived intangible assets including goodwill
Our long-lived assets consist primarily of goodwill,
andother intangible assets and property and equipment. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such an asset may not be recoverable. Such events or circumstances46include, but are not limited to, a significant decrease in the fair value of the underlying business or asset, a significant decrease in the benefits realized from the acquired business, difficulty and delays in integrating the business or a significant change in the operations of the acquired business.business or use of an asset.Goodwill and other intangible assets, net of accumulated amortization, totaled $1.1 billion as of December 31, 2002, which was comprised of $667.3 million of goodwill, including workforce in place, and $462.3 million of other intangibles assets. Other intangible assets include ISP hosting relationships, customer relationships, technology in place, non-compete agreements, trade names, and contracts with ICANN and customer lists. Factors we consider important which could trigger an impairment review include, but are not limited to, significant under-performance relative to expected historical or projected future operating results, significant changes in the manner of our use of our acquired assets or the strategy for our overall business or significant negative economic trends. If this evaluation indicates that the value of an intangible asset may be impaired, an assessment of the recoverability of the net carrying value of the asset over its remaining useful life is made. If this assessment indicates that an intangible asset is not recoverable, based on the estimated undiscounted future cash flows or other comparable market valuations, of the entity or technology acquired over the remaining amortization period, the net carrying value of the related intangible asset will be reduced to fair value and the remaining amortization period may be adjusted. Any such impairment charge could be significant and could have a material adverse effect on our reported financial statements. Based on these measurements, we recorded an impairment charge of approximately $4.6 billion during 2002.
Recoverability of long-lived assets other than goodwill is measured by comparison of the carrying amount of an asset to estimated
futureundiscountednetcash flowsthe assets areexpected togenerate. Those cash flows include an estimated terminal value based on a hypothetical sale of an acquisition atbe generated by theend of its goodwill amortization period. Estimating these cash flows and terminal values requires management to make judgments about the growth in demand for our services, sustainability of gross margins, our ability to integrate acquired companies and achieve economies of scale, and valuation multiples required by investors or buyers. Changes in these estimates could require us to further write downasset. If the carrying amount ofour long-lived assets. If assets are considered to be impaired, thean asset exceeds its estimated future cash flows, an impairmentto becharge is recognizedis measuredby the amount by which the carrying amount of thelong-livedasset exceeds its fair value.Effective January 1, 2002, we will assessWe review, at least annually, goodwill resulting from purchase business combinations for impairment
of goodwillin accordance withthe provisions of SFAS No. 142. The provisions ofSFAS No. 142,require“Goodwill and Other Intangible Assets.” We review long-lived assets, including certain identifiable intangibles, for impairment whenever events or changes in circumstances indicate thata two-step testwe will not beperformed. First,able to recover thefair valueasset’s carrying amount in accordance with SFAS No. 144,“Accounting for the Impairment or Disposal ofeach of our reporting units will be compared to its carrying value. If the fair value exceeds the carrying value, goodwill is not impaired and no further testing is performed. If the carrying value exceeds the fair value, then the implied fair value of the reporting unit's goodwill must be determined and compared to the carrying value of the goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then an impairment loss equal to the difference will be recorded.Long-Lived Assets.”Results of Operations
We have experienced substantial net losses in the past
substantiallydue primarily to the charges we have incurred for the amortization andwrite downwrite-down of acquired goodwill and other intangible assets related to our acquisitions. As of December 31,2001,2002, we had an accumulated deficit of approximately$16.5$21.5 billion, primarily due to the amortization and write-down of goodwill and other intangible assets of approximately$16.8$21.7 billion related to our acquisitions. In accordance with the provisions of SFAS No. 142, goodwillwillis no longerbeamortized to earningscommencing January 1, 2002. Instead goodwill will be reviewed for impairmentas of January 1,2002 and annually thereafter, or more often if circumstances indicate that an impairment may have occurred.2002. Amortization of other intangible assets is expected to be approximately$84$189 millionper quarterin2002,2003, including the impact of all acquisitions through December 31,2001, excluding the impact of H.O. Systems2002, and assuming no other future acquisitions or impairment charges.We accounted for all of our acquisitions in
20002002, 2001 and20012000 as purchase business combinations. Accordingly, the acquiredcompanies'companies’ revenues, costs and expenses have been included in our results of operations beginning with their dates of acquisition. As a result of our acquisitions ofTHAWTE and SignioH.O. Systems in February2000,2002, Illuminet Holdings in December 2001, Network Solutions in June 2000, andIlluminetTHAWTE and Signio inDecember 2001,February 2000, comparisons of revenues, costs and expenses for the year ended December 31,20012002 to the years ended December 31,20002001, and19992000 may not be relevant, as the businessesofrepresented in thecombined companyconsolidated financial statements were not equivalent.47Revenues
Beginning in the first quarter of 2003, VeriSign realigned its business segments. The new service-based business segments consist of the Internet Services Group, the Telecommunication Services Group and Network Solutions. The management’s discussion and analysis that follows is based on our previous structure that was in effect throughout 2002, 2001 and 2000. For more information on both our previous structure and our new service-based business segments, please refer to Note 13 of our Notes to Consolidated Financial Statements.
A comparison of revenues for the years ended December 31, 2002, 2001
2000and19992000 is presented below.
2001 Change 2000 Change 1999 -------- ------ -------- ------ ------- (Dollars in thousands)Web presence and trust services.............. $555,061 96% $282,634 * -------- -------- Subtotal--Mass Market Division............. 555,061 282,634 -------- -------- Managed security and network services........ 298,000 101% 147,984 * Registry and telecommunications services..... 130,503 196% 44,148 * -------- -------- Subtotal--Enterprise and Service Provider Division.................................. 428,503 192,132 -------- -------- Total revenues............................... $983,564 107% $474,766 460% $84,776 ======== ======== =======- -------- * In 1999,
2002
Change
2001
Change
2000
(Dollars in thousands)
Managed security and network services
$
287,615
(3
)%
$
298,000
101
%
$
147,984
Registry and telecommunications services
521,940
300
%
130,503
196
%
44,148
Subtotal—Enterprise and Service Provider Division
809,555
89
%
428,503
123
%
192,132
Web presence and trust services
412,113
(26
)%
555,061
96
%
282,634
Subtotal—Mass Markets Division
412,113
(26
)%
555,061
96
%
282,634
Total revenues
$
1,221,668
24
%
$
983,564
107
%
$
474,766
Total revenues increased 24% in 2002 compared to 2001, consisting of an increase in Enterprise and Service Provider Division revenues of 89% partially offset by a decrease in Mass Markets Division revenues of 26%. The increase in revenues for our Enterprise and Service Provider Division was primarily due to our telecommunications services acquisitions of Illuminet Holdings in December 2001, and H.O. Systems in February 2002. Additionally, we
derived all ofexperienced a modest increase in our Registry Services revenues. Revenues for our Mass Markets Division, which included revenues from ourEnterprise ServicesWeb presence and trust services businesses, decreased 26% primarily due to a decline in the amount of deferred revenue recognized in 2002 from prior yearsales compared with the amount of such deferred revenue from prior year sales recognized in 2001 revenue. A decrease in the number of new names and the non-renewal of names paid for, contributed to this decline in deferred revenue in 2002 as compared to 2001. There were fewer domain names under
one reportable segment.management by Network Solutions at December 31, 2002, as compared to December 31, 2001, mainly due to the deletion of names that had never been paid for, or the term of which had expired in years prior to 2002, but which had not been deleted in those prior years. Many of these were non-revenue generating names.Revenues increased significantly in 2001 from 2000 for
bothour Enterprise and Service Provider Division and our Mass Markets Division. The increases were primarily due to the acquisition of Network Solutions in June2000.2000 whose registry services revenues and Web presence revenues are attributable to our Enterprise and Service Provider Division and our Mass Markets Division, respectively. Sales of authentication services, particularly Web site digital certificates and enterprise and affiliate PKI services, alsoincreased.increased in 2001 as compared to 2000. In addition, we expanded the VeriSign Trust Network of worldwide affiliates in 2001 and saw increased demand for our training and consultingservices. The increaseservices during 2001 as compared to 2000.We derived 2.2% in
revenues2002, 6.5% in 2001 and 2.8% in 2000from 1999 is primarily due to the acquisitions of THAWTE, Signio and Network Solutions. In addition, we increased salesof ourauthenticationtotal revenues from customers with whom we have participated in a private equity round of financing, including several of the VeriSign Affiliates as well as various technology companies in a variety of related market areas. Typically in these relationships, we sell our products and servicesparticularlyto a company and, under a separate agreement, participate with other investors in a private equity round financing of the company. We typically make ourWeb site digital certificatesinvestments with others where our investment is less than 50% of the total financing round. Our policy is not to recognize revenue in excess of other investors’ financing of the company. These arrangements are independent relationships andenterpriseare not terminable unless the terms of the agreements are violated.In 2002 and
affiliate PKI services, expanded our international affiliate network and delivered more training and consulting services. In2001, we derived 1.1% and 3.8% of our total revenues from reciprocalarrangements.arrangements, respectively. We derived no revenues from customers from reciprocal arrangements in2000 and 1999.2000. Typically in these relationships, under separate agreements, we sell our products and services to a company and that company sells to us their products and services. We enter into these arrangements for strategic business purposes and the goods and services we receive in exchange are those we would have purchased in non-reciprocal arrangements. These arrangements are independent relationships and are not terminable unless the terms of the agreements are violated.We derived 6.5% in 2001, 2.8% in 2000 and 1.1% in 1999 of our total revenues from customers with whom we have participated in a private equity round of financing, including several of the VeriSign Affiliates as well as various technology companies in a variety of related market areas. Typically in these relationships, under separate agreements, we sell our products and services to a company and, under a separate agreement, participate with other investors in a private equity round financing of the company. We typically make our investments with others where our investment is less than 50% of the total financing round. Our policy is not to recognize revenue in excess of other investors' financing of the company. These arrangements are independent relationships and are not terminable unless the terms of the agreements are violated.Enterprise and Service Provider Division
Enterprise and Service Provider Division revenues from external customers were $809.6 million in 2002, $428.5 million in 2001 and $192.1 million in
20002000. In 2002, revenues from our managed security and$84.8network services product line decreased approximately $10.4 million, to $287.6 million from $298.0 million in1999. 482001. The decrease in revenues was related to a decrease in international affiliate revenues partially offset by an increase in revenues related to prior year acquisitions and from an increase in consulting services revenues which included the resale of third-party products. We expect revenues from our managed security and networks services, which will be included in our Internet Services Group in future periods, to decrease in 2003 due to our recent decision to significantly reduce the resale of third-party products. Third-party software and hardware sales are generally made at lower margins than our other enterprise and mass market sales. In 2001, revenues from the managed security and network services product line increased approximately
$150$150.0 million, to$298$298.0 millionin 2001from$148$148.0 million in 2000. The revenue increase was primarily due to increases inOnSitemanaged PKI services sold, software licenses sold tothe13 new affiliate service providers, an increase in royalties earned from existing affiliates and an overall increase in the volume of consulting services that included the resale ofthird partythird-party products.Third party softwareIn 2002, revenues from registry and
hardware sales are generally made at lower margins thantelecommunications services increased approximately $391.4 million, to $521.9 million from $130.5 million in 2001. This increase reflects the inclusion of a full year of telecommunications services revenues in 2002 relating to ourother enterpriseacquisition of Illuminet Holdings in December 2001, andmass market sales.over ten months of revenues relating to our acquisition of H.O. Systems in February 2002. The acquisition of Illuminet Holdings and H.O. Systems resulted in a net increase in telecommunications services revenues of approximately $374.1 million in 2002. In addition, revenues from our registry services increased modestly. Our Registry Services business unit processed the renewal, extension or transfer of 10.5 million domain names during 2002, bringing the total number of paid domain name transactions during 2002 to 25.1 million, an increase of approximately 3.1 million over 2001. At December 31, 2002, our Registry Services business managed approximately 28.3 million domain names.In 2001, revenues from registry and telecommunications services increased approximately
$86$86.4 million, to$131$130.5 millionin 2001from$44$44.1 million in 2000. This increasewas primarily driven byreflects the inclusion of a full year of Registry services revenue compared to approximately seven months in 2000, as a result of the acquisition of Network Solutions in June 2000. Revenues related to outsourced managed registry services also increased.The VeriSign GlobalOur Registry Servicesgroupbusiness unit managed approximately 28.8 million domain names at December 31, 2001in the active zone filefor all domain names ending in .com, .net and.org. The Global.org. Our Registry Servicesgroupbusiness unit also processed the renewal, extension or transfer of 8.9 million domain names during 2001, bringing the total number of paid domain name transactions during 2001 to 22.0 million.Mass
MarketMarkets DivisionMass
MarketMarkets Division revenuesfrom external customerswere $412.1 million in 2002, $555.1 million in 2001, and $282.6 million in20002000. In 2002, the decrease in revenues of $143.0 million was primarily due to the decrease in the amount of deferred revenue recognized in 2002 from prior year sales compared to the amount of such deferred revenue from prior year sales recognized in 2001 revenue. A decrease in the number of new names andzerothe non-renewal of names paid for, contributed to this decline in1999.deferred revenue. This decline in revenue was also partially offset by an increase in revenues from the sales of Web site digital certificates and revenues related to payment services. At December 31, 2002, Network Solutions had a total of approximately 9.3 million domain names under management compared to approximately 13.6 million domain names at December 31, 2001.In 2001, the increase in revenues in the Mass
MarketMarkets Division was primarily due to the inclusion of a full year of revenues from WebPresence Servicespresence services compared to approximately seven months in 2000 as a result of the acquisition of Network Solutions in June 2000.During 2001, we added approximately 4.1 million new domain names and renewed or extended an additional 4.9 million domain names bringing the total active domain names under management by the Registrar to approximately 13.6 million at December 31, 2001, which does not include approximately 1.7 million domain names past their anniversary dates that have been deactivated from the zone files but not yet deleted from the Web presence services WHOIS database.In 2000, the demand for new domain name registrations in our Web presence business increased substantially, as a result of, but not limited to, the so-called “Internet bubble,” our promotional programs which included free names, and from registrations by entities who registered domain names with the hopes of reselling them.
ManyMost ofthosethe unpaid for, promotional andspeculator domainspeculative nameshavewere notbeenrenewed and havealreadybeendeactivateddeleted from theactiveRegistry zone filemaintained by the VeriSign Global Registry. In addition, due to the competitive marketindomain2002. Many of these were not revenue generating nameswe have experienced moderate price declinesor products insales prices for domain names. We expect that this situation will continue.2002.Our Mass Markets Division and our Enterprise and Service Provider Division issued approximately
366,000391,000 new and renewed Web site digital certificates in20012002 compared to 366,000 in 2001 and 274,000 in2000 and 112,000 in 1999.2000. The total installed basewas over 366,000 certificates at December 31, 2001. In particular, the Mass Markets Division Web site certificate base increased by 50,000 installed certificates in 2001 to a total of 260,000 certificates at December 31, 2001. The increase in salesof Web site digital certificatesin 2001 contributed approximately $25 millionwas over 392,000 at December 31, 2002, compared tothe increase in revenues.366,000 at December 31, 2001. In addition, due to increased competition in the Web trust services market, we have experienced moderate pricing pressure for our services. We expect that this pricing pressure willcontinue. 49continue in 2003. International revenues
Revenues from international subsidiaries and VeriSign Affiliates accounted for
13%9% of total revenues in 2002, 13% in 2001 and 14% in20002000. The percentage decrease in revenues from international subsidiaries and27%VeriSign Affiliates in1999.2002 compared to 2001 was primarily due to the acquisitions of Illuminet Holdings in December 2001 and H.O. Systems in February 2002 whose revenues are derived principally from customers located in the United States. Additionally, a decline in the number of new licensing agreements and royalty payments received from VeriSign Affiliates has resulted in a decrease in international revenues in 2002 of approximately $43 million partially offset by increases in revenues from international subsidiaries of approximately $20 million. In 2003, VeriSign is transitioning its international strategy in some countries by moving from a distribution model through the VeriSign Affiliates to a direct distribution model through its international subsidiaries. As a result, in 2003 we expect international revenues to increase modestly even though revenues from VeriSign Affiliates will likely decline.The percentage decrease in revenues from international subsidiaries and VeriSign Affiliates in 2001 compared to 2000
and 1999was primarily related to the acquisition in June 2000 of Network Solutions, whose revenues are primarily attributable to U.S. sources. This was partially offset by additional revenues from international subsidiaries and VeriSign Affiliates in 2001 related to an increase in the number of VeriSign Affiliates in the VeriSign Trust Network combined with other activities to expand our presence in foreign markets.In 1998, we beganUnder our international affiliate program
under whichwesignedsign agreements with local telecommunications companies, financial institutions and others to promote, sell and distribute our PKI services in international markets around the world. These VeriSign Affiliates typically require significant capital development, the cost of which is borne by the affiliate. Our strategy from time to time also includes investing in certain affiliates in strategic markets that represent advantageous economic opportunities for a minorityinterestinvestment of less than 20%. As a result, wehaveinvested in several international affiliates in20012002 and prior years. Revenues from VeriSign Affiliates in which we haveinvesteda minority investment of less than 20% accounted for4.5%1.5% of total revenues in 2002, 4.5% in 2001 and 1.5% in2000 and 1.1% in 1999.2000.Costs and Expenses
Cost of revenues
Cost of revenues consists primarily of costs related to providing digital certificate enrollment and issuance services, payment services, operational costs for the domain name registration
services,business, customer support and training, consulting and development services, carrier costs for our SS7 and IP-based networks and costs of facilities and computer equipment used in these activities. In addition, with respect to our digital certificate services, cost of revenues also includes fees paid to third parties to verify certificateapplicants'applicants’ identities, insurance premiums for our service warranty plan, errors and omission insurance and the cost of software and hardware resold to customers.A comparison of cost of revenues for the years ended December 31, 2002, 2001
2000and19992000 is presented below.
2001 Change 2000 Change 1999 -------- ------ -------- ------ ------- (Dollars in thousands)Cost of revenues................................. $343,721 111% $163,049 411% $31,898 Percentage of revenues........................... 35% 34% 38%
2002
Change
2001
Change
2000
(Dollars in thousands)
Cost of revenues
$
571,367
66
%
$
343,721
111
%
$
163,049
Percentage of revenues
47
%
35
%
34
%
Growth of revenues was the primary factor in the increase of cost of revenues on an absolute dollar basis in 2002 as compared to 2001 and in 2001
from 2000as compared to 2000. We acquired Illuminet Holdings in December 2001 and H.O. Systems in2000 from 1999. We hired more employees to support the growthFebruary 2002, which added significant cost ofdemand for our products and services and to support the growth of our consulting and training services.revenues during 2002. We incurred increased expenses for access to third-party databases to verify digital certificateapplicants'applicants’ identities, increased customer service costs related to our larger customer base and increased expenses related to the cost of hardware and software products resold to customers as part of our consulting business.We anticipate thatRegistry fees, third-party fees, other direct costs, and labor are our largest expense categories for cost ofrevenues will continue to increase in absolute dollars as a resultrevenues. The acquisition ofcontinued growth in all of our lines of business. Our acquisitions of THAWTE, Signio and Network Solutions haveIlluminet Holdings resulted in an increase in labor expenses of $35.4 million in 2002 and an increase of $124.5 million for third-party fees and other direct costs. Additionally, depreciation expenses in cost of revenues increased due to the Illuminet acquisition by $31.3 million in 2002 compared to 2001. While overall our cost of revenuesincreased, we reduced outside consulting costs by $10.4 million in 2002 from 2001 due to a company-wide cost reduction effort. Our acquisition of Network Solutions in June of 2000 increased our cost of revenues
since their acquisitionsin 2001 as compared to 2000 due to the inclusion of a full year of operating activity in 2001 compared to less than seven months in 2000.Our recent acquisitions of Illuminet in December 2001 and H.O. Systems in February 2002 will further increase the dollar amount of our cost of revenues.Future50acquisitions, further expansion into international markets and introduction of new products willmay result in additional increases in cost of revenues, due to the hiring of additional personnel and related expenses and other factors.Cost of revenues as a percentage of revenues increased significantly during 2002 compared to 2001 due to the inclusion of a full year of activity from our Illuminet Holdings acquisition and due to over 10 months of activity from our H.O. Systems acquisition. Our telecommunications services businesses have different cost structures than our other businesses resulting in an increase in cost of revenues as a percentage of revenues since their acquisitions. Cost of revenues as a percentage of revenues increased slightly in 2001 from 2000, primarily due to the cost structure of the Network Solutions product mix and the increase in the volume of
third partythird-party hardware and software sales, which was partially offset by economies of scale associated with the growth in recurring revenues from existing customers.The decrease in 2000 from 1999 was primarily a result of the continued realization of economies of scale from our technology infrastructure and the efficiency gains in the certificate enrollment and issuance process.Certain of our services, such as consulting and training, require greater initial personnel involvement and therefore have higher costs than other types of services. In addition, revenues derived from our authentication services, domain name registration services, registry services, payment services, and our telecommunications services
as a result of our recent acquisition of Illumineteach have different coststructures. As a result, westructures and our overall cost of revenues may fluctuate as these businesses mature. We anticipate that our overall cost of revenues as a percentage of revenues willincreasedecrease modestly in 2003 due to our recent decision to significantly reduce thenear term.resale of third-party products.Sales and marketing
Sales and marketing expenses consist primarily of costs related to sales and marketing, and policy activities. These expenses include salaries, sales commissions, sales operations and other personnel-related expenses, travel and related expenses, trade shows, costs of lead generation, costs of computer and communications equipment and support services, facilities costs, consulting fees and costs of marketing programs, such as Internet, television, radio, print, and
print advertising.direct mail advertising costs.A comparison of sales and marketing expenses for the years ended December 31, 2002, 2001
2000and19992000 is presented below.
2001 Change 2000 Change 1999 -------- ------ -------- ------ ------- (Dollars in thousands)Sales and marketing.................... $259,585 55% $167,148 390% $34,145 Percentage of revenues................. 26% 35% 40%
2002
Change
2001
Change
2000
(Dollars in thousands)
Sales and marketing
$
248,170
(4
)%
$
259,585
55
%
$
167,148
Percentage of revenues
20
%
26
%
35
%
Sales and marketing expenses decreased on an absolute dollar basis and as a percentage of revenues in 2002 from 2001 primarily due to a substantial reduction in expenditures for advertising and related promotional activities, particularly with respect to Network Solutions, and from a decrease in allocated lease expenses. Advertising and related promotional expenditures declined by over $44.7 million due to a heightened effort to control spending in conjunction with our restructuring program announced in April 2002. In an effort to decrease the use of external vendors for sales and marketing efforts, we have increased our internal labor expenses during 2002. This increase partially offsets the savings noted above. The decrease in allocated lease expenses is a result of our purchase of our headquarters complex in Mountain View, California in October of 2001. On an absolute dollar basis, our acquisitions of Illuminet Holdings and H.O. Systems in December 2001 and February 2002, respectively, partially offset the decrease in spending for advertising and related promotional activities and allocated lease expenses during 2002. These acquisitions resulted in an additional $12.1 million of sales and marketing labor expenses for 2002 as compared to 2001. Additionally, we incurred increased depreciation expense during 2002 compared to 2001 due to the depreciation of our headquarters facility and other property and equipment expenditures during 2002.
The Network Solutions acquisition was the primary reason for the increase in sales and marketing expenses on an absolute dollar basis in 2001
from 2000 as well as in 2000as compared to1999.2000. The Mass Markets Divisionincursincurred expenses promoting the value of the.com, .netand.org..org. Web addresses as well as value-added services including Web site design tools and other enhanced service offerings. The remainder of the increase in both periods was driven by lead and demand generation activities in our enterprise and affiliate PKI businesses, expansion of our sales force and an increase in international sales expenses.The increase in 2000 from 1999 also reflectsOn a percentage of revenues basis, theeffectacquisition of Network Solutions, whose sales and marketingexpensescosts were comparatively less per revenue dollar than our other existing businesses combined, was the primary reason for the decrease in 2001 fromTHAWTE and Signio. While the absolute dollar spending increased for sales and marketing expenses, we continue2000.We have continued to realize a decline in sales and marketing expenses as a percentage of revenues over the three-year
period.period presented. This is primarily due to the increase in recurring revenues from existing customers, which tend to have lower retention costs and the increase in the productivity of our direct and inside sales forces. However, we cannot forecast that these sales and marketing expenses will continue to decline as a percentage ofrevenues. 51Werevenues and we expect sales and marketing expenses tocontinue toincrease modestly on an absolute dollar basis in the futureprimarily relateddue toan expandedour expectations to increase our direct sales forceexpanded marketingabroad, anddemand generation activities, development and enhancement of partner andto expand our other distributionchannels and promotional activities for Web presence products and services.channels.Research and development
Research and development expenses consist primarily of costs related to research and development personnel, including salaries and other personnel-related expenses, consulting fees and the costs of facilities, computer and communications equipment and support services used in service and technology development.
A comparison of research and development expenses for the years ended December 31, 2002, 2001
2000and19992000 is presented below.
2001 Change 2000 Change 1999 ------- ------ ------- ------ ------- (Dollars in thousands)Research and development $78,134 89% $41,256 210% $13,303 Percentage of revenues.. 8% 9% 16%
2002
Change
2001
Change
2000
(Dollars in thousands)
Research and development
$
48,353
(38
)%
$
78,134
89
%
$
41,256
Percentage of revenues
4
%
8
%
9
%
Research and development expenses decreased in 2002 from 2001 in absolute dollars and as a percentage of revenues. The absolute dollar decrease is related to a substantial decrease in allocated lease expenses resulting from our purchase of our headquarters complex in Mountain View, California in October 2001, and from benefits realized as a result of our restructuring program. Additionally, during 2001, we incurred overall higher expenses for the design, testing and deployment of our security service offerings as compared to 2002.
Research and development expenses increased in absolute dollars in 2001 from 2000
and in 2000 from 1999primarily due to the acquisition of Network Solutions in June 2000. Theincreases in both periods relateincrease relates to the development and enhancement of new registry products related to multilingual domain names and managed domain name system services. In addition, we continued to invest in the design, testing and deployment of, and technical support for our expanded digital trust service offerings and technology. We also expanded our engineering staff and incurred related costs required to support our continued emphasis on developing new products and services as well as enhancing existing products and services.Some of the new products and services developed during 2001 include our Entitlement Management Services, Authentication Service Bureau and Digital Trust Services platform.The decrease in research and development expenses as a percentage of revenues in 2001 from 2000
and in 2000 from 1999is largely due to the fact that revenues increased faster than research and development expenses in these periods.We expect research and development expenses as a percentage of revenues to decline in future periods.We believe that timely development of new and enhanced enterprise services, payment services, Web presence services and other technologies are necessary to maintain our position in the marketplace. Accordingly, we intend to continue to recruit experienced research and development personnel and to make other investments in research and development. As a result, we expect research and development expenses
will continueto increase modestly in absolutedollars.dollars and on a percentage of revenues basis in the future. To date, we have expensed all research and development expenditures as incurred.General and administrative
General and administrative expenses consist primarily of salaries and other personnel-related expenses for our executive, administrative, legal, finance and human resources personnel, facilities, and computer and communications equipment, management information systems, support services, professional services fees and bad debt expense.
52A comparison of general and administrative expenses for the years ended December 31, 2002, 2001
2000and19992000 is presented below.
2001 Change 2000 Change 1999 -------- ------ ------- ------ ------ (Dollars in thousands)General and administrative $143,297 136% $60,672 594% $8,740 Percentage of revenues.... 15% 13% 10%
2002
Change
2001
Change
2000
(Dollars in thousands)
General and administrative
$
172,123
20
%
$
143,297
136
%
$
60,672
Percentage of revenues
14
%
15
%
13
%
General and administrative expenses increased in 2002 from 2001 on an absolute dollar basis primarily due to our acquisitions of Illuminet Holdings and H.O. Systems in December 2001 and February 2002, respectively. These acquisitions resulted in a net increase in general and administrative expenses of $23.3 million during 2002, of which $9.0 million was labor expenses. In addition, bad debt expense increased to $42.7 million in 2002 compared to $26.9 million in 2001, primarily as a result of the continued deterioration in the overall economy. Legal expense increased by $3.2 million for 2002 and insurance costs increased $1.9 million primarily due to an increase in renewal premium rates in 2002 as compared to 2001. Depreciation expense increased modestly during 2002 resulting from the depreciation of our headquarters facility and other property and equipment expenditures during 2002. Increases in our general and administrative expenses were partially offset by decreases in lease expenses resulting from the purchase of our headquarters complex in Mountain View, California in October 2001, and the benefits realized from our restructuring program announced in April 2002. These benefits included reduction in general and administrative outside consulting expenses of $13.4 million and travel expenses of $2.1 million for 2002. The decrease in general and administrative expenses as a percentage of revenues in 2002 compared to 2001 is due to the fact that consolidated revenues increased at a faster rate than general and administrative expenses over the same periods as a result of our acquisitions of Illuminet Holdings and H.O. Systems.
The increase in general and administrative expenses in 2001
fromover 2000 on an absolute dollar basis andin 2000 over 1999as a percentage of revenues was primarily related to the acquisition of Network Solutions in June 2000. Expensesalsoincreased in 2001 from 2000,as well as in 2000 from 1999,due to additional staffing levels required to manage and support our expanded operations, the implementation of additional management information systems and the expansion of our corporate headquarters. In addition, our bad debt expense increased to $26.9 million in 2001 from $5.8 million in 2000,and $.9 million in 1999,primarily as a result of increased revenues and deterioration in the overall economyinduring 2001.The increase in general and administrative expenses as a percentage of revenues in 2001 from 2000 and in 2000 from 1999 is primarily due to incremental expenses related to integrating our acquisitions and different cost structures of those acquisitions.We anticipate that general and administrative expenses will
continue to increasedecrease on an absolute dollar basis in 2003.Restructuring and Other Charges
In April 2002, we announced plans to restructure our operations to rationalize, integrate and align our resources. Our restructuring program included workforce reductions, abandonment of excess facilities, write-off of abandoned property and equipment and other charges. As a result of our restructuring program and in conformity with SAB No. 100 and EITF Issues No. 94-3 and 88-10, we recorded restructuring and other charges of $88.6 million during 2002. We expect to incur additional restructuring charges of approximately $10 to $15 million in the
futurefirst quarter of 2003 related to the restructuring of our consulting services. Our restructuring program is part of a larger-scale, ongoing effort to reduce company-wide spending. Cost savings resulting from our restructuring program, not including other cost savings efforts, were estimated to have been approximately $52 million in 2002 and are estimated to be approximately $56 million in 2003.Workforce reduction. The restructuring program resulted in a workforce reduction of approximately 400 employees across certain business functions, operating units, and geographic regions. We recorded a workforce reduction charge of $6.2 million during 2002, relating primarily to severance and fringe benefits.
Excess facilities. We recorded charges of approximately $29.7 million during 2002 for excess facilities that were either abandoned or downsized relating to lease terminations and non-cancelable lease costs. To determine the lease loss, which is the loss after our cost recovery efforts from subleasing an abandoned building or separable portion thereof, certain estimates were made related to the (1) time period over which the relevant space would remain vacant, (2) sublease terms, and (3) sublease rates, including common area charges. If market sublease rates continue to decrease in these markets or if it takes longer than expected to sublease these facilities, the actual loss could exceed this estimate by an additional $36 million. Property and equipment that was disposed of or abandoned resulted in a net charge of $25.0 million during 2002 and consisted primarily of computer software, leasehold improvements, and computer equipment.
Exit costs and other charges. We recorded other exit costs consisting of the write-off of prepaid license fees associated with products that were intended to be incorporated into our product offerings but were subsequently abandoned as a result of the decision to restructure. These charges totaled approximately $9.1 million during 2002. As part of our efforts to rationalize, integrate and align resources, we
expand our administrativealso recorded other charges of $18.6 million during 2002 relating primarily to the write-off of prepaid marketing assets associated with discontinued advertising.A summary of the restructuring and
executive staff, add infrastructure, expand facilitiesother charges recorded during 2002 are as follows:
Year Ended December 31, 2002
(In thousands)
Workforce reduction
$
6,207
Excess facilities
29,689
Write-off of property and equipment
25,011
Exit costs and other charges
27,667
$
88,574
At December 31, 2002, the accrued liability associated with the restructuring and
assimilate acquired technologiesother charges was $23.8 million andbusinesses.consisted of the following:
Accrued Restructuring Costs at December 31, 2001
Restructuring and Other
Charges
Non-Cash
Restructuring and Other
Charges
Cash Payments
Accrued Restructuring Costs at December 31, 2002
(In thousands)
Workforce reduction
$
—
$
6,207
$
—
$
(6,094
)
$
113
Excess facilities
—
29,689
—
(6,177
)
23,512
Write-off of property and equipment
—
25,011
(25,011
)
—
—
Exit costs and other charges
—
27,667
(16,857
)
(10,600
)
210
$
—
$
88,574
$
(41,868
)
$
(22,871
)
$
23,835
Write-off of acquired in-process research and development
The portion of the Network Solutions purchase price allocated to in-process research and development, or IPR&D, was $54 million and was expensed
during the quarter ended June 30,immediately upon acquisition in 2000. NetworkSolutions'Solutions’ IPR&D efforts focused on significant and substantial improvements and upgrades to its shared registration system, or SRS. The SRS is the system that provides a shared registration interface to the ICANN accredited and licensedregistrars into the.com, .net,and.org
top leveltop-level domain, or TLD,nameregistry. It is through this system that registrars from all over the world are able to register domain names with the central database. Given the high demand on the SRS, it was in need of improvements and upgrades in the area of scalability, security, non-English language capability and next generation resource provisioning protocol.As of the acquisition date, Network Solutions was in the process of developing technology that would add substantial functionality and features to the SRS. The IPR&D had not yet reached technological feasibility and had no alternative uses. The technological feasibility of the in-process development efforts is established when the enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish that the technology can be utilized to meet its design specifications including functions, features, and technical performance requirements. The development efforts related to upgrades and improvements in the SRS and other systems were completed in the first quarter of 2001.
The fair value assigned to IPR&D was estimated by discounting, to present value, the cash flows attributable to the technology once it reached technological feasibility. A discount rate of 22% was used to estimate the present value of cash flows. The value assigned to IPR&D was the amount attributable to the efforts of Network Solutions up to the time of acquisition. This amount was estimated through application of the "stage of completion" calculation by multiplying the estimated present value of future cash flows, 53excluding costs of completion, by the percentage of completion of the purchased research and development project at the time of acquisition.Amortization and write-down of goodwill and other intangible assets
During 2002, we completed our acquisition of H.O. Systems, which resulted in the recording of goodwill of approximately $213 million and other intangible assets of approximately $210 million. During 2001, we completed our acquisition of Illuminet Holdings along with a number of other less significant acquisitions, which resulted in the recording of goodwill of approximately $1.3 billion and other intangible assets of approximately $281 million. During 2000, we completed several acquisitions including THAWTE, Signio and Network Solutions. These acquisitions resulted in the recording of goodwill and other intangible assets in the amount of $21.3 billion.
OurWe adopted SFAS No. 142 as of January 1, 2002. Under the provisions of SFAS No. 142, purchased goodwill and certain indefinite-lived intangibles are no longer amortized but are subject to testing for impairment on at least an annual basis. VeriSign also adopted SFAS No. 144 as of January 1, 2002. Under the provisions of SFAS No. 144, long-lived assets, including intangible assets with finite lives, are reviewed for impairment whenever events or circumstances indicate that there has been a decline in the fair value of an asset. The results of this testing indicated the carrying values of goodwill for certain reporting units exceeded their implied fair values and other intangible assets with finite lives had carrying values that exceeded their fair values which resulted in an impairment charge of $4.6 billion in 2002.VeriSign determines the fair value of its reporting units, in part by engaging independent appraisers, who employ the income approach and the market comparables method of valuation. Determining the fair value of reporting units and intangible assets requires significant judgment with respect to projecting future cash flows, selecting appropriate terminal values and discount rates. Additionally, judgment is required in selecting appropriate market comparable companies in the valuations.
The impairment of goodwill and other intangible assets in 2002 resulted in a write-off of the net book value as follows:
Enterprise and
Service Provider
Division
Mass Markets
Division
Total
(In thousands)
Goodwill
$
2,360,634
$
2,026,375
$
4,387,009
Customer relationships
24,294
3,297
27,591
Technology in place
40,693
256
40,949
Trade name
3,205
—
3,205
Contracts with ICANN and customer lists
129,007
23,092
152,099
$
2,557,833
$
2,053,020
$
4,610,853
Prior to our adoption of SFAS No. 142 on January 1, 2002, our policy
iswas to assess the recoverability of goodwill using estimated undiscounted cash flows. Those cash flowsincludeincluded an estimated terminal value basedon a hypothetical sale of an acquisition at the end of its goodwill amortization period.
ThoughAlthough the acquisitionshaveof THAWTE, Signio and Network Solutions had been predominantly performing at or above expectations throughout 2001, market conditions and attendant multiples used to estimate terminal valueshave continued to remainwere depressed. At June 30, 2000, the NASDAQ market index was at 3,966 points and had decreased 1,805 points, or 46%, to 2,161 points at June 30, 2001. This decline affected the analysis used to assess the recoverability of goodwill. For goodwill associated with THAWTE and Network Solutions, fair value was determined based on future operating cash flows over the remaining amortization period of the goodwill. The terminal values were estimated based on the relationship of the value ofthe VeriSignour stock issued at the acquisition date to the value ofVeriSign'sour stock over the three-month period preceding the valuation. For Signio and the other acquisitions, fair value was determined through the use of recent indicators of fair value such as comparable sales and multiples derived from recent acquisition activities. As a result,managementwe recorded an impairment charge in thequarter ended June 30, 2001, in theamount of $9.9billion.billion in 2001. Since the most significant acquisitions were completed by issuing shares of our common stock, the impairmentshould beis considered a non-cash charge.The amortization and write-down of goodwill and other intangible assets was approximately $4.9 billion in 2002, $13.6 billion in 2001
compared toand $3.2 billion in 2000.In addition to the $9.9 billion write-down discussed above, the increase was primarily related to our purchase acquisitions during 2000, which accounted for approximately $21.3 billionExcluding impairment write-downs ofadditionalgoodwill and other intangibleassets. In accordance withassets, amortization expense was approximately $284 million in 2002, $3.7 billion in 2001 and $3.2 billion in 2000. The decrease in amortization expense excluding write-downs in 2002 from 2001 is due to the effects of the provisions of SFAS No. 142 in which goodwillwillis no longerbe amortizedamortized. The increase in amortization expense in 2001 from 2000 is due toearnings commencing January 1, 2002. Instead goodwill will be reviewed for impairment annually, or more often if circumstances indicate that an impairment may have occurred.a full year’s amortization of Network Solutions in 2001. Amortization of other intangible assets is expected to be approximately$84$189 millionper quarter thereafter,for 2003, including the impact of all acquisitions through December 31,2001, but excluding the impact of H.O. Systems2002, and assuming no other future acquisitions or impairment charges.OtherTotal other income (expense)
, net OtherTotal other income (expense)
, net,consists primarily of interest earned on our cash, cash equivalents and short-term and long-term investments, gains and losses on the sale or write-down of equity investments, and the net effect of foreign currency transaction gains and losses.A comparison of total other income (expense) for the years ended December 31, 2002, 2001
2000and19992000 is presented below.
2001 Change 2000 Change 1999 -------- ------ ------- ------ ------ (Dollars in thousands) -----------------------------------------Other income (expense)................. $(22,469) (126)% $86,169 1240% $6,429 Percentage
2002
Change
2001
Change
2000
(Dollars in thousands)
Total other income (expense)
$
(148,873
)
563
%
$
(22,469
)
(126
)%
$
86,169
Percentage of revenues
(12
)%
(2
)%
18
%
Total other expense in 2002 was primarily comprised of the write-down of investments totaling $170.9 million on certain public and non-public equity security investments, partially offset by $7.9 million of
revenues................. (2)% 18% 8%54Other (expense),net gains realized on the sale of investments and $14.1 million of interest and other income. In 2002, we determined that the decline in value of certain of our public and non-public equity securities investments was other-than-temporary and we recorded a write-down of these investments totaling $170.9 million. Our cash, cash equivalents, short-term and long-term investments decreased to $440.6 million at December 31, 2002 from $928.5 million at December 31, 2001 primarily due to the acquisition of H.O. Systems, purchases of property and equipment and the decline in value and subsequent write-down of investments during 2002. These actions resulted in a decrease in interest income earned during 2002 as compared to 2001.Total other expense in 2001 was primarily comprised of the write-down of investments totaling $89.1 million on certain public and non-public equity security investments, partially offset by $66.7 million of interest and other income.
OtherTotal other incomenet,in 2000 consisted primarily of a realized gain of $32.6 million from the sale of shares of Keynote Systems, Inc., and interest and other income of $53.6 million. In 2001, we determined that the decline in value of certain of our public and non-public equity securities investments wasother than temporaryother-than-temporary and we recorded a write-down of these investments totaling $89.1 million. We had previously valued certain of these investments at the then-fair-market value as part of the Network Solutions acquisition. We may from time to time recognize losses or gains from the sales, write-downs or write-offs of our equity investments.
OurIn 2000, our cash and investments base increased significantlythroughas a result of the acquisition of NetworkSolutions in June 2000;Solutions; however, our invested balances produced lower returns due to lower market interest rates in 2001 as compared to 2000.The increase in 2000 from 1999 is primarily due to increased earnings on funds invested. Investments increased in part due to our net proceeds of $121.4 million generated from the follow-on public offering of our common stock in January 1999 and the investment of cash generated from operations. Our investment base was also significantly increased through the acquisition of Network Solutions, which added over $925 million of cash and investments. In 2000, we also realized a $32.6 million gain from the sale of shares of Keynote Systems, Inc.Income tax benefit (expense)
In
2001,2002, we recordeda $77.9income tax expense of $10.4 million. This expense was comprised of federal taxes of $2.1 million, state taxes of $9.2 million, and foreign income taxbenefit. Thebenefitis due to the realizationofcurrent net operating losses and certain current deferred tax assets.$.9 million. We have notprovidedrecorded a benefit forthe long-termU.S. federal and state deferred tax assets due to the uncertainty of theirbeing realized.realization. As of December 31,2001,2002, we had federal net operating loss carryforwards of approximately$492.4$18.8 million related to continuing operations and $663.1 million related to stock compensation deductions. We also had state net operating loss carryforwards of approximately$313.8$59.6 million related to continuing operations and $515.1 million related to stock compensation deductions.We had no net operating loss carryforwards for federal or state income tax purposes from operations.If we are not able to use them, the federal net operating loss carryforwards will expire in 2010 through20212022 and the state net operating loss carryforwards will expire in 2004 through2021.2022. In addition, we hadavailable for carryoverresearch and experimentation tax credits for federal income tax purposes of approximately$8.9$8.0 million available for carryover to future years, and for state income tax purposes of approximately$5.2 million.$6.5 million available for carryover to future years. The federal research and experimentation tax credits will expire, if not utilized, in 2010 through2021.2022. State research and experimental tax credits carry forward indefinitely until utilized. The Tax Reform Act of 1986 imposes substantial restrictions on the utilization of net operating losses and tax credits in the event of acorporation'scorporation’s ownership change, as defined in the Internal Revenue Code. Our ability to utilize net operating loss carryforwards may be limited as a result of such ownershipchange. We do not anticipate that any material limitation exists on our ability to use our carryforwards and credits. Our accounting for deferred taxes under SFAS No. 109, "Accounting for Income Taxes," involves the evaluation of a number of factors concerning the realizability of our deferred tax assets. In concluding that a valuation allowance was required to be applied to certain deferred tax assets, we considered such factors as our history of operating losses, our expected current year taxable income (exclusive of stock compensation deductions), our uncertainty as to the projected long-term operating results, and the nature of our deferred tax assets. Although our operating plans assume taxable and operating income in future periods, our evaluation of all of the available evidence in assessing the realizability of the noncurrent deferred tax assets indicated that such plans were not considered sufficient to overcome the available negative evidence. The possible future reversal of the valuation allowance will result in future income statement benefit to the extent the valuation allowance was applied to deferred tax assets generated through ongoing operations. To the extent the valuation allowance relates to deferred tax assets generated through 55stock compensation deductions, the possible future reversal of such valuation allowance will result in a credit to additional paid in capital and will not result in future income statement benefit. See Note 10 of Notes to Consolidated Financial Statements.changes.Minority Interest in Net (Income) Loss of Subsidiary
Minority interest in the net (income) loss of VeriSign Japan K.K. and VeriSign Australia Limited was $(.4) million in 2002, $(.6) million in 2001 and $(1.3) million in
2000 and $.8 million in 1999.2000. The year-to-year changes are primarily due to VeriSignJapan'sJapan’s increased revenues as compared to the prioryears.years partially offset by losses incurred by VeriSign Australia following our acquisition of a majority interest in the company in July 2002. As the VeriSign Japanbusiness continuesand VeriSign Australia businesses continue to develop and evolve, we expect that the minority interest in net (income) loss of subsidiary will fluctuate.We Disclose Pro Forma Financial Information We prepare and release quarterly unaudited financial statements prepared in accordance with generally accepted accounting principles ("GAAP"). We also disclose and discuss certain pro forma financial information in the related earnings release and investor conference call. Our pro forma financial information does not include the amortization and write-down of goodwill and intangible assets related to acquisitions, stock-based compensation charges related to acquisitions, write-down of investments and benefit for income taxes. We believe the disclosure of the pro forma financial information helps investors more meaningfully evaluate the results of our ongoing operations. However, we urge investors to carefully review the GAAP financial information included as part of our Quarterly Reports on Form 10-Q, our Annual Reports on Form 10-K, and our quarterly earnings releases and compare that GAAP financial information with the pro forma financial results disclosed in our quarterly earnings releases and investor calls.Liquidity and Capital Resources
2001 2000 Change ---------- ----------- ------ (Dollars in thousands)Cash, cash equivalents and short-term investments.......................... $ 726,697 $ 1,026,275 (29)% Working capital........................ $ 256,714 $ 520,953 (51)% Stockholders' equity................... $6,506,074 $18,470,608 (65)%
2002
2001
Change
(Dollars in thousands)
Cash, cash equivalents and short-term investments
$
403,904
$
726,697
(44
)%
Working capital
$
(61,041
)
$
256,714
(124
)%
Stockholders’ equity
$
1,579,425
$
6,506,074
(76
)%
At December 31,
2001,2002, our principal source of liquidity was$726.7$403.9 million of cash, cash equivalents and short-term investments, consisting principally of commercial paper, medium term corporate notes, corporate bonds and notes, market auction securities, U.S. government and agency securities and money market funds.In addition, we hold $201.8Working capital decreased $317.8 million over the periods presented due to a decrease in cash, cash equivalents and short-term investments of
long-term investments, consisting$322.8 million primarily as a result ofdebtour acquisition of H.O. Systems in 2002, andequity securitiesdue to a decrease in net accounts receivable and other current assets ofnon-public companies, which have no ready market.$163.5 million, partially offset by a decrease in accounts payable and accrued liabilities of $55.1 million and a decrease in current deferred revenue of $113.4 million.Net cash provided by operating activities was $238.4 million in 2002, $227.5 million in 2001 and $192.0 million in
20002000. The increase in both 2002 and$14.7 million in 1999. The increase2001 was primarily due to an overall increase in net income after adjustments for non-cash items such as amortization and the write-down of goodwill and other intangible assets, depreciation of property and equipment and the write-down of certaininvestments, as well as higher levels ofinvestments. Additionally, in 2002 a substantial decrease in accounts receivable partially offset by a decrease in deferredrevenue. Therevenue, and accounts payable and accrual liabilities contributed to the increase in net cash provided by operating activities as compared to 2001.Net cash used in investing activities was $282.5 million in 2002, primarily as a result of $348.6 million used for acquisitions which includes $346.3 million for the acquisition of H.O. Systems along with an additional $53.6 million used in acquisition related costs during 2002. We also used $112.1 million for purchases of short and long-term investments and $176.2 million for purchases of property and equipment. These purchases were partially offset by
increases in deferred income taxesproceeds of $403.6 million from maturities andaccounts receivable.sales of short and long-term investments.Net cash used in investing activities was $389.1 million in 2001, primarily as a result of $1.3 billion used for purchases of investments, which were offset by proceeds of $1.4 billion from sales and maturities of investments, $380.3 million used for purchases of property and equipment, including approximately $285 million used for the purchase of the land and buildings for our corporate headquarters in California, and $52.6 million paid, net of cash acquired, for business combinations.
Net cash provided by investing activities was $124.0 million in 2000, primarily as a result of the cash acquired in our acquisitions, partially
56offset by increased purchases of short and long-term investments, and costs relating to our acquisitions. In 1999, net cash used in investing activities of $103.2 million was primarily related to net purchases of investments.Capital expenditures for property and equipment totaled $176.2 million in 2002, $380.3 million in 2001 and $58.8 million in2000 and $6.0 million in 1999.2000.Our planned capital expenditures for
20022003 are approximately$140$120 million to$150$130 million, primarily for computer and communications equipment, computer software and leasehold improvements. Our most significant expenditures are focused on market development initiatives as well as productivity and cost improvement. As of December 31,2001,2002, we also had commitments undernoncancelablenon-cancelable operating leases for our facilities for various terms through2011.2014. See Note1112 of Notes to Consolidated Financial Statements. We also expect to incur additional restructuring charges of approximately $10 to $15 million in the first quarter of 2003 due to the restructuring of our consulting services. In addition, cash payments totaling $23.5 million related to the abandonment of excess facilities will be paid over the next six years. See Note 3 of Notes to Consolidated Financial Statements. Cost savings resulting from our restructuring program, not including other cost savings efforts, were estimated to have been approximately $52 million in 2002 and are estimated to be approximately $56 million in 2003.Net cash provided by financing activities was $22.0 million in 2002, $10.8 million in 2001 and $73.5 million in
2000 and $136.2 million in 1999.2000. In 2002, 2001 and 2000, cash was provided primarily from common stock issuances as a result of stock option exercises. In 2001, these proceeds were partially offset by the use of approximately $70 million to repurchase shares of our common stock.In
1999, we received net cash proceeds2001, our Board of$121.4 million from the public offering of our stock. In April 2001, the BoardDirectors authorized the use of up to $350 million to repurchase shares of our common stock on the open market, or in negotiated or block trades. During 2001, we repurchased approximately 1,650,000 shares at a cost of approximately $70 million.AtDuring 2002, no shares were repurchased and at December 31,2001,2002, approximately $280 million remained available for futurepurchasesrepurchases under this program.We believe our existing cash, cash equivalents and short-term investments and operating cash flows, will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. An increase in the number of significant acquisitions or investments to be funded with cash may require us to raise additional funds through public or private financing, strategic relationships or other arrangements. This additional funding, if needed, might not be available on terms attractive to us, or at all. Failure to raise capital
when needed could materially harm our business. If we raise additional funds through the issuance of equity securities, the percentage of our stock owned by our then-current stockholders will be reduced. Furthermore, these equity securities might have rights, preferences or privileges senior to those of our common stock.
Our Illuminet subsidiaryWe have entered into various capital lease obligations and we lease a portion of our facilities under operating leases. We also sub-lease a portion of our office space to third parties. In addition, we have signed a master contract with IBM under which we are committed to purchase a pre-determined value of their technology and we have entered into an agreement for the management and administration of the.tv ccTLD with the Government of Tuvalu for payments of future royalties. As of December 31, 2002, the present value of our future minimum capital lease payments, our future minimum lease payments under non-cancelable operating leases, our future minimum sub-lease income, our IBM purchase commitments and our future royalty payments for the next five years are as follows:
Commitments by Period
2003
2004
2005
2006
2007
Total
(Dollars in thousands)
Capital lease payments (including interest)
$
559
$
—
$
—
$
—
$
—
$
559
Operating lease payments
28,242
28,558
25,056
22,540
21,675
126,071
Sub-lease income
(1,731
)
(1,051
)
(982
)
(519
)
—
(4,283
)
Purchase commitments
2,052
3,874
—
—
—
5,926
Tuvalu royalty payments
2,200
2,200
2,200
2,200
2,000
10,800
Total
$
31,322
$
33,581
$
26,274
$
22,221
$
23,675
$
139,073
We have pledged a portion of our short-term investments as collateral for standby letters of credit that guarantee certain of our contractual obligations, primarily relating to our real estate lease agreements. As of December 31, 2002, the amount of short-term investments we have pledged pursuant to such agreements was approximately $21 million.
The restructuring accrual is included on the balance sheet as accrued restructuring costs. Amounts related to the lease terminations due to the abandonment of excess facilities will be paid over the respective lease terms, the longest of which extends through February 2008.
Future cash payments related to lease terminations due to the abandonment of excess facilities are expected to be as follows:
(In thousands)
2003
$
6,403
2004
6,086
2005
4,589
2006
3,038
2007
2,367
Thereafter
1,029
$
23,512
We entered into an agreement with Bank of America effective June 1, 2000 to provide a
line of credit and acapital expenditure loan facility.The line of credit is a $10.0 million unsecured loan that expires June 1, 2002, with a one-year extension available.The capital expenditure loan facility is a $15 million unsecured loan with a five-year term.No amounts were outstanding under the lineAs ofcredit and $800,000December 31, 2002, $720,000 was outstanding underthethis capital expenditurefacility at December 31, 2001. Amounts drawn under these agreements must be made by Illuminet. We currently have no plans to make any borrowings under this agreement.loan facility.In October 2001, we filed a shelf registration statement with the Securities and Exchange Commission to offer an indeterminate number of shares of common stock that may be issued at various times and at indeterminate prices, with a total public offering price not to exceed $750 million. To date, no shares have been issued under this registration statement.
In December 2001, we signed a master contract with IBM under which we committed to purchase $30 million of IBM technology on or before December 28, 2004. During 2002, we paid IBM $24.1 million and at December 31, 2002, we had an additional $2.1 million of open purchase orders with IBM under the master contract. IBM has also committed to use certain products and services of VeriSign.
In November 1999, we entered into an agreement for the management and administration of the Tuvalu Internet top-level domain,“.tv” with the Government of Tuvalu for payments of future royalties which will amount to $12.8 million over the next
threesix years.In February 2002, we completed our acquisition of H.O. Systems, Inc., a provider of billing and customer care solutions to wireless carriers. We used approximately $350 million in cash for this acquisition. 57Recently Issued Accounting Pronouncements
In June
2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for under the purchase method for business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is no longer permitted. We adopted the provisions of SFAS No. 141 commencing July 1, 2001. We have accounted for all of our business combinations in 2001 and 2000 as purchases and the adoption of SFAS No. 141 is not expected to have a significant impact on our financial position or results of operations. SFAS No. 142 requires that goodwill resulting from a business combination will no longer be amortized to earnings, but instead be reviewed for impairment. We are required to adopt SFAS No. 142 as of January 1, 2002. For goodwill resulting from business combinations prior to July 1, 2001, amortization of goodwill continued through December 31, 2001, but ceased commencing January 1, 2002. For business combinations occurring on or after July 1, 2001, the associated goodwill will not be amortized. Upon adoption of SFAS No. 142, we are required to perform a transitional impairment test for all recorded goodwill within six months and, if necessary, determine the amount of an impairment loss by December 31, 2002. The adoption of SFAS No. 142 will reduce the amount of amortization of goodwill and intangible assets from approximately $460 million per quarter to approximately $84 million per quarter, including the effect of all acquisitions through December 31, 2001, but excluding the impact of H.O. Systems and assuming no other acquisitions or impairment charges. In addition, approximately $10.9 million of intangible assets previously allocated to workforce in place will be subsumed into goodwill as of January 1, 2002. We are currently evaluating the effect, if any, of the required impairment testing on our recorded goodwill, which had a net book value of $4.9 billion at December 31, 2001. In August 2001,2002, the FASB issued SFAS No.143, "Accounting146,“Accounting forAsset Retirement Obligations" and in October issuedCosts Associated with Exit or Disposal Activities.”SFAS No.144, "Accounting146 eliminates Emerging Issues Task Force (“EITF”) Issue No. 94-3 “Liability Recognition forthe Impairment or Disposal of Long-Lived Assets."Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring).” Under SFAS No.143 requires146, liabilities for costs associated with an exit or disposal activity are recognized when the liabilities are incurred, as opposed to being recognized at the date of an entity’s commitment to an exit plan under EITF No. 94-3. Furthermore, SFAS No. 146 establishes thatthefair value is the objective for initial measurement ofan asset retirement obligationthe liabilities. This Statement will berecorded as a liability in the period in which the obligation is incurred. SFAS No. 144 addresses financial accounting and reportingeffective forthe impairmentexit or disposalof long-lived assets and supercedes SFAS No. 121 and the accounting and reporting provisions of APB Opinion No. 30 as it related to the disposal of a segment of a business. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 and SFAS No. 144 is effective for fiscal years beginningactivities that are initiated after December15, 2001. We have adopted SFAS No. 144 effective January 1, 2002 and SFAS No. 143 will be adopted effective January 1, 2003.31, 2002. The effect of adoptingthese StatementsSFAS No. 146 is not expected to have a material effect onoursour consolidated financial position or results of operations. The effect on timing of recognition of liabilities could be significantly different from previous restructurings.In December 2002, the FASB issued SFAS No. 148,“Accounting for Stock-Based Compensation—Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The annual disclosure provisions of SFAS No. 148 are presented in Note 1 of Notes to Consolidated Financial Statements. The interim disclosure provisions are effective for our March 31, 2003 interim period. We have determined that the adoption of SFAS No. 148 will not have a material effect on our consolidated financial position, results of operations or cash flows.
In November 2002, the FASB issued Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34.” This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on our financial statements. The annual disclosure requirements are effective for these financial statements and for interim periods ending after December 15, 2002. See Note 1 of Notes to Consolidated Financial Statements for disclosures required by FASB Interpretation No. 45. The adoption of FASB Interpretation No. 45 did not have a material effect on our financial position, results of operations or cash flows.
In January 2003, the FASB issued Interpretation No. 46,“Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin (“ARB”) No. 51.” This Interpretation requires companies to include in their consolidated financial statements the assets, liabilities and results of activities of variable interest entities if the company holds a majority of the variable interests. The consolidated requirements of this Interpretation are effective for variable interest entities created after January 31, 2003 or for entities in which an interest is acquired after January 31, 2003. The consolidation requirements of this Interpretation are effective June 15, 2003 for all variable entities acquired before February 1, 2003. This Interpretation also requires companies that expect to consolidate a variable interest entity they acquired before February 1, 2003 to disclose
the entities nature, size, activities, and the company’s maximum exposure to loss in financial statements issued after January 31, 2003. We have determined this Interpretation will not have a material effect on our consolidated financial position, results of operations or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate sensitivity
The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we have invested in may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline in value. If market interest rates were to increase immediately and uniformly by 10 percent from levels at December 31,
2001,2002, this would not materially change the fair market value of our portfolio. To minimize this risk, we maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, medium-term notes, corporate bonds and notes, market auction securities, U.S. government and58agency securities and money market funds. In general, money market funds are not subject to interest rate risk because the interest paid on such funds fluctuates with the prevailing interest rate. In addition, we generally invest in relatively short-term securities. As of December 31, 2001, 43%2002, 70% of ourshort-termnon-strategic investments mature in less than one year.We do not hold any derivative financial instruments.
The following table presents the amounts of our cash equivalents and investments that are subject to market risk by range of expected maturity and weighted-average interest rates as of December 31,
2001.2002. This table does not include money market funds because those funds are not subject to market risk.
Maturing in --------------------------- Six Six Months Months or to One More than Estimated Less Year One Year Total Fair Value --------- ------- --------- -------- ---------- (Dollars in thousands)Included in cash and cash equivalents.. $ 97,830 $ -- $ -- $ 97,830 $ 97,840 Weighted-average interest rate......... 2.65% -- -- Included in short-term investments..... $132,090 $38,887 $222,563 $393,540 $396,840 Weighted-average interest rate......... 3.21% 3.55% 4.99%
Maturing in
Six Months or Less
Six Months to One Year
More than One Year
Total
Estimated Fair Value
(Dollars in thousands)
Included in cash and cash equivalents
$
128,017
$
—
$
—
$
128,017
$
128,031
Weighted-average interest rate
1.70
%
—
—
Included in short-term investments
$
35,477
$
10,237
$
73,617
$
119,331
$
119,789
Weighted-average interest rate
1.75
%
2.98
%
3.35
%
Exchange rate sensitivity
We consider our exposure to foreign currency exchange rate fluctuations to be minimal. All revenues derived from operations, other than VeriSign Japan K.K., THAWTE (South Africa),
Registrars.com (Canada), euro909 (Europe) andVeriSign Australia Limited, Domainnames.com (U.K.) and our European digital brand management services business, are denominated in United StatesdollarsDollars and, therefore, are not subject to exchange rate fluctuations. Revenues from international subsidiaries and affiliates accounted for approximately 9% of our revenues in 2002, 13% in 2001 and 14% in 2000.Both the revenues and expenses of our majority-owned
subsidiarysubsidiaries in Japan and Australia as well as ourwholly ownedwholly-owned subsidiaries and sales offices in South Africa, Europe,Sweden, Canadaand the United Kingdom are denominated in local currencies. In these regions, we believe this serves as a natural hedge against exchange rate fluctuations because although an unfavorable change in the exchange rate of the foreign currency against the United States dollar will result in lower revenues when translated to United States Dollars, operating expenses will also be lower in these circumstances.Because of our minimal exposure to foreign currencies, weWe have not engaged in any hedging activities, although if future events or changes in circumstances indicate that hedging activities would be beneficial, we may consider such activities.Equity price risk
We own shares of common stock of
severalpublic companies. We value these investments using the closing market value for the last day of each month. These investments are subject to market price volatility. We reflect these investments on our balance sheet at their market value, with the unrealized gains and losses excluded from earnings and reported in the"Accumulated“Accumulated other comprehensiveincome"income (loss)” component ofstockholders'stockholders’ equity. We have also invested in equity instruments of several privately held companies, many of which can still be considered in the startup or development stages, and therefore, carry a high level of risk. In 2002 and 2001, we determined the decline in value of certain public and non-public equity investments wasother than temporaryother-than-temporary and we recognizedaimpairment losses totaling $170.9 million and $89.1 million,impairment loss.respectively. Due to the inherent risk associated with some of our investments, and in light of current stock market conditions, we may incur future losses on the sales, write-downs or write-offs of our investments. We do not currently hedge against equity price changes.59ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements
VeriSign'sVeriSign’s financial statements required by this item are set forth as a separate section of this Form 10-K. See Item
1415 (a)1 for a listing of financial statements provided in the section titled"FINANCIAL STATEMENTS."“Financial Statements.”Supplemental Data (Unaudited)
The following tables set forth unaudited quarterly supplementary data for
each of the years inthe two-year period ended December 31,2001.2002.
2002
First
Quarter(2)
Second
Quarter(3)
Third
Quarter(4)
Fourth
Quarter(5)
Year Ended December 31
(In thousands, except per share data)
Revenues
$
327,816
$
317,409
$
301,441
$
275,002
$
1,221,668
Total costs and expenses
355,191
5,029,109
325,441
313,560
6,023,301
Operating loss
(27,375
)
(4,711,700
)
(24,000
)
(38,558
)
(4,801,633
)
Minority interest in net (income) loss of subsidiary
(165
)
(172
)
(237
)
158
(416
)
Net loss
(39,710
)
(4,802,535
)
(79,672
)
(39,380
)
(4,961,297
)
Basic and diluted net loss per share(1)
(0.17
)
(20.31
)
(0.34
)
(0.17
)
(20.97
)
2001(9)
First
Quarter(6)
Second
Quarter(7)
Third
Quarter
Fourth
Quarter(8)
Year Ended December 31
(In thousands, except per share data)
Revenues
$
213,413
$
231,197
$
255,155
$
283,799
$
983,564
Total costs and expenses
1,564,613
11,470,182
667,944
691,651
14,394,390
Operating loss
(1,351,200
)
(11,238,985
)
(412,789
)
(407,852
)
(13,410,826
)
Minority interest in net (income) loss of subsidiary
(210
)
(309
)
(405
)
345
(579
)
Net loss
(1,377,377
)
(11,190,730
)
(386,735
)
(401,110
)
(13,355,952
)
Basic and diluted net loss per share(1)
(6.90
)
(55.49
)
(1.91
)
(1.91
)
(65.64
)
2001 ----------------------------------------------------------------- Year Ended March 31 June 30 September 30 December 31 December 31 ----------- ------------ ------------ ----------- ------------ (In thousands, except(1) Net loss per share data)Revenues.......................... $ 213,413 $ 231,197 $ 255,155 $ 283,799 $ 983,564 Total costs and expenses.......... 1,564,613 11,470,182 667,944 691,651 14,394,390 Operating loss.................... (1,351,200) (11,238,985) (412,789) (407,852) (13,410,826) Minority interestis computed independently for each of the quarters represented innet (income) lossaccordance with SFAS No. 128. Therefore, the sum ofsubsidiary.............. (210) (309) (405) 345 (579) Net loss.......................... (1,377,377) (11,190,730) (386,735) (401,110) (13,355,952) Basic and dilutedthe quarterly net loss pershare........................... (6.90) (55.49) (1.91) (1.91) (65.64) 2000 ----------------------------------------------------------------- Year Ended March 31 June 30 September 30 December 31 December 31 ----------- ------------ ------------ ----------- ------------ (In thousands, except persharedata) Revenues.......................... $ 34,071 $ 70,254 $ 173,086 $ 197,355 $ 474,766 Totalmay not equal the total computed for the fiscal year or any cumulative interim period.
(2) Results include a $18.8 million charge for the write-down of investments.
(3) Results include a $4.6 billion charge for the impairment of goodwill and other intangible assets, a $94.8 million charge for the write-down of investments and a $67.8 million restructuring charge in connection with workforce reductions, closures of excess facilities, write-downs of property and equipment and exit costs and expenses.......... 95,220 529,939 1,518,873 1,531,043 3,675,075 Operating loss.................... (61,149) (459,685) (1,345,787) (1,333,688) (3,200,309) Minority interestother charges.
(4) Results include a $53.2 million charge for the write-down of investments and a $5.6 million restructuring charge in connection with workforce reductions, closures of excess facilities and exit costs and other charges.
(5) Results include a $15.2 million restructuring charge in connection with workforce reductions, closures of excess facilities, write-downs of property and equipment, a payment related to the transfer of the.org registry and exit costs and other charges, a $12.2 million charge for an adjustment to goodwill and a net (income) lossgain ofsubsidiary.............. 147 (57) (130) (1,294) (1,334) Net loss.......................... (26,155) (452,938) (1,324,185) (1,312,196) (3,115,474) Basic$7.9 million related to the sale of investments.
(6) Results include a $74.7 million charge for the write-down of investments.
(7) Results include a $9.9 billion charge for the impairment of goodwill and dilutedother intangible assets.
(8) Results include a $14.4 million charge for the write-down of investments.
(9) Beginning January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” and, as a result, as of the date of adoption we have ceased to amortize $5.0 billion of goodwill, net loss per share........................... (.24) (3.37) (6.78) (6.64) (19.57)of accumulated amortization, including workforce in place that was subsumed into goodwill upon the date of adoption. The Summary Data for 2001 includes amortization of goodwill and workforce in place totaling $3.4 billion.Our quarterly revenues and operating results are difficult to forecast. Therefore, we believe that period-to-period comparisons of our operating results will not necessarily be meaningful, and should not be relied upon as an indication of future performance. Also, operating results may fall below our expectations and the expectations of securities analysts or investors in one or more future quarters. If this were to occur, the market price of our common stock would likely decline.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREFor more information regarding the quarterly fluctuation of our revenues and operating results, see the section captioned “Business—Factors That May Affect Future Results of Operations—Our operating results may fluctuate and our future revenues and profitability are uncertain.”
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
60PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information
with respect to this itemregarding executive officers may be found in the section captioned"Directors and Executive“Executive Officers of theRegistrant"Registrant” (Part I, Item 4A) of this Annual Report on Form 10-K. Information regarding directors may be found in the section captioned “Proposal No. 1—Election of Directors” appearing in the definitive Proxy Statement to be delivered to stockholders in connection with the20022003 Annual Meeting ofStockholders. ThisStockholders which information is incorporated herein by reference.ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item may be found in the section captioned
"Executive Compensation"“Executive Compensation” appearing in the definitive Proxy Statement to be delivered to stockholders in connection with the20022003 Annual Meeting of Stockholders. This information is incorporated herein by reference.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item may be found in the section captioned
"Security“Security Ownership of Certain Beneficial Owners andManagement"Management” appearing in the definitive Proxy Statement to be delivered to stockholders in connection with the20022003 Annual Meeting of Stockholders. This information is incorporated herein by reference.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item may be found in the section captioned
"Certain Transactions"“Certain Relationships and Related Transactions” appearing in the definitive Proxy Statement to be delivered to stockholders in connection with the20022003 Annual Meeting of Stockholders. This information is incorporated herein by reference.61ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our chief executive officer and our chief financial officer, after evaluating the effectiveness of VeriSign’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (the “Evaluation Date”) within 90 days before the filing date of this annual report, have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities.
(b) Changes in internal controls. There were no significant changes in our internal controls or to our knowledge, in other factors that could significantly affect these controls subsequent to the Evaluation Date.
PART IV
ITEM
14.15. EXHIBITS, FINANCIAL STATEMENTSSCHEDULESCHEDULES AND REPORTS ON FORM 8-K(a) Documents filed as part of this report
1. Financial statements . Management's
1. Financial statements Independent Auditors’ Report. Independent Auditors' Report .Consolidated Balance SheetsAs of December 31,
20012002 and2000 .2001Consolidated Statements of OperationsYears Ended December 31, 2002, 2001
2000and1999 .2000Consolidated Statements ofStockholders'Stockholders’ EquityYears Ended December 31, 2002, 2001
2000and1999 .2000Consolidated Statements of ComprehensiveIncome (Loss)LossYears Ended December 31, 2002, 2001
2000and1999 .2000Consolidated Statements of Cash FlowsYears Ended December 31, 2002, 2001
2000and1999 .2000Notes to Consolidated Financial Statements2. Financial statement schedules .
2. Financial statement schedules Financial statement schedules are omitted because the information called for is not required or is shown either in the consolidated financial statements or the notes thereto.3. Exhibits
3. Exhibits (a)Index to Exhibits
Exhibit Number
Incorporated by Reference
Filed Herewith
Exhibit Description
Form
Date
Number
2.01
Agreement and Plan of Merger dated as of March 6, 2000, by and among the Registrant, Nickel Acquisition Corporation and Network Solutions, Inc.
8-K
3/8/00
2.1
2.02
Agreement and Plan of Merger dated September 23, 2001, by and among the Registrant, Illinois Acquisition Corporation and Illuminet Holdings, Inc.
S-4
10/10/01
4.03
3.01
Third Amended and Restated Certificate of Incorporation of the Registrant
S-1
1/29/98
3.02
3.02
Certificate of Amendment of Third Amended and Restated Certificate of Incorporation of the Registrant dated May 27, 1999
S-8
7/15/99
4.03
3.03
Certificate of Amendment of Third Amended and Restated Certificate of Incorporation of the Registrant dated June 8, 2000
S-8
6/14/00
4.03
3.04
Amended and Restated Bylaws of Registrant
S-1
1/29/98
3.05
3.05
Amendment to Amended and Restated Bylaws of Registrant
S-8
6/14/00
4.04
4.01
Registration Rights Agreement dated as of March 6, 2000, between the Registrant and the parties indicated therein
8-K
3/8/00
99.1
Exhibit Number
Incorporated by Reference
Filed Herewith
Exhibit Description
Form
Date
Number
4.02
Rights Agreement dated as of September 27, 2002, between the Registrant and Mellon Investor Services LLC, as Rights Agent, which includes as Exhibit A the Form of Certificate of Designations of Series A Junior Participating Preferred Stock, as Exhibit B the Summary of Stock Purchase Rights and as Exhibit C the Form of Rights Certificate
8-A
9/30/02
4.01
4.03
Amendment to Rights Agreement dated as of February 11, 2003, between the Registrant and Mellon Investor Services LLC, as Rights Agent
8-A/A
3/19/03
4.02
10.01
Form of Indemnification Agreement entered into by the
Registrant with each of its directors and executive officers
S-1
1/29/98
10.05
10.02
Form of Revised Indemnification Agreement entered into by the Registrant with each of its directors and executive officers
X
10.03
Registrant’s 1995 Stock Option Plan, as amended through 8/6/96
S-1
1/29/98
10.06
10.04
Registrant’s 1997 Stock Option Plan
S-1
1/29/98
10.07
10.05
Registrant’s 1998 Equity Incentive Plan, as amended through 5/21/02
10-Q
8/14/02
10.1
10.06
Registrant’s 1998 Directors’ Stock Option Plan, as amended through 5/21/02
10-Q
8/14/02
10.2
10.07
Registrant’s 1998 Employee Stock Purchase Plan, as amended through 6/8/00
S-8
6/14/00
4.06
10.08
Registrant’s 2001 Stock Incentive Plan, as amended through 11/22/02
X
10.09
Registrant’s Executive Loan Program of 1996
S-1
1/29/98
10.11
10.10
Form of Full Recourse Secured Promissory Note and Form of Pledge and Security Agreement entered into between the
Registrant and certain executive officers
S-1
1/29/98
10.14
10.11
Assignment Agreement, dated as of April 18, 1995 between the Registrant and RSA Data Security, Inc.
S-1
1/29/98
10.15
10.12
BSAFE/TIPEM OEM Master License Agreement, dated as of April 18, 1995, between the Registrant and RSA Data Security, Inc., as amended
S-1
1/29/98
10.16
10.13
Amendment Number Two to BSAFE/TIPEM OEM Master
License Agreement dated as of December 31, 1998 between the Registrant and RSA Data Security, Inc.
S-1
1/5/99
10.31
10.14
Non-Compete and Non-Solicitation Agreement, dated April 18, 1995, between the Registrant and RSA Security, Inc.
S-1
1/29/98
10.17
10.15*
Microsoft/VeriSign Certificate Technology Preferred Provider Agreement, effective as of May 1, 1997, between the Registrant and Microsoft Corporation
S-1
1/29/98
10.18
10.16*
Master Development and License Agreement, dated as of September 30, 1997, between the Registrant and Security Dynamics Technologies, Inc.
S-1
1/29/98
10.19
Exhibit Number
Incorporated by Reference
Filed Herewith
Exhibit Description
Form
Date
Number
10.18
Amendment Number One to Master Development and License Agreement dated as of December 31, 1998 between the Registrant and Security Dynamics Technologies, Inc.
S-1
1/5/99
10.30
10.19
Employment Offer Letter Agreement between the Registrant
and Stratton Sclavos dated as of June 12, 1995, as amended October 4, 1995
S-1
1/29/98
10.28
10.20
Separation Letter Agreement between James P. Rutt and the Registrant dated as of February 23, 2001
10-K
3/28/01
10.37
10.21
Description of Severance Arrangement between the Registrant and William P. Fasig
X
10.22
Employment Offer Letter Agreement between the Registrant and W. G. Champion Mitchell dated July 25, 2001
X
10.23
.com Registry Agreement between VeriSign and ICANN
8-K
6/1/01
99.3
10.24
.net Registry Agreement between VeriSign and ICANN
8-K
6/1/01
99.4
10.25
.org Registry Agreement between VeriSign and ICANN
8-K
6/1/01
99.5
10.26
Amendment No. 24 to Cooperative Agreement #NCR 92-18742 between the DOC and Network Solutions, Inc.
8-K
6/1/01
99.6
10.27
Deed of Lease between TST Waterview I, L.L.C. and the Registrant dated as of July 19, 2001
10-Q
11/14/01
10.01
10.28
Agreement to Purchase Building between the Registrant and Sobrato Development Co. #792, dated as of October 1, 2001
10-Q
11/14/01
10.02
10.29
Agreement to Purchase Buildings between the Registrant and Ellis-Middlefield Business Park, dated as of October 1, 2001
10-Q
11/14/01
10.03
21.01
Subsidiaries of the Registrant
X
23.01
Consent of KPMG LLP
X
99.01
Certification of President/Chief Executive Officer/Chairman of the Board, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
99.02
Certification of Executive Vice President of Finance and Administration/Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
Incorporated by Reference Exhibit ------------------------- Filed Number Exhibit Description Form Date Number Herewith - ------ ------------------- ---- -------- ------ --------2.01 Agreement and Plan of Reorganization dated as of December 17, 1999 by and among the Registrant, Signio, Inc. and BEHAD Acquisition Corp. 8-K 3/7/00 2.1 2.02 Exchange Agreement dated as of December 19, 1999 by and between the Registrant and Mark Shuttleworth 8-K 2/16/00 2.1 2.03 Agreement and Plan of Reorganization dated as of March 6, 2000 by and among the Registrant, Nickel Acquisition Corporation and Network Solutions, Inc. 8-K 3/8/00 2.1 2.04 Agreement and Plan of Merger by and among the Registrant, Illinois Acquisition Coropration and Illuminet Holding, Inc. S-4 10/10/01 2.01 3.01 Third Amended and Restated Certificate of Incorporation of the Registrant S-1 1/29/98 3.0262
Incorporated by Reference Exhibit ------------------------- Filed Number Exhibit Description Form Date Number Herewith - ------ ------------------- ---- ------- ------ --------3.02 Amended and Restated Bylaws of the Registrant S-1 1/29/98 3.04 3.03 Amendment to Third Amended and Restated Certificate of Incorporation of the Registrant S-8 7/15/99 4.03 4.01 Registration Rights Agreement dated as of December 19, 1999 by and between the Registrant and Mark Shuttleworth 10-K 3/22/00 4.06 10.01 Registrant's 1998 Equity Incentive Plan S-8 7/15/99 4.04 10.02 Registrant's 1998 Employee Stock Purchase Plan S-8 7/15/99 4.05 10.03 Form of Non-Plan Stock Option for options granted*Confidential treatment was received with respect to certain non-executive officer employees S-8 7/15/99 4.06 10.04 Formportions ofIndemnification Agreement entered into bythis agreement. Such portions were omitted and filed separately with theRegistrant with each of its directorsSecurities andexecutive officers S-1 1/29/98 10.05 10.05 Registrant's 1995 Stock Option Plan and related documents S-1 1/29/98 10.06 10.06 Registrant's 1997 Stock Option Plan S-1 1/29/98 10.07 10.07 Registrant's 1998 Directors' Stock Option Plan and related documents S-1 1/29/98 10.08 10.08 Registrant's 1998 Equity Incentive Plan and related documents S-1 1/29/98 10.09 10.09 Registrant's 1998 Employee Stock Purchase Plan and related documents S-1 1/29/98 10.10 10.10 Registrant's Executive Loan Program of 1996 S-1 1/29/98 10.11 10.11 Form of Full Recourse Secured Promissory Note and Form of Pledge and Security Agreement entered into between the Registrant and certain executive officers S-1 1/29/98 10.14 10.12 Assignment Agreement, dated April 19, 1995 between the Registrant and RSA Data Security, Inc. S-1 1/29/98 10.15 10.13 BSAFE/TIPEM OEM Master License Agreement, dated April 18, 1995, between the Registrant and RSA Data Security, Inc., as amended S-1 1/29/98 10.16 10.14 Non-Compete and Non-Solicitation Agreement, dated April 18, 1995, between the Registrant and RSA Security, Inc. S-1 1/29/98 10.17 10.15* Microsoft/VeriSign Certificate Technology Preferred Provider Agreement, effective as of May 1, 1997, between the Registrant and Microsoft Corporation S-1 1/29/98 10.18 10.16* Master Development and License Agreement, dated September 30, 1997, between the Registrant and Security Dynamics Technologies, Inc. S-1 1/29/98 10.19Exchange Commission.63
Incorporated by Reference Exhibit ------------------------- Filed Number Exhibit Description Form Date Number Herewith - ------ ------------------- ---- -------- ------ --------10.17 Employment Offer Letter Agreement, between the Registrant And Stratton Sclavos, dated June 12, 1995, as amended October 4, 1995 S-1 1/29/98 10.28 10.18 Amendment Number One to Master Development and License Agreement dated as of December 31, 1998 between the Registrant and Security Dynamics Technologies, Inc. S-1 1/5/99 10.30 10.19 Amendment Number Two to BSAFE/TIPEM OEM Master License Agreement dated as of December 31, 1998 between the Registrant and RSA Data Security, Inc. S-1 1/5/99 10.31 10.20 Separation Letter Agreement between James P. Rutt and VeriSign, Inc. dated February 23, 2001 10-K 3/28/01 10.37 10.21 Deed of lease between TST Waterview I, L.L.C. and VeriSign, Inc., dated July 19, 2001 10-Q 11/14/01 10.01 10.22 Agreement to purchase building between VeriSign, Inc. and Sobrato Development Co. #792, dated October 1, 2001 10-Q 11/14/01 10.02 10.23 Agreement to purchase buildings between VeriSign, Inc. and Ellis-Middlefield Business Park, dated October 1, 2001 10-Q 11/14/01 10.03 10.24 .com Registry Agreement between VeriSign and ICANN 8-K 6/01/01 99.03 10.25 .net Registry Agreement between VeriSign and ICANN 8-K 6/01/01 99.04 10.26 .org Registry Agreement between VeriSign and ICANN 8-K 6/01/01 99.05 10.27 Amendment No. 24 to Cooperative Agreement #NCR 92-18742 between the DOC and Network Solutions, Inc. 8-K 6/01/01 99.06 10.28 Registrant's 2001 Incentive Stock Plan S-8 9/21/01 4.05 21.01 Subsidiaries of the Registrant X 23.01 Consent of KPMG LLP X- -------- * Confidential treatment was received with respect to certain portions of this agreement. Such portions were omitted and filed separately with the Securities and Exchange Commission.(b)Reports on Form 8-K
The followingNo reports
were filedon Form 8-Kor Form 8-K/Awere filed during the quarter ended December 31,2001: . Current Report on Form 8-K dated December 12, 2001 and filed December 27, 2001 pursuant to Item 2 (Acquisition or disposition of assets), regarding the acquisition of Illuminet Holdings, Inc. 642002. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Mountain View, State of California, on the19th31st day of March2002. VERISIGN, INC. By: /s/ STRATTON D. SCLAVOS __________________________________ Stratton D. Sclavos President and Chief Executive Officer2003.
VERISIGN,INC.
By
/S/ STRATTON D. SCLAVOS
Stratton D. Sclavos
President and Chief Executive OfficerKNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints Stratton D. Sclavos, Dana L. Evan and James M. Ulam, and each of them, his or her true lawful attorneys-in-fact and agents, with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granted 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 in and about the premises, as fully to all
intendsintents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his, her or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on the
19th31st day of March2002. Signature Title --------- ----- /s/ STRATTON D. SCLAVOS President, Chief Executive Officer and - --------------------------------------2003.
Signature
Title
/S/ STRATTON D. SCLAVOS
Stratton D. Sclavos
President, Chief Executive Officer and
Chairman of the Board
/S/ DANA L. EVAN
Dana L. Evan
Executive Vice President of Finance and
Administration and Chief Financial Officer
(Principal finance and accounting officer)
/S/ D. JAMES BIDZOS
D. James Bidzos
Vice Chairman of the Board
/S/ WILLIAM CHENEVICH
William Chenevich
Director
/S/ KEVIN R. COMPTON
Kevin R. Compton
Director
/S/ DAVID J. COWAN
David J. Cowan
Director
/S/ SCOTT G. KRIENS
Scott G. Kriens
Director
/S/ ROGER H. MOORE
Roger H. Moore
Director
/S/ GREGORY L. REYES
Gregory L. Reyes
Director
I, Stratton D. Sclavos,
/s/ DANA L. EVAN Executive Vice Presidentcertify that:1. I have reviewed this annual report on Form 10-K of
FinanceVeriSign, Inc.;2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and
- -------------------------------------- Administrationother financial information included in this annual report, fairly present in all material respects the financial condition, results of operations andChief Financialcash flows of the registrant as of, and for, the periods presented in this annual report;4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
By:
/S/ STRATTON D. SCLAVOS
Stratton D. Sclavos
President, Chief Executive Officer and Chairman of the Board
I, Dana L. Evan,
Officer (Principal finance and accounting officer) /s/ D. JAMES BIDZOS Vice Chairmancertify that:1. I have reviewed this annual report on Form 10-K of VeriSign, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the
Board - -------------------------------------- D. James Bidzos /s/ WILLIAM CHENEVICH Director - -------------------------------------- William Chenevich /s/ KEVIN R. COMPTON Director - -------------------------------------- Kevin R. Compton /s/ DAVID J. COWAN Director - -------------------------------------- David J. Cowan 65Signature Title --------- ----- /s/ SCOTT G. KRIENS Director - -------------------------------------- Scott G. Kriens /s/ ROGER H. MOORE Director - -------------------------------------- Roger H. Moore /s/ GREGORY L. REYES Director - -------------------------------------- Gregory L. Reyes /s/ TIMOTHY TOMLINSON Director - -------------------------------------- Timothy Tomlinson 66circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
By:
/S/ DANA L. EVAN
Dana L. Evan
Executive Vice President of Finance and Administration and Chief Financial Officer
As required under Item
8--Financial8—Financial Statements and Supplementary Data, the consolidated financial statements ofthe CompanyVeriSign are provided in this separate section. The consolidated financial statements included in this section are as follows:
Financial Statement Description
Page
------------------------------- ----. Management's Report............................................... 68 .• Independent
Auditors' Report...................................... 69 .Auditors’ Report68
• Consolidated Balance Sheets
As of December 31,20012002 and2000...... 70 .200169
• Consolidated Statements of Operations
For the Years Ended December 31, 2002, 20012000and1999........................................... 71 .200070
• Consolidated Statements of
Stockholders'Stockholders’ Equity
For the Years Ended December 31, 2002, 20012000and1999............................ 72 .200071
• Consolidated Statements of Comprehensive
Income (Loss)Loss
For the Years Ended December 31, 2002, 20012000and1999...................... 74 .200072
• Consolidated Statements of Cash Flows
For the Years Ended December 31, 2002, 20012000and1999........................................... 75 .200073
• Notes to Consolidated Financial
Statements........................ 76Statements74
67MANAGEMENT'S REPORT VeriSign's management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and other financial information presented in this report. The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles and reflect the effects of certain estimates and judgments made by management. VeriSign's management maintains a system of internal control that is designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded and executed in accordance with management's authorization. The system is continuously monitored by direct management review. VeriSign selects and trains qualified people who are provided with and expected to adhere to our standards of business conduct. These standards, which set forth the highest principles of business ethics and conduct, are a key element of our control system. VeriSign's consolidated financial statements have been audited by KPMG LLP, independent auditors. Their audits were conducted in accordance with auditing standards generally accepted in the United States of America, and included procedures and tests of accounting records as they considered necessary in the circumstances. The Audit Committee of the Board of Directors, which consists of outside directors, meets regularly with management and the independent auditors to review accounting, reporting, auditing and internal control matters. The committee has direct and private access to the independent auditors. VERISIGN, INC. By /s/ STRATTON D. SCLAVOS __________________________________ Stratton D. Sclavos President and Chief Executive Officer By /s/ DANA L. EVAN __________________________________ Dana L. Evan Executive Vice President of Finance and Administration and Chief Financial Officer Mountain View, California January 22, 2002 68INDEPENDENT
AUDITORS'AUDITORS’ REPORTThe Board of Directors and Stockholders
VeriSign, Inc.:
We have audited the accompanying consolidated balance sheets of VeriSign, Inc. and subsidiaries
(the Company)as of December 31,20012002 and2000,2001, and the related consolidated statements of operations,stockholders'stockholders’ equity, comprehensiveincome (loss)loss and cash flows for each of the years in the three-year period ended December 31,2001.2002. These consolidated financial statements are the responsibility of theCompany'sCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of VeriSign, Inc. and subsidiaries as of December 31,
20012002 and2000,2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31,2001,2002, in conformity with accounting principles generally accepted in the United States of America.As discussed in Note 1 to the consolidated financial statements, effective July 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards
(SFAS)(“SFAS”) No. 141,"Business“Business Combinations,"” and certain provisions of SFAS No. 142,"Goodwill“Goodwill and Other Intangible Assets,"” as required for goodwill and intangible assets resulting from business combinations consummated after June 30, 2001./s/On January 1, 2002, the Company completed its adoption of SFAS No. 142./S/ KPMG LLP
Mountain View, California
January
22, 2002 6921, 2003 VERISIGN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In(In thousands, except share data)
December 31, ------------------------- 2001 2000 ------------ -----------ASSETS ------ Current assets: Cash and cash equivalents................................ $ 306,054 $ 460,362 Short-term investments................................... 420,643 565,913 Accounts receivable, net of allowance for doubtful accounts of $24,290 in 2001 and $5,261 in 2000......... 314,923 128,011 Prepaid expenses and other current assets................ 48,939 32,146 ------------ ----------- Total current assets.................................. 1,090,559 1,186,432 Property and equipment, net................................. 532,546 105,602 Goodwill and other intangible assets, net................... 5,691,169 17,656,641 Long-term investments....................................... 201,781 209,145 Other assets, net........................................... 21,453 37,402 ------------ ----------- $ 7,537,508 $19,195,222 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable and accrued liabilities................. $ 313,447 $ 193,952 Accrued merger costs..................................... 49,069 18,814 Deferred revenue......................................... 471,329 452,713 ------------ ----------- Total current liabilities............................. 833,845 665,479 ------------ ----------- Long-term deferred revenue.................................. 150,727 55,575 Deferred taxes.............................................. 26,553 -- Other long-term liabilities................................. 20,309 3,560 ------------ ----------- Total long-term liabilities........................... 197,589 59,135 ------------ ----------- Commetments and contingencies Stockholders' equity: Preferred stock--par value $.001 per share Authorized shares: 5,000,000 Issued and outstanding shares: none.. -- -- Common stock--par value $.001 per share Authorized shares: 1,000,000,000 Issued and outstanding shares: 234,358,114, excluding 1,690,000 shares held in treasury, at December 31, 2001; 198,639,497, excluding 40,000 shares held in treasury, at December 31, 2000... 234 199 Additional paid-in capital.................................. 23,051,546 21,670,647 Notes receivable from stockholders.......................... (252) (245) Unearned compensation....................................... (27,042) (36,365) Accumulated deficit......................................... (16,518,878) (3,162,926) Accumulated other comprehensive income (loss)............... 466 (702) ------------ ----------- Total stockholders' equity............................ 6,506,074 18,470,608 ------------ ----------- $ 7,537,508 $19,195,222 ============ ===========
December 31,
ASSETS
2002
2001
Current assets:
Cash and cash equivalents
$
282,288
$
306,054
Short-term investments
121,616
420,643
Accounts receivable, net of allowance for doubtful accounts of $27,853 in 2002 and $24,290 in 2001
134,124
290,923
Prepaid expenses and other current assets
56,618
72,939
Deferred tax assets
9,658
—
Total current assets
604,304
1,090,559
Property and equipment, net
609,354
532,546
Goodwill and other intangible assets, net
1,129,602
5,691,169
Long-term investments
36,741
201,781
Other assets, net
11,317
21,453
Total assets
$
2,391,318
$
7,537,508
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities
$
278,545
$
313,447
Accrued merger costs
5,015
49,069
Accrued restructuring costs
23,835
—
Deferred revenue
357,950
471,329
Total current liabilities
665,345
833,845
Long-term deferred revenue
125,893
150,727
Other long-term liabilities
20,655
46,862
Total long-term liabilities
146,548
197,589
Total liabilities
811,893
1,031,434
Commitments and contingencies
Stockholders’ equity:
Preferred stock—par value $.001 per share
Authorized shares: 5,000,000 Issued and outstanding shares: none
—
—
Common stock—par value $.001 per share Authorized shares: 1,000,000,000
Issued and outstanding shares: 237,510,063, excluding 1,690,000 shares held in treasury, at December 31, 2002; 234,358,114, excluding
1,690,000 shares held in treasury, at December 31, 2001
238
234
Additional paid-in capital
23,072,212
23,051,546
Notes receivable from stockholders
—
(252
)
Unearned compensation
(8,086
)
(27,042
)
Accumulated deficit
(21,480,175
)
(16,518,878
)
Accumulated other comprehensive income (loss)
(4,764
)
466
Total stockholders’ equity
1,579,425
6,506,074
Total liabilities and stockholders’ equity
$
2,391,318
$
7,537,508
See accompanying notes to consolidated financial statements.
70VERISIGN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In(In thousands, except per share data)
Year Ended December 31, ----------------------------------- 2001 2000 1999 ------------ ----------- --------Revenues.......................................... $ 983,564 $ 474,766 $ 84,776 ------------ ----------- -------- Costs and expenses: Cost of revenues............................... 343,721 163,049 31,898 Sales and marketing............................ 259,585 167,148 34,145 Research and development....................... 78,134 41,256 13,303 General and administrative..................... 143,297 60,672 8,740 Write-off of acquired in-process research and development.................................. -- 54,000 -- Amortization and write-down of goodwill and other intangible assets...................... 13,569,653 3,188,950 -- ------------ ----------- -------- Total costs and expenses................... 14,394,390 3,675,075 88,086 ------------ ----------- -------- Operating loss.................................... (13,410,826) (3,200,309) (3,310) Other income: Interest and investment income (loss).......... (20,681) 87,647 7,365 Other expense, net............................. (1,788) (1,478) (936) ------------ ----------- -------- Total other income (expense)............... (22,469) 86,169 6,429 ------------ ----------- -------- Income (loss) before income taxes and minority interest........................................ (13,433,295) (3,114,140) 3,119 Income tax benefit................................ 77,922 -- -- ------------ ----------- -------- Income (loss) before minority interest............ (13,355,373) (3,114,140) 3,119 Minority interest in net (income) loss of subsidiary...................................... (579) (1,334) 836 ------------ ----------- -------- Net income (loss)................................. $(13,355,952) $(3,115,474) $ 3,955 ============ =========== ======== Net income (loss) per share: Basic.......................................... $ (65.64) $ (19.57) $ .04 ============ =========== ======== Diluted........................................ $ (65.64) $ (19.57) $ .03 ============ =========== ======== Shares used in per share computation: Basic.......................................... 203,478 159,169 100,531 ============ =========== ======== Diluted........................................ 203,478 159,169 114,610 ============ =========== ========
Year Ended December 31,
2002
2001
2000
Revenues
$
1,221,668
$
983,564
$
474,766
Costs and expenses:
Cost of revenues
571,367
343,721
163,049
Sales and marketing
248,170
259,585
167,148
Research and development
48,353
78,134
41,256
General and administrative
172,123
143,297
60,672
Write-off of acquired in-process research and development
—
—
54,000
Restructuring and other charges
88,574
—
—
Amortization and write-down of goodwill and other intangible assets
4,894,714
13,569,653
3,188,950
Total costs and expenses
6,023,301
14,394,390
3,675,075
Operating loss
(4,801,633
)
(13,410,826
)
(3,200,309
)
Other income (expense):
Interest and investment income (loss)
(148,946
)
(20,681
)
87,647
Other income (expense), net
73
(1,788
)
(1,478
)
Total other income (expense)
(148,873
)
(22,469
)
86,169
Loss before income taxes and minority interest
(4,950,506
)
(13,433,295
)
(3,114,140
)
Income tax benefit (expense)
(10,375
)
77,922
—
Loss before minority interest
(4,960,881
)
(13,355,373
)
(3,114,140
)
Minority interest in net income of subsidiary
(416
)
(579
)
(1,334
)
Net loss
$
(4,961,297
)
$
(13,355,952
)
$
(3,115,474
)
Net loss per share:
Basic and diluted
$
(20.97
)
$
(65.64
)
$
(19.57
)
Shares used in per share computation:
Basic and diluted
236,552
203,478
159,169
See accompanying notes to consolidated financial statements.
71VERISIGN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS'STOCKHOLDERS’ EQUITY(In(In thousands, except share data)
Year Ended December 31, -------------------------------- 2001 2000 1999 ----------- ---------- --------Common stock: Balance, beginning of year: 198,639,497 shares at January 1, 2001 103,482,841 shares at January 1, 2000 92,346,768 shares at January 1, 1999..................... $ 199 $ 103 $ 92 Issuance of common stock through public offerings: 6,390,000 shares in 1999................................. -- -- 6 Issuance of common stock for business combinations: 31,513,530 shares in 2001 88,948,676 shares in 2000................................ 31 89 -- Issuance of common stock under employee stock purchase plan: 201,953 shares in 2001 550,724 shares in 2000 547,896 shares in 1999................................... -- 1 1 Exercise of common stock options: 5,653,134 shares in 2001 5,657,256 shares in 2000 4,198,177 shares in 1999................................. 6 6 4 Repurchase of common stock: (1,650,000) shares in 2001............................... (2) -- -- ----------- ---------- -------- Balance, end of year: 234,358,114 shares at December 31, 2001 198,639,497 shares at December 31, 2000 103,482,841 shares at December 31, 1999.................. 234 199 103 ----------- ---------- --------(Continued)
Year Ended December 31,
2002
2001
2000
Common stock:
Balance, beginning of year:
234,358,114 shares at January 1, 2002
198,639,497 shares at January 1, 2001
103,482,841 shares at January 1, 2000
$
234
$
199
$
103
Issuance of common stock for business combinations:
31,513,530 shares in 2001
88,948,676 shares in 2000
—
31
89
Issuance of common stock under employee stock purchase plan:
645,595 shares in 2002
201,953 shares in 2001
550,724 shares in 2000
1
—
1
Exercise of common stock options:
2,506,354 shares in 2002
5,653,134 shares in 2001
5,657,256 shares in 2000
3
6
6
Repurchase of common stock:
1,650,000 shares in 2001
—
(2
)
—
Balance, end of year:
237,510,063 shares at December 31, 2002
234,358,114 shares at December 31, 2001
198,639,497 shares at December 31, 2000
238
234
199
Additional paid-in capital:
Balance, beginning of year
23,051,546
21,670,647
258,239
Issuance of common stock and common stock options for business combinations
—
1,370,208
21,273,280
Issuance of common stock under employee stock purchase plan
7,546
9,767
4,696
Income tax benefit from exercise of employee stock options
—
—
67,448
Exercise of common stock options
13,120
70,436
66,984
Repurchase of common stock
—
(69,512
)
—
Balance, end of year
23,072,212
23,051,546
21,670,647
Notes receivable from stockholders:
Balance, beginning of year
(252
)
(245
)
—
Loans acquired through business combinations
—
—
(766
)
Interest accrued
—
(7
)
—
Payments on notes receivable
—
—
521
Write-off of notes receivable
252
—
—
Balance, end of year
—
(252
)
(245
)
Unearned compensation:
Balance, beginning of year
(27,042
)
(36,365
)
(172
)
Unearned compensation resulting from business combinations
—
(24,296
)
(37,915
)
Reversal of unearned compensation upon forfeiture of awards
—
25,816
—
Amortization of unearned compensation
18,956
7,803
1,722
Balance, end of year
(8,086
)
(27,042
)
(36,365
)
Accumulated deficit:
Balance, beginning of year
(16,518,878
)
(3,162,926
)
(47,452
)
Net loss
(4,961,297
)
(13,355,952
)
(3,115,474
)
Balance, end of year
(21,480,175
)
(16,518,878
)
(3,162,926
)
Accumulated other comprehensive income (loss):
Balance, beginning of year
466
(702
)
87,641
Translation adjustments
(1,689
)
(3,597
)
525
Change in unrealized gain (loss) on investments, net of tax
(3,541
)
4,765
(88,868
)
Balance, end of year
(4,764
)
466
(702
)
Total stockholders’ equity
$
1,579,425
$
6,506,074
$
18,470,608
See accompanying notes to consolidated financial statements.
72VERISIGN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY--(Continued) (In thousands, except share data)COMPREHENSIVE LOSS
Year Ended December 31, ----------------------------------- 2001 2000 1999 ------------ ----------- --------Additional paid-in capital: Balance, beginning of year...................... $ 21,670,647 $ 258,239 $ 92,728 Issuance of common stock through public offerings, net of offering expenses of $7,239. -- -- 121,354 Issuance of common stock and common stock options for business combinations............. 1,370,208 21,273,280 -- Issuance of common stock under employee stock purchase plan................................. 9,767 4,696 1,989 Income tax benefit from exercise of employee stock options................................. -- 67,448 29,778 Exercise of common stock options................ 70,436 66,984 12,390 Repurchase of common stock...................... (69,512) -- -- ------------ ----------- -------- Balance, end of year............................ 23,051,546 21,670,647 258,239 ------------ ----------- -------- Notes receivable from stockholders: Balance, beginning of year...................... (245) -- (409) Loans acquired through business combinations.... -- (766) -- Interest accrued................................ (7) -- -- Payments on notes receivable.................... -- 521 409 ------------ ----------- -------- Balance, end of year............................ (252) (245) -- ------------ ----------- -------- Unearned compensation: Balance, beginning of year...................... (36,365) (172) (276) Unearned compensation resulting from business combinations.................................. (24,296) (37,915) -- Reversal of unearned compensation upon forfeiture of awards.......................... 25,816 -- -- Amortization of unearned compensation........... 7,803 1,722 104 ------------ ----------- -------- Balance, end of year............................ (27,042) (36,365) (172) ------------ ----------- -------- Accumulated deficit: Balance, beginning of year...................... (3,162,926) (47,452) (51,407) Net income (loss)............................... (13,355,952) (3,115,474) 3,955 ------------ ----------- -------- Balance, end of year............................ (16,518,878) (3,162,926) (47,452) ------------ ----------- -------- Accumulated other comprehensive income: Balance, beginning of year...................... (702) 87,641 -- Translation adjustments......................... (3,597) 525 -- Change in unrealized gain on investments, net of tax........................................ 4,765 (88,868) 87,641 ------------ ----------- -------- Balance, end of year............................... 466 (702) 87,641 ------------ ----------- -------- Total stockholders' equity......................... $ 6,506,074 $18,470,608 $298,359 ============ =========== ========(In thousands)
Year Ended December 31,
2002
2001
2000
Net loss
$
(4,961,297
)
$
(13,355,952
)
$
(3,115,474
)
Other comprehensive income (loss):
Translation adjustments
(1,689
)
(3,597
)
525
Change in unrealized gain (loss) on investments, net of tax
(3,541
)
4,765
(88,868
)
Comprehensive loss
$
(4,966,527
)
$
(13,354,784
)
$
(3,203,817
)
See accompanying notes to consolidated financial statements.
73VERISIGN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS) (InCASH FLOWS(In thousands)
Year Ended December 31, ---------------------------------- 2001 2000 1999 ------------ ----------- -------Net income (loss)................................. $(13,355,952) $(3,115,474) $ 3,955 Other comprehensive income: Translation adjustments........................ (3,597) 525 -- Change in unrealized gain on investments, net of tax....................................... 4,765 (88,868) 87,641 ------------ ----------- ------- Comprehensive income (loss)....................... $(13,354,784) $(3,203,817) $91,596 ============ =========== =======
Year Ended December 31,
2002
2001
2000
Cash flows from operating activities:
Net loss
$
(4,961,297
)
$
(13,355,952
)
$
(3,115,474
)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of property and equipment
105,482
58,862
27,855
Amortization and write-down of goodwill and other intangible assets
4,894,714
13,569,653
3,188,950
Write-off of acquired in-process research and development
—
—
54,000
Provision for doubtful accounts
42,712
26,910
5,797
Non-cash restructuring charges
41,868
—
—
Reciprocal transactions for purchases of property and equipment
(6,375
)
(5,500
)
—
Net loss (gain) on write-down and sale of marketable securities
162,469
87,022
(34,996
)
Minority interest in net income of subsidiary
416
579
1,334
Income tax expense (benefit)
10,375
(77,922
)
—
Amortization of unearned compensation
18,956
7,803
1,722
Loss on disposal of property and equipment
2,220
6,180
520
Changes in operating assets and liabilities:
Accounts receivable
158,757
(142,824
)
(87,965
)
Prepaid expenses and other current assets
(34,295
)
(4,674
)
29,359
Accounts payable and accrued liabilities
(48,587
)
10,890
71,803
Deferred revenue
(147,324
)
46,511
49,092
Net cash provided by operating activities
240,091
227,538
191,997
Cash flows from investing activities:
Purchases of investments
(132,119
)
(1,284,047
)
(1,205,170
)
Proceeds from maturities and sales of investments
423,610
1,383,029
640,803
Purchases of property and equipment
(176,233
)
(380,269
)
(58,778
)
Net cash acquired (paid) in business combinations
(348,643
)
(52,640
)
835,758
Merger related costs
(53,554
)
(24,127
)
(62,594
)
Other assets
4,448
(31,032
)
(26,015
)
Net cash provided by (used in) investing activities
(282,491
)
(389,086
)
124,004
Cash flows from financing activities:
Proceeds from issuance of common stock
20,670
80,209
71,687
Repurchase of common stock
—
(69,514
)
—
Collections on notes receivable from stockholders
—
—
521
Investment in VeriSign Japan K.K.
268
142
1,246
Payments of debt
(615
)
—
—
Net cash provided by financing activities
20,323
10,837
73,454
Effect of exchange rate changes
(1,689
)
(3,597
)
525
Net (decrease) increase in cash and cash equivalents
(23,766
)
(154,308
)
389,980
Cash and cash equivalents at beginning of year
306,054
460,362
70,382
Cash and cash equivalents at end of year
$
282,288
$
306,054
$
460,362
Supplemental cash flow disclosures:
Noncash investing and financing activities:
Issuance of common stock for business combinations
$
—
$
1,370,239
$
21,273,369
Income tax benefit from exercise of stock options
$
—
$
—
$
67,448
Unrealized gain (loss) on investments, net of tax
$
(3,541
)
$
4,765
$
(88,868
)
Cash paid for income taxes
$
23,011
$
4,169
$
1,267
See accompanying notes to consolidated financial statements.
74VERISIGN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year Ended December 31, ------------------------------------ 2001 2000 1999 ------------ ----------- ---------Cash flows from operating activities: Net income (loss).................................. $(13,355,952) $(3,115,474) $ 3,955 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization of property and equipment....................................... 58,862 27,855 5,404 Amortization and write-down of goodwill and other intangible assets......................... 13,569,653 3,188,950 -- Write-off of acquired in-process research and development..................................... -- 54,000 -- Provision for doubtful accounts.................. 26,910 5,797 859 Reciprocal transactions for purchases of property and equipment.......................... (5,500) -- -- Net loss (gain) on sale and write-down of marketable securities........................... 87,022 (34,996) -- Minority interest in net income (loss) of subsidiary...................................... 579 1,334 (836) Deferred income taxes............................ (77,922) -- -- Amortization of unearned compensation............ 7,803 1,722 104 Loss on disposal of property and equipment....... 6,180 520 381 Changes in operating assets and liabilities: Accounts receivable............................. (142,824) (87,965) (13,817) Prepaid expenses and other current assets....... (4,674) 29,359 (1,461) Accounts payable and accrued liabilities........ 10,890 71,803 1,395 Deferred revenue................................ 46,511 49,092 18,681 ------------ ----------- --------- Net cash provided by operating activities...... 227,538 191,997 14,665 ------------ ----------- --------- Cash flows from investing activities: Purchases of investments........................... (1,284,047) (1,205,170) (159,134) Proceeds from maturities and sales of investments.. 1,383,029 640,803 65,099 Purchases of property and equipment................ (380,269) (58,778) (6,019) Net cash (paid) acquired in purchase transactions.. (52,640) 835,758 -- Transaction costs.................................. (24,127) (62,594) -- Other assets....................................... (31,032) (26,015) (3,168) ------------ ----------- --------- Net cash provided by (used in) investing activities................................... (389,086) 124,004 (103,222) ------------ ----------- --------- Cash flows from financing activities: Net proceeds from issuance of common stock......... 80,209 71,687 135,744 Repurchase of common stock......................... (69,514) -- -- Collections on notes receivable from stockholders.. -- 521 409 Investment in VeriSign Japan KK.................... 142 1,246 -- ------------ ----------- --------- Net cash provided by financing activities...... 10,837 73,454 136,153 ------------ ----------- --------- Effect of exchange rate changes..................... (3,597) 525 -- ------------ ----------- --------- Net (decrease) increase in cash and cash equivalents........................................ (154,308) 389,980 47,596 Cash and cash equivalents at beginning of year...... 460,362 70,382 22,786 ------------ ----------- --------- Cash and cash equivalents at end of year............ $ 306,054 $ 460,362 $ 70,382 ============ =========== ========= Supplemental cash flow disclosures: Noncash investing and financing activities: Issuance of common stock for business combinations.................................... $ 1,370,239 $21,273,369 $ -- ============ =========== ========= Income tax benefit from exercise of stock options......................................... $ -- $ 67,448 $ 29,778 ============ =========== ========= Unrealized gain (loss) on investments, net of tax............................................. $ 4,765 $ (88,868) $ 87,641 ============ =========== ========= Cash paid for income taxes....................... $ 4,169 $ 1,267 $ 698 ============ =========== =========See accompanying notes to consolidated financial statements. 75VERISIGN, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001
2000AND19992000Note 1. Description of Business and Summary of Significant Accounting Policies
Description of Business
VeriSign, Inc., a Delaware corporation, is a leading provider of
digital trustcritical infrastructure services that enable Web site owners, enterprises, communications service providers, electronic commerce service providers and individuals to engage in secure digital commerce and communications.VeriSign's digital trustVeriSign’s services include three core offerings:managedInternet security andnetworkregistry services,registry andtelecommunications services, and Web presence services. VeriSign markets its products andtrust services. Theseservicesprovide the criticalthrough its direct sales force, telesales operations, member organizations in its global affiliate network, value-added resellers, service providers, and its Webidentity, authentication and transaction infrastructure that online businesses need to establish their Web identities and to conduct secure e-commerce and communications and support businesses and consumers from their first establishmentsites.Principles of
an Internet presence throughout the lifecycle of e-commerce activities.ConsolidationThe accompanying consolidated financial statements include the accounts of VeriSign and its subsidiaries after elimination of intercompany accounts and transactions. As of December 31,
2001,2002, VeriSign owned approximately 67.7% and 50.2% of the outstanding shares of capital stock of itssubsidiary,subsidiaries, VeriSign Japan K.K. and VeriSign Australia Limited, respectively. The minority interest in VeriSign Japan K.K.isand VeriSign Australia Limited are included in other long-term liabilities in the accompanying consolidated balance sheets. Changes inVeriSign'sVeriSign’s proportionate share of the net assets of both VeriSign Japan K.K. and VeriSign Australia Limited resulting from sales of capital stock by the subsidiary are accounted for as equity transactions.Use of Estimates
The discussion and analysis of VeriSign’s financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of
consolidatedthese financial statementsin conformity with generally accepted accounting principlesrequires management to make estimates andassumptionsjudgments that affect the reported amounts of assets, liabilities, revenues andliabilitiesexpenses, anddisclosurerelated disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, allowance for doubtful accounts, investments and long-lived assets. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilitiesat the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period.that are not readily available from other sources. Actual resultscouldmay differ fromthose estimates.these estimates under different assumptions or conditions.Cash and Cash Equivalents
and InvestmentsVeriSign considers all highly liquid investments with original maturities of three months or less at the date of acquisition to be cash equivalents. Cash and cash equivalents include money market funds, commercial paper and various deposit accounts.
VeriSign's investments in marketable securities are classified as "available-for-sale" and are carried at fair value based on quoted market prices. These investments consist primarily of U.S. government and agency securities, corporate bonds and notes, municipal bonds, asset-backed securities and medium-term notes. VeriSign has the intent to maintain a liquid portfolio and has the ability to redeem its investments at their carrying amounts. Therefore, all marketable investments at December 31, 2001 have been classified as short-term investments. Previously, investments with original maturities greater than twelve months at the time of purchase were classified as long-term investments because VeriSign's intent was to hold these investments for more than one year. VeriSign's investments in debt and equity securities of non-public 76VERISIGN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 2001, 2000 AND 1999 companies are classified as long-term investments. Realized gains and losses upon sale or maturity of investments are determined using the specific identification method.Short-Term Investments
VeriSign invests in debt and equity securities of technology companies for business and strategic purposes. Investments in public companies are classified as
"available-for-sale"“available-for-sale” and are included in short-term investments in the consolidated financial statements. These investments are carried at fair value based on quoted market prices. VeriSign reviews its marketable equity holdings inpublicly-tradedpublicly traded companies on a regular basis to determine if any security has experienced an other-than-temporary decline in its fair value. VeriSign considers the investeecompany'scompany’s cash position, earnings and revenue outlook, stock price performance over the pastVERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
six months, liquidity and management,
ownership,among other factors, in its review. If it is determined that an other-than-temporary decline in fair value exists in a marketable equity security, VeriSignwrites down the investment to its market value andrecordsthe related write-down asan investment loss in its consolidatedstatementsstatement of operations.Fair Value of Financial Instruments
The fair value of VeriSign’s cash, accounts receivable, long-term investments, accounts payable and long-term debt approximates the carrying amount, which is the amount for which the instrument could be exchanged in a current transaction between willing parties.
Long-Term Investments
Investments in non-public companies are included in long-term investments in the consolidated balance sheets and are accounted for under the cost method. For these non-quoted investments, VeriSign regularly reviews the assumptions underlying the operating performance and cash flow forecasts based on information requested from these privately held companies. Generally, this information may be more limited, may not be as timely and may be less accurate than information available from publicly traded companies. Assessing each
investment'sinvestment’s carrying value requires significant judgment by management. If it is determined that an other-than-temporary decline exists in a non-public equity security, VeriSignwrites downwrites-down the investment to its fair value and records the related write-down as an investment loss in its consolidatedstatementsstatement of operations. Generally, if cash balances are insufficient to sustain theinvestee'sinvestee’s operations for a six-month periodwe considerand there are no current prospects of future funding for the investee, VeriSign considers the decline in fair value to beother than temporary.other-than-temporary. During 2002 and 2001, VeriSign determined that the decline in value of certain of its public and non-public equity investments wasother than temporaryother-than-temporary and recordeda write-downwrite-downs of these investments totaling $170.9 million and $89.1million.million, respectively.From time to time, VeriSign may recognize revenues from companies in which it also has made an investment. In addition to its normal revenue recognition policies, VeriSign also considers the amount of other third-party investments in the company, its earnings and revenue outlook, and its operational performance in determining the propriety and amount of revenues to recognize. If the investment is made in the same quarter that revenues are recognized, VeriSign looks to the investments of other third parties made at that time to establish the fair value of
VeriSign'sVeriSign’s investment in the company as well as to support the amount of revenues recognized. VeriSign typically makes its investments with others where its investment is less than 50% of the total financing round.VeriSign'sVeriSign’s policy is not to recognize revenue in excess of otherinvestors'investors’ financing of the company. VeriSign recognized revenues totaling $27.1 million in 2002, $64.0 million in 2001 and $13.2 million in 2000 from customers, including VeriSign Affiliates, with whom it had previously participated in a private equity round of financing.Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is VeriSign’s best estimate of the amount of probable credit losses in VeriSign’s existing accounts receivable. VeriSign determines the allowance based on historical write-off experience, current market trends and for larger accounts, the ability to pay outstanding balances. VeriSign continually reviews its allowance for doubtful accounts. Past due balances over 90 days and other higher risk amounts are reviewed individually for collectibility. Account balances are charged against the allowance after all collection efforts have been exhausted and the potential for recovery is considered remote.
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, 40 years for buildings and three to five years for computer equipment, purchased software, office equipment, and furniture and fixtures. Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful lives of the assets or
remaininglease terms.77VERISIGN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 2001, 2000 AND 1999Capitalized Software
Costs incurred in connection with the development of software products are accounted for in accordance with Statement of Financial Accounting Standards
("SFAS"(“SFAS”) No. 86,"Accounting“Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed."” Development costs incurred in the research and development of new software products, and enhancements to existing software products are expensed as incurred until technological feasibility in the form of a working model has been established. To date,VeriSign'sVeriSign’s software has been available for general release concurrent with the establishment of technological feasibility, and accordingly no such costs have been capitalized.Software included in property and equipment includes amounts paid for purchased software and implementation services for software used internally that has been capitalized in accordance with the American Institute of Certified Public Accountants Statement of Position
("SOP"(“SOP”) No. 98-1. In 2002 and 2001, VeriSign capitalized $28.8 million and $8.0 million, respectively, of implementation and consulting services from third parties for software that is used internally.NoIn 2002, $19.1 million of costs related to internally developed software were capitalized. No such costs were capitalized in 2001.Goodwill and Other Intangible Assets
Goodwill represents the excess of costs over fair value of assets of businesses acquired. VeriSign adopted the provisions of SFAS No. 142,“Goodwill and Other Intangible Assets,” as of January 1, 2002. Goodwill and other intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. As of the date of adoption of SFAS No. 142, $5.0 billion of goodwill, net of accumulated amortization, including workforce in place, ceased to be amortized. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their finite residual values, and reviewed for impairment in accordance with SFAS No. 144,“Accounting for Impairment or Disposal of Long-Lived Assets.”
Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight-line basis over the expected periods to be benefited, generally three to four years, and assessed for recoverability by determining whether the amortization of the goodwill balance over its remaining life could be recovered through undiscounted future operating cash flows of the acquired operation. All other intangible assets were amortized on a straight-line basis, generally from two to four years. The amount of the impairment of goodwill and other intangible assets, if any, was measured based on projected discounted future operating cash flows using a discount rate reflecting VeriSign’s average cost of funds.
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
Had the provisions of SFAS No. 142 been in effect for all periods presented, VeriSign’s net loss would have been
capitalized.as follows:
Year Ended December 31,
2002
2001
2000
(In thousands, except per share data)
Net loss:
Net loss as reported
$
(4,961,297
)
$
(13,355,952
)
$
(3,115,474
)
Add back amortization of goodwill and workforce in place
—
3,409,621
3,011,921
Net loss as adjusted
$
(4,961,297
)
$
(9,946,331
)
$
(103,553
)
Net loss per share:
Basic and diluted as reported
$
(20.97
)
$
(65.64
)
$
(19.57
)
Add back amortization of goodwill and workforce in place
—
16.76
18.92
Basic and diluted as adjusted
$
(20.97
)
$
(48.88
)
$
(0.65
)
Impairment of Long-Lived Assets
In accordance with SFAS No. 144, long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such events or circumstances include, but are not limited to, a significant decrease in the fair value of the underlying business, a significant decrease in the benefits realized from an acquired business, difficulties or delays in integrating the business or a significant change in the operations of an acquired business. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds its fair value.
Goodwill and acquired intangible assets not subject to amortization are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. For goodwill, an impairment loss is recognized when its carrying amount exceeds its implied fair value as defined by SFAS No. 142. For acquired intangible assets not subject to amortization, an impairment loss is recognized to the extent that the carrying amount of the asset exceeds its fair value.
Prior to the adoption of SFAS No. 144, VeriSign accounted for long-lived assets in accordance with SFAS No. 121,“Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.”
Foreign Currency Translation
The functional currency for
substantially allseveral ofVeriSign'sVeriSign’s international subsidiaries is the U.S.dollar;Dollar; however, thesubsidiaries'subsidiaries’ books of record are maintained in local currency. As a result, thesubsidiaries'subsidiaries’ financial statements are remeasured into U.S.dollarsDollars using a combination of current and historical exchange rates and any transaction gains and losseswhich have not been significant,are included in operating results.The financial statements of the subsidiaries for which the local currency is the functional currency are translated into U.S.
dollarsDollars using the current rate for assets and liabilities and aweighted averageweighted-average rate for theVERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
period for revenues and expenses. The cumulative translation adjustment that results from this translation is included in accumulated other comprehensive
income.income (loss).Revenue Recognition
VeriSign derives revenues from three primary categories:
Web presence and trust(i) security services, which includedomain name registrationmanaged security and network services, Web trust services and paymentservices; managed security and network services, which include enterprise and affiliate PKIservices, andenterprise consultingregistry services;and registry and(ii) telecommunications services, which includeregistry services,connectivity, intelligentnetwork,networks, wireless and clearinghouse services; and (iii) domain name registration services. The revenue recognition policy for each of these areas is as follows:Domain Name Registration Services
Domain name registration revenues consist primarily of registration fees charged to customers and registrars for domain name registration services. Revenues from the
saleinitial registration or renewal of domain name registration services are deferred and recognized ratably over the registration term, generally one to two years and up to10ten years.Domain name registration renewal fees are estimated and recorded based on
recentrenewal and collection rates. Customers are notified of the expiration of their registration in advance, and VeriSign78VERISIGN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 2001, 2000 AND 1999records the receivables for estimated renewal fees in the month preceding the anniversary date of their registration whenitVeriSign has a right to bill under the terms of domain name registration agreements. The variance between the actual collections and the rate used to estimate the renewal fees is reflected in the setting of renewal rates for prospectiverenewal rates.periods. Fees for renewals and advance extensions to the existing term are deferred until the new incremental period commences. These fees are then recognized ratably over the new registration term, ranging from one to ten years.Security Services and Registry Services
Revenues from the licensing of digital certificate technology and business process technology are derived from arrangements involving multiple elements including post-contract customer support, or PCS, training and other services. These licenses, which do not provide for right of return, are primarily perpetual licenses for which revenues are recognized
up frontup-front once all criteria for revenue recognition have been met.Revenues from the sale or renewal of digital certificates are deferred and recognized ratably over the life of the digital certificate, generally 12 months. Revenues from the sale of
OnSitemanaged PKI services are deferred and recognized ratably over the term of the license, generally 12 to 36 months.MaintenancePCS is bundled withOnSitemanaged PKI services licenses and recognized over the license term.VeriSign recognizes revenues from issuances of digital certificates and business process licensing to VeriSign
affiliatesAffiliates in accordance with SOP 97-2,"Software“Software Revenue Recognition,"” as amended by SOP 98-9, andgenerallyrecognizes revenues when all of the following criteria aremet as set forth in paragraph 8 of SOP 97-2:met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the fee is fixed or determinable and (4) collectibility is probable. VeriSign defines each of these four criteria as follows:Persuasive evidence of an arrangement exists. It is
VeriSign'sVeriSign’s customary practice to have a written contract, which is signed by both the customer and VeriSign, or a purchase order from those customers who have previously negotiated a standard license arrangement with VeriSign.VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
Delivery has occurred.
VeriSign'sVeriSign’s software may be either physically or electronically delivered to the customer. Electronic delivery is deemed to have occurred upon download by the customer from an FTP server. If an arrangement includes undelivered products or services that are essential to the functionality of the delivered product, delivery is not considered to have occurred until these products or services are delivered.The fee is fixed or determinable.
VeriSign'sIt is VeriSign’s policyisto not provide customers the right to a refund of any portion oftheirits license fees paid. VeriSign may agree to extended payment terms with a foreign customer based on local customs. Generally, at least 80% of the arrangement fees are due within one year or less. Arrangements with payment terms extending beyond these customary payment terms are considered not to be fixed or determinable, and revenues from such arrangements are recognized as payments become due and payable.Collectibility is probable. Collectibility is assessed on a customer-by-customer basis. VeriSign typically sells to customers for whom there is a history of successful collection. New customers are subjected to a credit review process that evaluates the
customers'customer’s financial position and ultimately their ability to pay. If it is determined from the outset of an arrangement that collectibility is not probable based uponVeriSign'sVeriSign’s credit review process, revenues are recognized as cash is collected.79VERISIGN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 2001, 2000 AND 1999VeriSign allocates revenues on software arrangements involving multiple elements to each element based on the relative fair
valuesvalue of each element.VeriSign'sVeriSign’s determination of fair value of each element in multiple element arrangements is based on vendor-specific objective evidence("VSOE").of fair value, or VSOE. VeriSign limits its assessment of VSOE for each element to the price charged when the same element is sold separately. VeriSign has analyzed all of the elements included in its multiple-element arrangements and determined that it has sufficient VSOE to allocate revenues tomaintenance and support service,PCS, professional services and training components of its perpetual license arrangements. VeriSign sells its professional services and training separately, and has established VSOE on this basis. VSOE formaintenance and supportPCS is determined based upon thecustomer'scustomer’s annual renewal rates for these elements. Accordingly, assuming all other revenue recognition criteria are met, revenues from perpetual licenses are recognized upon delivery using the residual method in accordance with SOP 98-9.VeriSign recognizes revenues from licenses in which maintenance is bundled with the software license, such as for digital certificates, digital certificate provisioning and OnSite managed services ratably over the license term of one to three years. VeriSign'sVeriSign’s consulting services generally are not essential to the functionality of the software.
VeriSign'sVeriSign’s software products are fully functional upon deliveryand implementationand do not require any significant modification or alteration. Customers purchase these consulting services to facilitate the adoption ofVeriSign'sVeriSign’s technology and dedicate personnel to participate in the services being performed, but they may also decide to use their own resources or appoint other consulting service organizations to provide these services. Software products are billed separately and independently from consulting services, which are generally billed on a time-and-materials or milestone-achieved basis.VeriSign generally recognizes revenues from consulting services as the services are performed.Revenues from consulting
and trainingservices are recognized using either the percentage-of-completion method or on a time-and-materials basis as work is performed. Percentage-of-completion is based upon the ratio of hours incurred to total hours estimated to be incurred forfixed-fee development arrangements orthe project. VeriSign has a history of accurately estimating project status and the hours required to complete projects. If different conditions were to prevail such that accurate estimates could not be made, then the use of the completed contract method would be required and all revenue and costs would be deferred until the project was completed. Revenues from training are recognized asthe services are provided for time-and-materials arrangements.training is performed.Revenues from third-party product sales are recognized when title to the products sold passes to the customer.
VeriSign'sVeriSign’s shipping terms generally dictate that the passage of title occurs upon shipment of the products to the customer.VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
Revenues from payment services primarily consist of a set-up fee and a monthly service fee for the transaction processing services. In accordance with SEC Staff Accounting Bulletin
("SAB"(“SAB”) No. 101,"Revenue“Revenue Recognition in Financial Statements,"” revenues fromtheset-upfeefees are deferred and recognized ratably over the period that the fees are earned. Revenues from the service fees are recognized ratably over the periods in which the services are provided. Advance customer deposits received are deferred and allocated ratably to revenue over the periods the services are provided.Telecommunications Services
Revenues from
networktelecommunications services are comprised of network connectivity revenues and intelligent network servicesrevenues.revenues, and wireless billing and customer care services. Network connectivity revenues are derived from establishing and maintaining connection toVeriSign'sVeriSign’s SS7 network and trunk signaling services. Revenues from network connectivity consist primarily of monthly recurring fees, and trunk signaling service revenues are charged monthly based on the number of switches to which a customer signals. The initial connection fee and related costs are deferred and recognized over the term of the arrangement. Intelligent network services, which include calling card validation, local number portability, wireless services, toll-free database access and caller80VERISIGN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 2001, 2000 AND 1999identification are derived primarily from database administration and database query services and are charged on a per-use or per-query basis.PrepaidRevenues from prepaid wireless account management services and unregistered wireless roaming services are based on the revenue retained by VeriSign and recognized in the period in which such calls are processedby VeriSignon a per-minute or per-call basis. Revenues from wireless billing and customer care services primarily represent a monthly recurring fee for every subscriber activated by VeriSign’s wireless carrier customers.Clearinghouse services revenues are derived primarily from serving as a distribution and collection point for billing information and payment collection for services provided by one carrier to customers billed by another. Clearinghouse revenues are earned based on the number of messages processed. Included in prepaid expenses and other current assets are amounts from customers that are related to VeriSign’s telecommunications services for third-party network access, data base charges and clearinghouse toll amounts that have been invoiced and remitted to the customer.
Reciprocal Agreements
On occasion, VeriSign has purchased goods or services for its operations from organizations
such as IBM, Oracle, Phoenix Technologies and Infospaceat or about the same time thatitVeriSign has licensed its software to these organizations. These transactions are recorded at terms VeriSign considers to be fair value. For these reciprocal arrangements, VeriSign considers Accounting Principles Board("ABP"(“APB”) Opinion No. 29,"Accounting“Accounting for Nonmonetary Transactions",” and Emerging Issues Task Force("EITF"(“EITF”) Issue No. 01-02,"Interpretation“Interpretation of APB Opinion No. 29,"” to determine whether the arrangement is a monetary or nonmonetary transaction. Transactions involving the exchange of boot representing 25% or greater of the fair value of the reciprocal arrangement are considered monetary transactions within the context of APB Opinion No. 29 and EITF Issue No. 01-02. Monetary transactions and nonmonetary transactions that represent the culmination of an earnings process are recorded at the fair value of the products delivered or products or services received, whichever is more readily determinable, providingthethat fair values are determinable within reasonable limits. In determiningthefair values, VeriSign considers the recent history of cash sales of the same products or services in similar sized transactions. Revenues from such transactions may be recognized over a period of time as the products or services are received. For nonmonetary reciprocal arrangements that do not represent the culmination of the earnings process, the exchange is recorded based on the carrying value of the products delivered, which is generally zero.VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
Revenues recognized under reciprocal arrangements were approximately $14.0 million in 2002, of which $9.7 million involved nonmonetary transactions and recognized revenues of approximately $37.5 million in 2001, of which $27.0 million involved nonmonetary transactions, as defined above. VeriSign did not recognize any revenues under reciprocal arrangements in
20002000.Allowance for doubtful accounts
VeriSign maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. VeriSign regularly reviews the adequacy of the accounts receivable allowance after considering the size of the accounts receivable balance, each customer’s expected ability to pay and
1999.the collection history with each customer. VeriSign reviews significant invoices that are past due to determine if an allowance is appropriate based on the risk category using the factors described above. In addition, VeriSign maintains a general reserve for all invoices by applying a percentage based on the age category. VeriSign also monitors its accounts receivable for concentration to any one customer, industry or geographic region. To date VeriSign’s receivables have not had any particular concentrations that, if not collected, would have a significant impact on operating income. VeriSign requires all acquired companies to adopt our credit policies. The allowance for doubtful accounts represents VeriSign’s best estimate, but changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future.Advertising Expense
Advertising costs are expensed as incurred and are included in sales and marketing expense in the accompanying consolidated statements of operations. Advertising expense was
$102,429,000$52.1 million in 2002, $102.4 million in 2001$90,478,000and $90.5 million in2000 and $3,037,000 in 1999.2000.Income Taxes
VeriSign uses the asset and liability method to account for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the
81VERISIGN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 2001, 2000 AND 1999enactment date. VeriSign records a valuation allowance to reduce deferred tax assets to an amount whose realization is more likely than not.VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
Stock Compensation Plans and Unearned Compensation
At December 31, 2002, VeriSign has four stock-based employee compensation plans, including two terminated plans under which options are outstanding but no further grants can be made, and two active plans. VeriSign accounts for
its stock compensationthese plansusingunder theintrinsic value methodrecognition and measurement principals of APB Opinion No. 25,("APB 25"), "Accounting“Accounting for Stock Issued to Employees." In accordance with FASB Interpretation” The following table illustrates the effect on net loss and net loss per share if VeriSign had applied the fair value recognition provisions of SFAS No.44 ("FIN 44"), "Accounting123,“Accounting forCertain Transactions Involving StockStock-Based Compensation,an Interpretation of APB 25," VeriSign allocates” tounearned compensation a portion of the intrinsicstock-based employee compensation.
Year Ended December 31,
2002
2001
2000
(In thousands, except per share data)
Net loss, as reported
$
(4,961,297
)
$
(13,355,952
)
$
(3,115,474
)
Deduct: Equity-based compensation determined under the fair value method for all awards, net of tax
(240,731
)
(263,659
)
(130,948
)
Add: Unearned compensation related to acquisitions included in reported net loss, net of tax
18,953
7,803
1,722
Pro forma net loss
$
(5,183,075
)
$
(13,611,808
)
$
(3,244,700
)
Basic and diluted net loss per share:
As reported
$
(20.97
)
$
(65.64
)
$
(19.57
)
Pro forma equity-based compensation
(0.94
)
(1.26
)
(0.82
)
Pro forma basic and diluted net loss per share
$
(21.91
)
$
(66.90
)
$
(20.39
)
The fair value of
unvestedstock optionsif any, assumed in purchase business combinations completed after July 1, 2000,and Employee Stock Purchase Plan options was estimated on the date ofadoption of FIN 44. These amounts are amortized to expensegrant using thestraight-line method overBlack-Scholes model. The following table sets forth theremaining vesting periodsweighted-average assumptions used to calculate the fair value of therespective options.stock options and Employee Stock Purchase Plan options for each period presented.
Year Ended December 31,
2002
2001
2000
Stock options:
Volatility
110%
100%
115%
Risk-free interest rate
3.96%
4.25%
6.06%
Expected life
3.5 years
3.5 years
3.5 years
Dividend yield
zero
zero
zero
Employee Stock Purchase Plan options:
Volatility
110%
100%
115%
Risk-free interest rate
1.98%
4.07%
6.20%
Expected life
1.25 years
1.25 years
1.05 years
Dividend yield
zero
zero
zero
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
Other Comprehensive Income (Loss)
Other comprehensive income (loss) includes foreign currency translation adjustments and unrealized gains and losses on marketable securities classified as
available-for-sale and foreign currency translation adjustments.available-for-sale. The following table summarizes the adjustments in the components of other comprehensive income (loss) during 2002:
Foreign Currency
Translation
Adjustments
Gain (Loss)
Unrealized Gain (Loss)
On Investments,
Net of Tax
Total Accumulated
Other Comprehensive
Income (Loss)
(In thousands)
Balance, December 31, 2001
$
(3,072
)
$
3,538
$
466
Adjustments
(1,689
)
(3,541
)
(5,230
)
Balance, December 31, 2002
$
(4,761
)
$
(3
)
$
(4,764
)
Concentration of Credit Risk
Financial instruments that potentially subject VeriSign to significant concentrations of credit risk consist principally of cash, cash equivalents, short and long-term investments and accounts receivable. VeriSign maintains its cash, cash equivalents and investments in marketable securities with high quality financial institutions and, as part of its cash management process, performs periodic evaluations of the relative credit standing of these financial institutions. In addition, the portfolio of investments in marketable securities conforms to
VeriSign'sVeriSign’s policy regarding concentration of investments, maximum maturity and quality of investment. Concentration of credit risk with respect to accounts receivable is limited by the diversity of the customer base and geographic dispersion. VeriSign also performs ongoing credit evaluations of its customers and generally requires no collateral. VeriSign maintains an allowance for potential credit losses on its accounts receivable. Amounts added to the allowance for doubtful accounts through charges to bad debt expense totaled$26,910,000$42.7 million in 2002, $26.9 million in 2001$5,797,000and $5.8 million in2000 and $859,000 in 1999.2000. Uncollectible amounts written off totaled$7,881,000$39.2 million in 2002, $7.9 million in 2001$1,644,000and $1.6 million in2000 and $268,000 in 1999. Impairment of Long-Lived Assets VeriSign's long-lived assets consist primarily of goodwill and other intangible assets and property and equipment. VeriSign reviews long-lived assets for impairment whenever events or changes in circumstances indicate that2000.Reclassifications
Certain reclassifications to VeriSign’s Consolidated Financial Statements have been made to conform to the
carrying amount of such an asset may not be recoverable.2002 presentation. Suchevents or circumstances include, butreclassifications are notlimited to, a significant decrease in the fair value of the underlying business, a significant decrease in the benefits realized from the acquired business, difficulties or delays in integrating the business or a significant change in the operations of the acquired business. Recoverability of long-lived assets is measured by comparison of the carrying amount to estimated future undiscounted net cash flows the assets are expected to generate. Those cash flows include an 82VERISIGN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 2001, 2000 AND 1999 estimated terminal value based on a hypothetical sale of an acquisition at the end of its goodwill amortization period. If assets areconsideredto be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the long-lived asset exceeds its fair value.significant.Recently Issued Accounting Pronouncements
In June
2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for under the purchase method for business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is no longer permitted. VeriSign adopted the provisions of SFAS No. 141 commencing July 1, 2001. VeriSign has accounted for all of its business combinations in 2001 and 2000 as purchases and the adoption of SFAS No. 141 is not expected to have a significant impact on its financial position or results of operations. SFAS No. 142 requires that goodwill resulting from a business combination will no longer be amortized to earnings, but instead be reviewed for impairment. VeriSign is required to adopt SFAS No. 142 as of January 1, 2002. For goodwill resulting from business combinations prior to July 1, 2001, amortization of goodwill continued through December 31, 2001, but ceased commencing January 1, 2002. For business combinations occurring on or after July 1, 2001, the associated goodwill will not be amortized. Upon adoption of SFAS No. 142, VeriSign is required to perform a transitional impairment test for all recorded goodwill within six months and, if necessary, determine the amount of an impairment loss by December 31, 2002. The adoption of SFAS No. 142 will reduce the amount of amortization of goodwill and intangible assets from approximately $460 million per quarter to approximately $84 million per quarter, including the impact of all acquisitions through December 31, 2001, excluding the impact of H.O. Systems and assuming no other acquisitions or impairment charges. In addition, approximately $10.9 million of intangible assets previously allocated to workforce in place will be subsumed into goodwill as of January 1, 2002. Management is currently evaluating the effect, if any, of the required impairment testing on VeriSign's recorded goodwill, which had a net book value of $4.9 billion at December 31, 2001. In August 20012002, the FASB issued SFAS No.143, "Accounting146,“Accounting forAsset Retirement Obligations" and in October issuedCosts Associated with Exit or Disposal Activities.” SFAS No.144, "Accounting146 eliminates Emerging Issues Task Force, or EITF, Issue No. 94-3“Liability Recognition forthe Impairment or Disposal of Long-Lived Assets."Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring).” Under SFAS No.143 requires146, liabilities for costs associated with an exit or disposal activity are recognized when the liabilities are incurred, as opposed to being recognized at the date of an entity’s commitment to an exit plan under EITF No. 94-3. Furthermore, SFAS No. 146 establishes thatthefair value is the objective for initial measurement ofan asset retirement obligationthe liabilities. This Statement will berecorded as a liability in the period in which the obligation is incurred. SFAS No. 144 addresses financial accounting and reportingeffective forthe impairmentexit or disposalof long-lived assets and supercedes SFAS No. 121 and the accounting and reporting provisions of APB Opinion No. 30 as it relates to the disposal of a segment of a business. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 and SFAS No. 144 is effective for fiscal years beginningactivities that are initiated after December15, 2001. VeriSign has adopted SFAS No. 144 effective January 1, 2002 and SFAS No. 143 will be adopted effective January 1, 2003.31, 2002. The effect of adoptingthese StatementsSFAS No. 146 is not expected to have a material effect onVeriSign'sVeriSign’s consolidated financial position or results of operations.83The effect on timing of recognition of liabilities could be significantly different from previous restructurings. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123,“Accounting for Stock-BasedCompensation,”
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS--STATEMENTS—(Continued)DECEMBER 31, 2002, 2001
2000AND19992000to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The annual disclosure provisions of SFAS No. 148 are currently effective for these financial statements. The interim disclosure provisions are effective for financial reports containing financial statements for interim or annual periods beginning after December 15, 2002. VeriSign has determined that the adoption of SFAS No. 148 will not have a material effect on its consolidated financial position, results of operations or cash flows.
In November 2002, the FASB issued Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34.” This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on VeriSign’s financial statements. VeriSign has not incurred significant obligations under customer indemnification or warranty provisions historically and does not expect to incur significant obligations in the future. Accordingly, VeriSign does not maintain accruals for potential customer indemnification or warranty-related obligations. The annual disclosure requirements are effective for these financial statements and for interim periods ending after December 15, 2002. The adoption of FASB Interpretation No. 45 did not have a material effect on VeriSign’s consolidated financial position, results of operations or cash flows.
In January 2003, the FASB issued Interpretation No. 46,“Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin (“ARB”) No. 51.” This Interpretation requires companies to include in their consolidated financial statements the assets, liabilities and results of activities of variable interest entities if the company holds a majority of the variable interests. The consolidated requirements of this Interpretation are effective for variable interest entities created after January 31, 2003 of for entities in which an interest is acquired after January 31, 2003. The consolidation requirements of this Interpretation are effective June 15, 2003 for all variable entities acquired before February 1, 2003. This Interpretation also requires companies that expect to consolidate a variable interest entity they acquired before February 1, 2003 to disclose the entities nature, size, activities, and the company’s maximum exposure to loss in financial statements issued after January 31, 2003. VeriSign has determined that FASB Interpretation No. 46 will not have a material effect on its consolidated financial position, results of operations or cash flows.
Note 2. Business Combinations
Acquisitions in 2002
H.O. Systems, Inc.
In February 2002, VeriSign completed its acquisition of H.O. Systems, Inc., a provider of billing and customer care solutions to wireless telecommunications carriers, to complement VeriSign’s acquisition of Illuminet Holdings, Inc., a provider of telecommunications services. VeriSign paid approximately $350 million in cash for all of the outstanding stock of LiveWire Corp., H.O. Systems’ parent company, for the purchase of H.O. Systems. As part of the purchase price, VeriSign recorded an accrual for merger related costs of $17 million of which $1.0 million remained in the accrued merger costs balance as of December 31, 2002. The total purchase price has been allocated to the tangible and intangible assets acquired and the liabilities assumed based on their
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
respective fair values on the acquisition date. VeriSign recorded goodwill of approximately $213 million and other intangible assets of approximately $210 million as a result of this acquisition. Other intangible assets, which includes installed customer base, technology in place and trade names, are being amortized over a six-year period. Goodwill is not amortized but will be tested for impairment at least annually. H.O. Systems’ results of operations have been included in the consolidated financial statements from its date of acquisition. The goodwill has been assigned to our Enterprise and Service Provider Division segment.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:
February 5, 2002
(In thousands)
Current assets
$
29,791
Property and equipment, net
28,513
Other long-term assets
201
Goodwill
212,923
Customer base
110,040
Technology in place
98,380
Trade name
1,850
Total assets acquired
481,698
Current liabilities
(36,022
)
Deferred income tax liabilities
(84,542
)
Other long-term liabilities
(16,538
)
Total liabilities assumed
(137,102
)
Net assets acquired
$
344,596
In July 2002, VeriSign increased its equity ownership in VeriSign Australia Limited (formerly known as eSign Australia Limited) to approximately 50.2% of the total outstanding stock of VeriSign Australia, and as a result, has included their financial statements in VeriSign’s consolidated results as of the third quarter of 2002. These results are not considered significant to the consolidated financial statements. VeriSign recorded goodwill of approximately $13 million related to its increase in equity ownership.
Acquisitions in 2001
Illuminet Holdings, Inc.
OnIn December
12,2001, VeriSign completed its acquisition of publicly traded Illuminet Holdings, Inc.("Illuminet"(“Illuminet Holdings”), apublicly tradedcompany that provides intelligent network and signaling services to telecommunications carriers.WeVeriSign acquired Illuminet Holdings to create new opportunities for data and voice services through the integration of VeriSign’s Internet infrastructure and Illuminet Holdings’ communications network. VeriSign issued approximately 30.6 million shares ofourits common stock for all of the outstanding stock of Illuminet Holdings, andwe alsoassumed all ofIlluminet'sIlluminet Holdings’ outstanding stock options,allmost of which were vested. The acquisition has been accounted for as a purchase and, accordingly, the total purchase price of approximately $1.4 billionhas been preliminarilywas allocated to the tangible and intangible assets acquired and the liabilities assumed based on their respective fair values on the acquisition date.Illuminet's resultsResults of operations for Illuminet Holdings have been included in the consolidated financial statements from its date of acquisition. As part of the purchase price,VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
VeriSign recorded a provision for
merger-relatedmerger related costs of $36.9 million. As of December 31, 2002, there was no provision for merger related costs relating to the acquisition of Illuminet Holdings remaining. As a result of the acquisition of Illuminet Holdings, VeriSign recorded goodwill of approximately $1.0 billion and other intangible assets of approximately $281 million. The intangible assets will be amortized over afour yearfour-year period.In accordance with the transitional provisions of SFAS No. 142, goodwillGoodwill related to this acquisition will not beamortized. Pro formaamortized but will be tested for impairment at least annually. Illuminet Holdings’ results of operationsreflectinghave been included in theacquisitionconsolidated financial statements from its date ofIluminet have notacquisition. The goodwill has beenpresented because Iluminet's resultsassigned to our Enterprise and Service Provider Division segment.The following table summarizes the estimated fair value of
operations are not material to VeriSign's resultsthe assets acquired and liabilities assumed at the date ofoperations.acquisition:
December 12, 2001
(In thousands)
Current assets
$
167,958
Property and equipment, net
85,359
Other long-term assets
660
Goodwill
1,026,735
Customer relationships
242,380
Contracts
25,690
Technology in place
11,020
Trade name
1,650
Total assets acquired
1,561,452
Current liabilities
(60,493
)
Deferred income tax liabilities
(112,296
)
Other long-term liabilities
(6,460
)
Total liabilities assumed
(179,249
)
Net assets acquired
$
1,382,203
Other Acquisitions in 2001
During 2001, VeriSign completed acquisitions of eleven privately held companies, or acquired certain assets of privately held companies, which were not significant, either individually or in the aggregate. VeriSign issued approximately 939,000 shares of common stock and paid approximately $151 million in cash in exchange for all of the outstanding stock of these companies. VeriSign also assumed certain of the
companies'companies’ outstanding vested and unvested stock options. Each of these transactions has been accounted for as a purchase and, accordingly, the results of the acquiredcompanies'companies’ operations are included in the consolidated financial statements from their respective dates of acquisition. As part of the purchase price, VeriSign recorded a provision formerger-relatedmerger related costs of $17.5 million in connection with thesetransactions.transactions and at December 31, 2002, a balance of $4.0 million remains accrued for future use. As a result of these acquisitions, VeriSign recorded goodwill of approximately $252 million and unearned compensation of approximately $19 million. The unearned compensationwill beis being amortized over the remaining vesting period for stock options assumed.In accordance with the transitional provisionsAs ofSFAS No. 142, goodwill related to acquisitions that were completed after June 30, 2001 will not be amortized and goodwill related to acquisitions that were completed prior to July 1, 2001 will be amortized based on a three-year life untilDecember 31, 2001,at which time$247.8 million of goodwill, net of accumulated amortization,will cease.ceased being amortized related to these acquisitions.VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
Pro forma results of operations reflecting
theseVeriSign’s 2001 acquisitions have not been presented because the results of operations of the acquired companies, either individually or collectively, are not material toVeriSign'sVeriSign’s results of operations.84VERISIGN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 2001, 2000 AND 1999 Purchase Price Allocations The purchase consideration for the acquisitions was allocated to the assets acquired and liabilities assumed based on fair values as follows:
Straight-Line Amortization Illuminet Other Period ---------- -------- ------------- (Dollars in thousands) (Years)Net tangible assets (liabilities)................ $ 187,024 $(18,343) -- Customer relationships........................... 242,380 -- 4.0 Contracts........................................ 25,690 -- 4.0 Technology in place.............................. 11,020 -- 4.0 Trade name....................................... 1,650 -- 4.0 Goodwill......................................... 1,026,735 252,121 * Unearned compensation attributable to unvested stock options assumed.......................... -- 18,905 -- Deferred income tax liabilities attributable to identifiable intangible assets................. (112,296) (14,597) -- ---------- -------- Net assets acquired.............................. $1,382,203 $238,086 ========== ========- -------- * Goodwill related to acquisitions that were completed prior to July 1, 2001 will be amortized based on a three-year life until December 31, 2001 at which time amortization will cease. Goodwill related to acquisitions that were completed after June 30, 2001 is not subject to amortization.Acquisitions in 2000
THAWTE Consulting (Pty) Ltd.
On February 1,In 2000, VeriSign completed its acquisition of privately held THAWTE Consulting (Pty) Ltd.
("THAWTE"(“THAWTE”), aprivately heldSouth African company that provides digital certificates to Web site owners and software developers. VeriSign issued approximately 4.4 million shares of its common stock in exchange for all of the outstanding stock of THAWTE. The acquisition was accounted for as a purchase and, accordingly, the total purchase price of approximately $652 million was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their respective fair values on the acquisition date.THAWTE'sTHAWTE’s results of operations have been included in the consolidated financial statements from its date of acquisition.Goodwill and otherOther intangible assets are being amortized on a straight-line basis over two to three years.EffectiveAs of December 31, 2001,amortization$159.7 million of goodwill,will cease.net of accumulated amortization related to the acquisition THAWTE ceased being amortized.Signio, Inc.
On February 29, 2000,VeriSign completed its acquisition of privately held Signio, Inc.
("Signio"(“Signio”), a privately held company thatin 2000. Signio provides payment services that connect online merchants, business-to-business exchanges, payment processors and financial institutions on the Internet. VeriSign issued approximately 5.6 million85VERISIGN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 2001, 2000 AND 1999shares of its common stock in exchange for all the outstanding stock of Signio and also assumed all ofSignio'sSignio’s outstanding stock options. The acquisition was accounted for as a purchase and, accordingly, the total purchase price of approximately $876 million was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their respective fair values on the acquisition date.Signio'sSignio’s results of operations have been included in the consolidated financial statements from its date of acquisition.Goodwill and otherOther intangible assets are being amortized on a straight-line basis over three years.EffectiveAs of December 31, 2001,amortization$14.5 million of goodwill,will cease.net of accumulated amortization, related to the acquisition of Signio ceased being amortized.Network Solutions, Inc.
On June 8,In 2000, VeriSign completed its acquisition of publicly traded Network Solutions, Inc.
("(“NetworkSolutions"Solutions”), apublicly tradedcompany that provides Internet domain name registration andglobalregistry services. The total consideration of approximately $19.6 billion was based on the fair value ofVeriSign'sVeriSign’s common stock issued, stock options assumed and merger relatedcosts. At the closing,costs of approximately $67.3 million. VeriSign issued approximately 78.3 million shares of its common stock valued at approximately $18.0 billionbased on an exchange ratio of 1.075 shares of VeriSign's common stock for each outstanding share of Network Solutions' common stock. VeriSignand assumedoutstandingoptions to purchase NetworkSolutions'Solutions’ common stock, which were converted into options to acquire approximately 9.1 million shares ofVeriSign'sVeriSign’s common stock, with a fair value of approximately $1.6billion, based on the same exchange ratio, subject to terms and conditions, including exercisability and vesting schedules,billion. As ofthe original options. As part of the purchase price, VeriSign recorded aDecember 31, 2002, there was no provision formerger-relatedmerger related costsof $67.3 million, related tofor theintegration ofNetwork Solutionsand VeriSign. The provision was associated with the activities of integration teams responsible for merging the two companies and includes such items as investment banking fees, legal fees, filing fees, provision for acceleration of stock option vesting and employee relocation expenses, as well as provisions for the write-off of duplicative information systems and prepaid director and officer insurance premiums. Approximately $52.4 million of the provision was utilized in the period from June 8, 2000 to December 31, 2000. The remainder of the provision was utilized in 2001.acquisition remaining.This transaction was accounted for as a purchase. Network
Solutions'Solutions’ results of operations have been included in the consolidated financial statements from its date of acquisition. The purchase consideration of $19.6 billion has been allocated to the estimated fair value of the assets acquired and liabilities assumed, including in-process research and development("(“IPR&D"&D”), based on their estimated fair values as of the date of the acquisition.Goodwill and otherOther intangible assets are being amortized on a straight-line basis over useful lives of three toVERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
four years.
EffectiveAs of December 31, 2001,amortization$3.5 billion of goodwill,will cease.net of accumulated amortization, related to the acquisition of Network Solutions ceased being amortized.The portion of the Network Solutions purchase price allocated to IPR&D was
$54$54.0 million, which wasexpensed during the quarter ended June 30, 2000.immediately expensed. NetworkSolution'sSolution’s IPR&D efforts focused on significant and substantial improvements and upgrades to its shared registration system("SRS"(“SRS”). The SRS is the system that provides a shared registration interface to the ICANN accredited and licensed registrars into the.com,.com, .net,and.org top level.orgtop-level domain, or TLD,nameregistry. It is through this system that registrars from all over the world are able to register domain names with the central database. Given the86VERISIGN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 2001, 2000 AND 1999high demand on the SRS, it was in need of improvements and upgrades in the area of scalability, security, non-English language capability and next generation resource provisioning protocol.As of the acquisition date, Network Solutions was in the process of developing technology that would add substantial functionality and features to the SRS. The IPR&D had not yet reached technological feasibility and had no alternative uses. The technological feasibility of the
in-process developmentIPR&D efforts is established when the enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish that the technology can be utilized to meet its design specifications including functions, features, and technical performance requirements. The development efforts related to upgrades and improvements in the SRS were completed during the first quarter of 2001.The fair value assigned to IPR&D was estimated by discounting, to present value, the cash flows attributable to the technology once it has reached technological feasibility. A discount rate of 22% was used to estimate the present value of cash flows, which was consistent with the risk of the project. The value assigned to IPR&D was the amount attributable to the efforts of the seller up to the time of acquisition. This amount was estimated through application of the
"stage“stage ofcompletion"completion” calculation by multiplying the estimated present value of future cash flows, excluding costs of completion, by the percentage of completion of the purchased research and development project at the time of acquisition.Other Acquisitions in 2000
In 2000, VeriSign completed acquisitions of several other privately held companies, which were not significant either individually or in the aggregate. VeriSign issued approximately 661,000 shares of its common stock and approximately $33.3 million in cash in exchange for all of the outstanding stock of these companies. VeriSign also
assumed outstanding stock options for certain of these acquisitions. In addition, VeriSign escrowed shares of common stock that will be released to the principal stockholders of certain of the acquired companies over an employment term. As a result, unearned compensation of approximately $30.5 million was recorded which is being amortized over the two year period of required employment. VeriSign alsorecorded a provision for merger related costs of $4.2 million for employee severance, relocation andwrite downwrite-off of duplicativesystems.systems acquired. As of December 31, 2002, there was no merger related provision relating to these acquisitions remaining. Each of the acquisitionshas beenwas accounted for as a purchase and, accordingly, the aggregate purchase price of approximately $120.2 millionhas beenwas allocated to the tangible and intangible assets acquired and the liabilities assumed based on their respective fair values on the acquisition dates. The acquiredcompanies'companies’ results of operations have been included in the consolidated financial statements from their respective dates of acquisition.Goodwill and otherOther intangible assets are being amortized on a straight-line basis over two to four and a half years.EffectiveAs of December 31, 2001,amortization$11.4 million of goodwill,will cease. 87net of accumulated amortization, related to these acquisitions ceased being amortized. Note 3. Restructuring and Other Charges
In April 2002, VeriSign announced plans to restructure its operations to rationalize, integrate and align resources. This restructuring program included workforce reductions, abandonment of excess facilities, write-off of abandoned property and equipment and other charges. As a result of this restructuring program, in conformity
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS--STATEMENTS—(Continued)DECEMBER 31, 2002, 2001
2000AND19992000with SEC Staff Accounting Bulletin (“SAB”) No. 100 and EITF Issues No. 94-3 and 88-10, VeriSign recorded restructuring and other charges of $88.6 million during 2002. VeriSign expects to incur additional restructuring charges of approximately $10 to $15 million in the first quarter of 2003 related to the restructuring of VeriSign’s consulting services.
Workforce reduction. The restructuring program resulted in a workforce reduction of approximately 400 employees across certain business functions, operating units, and geographic regions. VeriSign recorded a workforce reduction charge of $6.2 million during 2002, relating primarily to severance and fringe benefits.
Excess facilities. VeriSign recorded charges of approximately $29.7 million during 2002 for excess facilities that were either abandoned or downsized relating to lease terminations and non-cancelable lease costs. To determine the lease loss, which is the loss after VeriSign’s cost recovery efforts from subleasing an abandoned building or separable portion thereof, certain estimates were made related to the (1) time period over which the relevant space would remain vacant, (2) sublease terms, and (3) sublease rates, including common area charges. If sublease rates continue to decrease in these markets or if it takes longer than expected to sublease these facilities, the actual loss could exceed this estimate by an additional $36 million. Property and equipment that was disposed of or abandoned resulted in a net charge of $25.0 million during 2002 and consisted primarily of computer software, leasehold improvements, and computer equipment.
Exit costs and other charges. VeriSign recorded other exit costs consisting of the write-off of prepaid license fees associated with products that were originally intended to be incorporated into VeriSign’s product offerings but were subsequently abandoned as a result of the decision to restructure. These charges totaled approximately $9.1 million during 2002. As part of VeriSign’s efforts to rationalize, integrate and align resources, VeriSign also recorded other charges of $18.6 million during 2002 relating primarily to the write-off of prepaid marketing assets associated with discontinued advertising.
A summary of the restructuring and other charges recorded during 2002 are as follows:
Year Ended December 31, 2002
(In thousands)
Workforce reduction
$
6,207
Excess facilities
29,689
Write-off of property and equipment
25,011
Exit costs and other charges
27,667
$
88,574
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
At December 31, 2002, the accrued liability associated with the restructuring and other charges was $23.8 million and consisted of the following:
Accrued
Restructuring Costs at December 31, 2001
Restructuring
and Other
Charges
Non-Cash
Restructuring
and Other
Charges
Cash Payments
Accrued
Restructuring Costs at December 31, 2002
(In thousands)
Workforce reduction
$
—
$
6,207
$
—
$
(6,094
)
$
113
Excess facilities
—
29,689
—
(6,177
)
23,512
Write-off of property and equipment
—
25,011
(25,011
)
—
—
Exit costs and other charges
—
27,667
(16,857
)
(10,600
)
210
$
—
$
88,574
$
(41,868
)
$
(22,871
)
$
23,835
Amounts related to the lease terminations due to the abandonment of excess facilities will be paid over the respective lease terms the longest of which extends through February 2008.
Future cash payments related to lease terminations due to the abandonment of excess facilities are expected to be as follows:
(In thousands)
2003
$
6,403
2004
6,086
2005
4,589
2006
3,038
2007
2,367
Thereafter
1,029
$
23,512
If market sublease rates continue to decrease in the markets where we have abandoned excess facilities, or it takes longer than expected to sublease these facilities, our actual loss could increase an additional $36 million.
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
Note
3.4. Cash, Cash Equivalents and Short and Long-Term InvestmentsVeriSign'sVeriSign’s cash equivalents and short-term investments have been classified as available-for-sale. Cash, cash equivalents and short and long-term investments consist of the following:
December 31, 2001 ----------------------------------------- Carrying Unrealized Unrealized Estimated Value Gains Losses Fair Value -------- ---------- ---------- ---------- (In thousands)Classified as current assets: Cash........................................ $178,556 $ -- $ -- $178,556 Commercial paper............................ 163,243 51 (4) 163,290 Corporate bonds and notes................... 94,887 1,266 (11) 96,142 Money market funds.......................... 30,070 -- -- 30,070 U.S. government and agency securities....... 139,015 1,708 (45) 140,678 Municipal bonds............................. 38,662 96 (20) 38,738 Asset-backed securities..................... 21,631 81 (9) 21,703 Medium term notes........................... 17,092 207 -- 17,299 Foreign debt securities..................... 4,189 -- (9) 4,180 Equity securities........................... 20,759 7,517 (4,885) 23,391 Other....................................... 12,650 -- -- 12,650 -------- ------- ------- -------- 720,754 10,926 (4,983) 726,697 -------- ------- ------- -------- Included in cash and cash equivalents.......... $306,054 -------- Included in short-term investments............. $420,643 ======== Long-term investments: Debt and equity securities of non-public companies...................... 186,689 -- -- 186,689 Other....................................... 15,092 -- -- 15,092 -------- ------- ------- -------- Total long-term investments............. 201,781 -- -- 201,781 -------- ------- ------- -------- Total cash, cash equivalents and short and long-term investments........................ $922,535 $10,926 $(4,983) $928,478 ======== ======= ======= ========88
December 31, 2002
Carrying
Value
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
(In thousands)
Classified as current assets:
Cash
$
117,427
$
—
$
—
$
117,427
Commercial paper
103,281
14
—
103,295
Corporate bonds and notes
31,897
332
(1
)
32,228
Money market funds
36,839
5
—
36,844
U.S. government and agency securities
29,207
134
—
29,341
Municipal bonds
12,369
20
(4
)
12,385
Asset-backed securities
15,222
4
(59
)
15,167
Medium term notes
3,047
29
—
3,076
Foreign debt securities
4,119
3
—
4,122
Equity securities
2,307
—
(480
)
1,827
Certificates of deposit
19,475
—
—
19,475
Market Auction Preferred
27,783
—
—
27,783
Escrow
934
—
—
934
403,907
541
(544
)
403,904
Included in cash and cash equivalents
$
282,288
Included in short-term investments
$
121,616
Long-term investments:
Debt and equity securities of non-public companies
33,114
—
—
33,114
Other
3,627
—
—
3,627
Total long-term investments
36,741
—
—
36,741
Total cash, cash equivalents and short and long-term investments
$
440,648
$
541
$
(544
)
$
440,645
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS--STATEMENTS—(Continued)DECEMBER 31, 2002, 2001
2000AND19992000
December 31, 2000 ------------------------------------------- Carrying Unrealized Unrealized Estimated Value Gains Losses Fair Value ---------- ---------- ---------- ---------- (In thousands)Classified as current assets: Cash........................................ $ 67,848 $ -- $ -- $ 67,848 Commercial paper............................ 740,162 30 (503) 739,689 Corporate bonds and notes................... 8,004 31 -- 8,035 Money market funds.......................... 186,736 -- -- 186,736 Medium term corporate notes................. 10,882 17 -- 10,899 Other....................................... 13,068 -- -- 13,068 ---------- ------- -------- ---------- 1,026,700 78 (503) 1,026,275 ---------- ------- -------- ---------- Included in cash and cash equivalents.......... $ 460,362 ---------- Included in short-term investments............. $ 565,913 ========== Marketable long-term investments: Equity securities........................... 47,848 17,405 (24,795) 40,458 Corporate bonds and notes................... 24,728 29 (20) 24,737 Foreign debt securities..................... 9,941 54 -- 9,995 Medium term notes........................... 8,232 64 -- 8,296 U.S. government and agency securities....... 5,899 -- (10) 5,889 Municipal bonds............................. 2,080 -- -- 2,080 ---------- ------- -------- ---------- Total marketable long-term investments........................... 98,728 17,552 (24,825) 91,455 Debt and equity securities of non-public companies......................... 117,690 -- -- 117,690 ---------- ------- -------- ---------- Total long-term investments............. 216,418 17,552 (24,825) 209,145 ---------- ------- -------- ---------- Total cash, cash equivalents and short and long-term investments........................ $1,243,118 $17,630 $(25,328) $1,235,420 ========== ======= ======== ==========Gross realized losses on investments totaled $170.9 million in 2002 consisting of the write-down and sale of certain public and non-public equity investments. Gross realized gains on investments were $7.9 million in 2002.
December 31, 2001
Carrying
Value
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
(In thousands)
Classified as current assets:
Cash
$
178,556
$
—
$
—
$
178,556
Commercial paper
163,243
51
(4
)
163,290
Corporate bonds and notes
94,887
1,266
(11
)
96,142
Money market funds
30,070
—
—
30,070
U.S. government and agency securities
139,015
1,708
(45
)
140,678
Municipal bonds
38,662
96
(20
)
38,738
Asset-backed securities
21,631
81
(9
)
21,703
Medium term notes
17,092
207
—
17,299
Foreign debt securities
4,189
—
(9
)
4,180
Equity securities
20,759
7,517
(4,885
)
23,391
Other
12,650
—
—
12,650
720,754
10,926
(4,983
)
726,697
Included in cash and cash equivalents
$
306,054
Included in short-term investments
$
420,643
Long-term investments:
Debt and equity securities of non-public companies
186,689
—
—
186,689
Other
15,092
—
—
15,092
Total long-term investments
201,781
—
—
201,781
Total cash, cash equivalents and short and long-term investments
$
922,535
$
10,926
$
(4,983
)
$
928,478
Gross realized losses on investments were $89.1 million in 2001, consisting of the write-down of certain public and non-public equity investments. Gross realized gains on investments were $2.1 million in 2001 and $35.0 million in 2000.
Gross realized gainsNote 5. Long-Lived Assets
Property and
losses on investments in 1999 were not material. 89Equipment, Net
December 31,
2002
2001
(In thousands)
Land
$
222,516
$
222,516
Buildings
73,323
63,493
Computer equipment and purchased software
427,828
286,896
Office equipment, furniture and fixtures
15,733
15,311
Leasehold improvements
62,909
37,565
802,309
625,781
Less accumulated depreciation and amortization
(192,955
)
(93,235
)
$
609,354
$
532,546
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS--STATEMENTS—(Continued)DECEMBER 31, 2002, 2001
2000AND1999 Note 4. Long-Lived Assets Property2000The following table presents details of VeriSign’s goodwill:
(In thousands)
Balance at December 31, 2001
$
4,955,647
Goodwill resulting from acquisitions
227,402
Impairment write-down
(4,387,009
)
Adjustments
(128,729
)
Balance at December 31, 2002
$
667,311
The following table presents details of the VeriSign’s acquired other intangible assets:
December 31, 2002
Accumulated
Amortization
Carrying
Value
Weighted Average
Useful Life
(In thousands)
Purchased other intangible assets:
ISP hosting relationships
$
(11,213
)
$
175
3.0 years
Customer relationships
(57,078
)
175,928
5.6 years
Technology in place
(46,570
)
60,724
3.7 years
Non-compete agreements
(988
)
31
3.0 years
Trade name
(21,048
)
25
4.6 years
Contracts with ICANN and customer lists
(579,985
)
225,408
3.5 years
Total purchased other intangible assets
$
(716,882
)
$
462,291
3.8 years
December 31, 2001
Accumulated
Amortization
Carrying
Value
Weighted Average
Useful Life
(In thousands)
Purchased other intangible assets:
ISP hosting relationships
$
(9,115
)
$
2,273
3.0 years
Customer relationships
(15,408
)
245,189
5.6 years
Technology in place
(20,943
)
28,220
3.4 years
Non-compete agreements
(649
)
370
3.0 years
Trade name
(20,479
)
1,950
4.7 years
Contracts with ICANN and customer lists
(368,870
)
457,520
3.5 years
Total purchased other intangible assets
$
(487,499
)
$
735,522
3.8 years
VeriSign performed its transitional impairment test with regard to the carrying value of goodwill as of January 1, 2002 and
equipment, netconcluded no impairment of the carrying value of goodwill existed at that date.
December 31, ----------------- 2001 2000 -------- -------- (In thousands)Land....................................................... $222,516 $ -- Buildings.................................................. 63,493 -- Computer equipment and purchased software.................. 286,896 121,437 Office equipment, furniture and fixtures................... 15,311 4,803 Leasehold improvements..................................... 37,565 14,147 -------- -------- 625,781 140,387 Less accumulated depreciation and amortization............. 93,235 34,785 -------- -------- $532,546 $105,602 ======== ========VeriSign performed its annual impairment test as of June 30, 2002. The fair value of VeriSign’s reporting units was determined using a combination of the income and the market valuation approaches. Under the income approach, the fair value of the reporting unit is based on the present value of estimated future cash flows that the reporting unit is expected to generate over its remaining life. Under the market approach, the value of the reporting unit is based on an analysis that compares the value of the reporting unit to values of publicly traded companies in similar lines of business. Other intangible assets were valued using a combination of the income approach and cost approaches. Under the cost approach, fair value is based on an estimate of the current costs to
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
replace the asset with an asset of similar utility. In
October 2001,the application of the income, market and cost valuation approaches, VeriSignpurchased the landwas required to make estimates of future operating trends andbuildings related to its headquarters complex in Mountain View, California for a total of $285 million in cash. This complex includes five buildings with a combined area of approximately 395,000 square feet. Goodwilljudgments on discount rates and otherintangible assets, net
December 31, ----------------------- 2001 2000 ----------- ----------- (In thousands)ISP hosting relationships.................................. $ 11,388 $ 11,389 Customer relationships..................................... 260,597 18,217 Technology in place........................................ 49,163 38,533 Non-compete agreement...................................... 1,019 939 Trade name................................................. 74,464 74,214 Workforce in place......................................... 18,595 19,395 Contracts with ICANN and customer lists.................... 826,390 810,930 Goodwill................................................... 21,187,391 19,868,903 ----------- ----------- 22,429,007 20,842,520 Less accumulated amortization and write-down............... 16,737,838 3,185,879 ----------- ----------- $ 5,691,169 $17,656,641 =========== ===========During 2000, VeriSign completed several acquisitions, includingvariables. Actual future results and other assumed variables could differ from these estimates. As a result of theacquisitions of THAWTE, Signio and Network Solutions. These acquisitions resulteddeterioration in therecordingmarket value of VeriSign since January 1, 2002, the results of this annual impairment test indicated the carrying values of goodwill for certain reporting units exceeded their implied fair values and the carrying values of certain other intangibles exceeded their fair value, and accordingly, an impairment charge was recorded during the second quarter of 2002.The impairment of goodwill and other intangible assets in 2002 resulted in a write-off of
approximately $21.3 billion. Thoughthe net book value as follows:
Enterprise and Service Provider Division
Mass Markets
Division
Total
(In thousands)
Goodwill
$
2,360,634
$
2,026,375
$
4,387,009
Customer relationships
24,294
3,297
27,591
Technology in place
40,693
256
40,949
Trade name
3,205
—
3,205
Contracts with ICANN and customer lists
129,007
23,092
152,099
$
2,557,833
$
2,053,020
$
4,610,853
Prior to VeriSign’s adoption of SFAS No. 142 and SFAS No. 144 on January 1, 2002, VeriSign’s policy was to assess the recoverability of goodwill using estimated undiscounted cash flows. Those cash flows included an estimated terminal value based on a hypothetical sale of an acquisition at the end of its goodwill amortization period. Although our acquisitions
havehad been predominantlybeenperforming at or above expectations at the time, market conditions and attendant multiples used to estimate terminal valueshave continued to remainremained depressed.At June 30, 2000, the NASDAQ market index was at 3,966 points and had decreased 1,805 points, or 46%, to 2,161 points at June 30, 2001. This decline 90VERISIGN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 2001, 2000 AND 1999 affected the analysis used to assess the recoverability of goodwill. For goodwill associated with THAWTE and Network Solutions, fair value was determined based on future operating cash flows over the remaining amortization period of the goodwill. The terminal values were estimated based on the relationship of the value of the VeriSign stock issued at the acquisition date to the value of VeriSign's stock over the three-month period preceding the valuation. For Signio and the other acquisitions, fair value was determined through the use of recent indicators of fair value such as comparable sales and multiples derived from recent acquisition activities.As a result,managementVeriSign recorded an impairment charge in thesecond quarter of 2001 totaling $9.9 billion. Since the most significant acquisitions were completed by issuing shares of VeriSign's common stock, the impairment should be considered a non-cash charge. The impairment ofamount to goodwill and other intangible assets of $9.9 billion inthe second quarter of2001.Amortization expense, excluding impairment write-downs, related to other intangible assets was $283.9 million, $268.8 million and $177.0 million in 2002, 2001
resulted in a write-off of the net book valueand 2000, respectively. Estimated future amortization expense related to other intangible assets at December 31, 2002 is as follows:
Network THAWTE Signio Solutions Other Total -------- -------- ---------- ------- ---------- (In thousands)Goodwill..................... $100,451 $447,442 $9,228,263 $63,064 $9,839,220 Trade names.................. -- 2,501 49,535 -- 52,036 -------- -------- ---------- ------- ---------- $100,451 $449,943 $9,277,798 $63,064 $9,891,256 ======== ======== ========== ======= ==========
(In thousands)
2003
$
189,475
2004
71,762
2005
71,762
2006
65,019
2007
61,937
Thereafter
2,336
$
462,291
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
Note
5.6. AccountspayablePayable andaccrued liabilitiesAccrued LiabilitiesAccounts payable and accrued liabilities consist of the following:
December 31, ----------------- 2001 2001 -------- -------- (In thousands)Accounts payable........................................... $111,562 $ 39,330 Employee compensation...................................... 45,107 16,509 Professional fees.......................................... 33,272 39,228 Due to customers........................................... 17,333 -- Other...................................................... 106,173 98,885 -------- -------- $313,447 $193,952 ======== ========
December 31,
2002
2001
(In thousands)
Accounts payable
$
72,907
$
111,562
Employee compensation
34,511
45,107
Professional fees
19,172
33,272
Due to customers
15,544
17,333
Tax
63,872
54,135
Other
72,539
52,038
$
278,545
$
313,447
Note
6. Long-Term7. Long-term DebtIlluminet, a wholly-owned subsidiary ofVeriSign entered into
ana five-year agreement with Bank of America effective June 1, 2000 to provide aline of credit and a$15 million unsecured capital expenditure loan facility. Theline of credit is a $10.0 million unsecuredloanthat expires June 1, 2002, with a one-year extension available. The capital expenditure loan facility is a $15 million unsecured loan with a five-year term. The loans bearbears interest at the lesser of thebank'sbank’s prime lending rate or LIBOR plus 1.35% to 1.75%, depending onIlluminet'sVeriSign’s trailing twelve-month earnings adjusted cash flow as defined by the agreement. The interest rate was 4.25% and 4.75% at December 31,2001.2002, and 2001, respectively. The loanagreements containagreement contains certain covenants, the most restrictive of which91VERISIGN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 2001, 2000 AND 1999requiresIlluminetVeriSign to maintain certain financial ratios.IlluminetVeriSign is in compliance with all debt-related covenants.No amounts were outstanding under the line of creditAt December 31, 2002, and 2001, $720,000 and $800,000, respectively, was outstanding under the capital expenditurefacilityfacility.VeriSign entered into an agreement with a former principal shareholder of H.O. Systems effective December 18, 1998 as part of a recapitalization agreement. The $5.0 million unsecured note has a five-year term, bears interest at 7%, and has no restrictive covenants. The principal and accrued interest are due at maturity. At December 31,
20012002, $6.6 million was outstanding on the note. As part of the recapitalization agreement, VeriSign also agreed to make annual performance payments to the former principal shareholder over a five-year period totaling approximately $13.9 million. The imputed interest rate was 9.41% and there are no restrictive covenants. At December 31, 2002, $5.8 million was outstanding for performance payments.The current portion of long-term debt payable is included in accounts payable and accrued liabilities and the non-current portion is included in other long-term liabilities in the accompanying consolidated balance
sheet.sheets.Maturities of
thelong-term debt for the years ended December 31 are scheduled as follows:
(In thousands) --------------2002....................................................... $ 80 2003....................................................... 160 2004....................................................... 320 2005....................................................... 240 ---- $800 ====
Maturities of
Long-Term Debt
(In thousands)
2003
$
10,482
2004
2,322
2005
240
$
13,044
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
Note
7. Stockholders'8. Stockholders’ EquityPreferred Stock
VeriSign is authorized to issue up to 5,000,000 shares of preferred stock. As of December 31,
2001,2002, no shares of preferred stock had been issued. Each preferred share will be entitled to a quarterly dividend payment of 100 times the dividend declared per common share. In the event of liquidation, each preferred share will be entitled to a $1.00 preference, and thereafter the holders of the preferred shares will be entitled to an aggregate payment of 100 times the aggregate payment made per common share. Each preferred share will have 100 votes, voting together with the common shares. Finally, in the event of any merger, consolidation or other transaction in which common shares are exchanged, each preferred share will be entitled to receive 100 times the amount received per common share. These rights are protected by customary anti-dilution provisions.Common Stock
In
January 1999, VeriSign completed a follow-on public offering by issuing 6,390,000 shares at an offering price of $20.13 per share. VeriSign received net proceeds from the offering of approximately $121.4 million. In April2001, the Board of Directors of VeriSign authorized the use of up to $350 million to repurchase shares ofVeriSign'sVeriSign’s common stock on the open market, or in negotiated or block trades. During 2001, VeriSign repurchased 1,650,000 shares at a cost of approximately $70 million.AtDuring 2002 no stock was repurchased and at December 31,2001,2002, approximately $280 million remained available for futurepurchases. Norepurchases.Other than the dividend of one stock purchase right for each outstanding share of common stock that was declared on September 24, 2002, no dividends have been declared or paid on VeriSign’s common stock since
VeriSign'sinception.Stockholder Rights Plan
On September 24, 2002, the Board of Directors of VeriSign, declared a dividend of one stock purchase right (“Right”) for each outstanding share of VeriSign common stock. The dividend was paid to stockholders of record on October 4, 2002 (“Record Date”). In addition, one Right shall be issued with each common share that becomes outstanding (i) between the Record Date and the earliest of the Distribution Date, the Redemption Date and the Final Expiration Date (as such terms are defined in the Rights Agreement) or (ii) following the Distribution Date and prior to the Redemption Date or Final Expiration Date, pursuant to the exercise of stock options or under any employee plan or arrangement or upon the exercise, conversion or exchange of other securities of VeriSign, which options or securities were outstanding prior to the Distribution Date. The Rights will become exercisable only upon the occurrence of certain events specified in the Rights Agreement (“Rights Agreement”), including the acquisition of 20% of VeriSign’s outstanding common stock by a person or group. Each Right entitles the registered holder, other than an “acquiring person”, under specified circumstances, to purchase from VeriSign one one-hundredth of a share of VeriSign Series A Junior Participating Preferred Stock, par value $0.001 per share (“Preferred Share”), at a price of $55.00 per one one-hundredth of a Preferred Share, subject to adjustment. Preferred Shares purchasable upon exercise of the Rights will not be redeemable. In addition, each Right entitles the registered holder, other than an “acquiring person”, under specified circumstances, to purchase from VeriSign that number of shares of VeriSign common stock having a market value of two times the exercise price of the Right.
Notes Receivable From Stockholders
In 2000, in connection with its acquisition of Signio, VeriSign assumed notes receivable from stockholders for the exercise of stock options. The stockholders represented employees of Signio. The notes
bearbore interest at 5.5% per annum andarewere secured by the underlying common stock.92None of the notes receivable that were written off in 2002 belonged to executive officers. VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS--STATEMENTS—(Continued)DECEMBER 31, 2002, 2001
2000AND19992000Note
8.9. Calculation of NetIncome (Loss)Loss Per ShareBasic net
income (loss)loss per share is computed by dividing netincome (loss)loss (numerator) by theweighted averageweighted-average number of shares of common stock outstanding (denominator) during the period. Diluted netincome (loss)loss per share gives effect to stock options considered to be potential common shares, ifdilutive,dilutive. Potential common shares consist of shares issuable upon the exercise of stock options computed using the treasury stock method.The following table presents the
calculation for the numbercomputation ofshares used in thebasic and diluted netincome (loss)loss per share:
Year Ended December 31,
2002
2001
2000
(In thousands)
Basic and diluted net loss per share:
Net loss
$
(4,961,297
)
$
(13,355,952
)
$
(3,115,474
)
Determination of basic and diluted shares:
Weighted-average shares outstanding
236,552
203,478
159,169
Potential common shares—dilutive stock options
—
—
—
Basic and diluted average common shares outstanding
236,552
203,478
159,169
Basic and diluted net loss per share
(20.97
)
(65.64
)
(19.57
)
In 2002, VeriSign excluded 3,498,082 weighted-average common share
computations:equivalents with a weighted-average share price of $8.18. In 2001, VeriSign excluded 9,892,874 weighted-average common share equivalents with a weighted-average share price of $24.42, and in 2000, VeriSign excluded
Year Ended December 31, ----------------------- 2001 2000 1999 ------- ------- ------- (In thousands)Shares used to compute basic net income (loss) per share: Weighted average shares outstanding............. 203,478 159,169 100,531 Potential common shares--dilutive stock options. -- -- 14,079 ------- ------- ------- Shares used to compute diluted net income (loss) per share........................................ 203,478 159,169 114,610 ======= ======= =======potential19,082,438 weighted-average commonshares subject to outstanding stock options from the calculationshare equivalents with a weighted-average share price ofdiluted net loss per share$36.92 because their effect would have been anti-dilutive.The excluded shares totaled 37,340,507 for 2001 and 28,639,917 for 2000. In 1999, VeriSign excluded from the calculation of diluted net income perWeighted-average common share481,320 shares related toequivalents do not include stock options with an exercise pricegreater than $49.70,that exceeded theweightedaverage fair market value oftheVeriSign’s common stock for theyear, because their effect would have been antidilutive.period.Note
9.10. Stock Compensation PlansStock Option Plans
As of December 31,
2001,2002, a total of47,712,00153,313,022 shares of common stock were reserved for issuance upon the exercise of stock options and for the future grant of stock options or awards underVeriSign'sVeriSign’s equity incentive plans.The 1995 Stock Option Plan and the 1997 Stock Option Plan
(the "1995(“1995 and 1997Plans"Plans”) were terminated concurrent withVeriSign'sVeriSign’s initial public offering in 1998. Options to purchase common stock granted under the 1995 and 1997 Plans remain outstanding and subject to the vesting and exercise terms of the original grant. All shares that remained available for future issuance under the 1995 and 1997 Plans at the time of their termination were transferred to the 1998 Equity Incentive Plan. No further options can be granted under the 1995 and 1997 Plans. Options granted under the 1995 and 1997 Plans are subject to terms substantially similar to those described below with respect to options granted under the 1998 Equity Incentive Plan.The 1998 Equity Incentive Plan
(the "1998 Plan"(“1998 Plan”) authorizes the award of options, restricted stock awards and stock bonuses. As of December 31,2001,2002, no restricted stock awards or stock bonus awards93have been made VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS--STATEMENTS—(Continued)DECEMBER 31, 2002, 2001
2000AND1999 have been made2000under the 1998 Plan. Options may be granted at an exercise price not less than 100% of the fair market value of
VeriSign'sVeriSign’s common stock on the date of grant for incentive stock options and 85% of the fair market value fornonqualifiednon-qualified stock options. All options are granted at the discretion of the Board and have a term not greater than 7 years from the date of grant. Options issued generally vest 25% on the first anniversary date and ratably over the following 12 quarters. At December 31,2001, 7,820,4172002, 13,193,671 shares remain available for future awards under the 1998Plan.Plan including shares transferred from the 1995 and 1997 plans that were terminated.The Board adopted the 2001 Stock Incentive Plan
(the "2001 Plan"(“2001 Plan”) in January 2001. The 2001 Plan, which did not require approval by the stockholders, authorizes the award of non-qualified stock options and restricted stock awards to eligible employees, officers who are not subject to Section 16 reporting requirements, contractors and consultants. As of December 31,2001,2002, no restricted stock awards have been made under the 2001 Plan. Options may be granted at an exercise price not less than the par value ofVeriSign'sVeriSign’s common stock on the date of grant. All options are granted at the discretion of the Board and have a term not greater than 10 years from the date of grant. Options issued generally vest 25% on the first anniversary date and ratably over the following 12 quarters. At December 31,2001, 2,276,0772002, 12,983,872 shares remain available for future awards under the 2001 Plan. On January 1 of each year beginning in 2002, the number of shares available for grant under the 2001 Plan will automatically be increased by an amount equal to 2% of the outstanding common shares on the immediately preceding December 31.In November 2002, VeriSign offered all U.S. employees holding options granted under the 2001 Plan between January 1, 2001 and May 24, 2002 the opportunity to cancel those options and to receive in exchange a new option to be granted not less than six months and one day after the cancellation date of the existing option. The number of shares granted under the new option was dependent on the exercise price of the original option, as follows:
Exercise Price Range of
Original Option
Exchange Ratio
$0.001–$24.99
1 share subject to existing option for 1 share subject to exchanged option
$25.00–$49.99
2 shares subject to existing option for 1 share subject to exchanged option
$50.00 and above
2.5 shares subject to existing option for 1 share subject to exchanged option
Under this program, employees tendered options to purchase approximately 11.4 million shares, which were cancelled effective December 26, 2002. In exchange, VeriSign expects to grant options to purchase approximately 7.7 million shares at an exercise price equal to the fair market value on the date of grant. The date of grant of the exchanged options will not be earlier than June 27, 2003. Except for the exercise price, all terms and conditions of the new option will be substantially the same as the cancelled option. In particular, the new option will be vested to the same degree, as a percentage of the option, that the cancelled option would have been vested on the new option date if the cancelled option had not been cancelled and will continue to vest on the same schedule as the cancelled option.
Members of the Board who are not employees of VeriSign, or of any parent, subsidiary or affiliate of VeriSign, are eligible to participate in the 1998 Directors Plan
(the "Directors Plan"(“Directors Plan”). The option grants under the Directors Plan are automatic andnondiscretionary,non-discretionary, and the exercise price of the options is 100% of the fair market value of the common stock on the date of the grant. Each eligible directorwho becomes a director on or after January 28, 1998 willis initiallybegranted an option to purchase 25,000 shares on the date he or she first becomes a director(the "Initial Grant"(“Initial Grant”). On each anniversary of adirector'sdirector’s Initial Grant or most recent grant if he or she was ineligible to receive an Initial Grant, each eligible director will automatically be granted an additional option to purchase 12,500 shares of common stock if the director has served continuously as a director since the date of the Initial Grant or most recent grant. The term ofVERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
the options under the Directors Plan is ten years and options vest as to 6.25% of the shares each quarter after the date of the grant, provided the optionee remains a director of VeriSign. At December 31,
2001, 275,0002002, 175,000 shares remain available for future grant under the Directors Plan.In connection with its acquisitions in 2001 and 2000, VeriSign assumed some of the acquired
companies'companies’ stockoption plans.options. Optionsgranted under these plansassumed generally have terms of seven to ten years and generally vest over a four-year period.No further options can be granted under any of the assumed plans. 94VERISIGN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 2001, 2000 AND 1999A summary of stock option activity under
theall Plans is as follows:
Year Ended December 31, ----------------------------------------------------------------- 2001 2000 1999 --------------------- --------------------- --------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------- --------- ---------- --------- ---------- ---------Outstanding at beginning of year....................... 28,639,917 $59.65 17,835,362 $ 16.77 16,516,368 $ 4.79 Assumed in business combinations............... 3,550,832 15.16 10,204,590 50.23 -- -- Granted...................... 15,789,042 39.12 8,007,368 129.92 7,300,926 35.66 Exercised.................... (5,653,134) 12.75 (5,657,256) 11.70 (4,198,177) 3.10 Canceled..................... (4,986,150) 73.05 (1,750,147) 49.36 (1,783,755) 9.60 ---------- ---------- ---------- Outstanding at end of year... 37,340,507 52.50 28,639,917 59.65 17,835,362 16.77 ========== ========== ========== Exercisable at end of year... 12,074,142 44.53 6,297,793 17.40 2,424,728 3.36 ========== ========== ========== Weighted average fair value of options granted during the year................... 26.42 97.01 21.86
Year Ended December 31,
2002
2001
2000
Shares
Weighted-
Average
Exercise Price
Shares
Weighted-
Average
Exercise Price
Shares
Weighted-
Average
Exercise Price
Outstanding at beginning of year
37,340,507
$
52.50
28,639,917
$
59.65
17,835,362
$
16.77
Assumed in business combinations
—
—
3,550,832
15.16
10,204,590
50.23
Granted
12,850,130
16.69
15,789,042
39.12
8,007,368
129.92
Exercised
(2,506,354
)
4.30
(5,653,134
)
12.75
(5,657,256
)
11.70
Cancelled
(20,723,804
)
42.70
(4,986,150
)
73.05
(1,750,147
)
49.36
Outstanding at end of year
26,960,479
47.41
37,340,507
52.50
28,639,917
59.65
Exercisable at end of year
13,874,208
52.94
12,074,142
44.53
6,297,793
17.40
Weighted-average fair value of options granted during the year
11.97
26.42
97.01
The following table summarizes information about stock options outstanding as of December 31,
2001:
Weighted- Average Weighted- Weighted- Remaining Average Average Shares Contractual Exercise Shares Exercise Range of Exercise Prices Outstanding Life Price Exercisable Price - ------------------------ ----------- ----------- --------- ----------- ---------$ .03 - $ 2.80..................... 2,249,705 3.96 years $ 1.65 2,176,399 $ 1.65 $ 3.03 - $ 9.81..................... 3,361,287 4.25 years 7.21 2,239,869 7.09 $ 10.03 - $ 18.25..................... 1,630,787 3.72 years 12.90 1,153,984 12.81 $ 20.44 - $ 29.90..................... 2,311,950 6.46 years 27.16 1,289,828 27.13 $ 30.44 - $ 39.80..................... 12,861,087 5.72 years 34.84 1,190,825 36.29 $ 40.00 - $ 49.94..................... 3,374,867 5.58 years 43.65 769,284 43.16 $ 50.11 - $ 99.51..................... 5,496,933 5.83 years 68.75 1,196,069 78.12 $ 100.73 - $149.97..................... 3,046,664 4.17 years 126.95 1,078,508 128.45 $ 150.09 - $199.88..................... 2,942,167 5.46 years 160.77 950,910 161.16 $ 218.50 - $253.00..................... 65,060 5.15 years 237.81 28,466 237.81 ---------- ---------- 37,340,507 5.30 years 52.50 12,074,142 44.53 ========== ==========95VERISIGN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 2001, 2000 AND 19992002.
Range of
Exercise Prices
Shares
Outstanding
Weighted-Average
Remaining
Contractual Life
Weighted-Average
Exercise Price
Shares
Exercisable
Weighted-Average
Exercise Price
$ .19–$ 4.90
1,078,116
3.02 years
$
2.18
1,057,410
$
2.15
$ 5.05–$ 9.81
3,987,418
5.02 years
7.61
1,835,628
7.87
$ 10.08–$ 18.25
4,634,672
5.24 years
10.90
1,450,283
12.63
$ 20.44–$ 29.90
4,046,328
5.80 years
24.76
1,478,714
26.70
$ 30.36–$ 39.80
3,853,546
4.55 years
35.46
2,605,271
35.57
$ 40.08–$ 49.94
1,549,122
3.94 years
43.64
1,042,802
43.41
$ 50.11–$ 99.51
3,268,131
5.94 years
69.79
1,639,413
73.20
$ 100.73–$149.97
2,129,884
3.22 years
127.34
1,345,788
127.25
$ 150.09–$199.88
2,366,639
4.48 years
160.71
1,384,793
160.96
$ 218.50–$253.00
46,623
4.14 years
233.61
34,106
233.49
26,960,479
4.89 years
47.41
13,874,208
52.94
1998 Employee Stock Purchase Plan
VeriSign has reserved
5,486,7857,830,366 shares for issuance under the 1998 Employee Stock Purchase Plan("(“PurchasePlan"Plan”). Eligible employees may purchase common stock through payroll deductions by electing toVERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
have between 2% and 15% of their compensation withheld. Each participant is granted an option to purchase common stock on the first day of each 24-month offering period and this option is automatically exercised on the last day of each
six monthsix-month purchase period during the offering period. The purchase price for the common stock under the Purchase Plan is 85% of the lesser of the fair market value of the common stock on the first day of the applicable offering period and the last day of the applicable purchase period. Offering periods begin on February 1 and August 1 of each year. Shares of common stock issued under the Purchase Plan totaled 645,595 in 2002, 201,953 in 2001 and 550,724 in2000 and 547,896 in 1999.2000. As of December 31,2001, 3,956,6292002, 5,654,615 shares remain available for future issuance. On January 1 of each year, the number of shares available for grant under the Purchase Plan will automatically be increased by an amount equal to 1% of the outstanding common shares on the immediately preceding December 31. The weighted-average fair value of the stock purchase rights granted under the Purchase Plan was $4.84 in 2002, $27.74 in 2001 and $103.76 in2000 and $15.28 in 1999. Pro Forma Information VeriSign applies the intrinsic value method in accounting for its equity-based compensation plans. Had compensation cost for its equity-based compensation plans been determined consistent with the fair value approach set forth in SFAS No. 123, "Accounting for Stock-Based Compensation," VeriSign's net income (loss) would have been as follows:
Year Ended December 31, ------------------------------------ 2001 2000 1999 ------------ ----------- -------- (In thousands, except per share data)As reported: Net income (loss).............................. $(13,355,952) $(3,115,474) $ 3,955 Net income (loss) per share: Basic...................................... $ (65.64) $ (19.57) $ .04 Diluted.................................... $ (65.64) $ (19.57) $ .03 Pro forma: Net (loss) under SFAS No. 123.................. $(13,619,611) $(3,246,422) $(24,667) Net (loss) per share: Basic...................................... $ (66.93) $ (20.40) $ (.25) Diluted.................................... $ (66.93) $ (20.40) $ (.25)96VERISIGN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 2001, 2000 AND 1999 The fair value of stock options and Purchase Plan options was estimated on the date of grant using the Black-Scholes model. The following table sets forth the weighted-average assumptions used to calculate the fair value of the stock options and Purchase Plan options for each period presented.2000.
Year Ended December 31, ---------------------------------- 2001 2000 1999 ---------- ---------- ----------Stock options: Volatility.................................... 100% 115% 85% Risk-free interest rate....................... 4.25% 6.06% 5.54% Expected life................................. 3.5 years 3.5 years 3.5 years Dividend yield................................ zero zero zero Purchase Plan options: Volatility.................................... 100% 115% 85% Risk-free interest rate....................... 4.07% 6.20% 5.00% Expected life................................. 1.25 years 1.05 years 1.25 years Dividend yield................................ zero zero zeroNote
10.11. Income TaxesTotal income tax expense was allocated as follows:
Year Ended December 31, ----------------------------- 2001 2000 1999 --------- -------- -------- (In thousands)Continuing operations: Current: Federal.................................... $ 106,135 $ -- $ -- State...................................... 20,308 -- -- Foreign.................................... 3,137 -- -- --------- -------- -------- 129,580 -- -- --------- -------- -------- Deferred: Federal.................................... (165,429) -- -- State...................................... (42,073) -- -- Foreign.................................... -- -- -- --------- -------- -------- (207,502) -- -- --------- -------- -------- Income tax benefit............................. (77,922) -- -- --------- -------- -------- Charge (benefit) to comprehensive loss attributable to investment securities........... 3,522 (30,963) 29,670 Tax benefit from employee stock plans credited to stockholders' equity............................ -- (67,448) (29,778) --------- -------- -------- $ (74,400) $(98,411) $ (108) ========= ======== ========97
Year Ended December 31,
2002
2001
2000
(In thousands)
Continuing operations:
Current:
Federal
$
—
$
106,135
$
—
State
9,180
20,308
—
Foreign, including foreign withholding tax
8,705
3,137
—
17,885
129,580
—
Deferred:
Federal
2,149
(165,429
)
—
State
—
(42,073
)
—
Foreign
(9,658
)
—
—
(7,510
)
(207,502
)
—
Income tax (benefit) expense
10,375
(77,922
)
—
Charge (benefit) to comprehensive loss attributable to investment securities
—
3,522
(30,963
)
Tax benefit from employee stock plans credited to stockholders’ equity
—
—
(67,448
)
$
10,375
$
(74,400
)
$
(98,411
)
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS--STATEMENTS—(Continued)DECEMBER 31, 2002, 2001
2000AND19992000The difference between income tax expense and the amount resulting from applying the
Federalfederal statutory rate of 35% toincomenet loss before income taxes is attributable to the following:
Year Ended December 31, --------------------------------- 2001 2000 1999 ----------- ----------- ------- (In thousands)Income tax benefit at Federal Statutory rate..... $(4,700,241) $(1,090,416) $ 1,384 State taxes, net of Federal benefit.............. (21,765) (1,732) 1 Foreign taxes.................................... 3,137 871 1,108 Goodwill amortization and in-process research and development.................................... 4,594,096 1,009,765 -- Current year operating losses and temporary differences for which no tax benefit is recognized..................................... -- 59,852 (1,726) Research and experimentation credit.............. (5,483) (1,444) (1,101) Other............................................ 52,334 23,104 334 ----------- ----------- ------- $ (77,922) $ -- $ -- =========== =========== =======
Year Ended December 31,
2002
2001
2000
(In thousands)
Income tax benefit at federal statutory rate
$
(1,732,677
)
$
(4,701,653
)
$
(1,089,949
)
State taxes, net of federal benefit
9,180
(21,765
)
(1,732
)
Differences between statutory rate and foreign effective tax rate
6,166
3,137
871
Goodwill amortization and in-process research and development
1,463,782
4,594,096
1,009,765
Current year operating losses and temporary differences for which no tax benefit is recognized
272,369
—
59,852
Research and experimentation credit
(1,800
)
(5,483
)
(1,444
)
Other
(6,645
)
53,746
22,637
$
10,375
$
(77,922
)
$
—
The tax effects of temporary differences that give rise to significant portions of
VeriSign'sVeriSign’s deferred tax assets and liabilities are as follows:
December 31, -------------------- 2001 2000 --------- --------- (In thousands)Deferred tax assets: Net operating loss carryforwards.............. $ 186,403 $ 148,282 Deductible goodwill........................... 170,155 67,198 Tax credit carryforwards...................... 12,325 4,332 Property and equipment........................ 10,605 6,204 Deferred revenue, accruals and reserves....... 209,072 153,557 Unrealized loss............................... -- 1,293 Other......................................... 3,247 899 --------- --------- 591,807 381,765 Valuation allowance.............................. (340,480) (68,843) Deferred tax liabilities: Non-deductible acquired intangibles........... (249,178) (312,922) Unrealized gain............................... (2,149) -- --------- --------- Net deferred tax assets....................... $ -- $ -- ========= =========
December 31,
2002
2001
(In thousands)
Deferred tax assets:
Net operating loss carryforwards
$
275,718
$
186,403
Deductible goodwill and intangible assets
215,293
170,155
Tax credit carryforwards
12,271
12,325
Property and equipment
26,600
10,605
Deferred revenue, accruals and reserves
185,095
209,072
Capital loss carryforwards
98,756
2,267
Other
4,836
980
Total deferred tax assets
818,569
591,807
Valuation allowance
(632,180
)
(340,480
)
Net deferred tax assets
186,389
251,327
Deferred tax liabilities:
Non-deductible acquired intangibles
(176,491
)
(249,178
)
Unrealized gain
—
(2,149
)
Other
(240
)
—
Total deferred tax liabilities
(176,761
)
(251,327
)
Total net deferred tax assets
$
9,658
$
—
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management does not believe it is more likely than not that the
98VERISIGN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 2001, 2000 AND 1999deferred tax assets relating to U.S. federal and state operations will be realized; accordingly, a full valuation allowance has beenestablished and noestablished. Management believes it is more likely than not that deferred taxasset is shown in the accompanying consolidated balance sheets.assets relating to certain foreign operations willVERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
be realized; accordingly, a valuation allowance was not applied on these assets. The total valuation allowance increased
$271,637,000$291.7 million in20012002 and$61,107,000$271.6 million in2000.2001. Of the total valuation allowance at December 31,2001, $270,891,000 arises from2002, $293.1 million is applied to deferred tax assets related to continuing operations and $339.1 million is applied to deferred tax assets related to stock compensation deductions. Ifrealized, this amount willthe valuation allowance were released, $293.1 million would be credited to the statement of operations and $339.1 million would be credited to additional paid-in capital.The remaining balance of the valuation allowance, $69,589,000, if realized will be credited to the statement of operations.As of December 31,
2001,2002, VeriSignhas availablehad federal net operating loss carryforwardsfor federal income tax purposesof approximately$492,370,000$18.8 million related to continuing operations and $663.1 million related to stock compensation deductions. VeriSignhas availablealso had state net operating loss carryforwardsfor state income tax purposesof approximately$313,785,000$59.6 million related to continuing operations and $515.1 million related to stock compensation deductions.At December 31, 2001,If VeriSignhas no net operating loss carryforwards for federal or state income tax purposes relatedis not able toits operations. Theuse them, the federal net operating loss carryforwards will expireif not utilized,in 2010 through2021. The2022 and the state net operating loss carryforwards will expireif not utilized,in 2004 through2021. As of December 31, 2001,2022. In addition, VeriSignhas available for carryoverhad research andexperimentationdevelopment tax credits for federal income tax purposes of approximately$8,931,000$8.0 million available for carryover to future years, and for state income tax purposes of approximately$5,189,000.$6.5 million available for carryover to future years. The federal research and experimentation tax credits will expire, if not utilized, in 2010 through2021.2022. State research andexperimentaldevelopment tax credits carry forward indefinitely until utilized. The Tax Reform Act of 1986 imposes substantial restrictions on the utilization of net operating losses and tax credits in the event of a corporation’s ownership change, as defined in the Internal Revenue Code. Our ability to utilize net operating loss carryforwards may be limited as a result of such ownership changes.Note
11.12. Commitments and ContingenciesLeases
Iluminet, a wholly-owned subsidiary ofVeriSign has entered into various capital lease obligations that expire in
2002 and2003 for network assets. The majority of the capital lease agreements allowIlluminetVeriSign to purchase the assets at the end of the lease term for a nominal amount. The cost of property and equipment held under capital leases at December 31, 2002 and 2001 was$3,480,000$1.3 million and $3.5 million, respectively, and was included in computer equipment and purchased software. Related accumulated depreciation at December 31, 2002 and 2001 was$177,000. 99VERISIGN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 2001, 2000 AND 1999$581,000 and $177,000, respectively.VeriSign leases a portion of its facilities under operating leases that extend through
2011. Future2014 and sub-leases a portion of its office space to third parties. The present value of future minimum capital lease payments, the future minimum lease payments under non-cancelable operating leases and thepresent value offuture minimumcapital lease paymentssub-lease income as of December 31,20012002 are as follows:
Capital Operating Leases Leases ------- --------- (In thousands)2002....................................................... $2,164 $ 27,320 2003....................................................... 409 20,804 2004....................................................... 58 18,094 2005....................................................... 6 14,499 2006....................................................... -- 10,301 Thereafter................................................. -- 23,241 ------ -------- Total minimum lease payments............................ 2,637 $114,259 ======== Less amount representing interest (at 8.12%)............... 150 ------ Obligations under capital leases........................... $2,487 ======
Capital
Lease Payments
Operating
Lease Payments
Sub-Lease
Income
(In thousands)
2003
$
559
$
28,242
$
(1,731
)
2004
—
8,558
(1,051
)
2005
—
25,056
(982
)
2006
—
22,540
(519
)
2007
—
21,675
—
Thereafter
—
90,882
—
Total minimum lease payments
559
$
216,953
$
(4,283
)
Less amount representing interest (at 8.12%)
30
Obligations under capital leases
$
529
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
Future operating lease payments include payments related to lease terminations due to the abandonment of excess facilities as a result of our restructuring. Obligations under capital leases are included in
other long-termaccounts payable and accrued liabilities in the accompanying consolidated balance sheets.Net rental expense under operating leases was
$33,167,000$21.8 million in 2002, $33.2 million in 2001$15,198,000and $15.2 million in2000 and $3,700,000 in 1999.2000. VeriSign has sub-leased offices to various companies under non-cancelable operating leases. VeriSign received payments of$3,020,000$3.1 million in 2002, $3.0 million in 2001,$1,222,000and $1.2 million in 2000 and$507,000 in 1999 and willis expecting to receive payments of$2,451,000$1.7 million in20022003 and$822,000$1.1 million in2003.2004.Other Commitments
In December 2001, VeriSign signed a master contract with IBM under which it committed to purchase
$30$30.0 million of IBM technology over the next three years. During 2002, VeriSign paid IBM $24.1 million and at December 31, 2002, had an additional $2.1 million of open purchase orders with IBM. IBM has also committed to use certain products and services of VeriSign.In December 2001, VeriSign entered into an Agreement for the management and administration of the Tuvalu Internet top-level domain,“.tv,” with the Government of Tuvalu for payments of future royalties. Future royalty payment obligations are as follows:
(In thousands)
2003
$
2,200
2004
2,200
2005
2,200
2006
2,200
2007
2,000
Thereafter
2,000
$
12,800
Letters of Credit
We have pledged a portion of our short-term investments as collateral for standby letters of credit that guarantee certain of our contractual obligations, primarily relating to our real estate lease agreements. As of December 31, 2002, the amount of short-term investments we have pledged pursuant to such agreements was approximately $21 million.
Legal Proceedings
VeriSign is engaged in several complaints, lawsuits and investigations arising in the ordinary course of business. VeriSign believes that it has adequate legal defenses and that the ultimate outcome of these actions will not have a material effect on
VeriSign'sVeriSign’s consolidated financial position and results of operations.Note
12.13. Segment InformationDescription of Segments
Beginning in 2003, VeriSign realigned its business segments
Subsequentto reflect the way it will manage its business. VeriSign is currently organized into three service-based lines of business: the Internet Services Group, theVERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
Telecommunication Services Group, and Network Solutions, Inc., or Network Solutions. The Internet Services Group consists of two business units: Security Services, which provides products and services that enable enterprises and service providers to establish and deliver secure Internet-based services to customers, and Registry Services, which acts as the exclusive registry of domain names in the.comand .netgeneric top-level domains, or gTLDs, and certain country code top-level domains, or ccTLDs. The Telecommunication Services Group provides specialized services to telecommunications carriers. Through VeriSign’s wholly-owned subsidiary, Network Solutions, VeriSign provides domain name registration and value-added services to enterprises and individuals who wish to establish an online presence. Prior to 2003 and subsequent to the acquisition of Network Solutions in June 2000, VeriSign organized its business into two reportable operating
segments,segments: the Enterprise and Service Provider Division and the Mass Markets Division. The segments were determined based primarily on how the chief operating decision maker100VERISIGN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 2001, 2000 AND 1999 ("CODM"(“CODM”) views and evaluatesVeriSign'sVeriSign’s operations.VeriSign'sVeriSign’s Chief Executive Officer has been identified as the CODM as defined by SFAS No. 131,"Disclosures“Disclosures About Segments of anEnterprise and Related Information."” Other factors, including customer base, homogeneity of products, technology and delivery channels, were also considered in determining the reportable segments. The performance of each segment is measured based on several metrics, including gross margin.The Mass Markets Division
providesprovided domain name registration, digital certificate and payment services and other value-added services to small and medium sized companies as well as to individual consumers. The Enterprise and Service Provider Divisionprovidesprovided products and services to organizations thatwantwanted to establish and deliver Internet-based and telecommunications-based services for their customers in both business-to-consumer and business-to-business environments. In 2000,VeriSign'sVeriSign’s results prior to its acquisition of Network Solutionsarewere included in the Enterprise and Service Provider Division.In 1999, VeriSign operated in a single reportable segment and derived substantially all of its revenues from sales of Internet-based trust services.The accounting policies used to derive reportable segment results are generally the same as those described in Note
1, "Description of Business and Summary of Significant Accounting Policies."1.VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
The following table reflects the results of
VeriSign'sVeriSign’s reportable segments underVeriSign's management system.VeriSign’s previous structure. The"Other"“Other” segment consists primarily of unallocated corporate expenses. These results are used, in part, by the CODM and by management, in evaluating the performance of, and in allocating resources to, each of the segments. Internal revenues and segment gross margin include transactions between segments that are intended to reflect anarm'sarm’s length transfer at the best price available for comparable external transactions.
Enterprise and Mass Service Provider Markets Total Division Division Other Segments ---------------- -------- ------- ---------- (In thousands)Year ended December 31, 2001: External revenues................... $428,503 $555,061 $ -- $ 983,564 Internal revenues................... 130,597 -- -- 130,597 -------- -------- ------- ---------- Total revenues.................. $559,100 $555,061 $ -- $1,114,161 ======== ======== ======= ========== Gross margin........................ $249,368 $396,587 $(6,112) $ 639,843 ======== ======== ======= ========== Year ended December 31, 2000: External revenues................... $192,132 $282,634 $ -- $ 474,766 Internal revenues................... 63,140 -- $ -- 63,140 -------- -------- ------- ---------- Total revenues.................. $255,272 $282,634 $ -- $ 537,906 ======== ======== ======= ========== Gross margin........................ $175,478 $136,239 $ -- $ 311,717 ======== ======== ======= ==========101
Enterprise and
Service Provider
Division
Mass
Markets
Division
Other
Total
Segments
(In thousands)
Year ended December 31, 2002:
Total revenues
$
897,812
$
412,113
$
—
$
1,309,925
Internal revenues
(88,257
)
—
—
(88,257
)
External revenues
$
809,555
$
412,113
$
—
$
1,221,668
Total cost of revenues
$
434,000
$
197,718
$
27,906
$
659,624
Internal cost of revenues
—
(88,257
)
—
(88,257
)
External cost of revenues
$
434,000
$
109,461
$
27,906
$
571,367
Gross margin after eliminations
$
375,555
$
302,652
$
(27,906
)
$
650,301
Year ended December 31, 2001:
Total revenues
$
559,100
$
555,061
$
—
$
1,114,161
Internal revenues
(130,597
)
—
—
(130,597
)
External revenues
$
428,503
$
555,061
$
—
$
983,564
Total cost of revenues
$
179,135
$
289,071
$
6,112
$
474,318
Internal cost of revenues
—
(130,597
)
—
(130,597
)
External cost of revenues
$
179,135
$
158,474
$
6,112
$
343,721
Gross margin after eliminations
$
249,368
$
396,587
$
(6,112
)
$
639,843
Year ended December 31, 2000:
Total revenues
$
255,272
$
282,634
$
—
$
537,906
Internal revenues
(63,140
)
—
—
(63,140
)
External revenues
$
192,132
$
282,634
$
—
$
474,766
Total cost of revenues
$
79,794
$
146,395
$
—
$
226,189
Internal cost of revenues
—
(63,140
)
—
(63,140
)
External cost of revenues
$
79,794
$
83,255
$
—
$
163,049
Gross margin after eliminations
$
112,338
$
199,379
$
—
$
311,717
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS--STATEMENTS—(Continued)DECEMBER 31, 2002, 2001
2000AND19992000The following table reflects the results of VeriSign’s reportable segments under VeriSign’s current service-based lines of business. The “Other” segment consists primarily of unallocated corporate expenses.
Internet
Services
Group
Telecommunication
Services
Group
Network
Solutions
Other
Total
Segments
(In thousands)
Year ended December 31, 2002:
Total revenues
$
620,301
$
385,734
$
303,890
$
—
$
1,309,925
Internal revenues
(88,257
)
—
—
—
(88,257
)
External revenues
$
532,044
$
385,734
$
303,890
$
—
$
1,221,668
Total cost of revenues
$
244,942
$
210,301
$
176,475
$
27,906
$
659,624
Internal cost of revenues
—
—
(88,257
)
—
(88,257
)
External cost of revenues
$
244,942
$
210,301
$
88,218
$
27,906
$
571,367
Gross margin after eliminations
$
287,102
$
175,433
$
215,672
$
(27,906
)
$
650,301
The following table presents
revenueexternal revenues for groups of similarservices:
Year Ended December 31, ----------------- 2001 2000 -------- -------- (In thousands)Web presence and trust services............................ $555,061 $282,634 Managed security and network services...................... 298,000 147,984 Registry and telecommunications services................... 130,503 44,148 -------- -------- Revenues as reported.................................... $983,564 $474,766 ======== ========Assets are not tracked by segment and the chief operating decision maker does not evaluate segment performance based on asset utilization.services.
Year Ended December 31,
2002
2001
2000
(In thousands)
Web presence and trust services
$
412,113
$
555,061
$
282,634
Managed security and network services
287,615
298,000
147,984
Registry and telecommunications services
521,940
130,503
44,148
Revenues as reported
$
1,221,668
$
983,564
$
474,766
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
The following table presents external revenues in alignment with VeriSign’s current service-based business segments.
Year Ended
December 31, 2002
(In thousands)
Internet Services Group
$
532,044
Telecommunication Services Group
385,734
Network Solutions
303,890
Revenues as reported
$
1,221,668
Reconciliation to VeriSign, as
reportedReported
Year Ended December 31, ------------------------- 2001 2000 ------------ ----------- (In thousands)Revenues: Total segments.......................................... $ 1,114,161 $ 537,906 Elimination of internal revenues........................ (130,597) (63,140) ------------ ----------- Revenues, as reported................................... $ 983,564 $ 474,766 ============ =========== Net loss: Total segments' gross margin............................ $ 639,843 $ 311,717 Operating expenses...................................... (14,050,669) (3,512,026) Other income (expense).................................. (22,469) 86,169 Income tax benefit...................................... 77,922 -- Minority interest in net income of subsidiary........... (579) (1,334) ------------ ----------- Net loss, as reported................................... $(13,355,952) $(3,115,474) ============ ===========
Year Ended December 31,
2002
2001
2000
(In thousands)
Revenues:
Total segments
$
1,309,925
$
1,114,161
$
537,906
Elimination of internal revenues
(88,257
)
(130,597
)
(63,140
)
Revenues, as reported
$
1,221,668
$
983,564
$
474,766
Net loss:
Total segments’ gross margin
$
650,301
$
639,843
$
311,717
Operating expenses
(5,451,934
)
(14,050,669
)
(3,512,026
)
Other income, (expense)
(148,873
)
(22,469
)
86,169
Minority interest in net income of subsidiary
(416
)
(579
)
(1,334
)
Income tax benefit (expense)
(10,375
)
77,922
—
Net loss, as reported
$
(4,961,297
)
$
(13,355,952
)
$
(3,115,474
)
Geographic
information
Year Ended December 31, ------------------------- 2001 2000 1999 -------- -------- ------- (In thousands)Revenues: United States................................. $854,495 $407,843 $61,997 All other countries........................... 129,069 66,923 22,779 -------- -------- ------- Total..................................... $983,564 $474,766 $84,776 ======== ======== =======102VERISIGN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) DECEMBER 31, 2001, 2000 AND 1999Information
Year Ended December 31,
2002
2001
2000
(In thousands)
Revenues:
United States
$
1,115,731
$
854,495
$
407,843
All other countries
105,937
129,069
66,923
Total
$
1,221,668
$
983,564
$
474,766
VeriSign operates in the United States, Europe, Japan, Australia and South Africa. In general, revenues are attributed to the country in which the contract originated. However, revenues from all digital certificates issued from the Mountain View, California facility and domain names issued from the Herndon, Virginia facility are attributed to the United States because it is impracticable to determine the country of origin.
Year Ended December 31, ------------------------------- 2001 2000 1999 ---------- ----------- -------- (In thousands)Long-lived assets: United States................................. $6,244,315 $17,539,817 $155,992 All other countries........................... 202,634 468,973 2,332 ---------- ----------- -------- Total..................................... $6,446,949 $18,008,790 $158,324 ========== =========== ========VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2002, 2001 AND 2000
Long-lived assets consist primarily of goodwill and other intangible assets, property and equipment and other long-term assets.
December 31,
2002
2001
(In thousands)
Long-lived assets:
United States
$
1,707,440
$
6,244,315
All other countries
79,574
202,634
Total
$
1,787,014
$
6,446,949
Assets are not tracked by segment and the chief operating decision maker does not evaluate segment performance based on asset utilization.
Major
customersCustomersNo customer accounted for 10% or more of consolidated revenues in 2002, 2001
2000or1999.2000.Note
13.14. Related Party TransactionsVeriSign recognized revenues totaling $27.1 million in 2002, $64.0 million in 2001 and $13.2 million in 2000
and $.9 million in 1999from customers, including VeriSign Affiliates, with whom it participated in a private equity round of financing.Prior to December 31, 2002, Science Application International Corporation
("SAIC"(“SAIC”)is anowned approximately 5%shareholderof the common shares outstanding of VeriSign, Inc. During 2002, SAIC sold all of its common stock inVeriSign.VeriSign and was no longer a shareholder. Also during 2002, VeriSign incurred and paid an immaterial amount to SAIC. In 2001, VeriSign incurred and paid$644,000$.6 million to SAIC for subcontractor labor and expenses for the operation of foreign offices. In 2000, VeriSign incurred and paid $1.4 million for fees and services provided by SAIC. Of the total expense, $.7 million was subcontractor labor and expenses for the operations of foreign offices and $.3 million was for corporate services provided by SAIC until all systems were transitioned afterourthe acquisition of Network Solutions. These corporate services included accounting, data processing, payroll and related taxes and employee benefit plans administration and processing. The remaining $.4 million represents other services provided by SAIC.Note 14. Subsequent Event (unaudited) In February 2002, VeriSign completed its acquisition of H.O. Systems, Inc., a provider of billing and customer care solutions to wireless carriers. VeriSign paid approximately $350 million in cash for all of the outstanding stock of H.O. Systems. The total purchase price will be allocated to the tangible and intangible assets acquired and the liabilities assumed based on their respective fair values on the acquisition date. H.O. System's results of operations will be included in the consolidated financial statements from its date of acquisition. 103As required under Item
14--Exhibits,15—Exhibits, Financial Statement Schedules and Reports on Form 8-K, the exhibits filed as part of this report are provided in this separate section. The exhibits included in this section are as follows:
Exhibit
Number
Exhibit Description
------ -------------------10.02
Form of Revised Indemnification Agreement entered into by the Registrant with each of its directors and executive officers
10.08
Registrant’s 2001 Stock Incentive Plan, as amended through 11/22/02
10.21
Description of Severance Arrangement between the Registrant and William P. Fasig
10.22
Employment Offer Letter Agreement between the Registrant and W. G. Champion Mitchell dated July 25, 2001
21.01
Subsidiaries of the Registrant
23.01
Consent of KPMG LLP
99.01
Certification of President/CEO/Chairman of the Board, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.02
Certification of Executive VP of Finance and Administration/CFO, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
104
109