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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBERJUNE 30, 19981999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER: 0-22967
NETWORK SOLUTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1146119
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR IDENTIFICATION NO.)
ORGANIZATION)
505 HUNTMAR PARK DRIVE
HERNDON, VIRGINIA 20170
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(703)742-0400
(ADDRESS, INCLUDING ZIP CODE, AND(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)CODE)
Indicate 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
Registrantregistrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 6, 1998,August 3, 1999, the Registrant had 4,168,20233,342,342 shares of Class A
common stock, $0.001 par value per share, issued and outstanding, and 11,925,000
shares of Class B common stock,
$0.001 par value per share, issued and outstanding.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Statements of Financial Position as of
December 31, 19971998 and SeptemberJune 30, 1998 (unaudited)...............1999....................... 3
Unaudited Condensed Statements of Operations for the three
and ninesix months ended SeptemberJune 30, 19971998 and 1998.........1999............... 4
Unaudited Condensed Statements of Changes in Stockholders'
Equity for the ninesix months ended SeptemberJune 30, 1998.......1999............. 5
Unaudited Condensed Statements of Cash Flows for the ninesix
months ended SeptemberJune 30, 19971998 and 1998..................1999....................... 6
Notes to Condensed Financial Statements..................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 9Operations................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 2726
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 28
Item 2. Changes in Securities and Use of Proceeds................... 29
Item 4. Submission of Matters to a Vote of Security Holders......... 29
Item 6. Exhibits and Reports on Form 8-K............................ 30
Signature ............................................................Signature............................................................ 31
Index to Exhibits.....................................................Exhibits.................................................... 32
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NETWORK SOLUTIONS, INC.
CONDENSED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, SEPTEMBERJUNE 30,
1997 1998 1999
------------ -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 41,146,00012,862,000 $ 9,124,00046,099,000
Short-term investments, marketable securities............. 40,200,000 107,876,000investments.................................... 118,808,000 114,215,000
Accounts receivable, net.................................. 5,792,000 13,922,00022,628,000 47,084,000
Prepaids and other assets................................. 1,005,000 1,512,0004,001,000 6,453,000
Deferred tax asset........................................ 20,153,000 30,941,000
Restricted assets......................................... 25,873,000 627,00040,508,000 67,212,000
------------ ------------
Total current assets........................................ 134,169,000 164,002,000198,807,000 281,063,000
Furniture and equipment, net................................ 6,146,000 9,579,00016,005,000 51,112,000
Long-term investments, marketable securities................ -- 6,272,000investments....................................... 13,590,000 42,060,000
Deferred tax asset.......................................... 8,128,000 11,292,00014,831,000 20,291,000
Goodwill, net............................................... 1,177,000 770,000634,000 362,000
------------ ------------
Total Assets................................................ $149,620,000 $191,915,000$243,867,000 $394,888,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 6,426,00028,287,000 $ 15,565,00043,323,000
Due to parent............................................. 1,250,000 2,587,000SAIC............................................... 4,766,000 7,607,000
Income taxes payable...................................... 5,042,000 3,090,0005,409,000 6,699,000
Current portion of capital lease obligations.............. 842,000 861,000834,000 643,000
Deferred revenue, net..................................... 43,789,000 77,766,000
Internet fund liability................................... 25,873,000 627,00093,720,000 156,906,000
------------ ------------
Total current liabilities................................... 83,222,000 100,496,000133,016,000 215,178,000
Capital lease obligations................................... 1,081,000 436,000247,000 --
Long-term deferred revenue, net............................. 17,662,000 28,964,00035,474,000 65,682,000
------------ ------------
Total liabilities........................................... 101,965,000 129,896,000168,737,000 280,860,000
Commitments and contingenciescontingencies............................... -- --
Stockholders' equity:
Preferred stock, $.001 par value, authorized 10,000,000
shares; none issued and outstanding in 19971998 and 1998...1999... -- --
Common stock, $.001 par value; authorized 210,000,000
shares; 33,319,000 issued and outstanding in 1999...... -- 33,000
Class A common stock, $.001 par value; authorized
100,000,000 shares;
3,795,000 and 4,139,838shares in 1998; 9,140,000 issued and
outstanding in 1997
and 1998............................................... 4,000 4,0001998.................................... 9,000 --
Class B common stock, $.001 par value; authorized
30,000,000 shares;
11,925,000shares in 1998; 23,850,000 issued and
outstanding in 1997 and 1998..... 12,000 12,0001998.................................... 24,000 --
Additional paid-in capital................................ 56,451,000 63,147,000
Accumulated deficit....................................... (8,812,000) (1,295,000)72,331,000 84,645,000
Retained earnings......................................... 2,407,000 13,000,000
Accumulated other comprehensive income.................... -- 151,000359,000 16,350,000
------------ ------------
Total stockholders' equity.................................. 47,655,000 62,019,00075,130,000 114,028,000
------------ ------------
Total Liabilities and Stockholders' Equity.................. $149,620,000 $191,915,000$243,867,000 $394,888,000
============ ============
The accompanying notes are an integral part of these financial statements.
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NETWORK SOLUTIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINESIX MONTHS ENDED
SEPTEMBERJUNE 30, SEPTEMBERJUNE 30,
------------------------- -------------------------
1997 1998 19971999 1998 1999
----------- ----------- ----------- -----------
Net revenue............................... $12,172,000 $25,427,000 $30,896,000 $62,395,000$20,476,000 $47,499,000 $36,968,000 $85,631,000
Cost of revenue........................... 7,033,000 10,312,000 18,468,000 26,451,0008,791,000 17,711,000 16,139,000 32,252,000
----------- ----------- ----------- -----------
Gross profit.............................. 5,139,000 15,115,000 12,428,000 35,944,00011,685,000 29,788,000 20,829,000 53,379,000
Research and development expenses......... 377,000 1,353,000 1,095,000 2,893,000815,000 2,460,000 1,540,000 4,495,000
Selling, general and administrative
expenses................................ 3,105,000 10,248,000 7,893,000 24,438,0008,008,000 19,395,000 14,190,000 34,660,000
Interest income........................... (570,000) (1,680,000) (1,054,000) (4,423,000)(1,416,000) (1,927,000) (2,743,000) (3,857,000)
Other expenses............................ -- 26,000 -- 93,00032,000 15,000 67,000 34,000
----------- ----------- ----------- -----------
Income before income taxes................ 2,227,000 5,168,000 4,494,000 12,943,0004,246,000 9,845,000 7,775,000 18,047,000
Provision for income taxes................ 995,000 2,163,000 2,006,000 5,426,0001,783,000 4,050,000 3,263,000 7,454,000
----------- ----------- ----------- -----------
Net income................................ $ 1,232,0002,463,000 $ 3,005,0005,795,000 $ 2,488,000 $ 7,517,0004,512,000 $10,593,000
=========== =========== =========== ===========
Earnings per common share:
Basic................................... $ 0.100.08 $ 0.190.17 $ 0.200.14 $ 0.470.32
=========== =========== =========== ===========
Diluted................................. $ 0.100.07 $ 0.180.17 $ 0.200.14 $ 0.450.30
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
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NETWORK SOLUTIONS, INC.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER
COMMON CLASS A CLASS B ACCUMULATEDPAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE
STOCK COMMON STOCK COMMON STOCK ADDITIONAL OTHER RETAINED TOTAL
------------------ -------------------- PAID-IN COMPREHENSIVE EARNINGS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME (DEFICIT) EQUITY
--------- ------ ----------EARNINGS INCOME
------- ------------ ------------ ----------- ------------- ----------- -------------
Balance, December 31,
1997.................... 3,795,000 $4,000 11,925,000 $12,000 $56,451,000 $(8,812,000) $47,655,0001998................. $ -- $ 9,000 $ 24,000 $72,331,000 $ 359,000 $ 2,407,000 $ --
Issuance of common
stock pursuant to
stock plans................... 344,838 4,456,000 4,456,000plans.......... -- -- -- 2,988,000 -- -- --
Tax benefit associated
with stock plans............. 2,240,000 2,240,000
Unrealized gain on
securities.............. $151,000 151,000plans..... -- -- -- 9,326,000 -- -- --
Conversion of Class B
common stock......... -- 24,000 (24,000) -- -- -- --
Reclassification of
Class A
common stock......... 33,000 (33,000) -- -- -- -- --
Comprehensive income:
Net income for the
nine
monthsperiod ended SeptemberJune 30,
1998................ 7,517,000 7,517,000
--------- ------ ----------1999................. -- -- -- -- -- 10,593,000 10,593,000
Other comprehensive
income, net of tax:
Unrealized gains on
securities........... -- -- -- -- 15,991,000 -- 15,991,000
-----------
Comprehensive
income............... -- -- -- -- -- -- $26,584,000
------- ------------------- -------- ----------- ----------- ----------- ===========
Balance, SeptemberJune 30,
1998.................... 4,139,838 $4,000 11,925,000 $12,000 $63,147,000 $151,000 $(1,295,000) $62,019,000
========= ====== ==========1999................. $33,000 $ -- $ -- $84,645,000 $16,350,000 $13,000,000
======= =================== ======== =========== =========== ===========
TOTAL
STOCKHOLDERS'
EQUITY
-------------
Balance, December 31,
1998................. $ 75,130,000
Issuance of common
stock pursuant to
stock plans.......... 2,988,000
Tax benefit associated
with stock plans..... 9,326,000
Conversion of Class B
common stock......... --
Reclassification of
Class A
common stock......... --
Comprehensive income:
Net income for the
period ended June 30,
1999................. 10,593,000
Other comprehensive
income, net of tax:
Unrealized gains on
securities........... 15,991,000
Comprehensive
income............... --
------------
Balance, June 30,
1999................. $114,028,000
============
The accompanying notes are an integral part of these financial statements.
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NETWORK SOLUTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINESIX MONTHS ENDED
SEPTEMBERJUNE 30,
---------------------------
1997 1998 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 2,488,0004,512,000 $ 7,517,00010,593,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 1,635,000 2,613,0001,459,000 3,439,000
Provision for uncollectible accounts receivable........ 5,577,000 2,168,000 --
Deferred income taxes.................................. (9,649,000) (14,061,000)(7,499,000) (43,743,000)
Tax benefit associated with stock plans................ -- 2,240,000
Changes2,118,000 9,326,000
Change in operating assets and liabilities:
Decrease (increase)Increase in accounts receivable........... 348,000 (10,298,000)receivable...................... (7,602,000) (24,456,000)
Increase in prepaids and other assets................ (896,000) (507,000)(1,045,000) (2,452,000)
Increase in accounts payable and accrued
liabilities....................................... 1,811,000 9,139,000
Decrease4,908,000 15,036,000
Increase (decrease) in income taxes payable..................... -- (1,952,000)payable.......... (4,513,000) 1,290,000
Increase in deferred revenue......................... 25,156,000 45,279,00027,500,000 93,394,000
------------ ------------
Net cash provided by operating activities............ 26,470,000 42,138,00022,006,000 62,427,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment....................... (1,254,000) (5,639,000)
Purchase(4,364,000) (38,274,000)
Sale (purchase) of short-term investments, net................... (28,321,000) (67,676,000)net............ (39,316,000) 5,693,000
Purchase of long-term investments......................... -- (6,012,000)(6,007,000) (2,000,000)
------------ ------------
Net cash used in investing activities................ (29,575,000) (79,327,000)(49,687,000) (34,581,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net transactions with SAIC................................ 6,627,000 1,337,0001,108,000 2,841,000
Repayment of capital lease obligations.................... -- (626,000)(412,000) (438,000)
Issuance of common stock pursuant to stock plans.......... -- 4,456,0003,767,000 2,988,000
------------ ------------
Net cash provided by financing activities............ 6,627,000 5,167,0004,463,000 5,391,000
------------ ------------
Net increase (decrease) in cash and cash equivalents........ 3,522,000 (32,022,000)(23,218,000) 33,237,000
Cash and cash equivalents, beginning of period.............. 15,540,000 41,146,000 12,862,000
------------ ------------
Cash and cash equivalents, end of period.................... $ 19,062,00017,928,000 $ 9,124,00046,099,000
============ ============
The accompanying notes are an integral part of these financial statements.
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NETWORK SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS
Since 1993, Network Solutions, Inc. ("the Company"Network Solutions") has actedcurrently acts as the
exclusive registrarregistry and registryas a registrar of Internet domain names within the .com,
.org, .net and .edu top level domains ("TLDs") under a cooperative agreement (as
amended,pursuant to the "Cooperative Agreement")Cooperative Agreement with the National Science Foundation
("NSF") and, currently,
the Department of Commerce's National Telecommunications
and Information Administration ("NTIA").Commerce. Domain names are used to identify a unique site or
presence on the Internet. As registrarregistry and registrya registrar for these TLDs, the Companytop level
domains, Network Solutions registers new domain names and is responsible for the
maintenance and dissemination of the master file of domain names through daily updates to the
Internet. The CompanyNetwork Solutions also provides enterprise network consultingInternet Technology Services, focusing
on architecture, implementation and support services to help large companies, focusing on network engineering, networkenterprises
and systems security and network management.Internet service providers improve their operational effectiveness.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The interim financial statements have been prepared by the Company,Network Solutions
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). In the opinion of management, financial statements
included in this report reflect all normal recurring adjustments which the CompanyNetwork
Solutions considers necessary for fair presentation of the results of operations
for the interim periods covered and of the financial position of the CompanyNetwork
Solutions at the date of the interim balance sheet. Certain information and
footnote disclosures normally included in the annual financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. However, the CompanyNetwork
Solutions believes that the disclosures are adequate for understanding the
information presented. The operating results for interim periods are not
necessarily indicative of the operating results for the entire year. These
interim financial statements should be read in conjunction with the Company'sNetwork
Solutions' December 31, 19971998 audited financial statements and notes thereto
included in the Company'sNetwork Solutions' Form 10-K annual report for the year ended
December 31, 1997.1998. Prior periods have been restated for comparative purposes.
NOTE 3 -- COMMON STOCK
STOCK SPLIT
On December 31, 1998, Network Solutions' board of directors approved a
two-for-one stock split of the shares of Class A common stock and Class B common
stock, to be effected in the form of a 100% stock dividend on shares of Class A
common stock and Class B common stock outstanding on February 26, 1999. The
stock dividend was distributed on March 23, 1999. Share and per share
information for all periods presented in the accompanying financial statements
have been adjusted to reflect the two-for-one stock split.
SECONDARY STOCK OFFERING AND STOCK RECLASSIFICATION
On February 12, 1999, Network Solutions completed a secondary stock
offering in which a total of 9,160,000 shares of Class A common stock were sold.
Concurrent with the offering, Science Applications International Corporation,
commonly known as "SAIC", converted 9,000,000 shares of Class B common stock
into 9,000,000 shares of Class A common stock sold in the offering. The
remaining 160,000 shares of Class A common stock were sold by other selling
stockholders after they exercised the applicable stock options simultaneously
with the closing of the offering. Network Solutions was not a selling
stockholder, and, therefore, did not receive any proceeds from the stock
offering other than proceeds from options exercised as part of the offering.
After the offering, SAIC owned approximately 89% of the combined voting power
and approximately 45% of the economic interest of the outstanding common stock.
On June 3, 1999, SAIC, the sole Class B common stock shareholder, converted
the remaining Class B common stock into an identical number of shares of Class A
common stock. As a result, SAIC's voting power
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changed from 89% to 45%, consistent with the number of Class A shares owned
after the conversion. On June 17, 1999, Network Solutions filed a Certificate of
Amendment of Second Amended and Restated Certificate of Incorporation whereby
its Class A common stock, par value $0.001 per share, and Class B common stock,
par value $0.001 per share, were reclassified as a single class of common stock,
par value $0.001 per share, the "Common Stock". At the time of the
reclassification of the Class A common stock and Class B common stock to Common
Stock, there were 33,312,594 shares of Class A common stock and no shares of
Class B common stock outstanding.
The Certificate of Amendment also increased the total number of authorized
shares of Network Solutions, Inc. to 220,000,000 of which 210,000,000 shares are
authorized shares of Common Stock and 10,000,000 shares are authorized shares of
preferred stock, par value $0.001 per share. There are no shares of preferred
stock outstanding.
NOTE 4 -- COMPUTATION OF EARNINGS PER SHARE
The following is a reconciliation of the numerator and denominator used in
the basic and diluted earnings per share computations:
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
THREE MONTHS ENDED SEPTEMBERJUNE 30, 19981999
Basic.................................. $3,005,000 16,041,000 $0.19$5,795,000 33,281,000 $0.17
=====
Dilutive securities:
Outstanding options.................. -- 705,0001,440,000
---------- ----------
Diluted................................ $3,005,000 16,746,000 $0.18$5,795,000 34,721,000 $0.17
========== ========== =====
THREE MONTHS ENDED SEPTEMBERJUNE 30, 19971998
Basic.................................. $1,232,000 12,502,000 $0.10$2,463,000 31,791,000 $0.08
=====
Dilutive securities:
Outstanding options.................. -- 118,0001,696,000
---------- ----------
Diluted................................ $1,232,000 12,620,000 $0.10$2,463,000 33,487,000 $0.07
========== ========== =====
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INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 1998
Basic.................................. $7,517,000 15,888,000 $0.471999
Basic................................. $10,593,000 33,202,000 $0.32
=====
Dilutive securities:
Outstanding options..................options................. -- 656,0001,558,000
----------- ----------
----------
Diluted................................ $7,517,000 16,544,000 $0.45
==========Diluted............................... $10,593,000 34,760,000 $0.30
=========== ========== =====
NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 1997
Basic.................................. $2,488,000 12,501,000 $0.201998
Basic................................. $ 4,512,000 31,623,000 $0.14
=====
Dilutive securities:
Outstanding options..................options................. -- 99,0001,262,000
----------- ----------
----------
Diluted................................ $2,488,000 12,600,000 $0.20
==========Diluted............................... $ 4,512,000 32,885,000 $0.14
=========== ========== =====
Common shares issued are weighted for the period the shares were
outstanding and incremental shares assumed issued under the treasury stock
method for diluted earnings per share are weighted for the period the underlying
options were outstanding.
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NOTE 45 -- ACCUMULATED OTHER COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which established standards for reporting and displaying
comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements.BALANCES
The changes in the components of accumulated other comprehensive income,
are reported net of income taxes, for the ninethree and six months ended SeptemberJune 30, 1999 and June
30, 1998 are as follows:
ACCUMULATED
OTHER
UNREALIZED GAINS COMPREHENSIVE(LOSSES) UNREALIZED GAINS
ON SECURITIES INCOME
----------------ON SECURITIES
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -----------------------
1998 1999 1998 1999
-------- ------------- -------- -----------
Pre-tax amount.......................... $260,000 $260,000amount............................. $22,000 $(10,979,000) $367,000 $27,568,000
Income tax.............................. 109,000 109,000taxes............................... 9,000 (4,612,000) 145,000 11,577,000
------- ------------ -------- -------------------
Net of tax amount....................... $151,000 $151,000amount.......................... $13,000 $ (6,367,000) $222,000 $15,991,000
======= ============ ======== ===================
NOTE 56 -- RESTRICTED ASSETS
UnderSUBSEQUENT EVENTS
LITIGATION
On August 17, 1998, we received notice from the termsCommission of the European
Communities, or "EC," of an investigation concerning the Company's Premier
Program agreements in Europe. The EC requested production of these agreements
and related materials for review and we complied. On June 17, 1999, we received
a second inquiry from the EC concerning our registrar licensing agreements with
the five newly-accredited testbed registrars and we responded to this inquiry on
July 9, 1999. We cannot reasonably estimate the potential impact of the
investigation nor can we predict whether an action will ultimately be brought by
the EC or the form of relief that might be sought. Any such relief could harm
our business.
STATUS OF COOPERATIVE AGREEMENT
On January 1, 1993, Network Solutions initiated phase-in of a Cooperative
Agreement with the National Science Foundation. The three-month phase-in was
followed by a five-year operations period, commencing April 1, 1993 and ending
March 31, 1998, and a six-month flexibility period through September 14, 1995 amendment to1998.
Effective in September 1998, the responsibility for the Cooperative Agreement
30% of the registration fees collected by the Company is required to
be set aside for the enhancement of the intellectual infrastructure of the
Internet ("set aside funds") and, as such, is not recognized as revenue by the
Company. The Company has reflected these set aside funds, along with the
appropriate percentage of net accounts receivable as restricted assets, and has
recorded an equivalent, related current liability. The Company maintains the
cash received relatingwas transferred to the set aside funds in a separate interest bearing
account. The set aside funds, plus any interest earned, are intended to be
disbursed at the directionDepartment of the NSF. In September 1998, the Company disbursed
$39.2 million out of this fund to the NSF at its direction, bringing cumulative
disbursements since September 14, 1995 to $62.2 million.
On March 12, 1998, the NSF and the Company amended the Cooperative
Agreement to eliminate the 30% set aside requirement effective April 1, 1998.
Future disbursement of these set aside funds will have no significant effect on
the Company's business, financial condition or results of operations. For
purposes of the Company's statements of cash flows, amounts relating to these
restricted assets and the Internet fund liability have been excluded in their
entirety.
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NOTE 6 -- COMMITMENTS AND CONTINGENCIES
INTERNET GOVERNANCE
Within the U.S. Government, leadership for the continued privatization of
Internet administration is currently provided by the NTIA. After a series of
draft proposals and public comment periods, on June 10, 1998, the NTIA published
in the Federal Register a plan referred to as the Statement of Policy or "White
Paper," calling for the formation of a not-for-profit corporation to assume
responsibility for administration of the domain name system ("DNS"), but which
is not expected to perform actual registration of domain names either as a
registrar or registry. The Statement of Policy invites private sector Internet
stakeholders to work together to form a new private, not-for-profit corporation
to oversee policy for the Internet name and address system. The Statement of
Policy calls for a separation of the registry and registrar functions of the
DNS, both of which functions are currently performed exclusively by the Company
in the .com, .org, .net and .edu TLDs.
As part of the process initiated by the Statement of Policy, several
proposals were put forward to the NTIA on the establishment and governance of
the not-for-profit corporation. A newly-formed U.S. based private not-for-profit
corporation denoted the Internet Corporation for Assigned Names and Numbers
("ICANN") has submitted a series of proposals which is forming the basis of
public discussion at a series of meetings one of which was held on November 14,
1998.
As a result of these and other meetings and private negotiations, the
process initiated by the Statement of Policy may result in U.S. Government
recognition of ICANN as the not-for-profit corporation under the Statement of
Policy. The NTIA plan calls for a phased transition of its responsibilities for
the DNS to the not-for-profit corporation over the period ending on September
30, 2000. Despite the significant efforts undertaken to date, it is impossible
to predict at this time whether or when the process initiated by the Statement
of Policy will result in the transition of DNS administration and, if it does,
the effect on the Company of such transition.Commerce. In October 1998, the Cooperative
Agreement was amended (the "October 1998
Amendment") to extend its termthe flexibility period through September 30,
2000. As the U.S.
Government transitions its authority over the DNS2000 and to the not-for-profit
corporation, corresponding obligations under the Cooperative Agreement may be
terminated and, as appropriate, covered in a contract between the not-for-profit
corporation and the Company. In the October 1998 Amendment, the Company and the
NTIA agreed to a plan for the transition to a shared registration system.
In accordance with the terms of the October 1998 and subsequent amendments
to the Cooperative Agreement, Network Solutions has developed a protocol and
associated software to support a shared registration system which will permit
multiple registrars to provide registration services within the top level
domains for which Network Solutions will act as registry. Network Solutions
deployed its proprietary shared registration system on schedule by establishing
a testbed to support actual registrations by five new registrars. We have
entered into license agreements with the five new registrars to provide access
to the shared registration system, permitting them to directly register and
maintain actual domain names.
During the current testbed period, we have agreed to charge the new
registrars an interim registry fee of $18 for each new two-year registration.
All of the five original new testbed registrars have completed their systems
development and testing, are certified and have begun to register actual names
within the shared registration system.
On August 6, 1999, Network Solutions agreed with the Department of Commerce
to extend the testbed period through September 10, 1999, and to consider
additional accredited registrars eligible to participate in the testbed. Network
Solutions has signed confidentiality agreements with 12 additional testbed
registrars and has shipped these new prospective registrars the software and
documentation to begin developing their system interfaces with the shared
registration system in which multipleorder to begin providing registration services. These 12
prospective registrars are among the 59 companies accredited, or to be
accredited, by the Internet Corporation for Assigned Names and Numbers. All 59
of these companies may register domain namesbe eligible to participate in the testbed.
9
10
Network Solutions continues to work with the singleU.S. Government toward
establishing the post-testbed registry for
each TLD,price and toward resolving other issues
surrounding the registry operations in a phased approach, the first phase of which is scheduled to be
completed by March 31, 1999.competitive environment.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This quarterly report on Form 10-Q contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Statements
regarding the intent, belief or current expectations of the CompanyNetwork Solutions are
intended to be forward-looking statements which may involve risk and
uncertainty. There are a number of factors that could cause the Company'sNetwork Solutions'
actual results to differ materially from those indicated by such forward-lookingforward-
looking statements, including, but not limited to, those discussed in "Part
I -- Item 1 -- Business -- Risk Factors" and "Part II -- Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Factors Affecting Operating Results" contained in the Company's 1997Network Solutions' 1998 Form
10-K, as filed with the SECSecurities and Exchange Commission on March 31, 1998.30, 1999. In
addition, set forth below under the heading "Factors Affecting Operating
Results" is a further discussion of certain of those risks as they relate to the
period covered by this report, the Company's near termNetwork Solutions' near-term outlook with respect
thereto, and the forward-looking statements set forth herein; however, the
absence in this quarterly report of a complete recitation of or update to all
risk factors identified in the 19971998 Form 10-K should not be interpreted as
modifying or superseding any such risk factors, except to the extent set forth
below. Investors should review this quarterly report in combination with the Company's 1997Network
Solutions' 1998 Form 10-K in order to have a more complete understanding of the
principal risks associated with an investment in the
Company'sNetwork Solutions' common
stock.
9
10
OVERVIEW
The CompanyNetwork Solutions currently acts as the exclusive registrarregistry and registryas a
registrar of Internet domain names within the .com, .net, .org .net and .edu TLDstop
level domains pursuant to the Cooperative Agreement with the NTIA.Department of
Commerce. Domain names are used to identify a unique site or presence on the
Internet. As registrarregistry and registrya registrar for these TLDs, the
Companytop level domains, Network
Solutions registers new domain names, and is responsible for the maintenance and
dissemination ofmaintains the master file of domain names
through dailyand updates that master file to the Internet.
The CompanyInternet daily. Network Solutions also
delivers enterprise network consulting services to large
companies that desire to establish or enhance theirprovides Internet presence or
re-engineer legacy network infrastructures to accommodate the integration of
both Internet connectivity and internal enterprise network ("Intranet"),
technology into their information technology base. The Company's consulting
services includeTechnology Services, focusing on network engineering, network
and systems security and network management.management solutions.
Registration Services. In December 1992, the CompanyNetwork Solutions entered into
the Cooperative Agreement with the NSFNational Science Foundation under which
the CompanyNetwork Solutions was to provide Internet domain name registration services for
five TLDs:top level domains: .com, .org, .net, .edu and .gov. These registration
services include the initial two year domain name registration and annual
re-registration, and throughout the registration term, maintenance of and
unlimited modifications to individual domain name records and updates to the
master file of domain names. The Cooperative Agreement became effective January
1, 1993. It includesincluded a three-month phase-in period, a five-year operational
period, (commencingcommencing April 1, 1993 and ending March 31, 1998),1998, and a six-month
flexibility period through September 30, 1998. Effective September 9, 1998, the
NTIADepartment of Commerce took over the administration of the Cooperative Agreement
from the NSF.National Science Foundation. In October 1998, the Cooperative Agreement
was amended and extendedto extend the flexibility period until September 30, 2000.2000 and to
transition to a shared registration system.
The original terms of the Cooperative Agreement provided for a cost
reimbursement plus fixed-fee contract (with an initial fee of 8%).contract. Effective September 14, 1995, the
NSFNational Science Foundation and the CompanyNetwork Solutions amended the Cooperative
Agreement to require the CompanyNetwork Solutions to begin charging end users a services
fee of $50 per year for each domain name in the .com, .org and .net TLDs. Priortop level
domains. Thus, prior to April 1, 1998, registrants paid a services fee of $100
for two years of domain name services upon each initial registration and an
annual re-registration fee of $50 per year thereafter (collectively "registration fees").thereafter. The NSFNational Science
Foundation paid the registration fees for domain names within the .edu and .gov
TLDstop level domains through March 31, 1997. Commencing April 1, 1997, the CompanyNetwork
Solutions agreed with the NSFNational Science Foundation to provide domain name
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11
services within the .edu and .gov TLDstop level domains free of charge. As of
October 1, 1997, the CompanyNetwork Solutions no longer registers or administers domain
names in the .gov TLD.top level domain.
Under the terms of the September 14, 1995 amendment to the Cooperative
Agreement, 30% of the registration fees collected by the CompanyNetwork Solutions was
required to be set aside for the enhancement of the intellectual infrastructure
of the Internet and, as such, was not recognized as revenue by the Company. The Company
has reflected these funds, along with the appropriate percentage of net accounts
receivable, as restricted assets and has recorded an equivalent, related current
liability. The Company maintains the cash received relating to the set aside
funds in a separate interest bearing account.Network
Solutions. The set aside funds, plus any interest earned, arewere disbursed at the
direction of the NSF. To date,National Science Foundation. As of December 31, 1998, the
Company hashad cumulatively disbursed $62.2 million to the NSFNational Science Foundation at theirits
direction all set aside funds collected and asassociated interest earned for a
total of September
30, 1998, has a remaining restricted cash balance of approximately $627,000.$62.3 million.
On March 12, 1998, the NSFNational Science Foundation and the CompanyNetwork Solutions
amended the Cooperative Agreement to eliminate the 30% set aside requirement
effective April 1, 1998 and to reduce the registration fees by a corresponding
amount. Initial registrations on and after April 1, 1998 are charged $70 for two
years of registration services and an annual re-registrationrenewal fee of $35 per year
thereafter. This amendment hashad no effect on the revenue currently recognized on each
registration ($70 for initial registrations and $35 for re-registrations)renewals), since the CompanyNetwork
Solutions previously did not recognize revenue on the 30% set aside funds.
Accordingly, while the revenue to the CompanyNetwork Solutions on a per registration basis
doesdid not change, the amount charged to customers declined.
In order to provide prompt access to new domain names on the Internet,
the
CompanyNetwork Solutions generally invoices customers and permits them to pay their
registration fees after their domain names are registered. The Company'sNetwork Solutions'
experience has been that, for the period from September 1995 through September 1998,June 1999,
approximately 30%36% of new registrations have ultimately been deactivated for
non-payment. The
Company
10
11Network Solutions believes that this level of uncollectible
receivables is due to, among other factors, the large number of individuals and
corporations that have registered multiple domain names with the apparent
intention of transferring registration
forreselling such names at a profit. Such speculative resellers have a
greater tendency than other customers to default on their registration fees. As
a consequence, the CompanyNetwork Solutions has recorded a comparable provision for
uncollectible accounts in determining net registration revenue.
This 30% provision has been consistently applied for
the period from September 1995 through September 1998 and is considered adequate
by the Company.
Registration fees charged to customersend users for registration services, net of
any 30% set aside funds, are recognized as revenue evenly over the registration
term. For example, the
CompanyAccordingly, Network Solutions recognizes $70 on a straight-line basis
over the two-year serviceservices period for each $70basic initial domain name
registration, equivalent to $35 per year. Annual re-registrations of basic
domain namesname registrations are recorded as revenue based upon $35 recognized on a
straight-line basis over the one-year serviceservices period. This subscription-based
model defers revenue recognition until the CompanyNetwork Solutions provides the
registration services, including maintenance of and unlimited modifications to
individual domain name records, over the respective registration terms. At SeptemberJune
30, 1998, the Company1999, Network Solutions had net deferred revenue of $106.7$222.6 million.
Enterprise Network ConsultingInternet Technology Services. Substantially all of the Company's
enterprise network consulting servicesNetwork Solutions'
Internet Technology Services revenue is derived from professional services which
are generally provided to clients on a time and expense basis and is recognized
as services are performed.
The majority of the Company's enterprise network consulting servicesNetwork Solutions' Internet Technology Services are
provided to customers in the financial services industry. Bank of America,
(formerly
NationsBanc)formerly NationsBanc, is currently the Company'sNetwork Solutions' largest consulting servicesInternet
Technology Services client, accounting for 49%38.8% of the Company's enterprise network consulting servicesNetwork Solutions' Internet
Technology Services business net revenue and 3.7%2.2% of the Company'sNetwork Solutions' total
net revenue infor the ninethree months ended SeptemberJune 30, 1998.1999. NationsBanc originally
contracted with the
CompanyNetwork Solutions in 1993 and the CompanyNetwork Solutions currently
provides network design and engineering services as well as a variety of project
specific services under the contract.
RESULTS OF OPERATIONS
Net Revenue. Net revenue increased 109%132% from $12.2$20.5 million for the three
months ended SeptemberJune 30, 19971998 to $25.4$47.5 million for the three months ended SeptemberJune 30,
1998.1999. This increase in net revenue was primarily attributable to the increase in
the number of domain name registrations, principally in the .com TLD.top level
domain. Net revenue from registration services increased 116%136% from $10.7$19.0 million
for the three months ended
September11
12
June 30, 19971998 to $23.1$44.8 million for the three months ended SeptemberJune 30, 1998.1999. Net new
registrations increased 89%166% from 269,000443,000 for the three months ended SeptemberJune 30,
19971998 to 507,0001,180,000 for the three months ended SeptemberJune 30, 1998.1999. This also represents
a 14%28% increase over the 443,000922,000 net new registrations for the three months ended
June 30, 1998.March 31, 1999. Growth in net registrations continues to be driven by the
widespread use and adoption by businesses of the Internet and Intranets on a
global basis. Cumulative net registrations as of SeptemberJune 30, 19971998 were 1,296,0002,289,000 as
compared to 2,777,0005,322,000 as of SeptemberJune 30, 1998,1999, for a 114%133% increase. In addition,
this growth in cumulative net registrations isrepresents a 21%28% increase in the Company'sNetwork
Solutions' entire customer base since June 30, 1998.March 31, 1999.
Net revenue from enterprise network consulting servicesInternet Technology Services increased 53%82% from $1.5
million for the three months ended SeptemberJune 30, 19971998 to $2.3$2.7 million for the three
months ended SeptemberJune 30, 1998.1999. This also represents a 53% increase
over20% decrease in net revenue from
Internet Technology Services from the $1.5three months ended March 31, 1999. Bank of
America accounted for $1.0 million in enterprise network consulting servicesor 2.2% of Network Solutions' total net
revenue for the three months ended June 30, 1998. NationsBanc accounted for $305,0001999 and $571,000 or 2.5% of
the Company's total net revenue2.8% for the
three months ended September 30, 1997
and $1.2 million or 4.7% of the Company's total net revenue for the three months
ended SeptemberJune 30, 1998.
Net revenue increased 102%132% from $30.9$37.0 million for the ninesix months ended SeptemberJune
30, 19971998 to $62.4$85.6 million for the ninesix months ended SeptemberJune 30, 1998.1999. This increase
in net revenue was primarily attributable to the increase in the number of
domain name registrations, principally in the .com TLD.top level domain. Net revenue
from registration services increased 123%131% from $25.9$34.5 million for the ninesix months
ended SeptemberJune 30, 19971998 to $57.7$79.7 million for the ninesix months ended SeptemberJune 30, 1998.1999.
Net new registrations increased 85% from 698,000 forduring the nine monthssix month period ended SeptemberJune 30, 19971999 were
2.1 million as compared to 1,290,000 for783,000 during the nine monthssix month period ended SeptemberJune 30,
11
12
1998. The provision for uncollectible accounts used in determining net new
registration revenue for the nine months ended September 30, 1997 and 1998, was
consistently applied at a ratean increase of 30%158%.
Net revenue from enterprise network consulting services decreased 6%Internet Technology Services increased 143% from $5.0$2.5
million for the ninesix months ended SeptemberJune 30, 19971998 to $4.7$6.0 million for the ninesix
months ended SeptemberJune 30, 1998. NationsBanc1999. This was primarily attributable to an increase in
business from Bank of America and other financial services customers. Bank of
America accounted for $1.7$1.8 million or 5.5%2.1% of the Company'sNetwork Solutions' total net
revenue for the ninesix months ended SeptemberJune 30, 19971999, and $2.3$1.1 million or 3.7%3.0% for the ninesix
months ended SeptemberJune 30, 1998.
During the three and nine months ended September 30, 1998, the consulting
services division continued to add new leadership in sales and operations and
hired additional technical consultants. In addition, the division continued to
emphasize its efforts targeted at lead generation and regional sales and
marketing programs by opening offices in New York City and Atlanta, Georgia.
Cost of Revenue. Cost of revenue consists primarily of salaries and
employee benefits, fees paid to subcontractors for work performed in connection
with revenue producing projects, depreciation and equipment costs, lease costs
of the operations infrastructure and the associated operating overhead. Cost of
revenue increased 101% from $7.0$8.8 million for the three months ended SeptemberJune 30,
19971998 to $10.3$17.7 million for the three months ended SeptemberJune 30, 1998. This 47%1999. The increase was
primarily driven by the growth of the Company'sNetwork Solutions' registration business which
experienced additional outsourcing costs of $1.2$2.8 million in support of
the Company's invoicing, collection and processing activities, $2.0 million in additional
depreciation charges and equipment expenditures and additional direct labor
charges of $795,000$3.1 million related to systems engineering and operations.
As a percentage of net revenue, cost of revenue decreased from 57.8%42.9% for
the three months ended SeptemberJune 30, 19971998 to 40.6%37.3% for the three months ended SeptemberJune
30, 1998.1999. This decrease primarily reflects economies of scale that the
CompanyNetwork
Solutions has continued to achieve due to the growth of its subscription-based
domain name registration business. In the near term, the continued need for back
office investments is expected to partially offset future margin improvements
arising from economies of scale.
Cost of revenue increased 100% from $18.5$16.1 million for the ninesix months ended
SeptemberJune 30, 19971998 to $26.5$32.3 million for the ninesix months ended SeptemberJune 30, 1998.1999. This 43%
increase was driven by a $1.8 million increase in labor, a $3.7$6.3 million increase in outsourcing costs and $2.6$3.0
million in additional depreciation charges and equipment expenditures and
additional direct labor charges of $4.4 million related to systems engineering
and operations primarily associated with supporting the growth of the Company'sNetwork
Solutions' registration services business.
As a percentage of net revenue, cost of revenue decreased from 59.8%43.7% for
the ninesix months ended SeptemberJune 30, 19971998 to 42.4%37.7% for the ninesix months ended SeptemberJune 30,
19981999 reflecting economies of scale achieved in the Company'sNetwork Solutions' registration
business.
Research and Development Expenses. Research and development expenses
consist primarily of compensation and consultant expenses to support the creation, development
and enhancement of the Company'sNetwork Solutions' products
services12
13
and technologies. Research and development expenses increased 259%202% from $377,000$815,000
for the three months ended SeptemberJune 30, 19971998 to $1.4 million$2,460,000 for the three months
ended SeptemberJune 30, 1998.1999. To date, all significant research and development costs
have been expensed as incurred. The CompanyNetwork Solutions expects that the level of
research and development expenses will continue to increase in the near future
in terms of
absolute dollars as the CompanyNetwork Solutions invests in developing new product and
service offerings. As a percentage of net revenue, research and development
expenses increased from 3.1%were 4.0% and 5.2% for the three months ended SeptemberJune 30, 1997 to 5.3% for
the three months ended September 30, 1998.1998 and 1999,
respectively.
Research and development expenses increased 164%192% from $1.1$1.5 million for the
ninesix months ended SeptemberJune 30, 19971998 to $2.9$4.5 million for the ninesix months ended SeptemberJune 30,
1998.1999. As a percentage of net revenue, research and development expenses
increased from 3.5%4.2% for the ninesix months ended SeptemberJune 30, 19971998 to 4.6%5.3% for the ninesix
months ended SeptemberJune 30, 1998.1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of salaries of business development,
general management, administrative and financial personnel, marketing expenses,
corporate services from Science Applications International Corporation ("SAIC"),SAIC, legal and other professional costs and
amortization of goodwill associated with the Company'sNetwork Solutions' 1995 acquisition by
12
13
SAIC. Selling, general and administrative expenses increased 230%142% from $3.1$8.0
million for the three months ended SeptemberJune 30, 19971998 to $10.2$19.4 million for the three
months ended SeptemberJune 30, 1998.1999. The increase iswas primarily attributable to increasesa $7.0
million increase in marketing and business development expenses of $5.0 million including
television, Internet banner advertising and targeted direct mail campaigns. The Company expects that the level of marketing and business
development expenses will increase in the near future as the Company continues
to promote the value of a .com Web address and other new Internet-based
value-added services. The Company also plans to continue to develop its
distribution channels, both domestically and internationally.
As a percentage of net revenue, selling, general and administrative
expenses increased from 25.5% for the three months ended September 30, 1997 to
40.3% for the three months ended September 30, 1998.
Selling, general and administrative expenses increased 210% from $7.9
million for the nine months ended September 30, 1997 to $24.4 million for the
nine months ended September 30, 1998. The increase was attributable to a $10.2
million increase in marketing and business development expenses,campaigns,
increased staffing expenses of $1.5 million$900,000 and an increase in legal andof other professional
costs of $2.7$2.1 million.
As a percentage of net revenue, selling, general and administrative
expenses increased from 25.5% for the nine months ended September 30, 1997 to
39.2% for the nine months ended September 30, 1998.
Interest Income. The Company had interest income of $570,00039.1% for the three months ended SeptemberJune 30, 19971998 to 40.8%
for the three months ended June 30, 1999.
Selling, general and administrative expenses increased 144% from $14.2
million for the six months ended June 30, 1998 to $34.7 million for the six
months ended June 30, 1999. This increase was primarily attributable to a $14.3
million increase in marketing and business development expenses including
television, Internet banner advertising and targeted direct mail campaigns,
increased staffing expenses of $2.0 million and an increase of other
professional costs of $2.3 million.
As a percentage of net revenue, selling, general and administrative
expenses increased from 38.4% for the six months ended June 30, 1998 to 40.5%
for the six months ended June 30, 1999.
Network Solutions expects that the level of selling, general and
administrative expenses will continue to increase significantly in the near
future in terms of absolute dollars as comparedoperations continue to $1.7expand. In
particular, sales, marketing and business development expenses will increase as
Network Solutions continues to promote the value of a .com web address and other
new Internet-based value-added services. Network Solutions also plans to
continue to develop and enhance its distribution channels, both domestically and
internationally.
Interest Income. Network Solutions had net interest income of $1.4 million
for the three months ended SeptemberJune 30, 1998.
The Company1998 as compared to $1.9 million for the
three months ended June 30, 1999.
Network Solutions had net interest income of $1.1$2.7 million for the ninesix
months ended SeptemberJune 30, 19971998 as compared to $4.4$3.9 million for the ninesix months ended
SeptemberJune 30, 1998.1999. The increase for both the three month and ninesix month comparisons
is attributable to the investment of the net proceeds of the
Company'sNetwork Solutions'
initial public offering as well as positive cash flow resulting from increasing
domain name registrations.
Income Taxes. The provision for income taxes was 45%42% of pretax earnings,
or $995,000 for the three months ended September 30, 1997, and 42% or $2.2$1.8 million for the three months ended SeptemberJune 30, 1998.1998, and 41%, or $4.1
million for the three months ended June 30, 1999.
The provision for income taxes was 45% of pretax earnings,42% or $2.0$3.3 million for the ninesix months
ended SeptemberJune 30, 1997,1998, and 42%,41% or $5.4$7.5 million for the ninesix months ended SeptemberJune 30,
1998.1999.
The difference between the effective ratesrate for both periods presented and
the statutory rate is principally attributable to the relative impact that
non-deductible goodwill had on pretax operating income. Goodwill is
13
14
being amortized by the CompanyNetwork Solutions over five years and is associated with the
acquisition of the CompanyNetwork Solutions by SAIC in 1995.
LIQUIDITY AND CAPITAL RESOURCES
At SeptemberJune 30, 1998, the Company's1999, Network Solutions' principal source of liquidity was its
cash and cash equivalents of $9.1$46.0 million and its short-term investments of
$107.9$114.2 million, which when combined represent an increase of $35.7$28.6 million from
theits December 31, 1997 balance1998 balances in those accounts. The CompanyNetwork Solutions also has
$6.3$42.1 million of marketable securities held as long term investments as of SeptemberJune
30, 1998.1999.
At SeptemberJune 30, 1998, the Company's1999, Network Solutions' cumulative net obligation to SAIC for
intercompany activity was $2.6 million, a net increase of $1.3 million from
December 31, 1997.$7.6 million. Intercompany activity is primarily
comprised of salaries and benefits paid by SAIC on behalf of the Company. The CompanyNetwork Solutions.
Network Solutions currently reimburses SAIC for intercompany activity on a
monthly basis. Pursuant to the Tax Sharing Agreement dated September 26, 1997,
the CompanyNetwork Solutions now generally remits income tax payments directly to tax
authorities as it no longer is part of SAIC's consolidated group for federal
income tax purposes.
Cash provided by operations was $42.1$62.4 million for the ninesix months ended SeptemberJune
30, 1998.1999. This amount is principally attributed to net income plus the increase
in deferred revenue reflecting cash collected in advance of registration
services revenue recognition which occurs ratably over the two- andtwo-and one-year
registration terms. Partially offsetting this amount is an increase in deferred
tax assets resulting from accelerated revenue recognition for tax purposes and
the subsequentassociated tax liabilities.
13
14liabilities, generally paid on a quarterly basis.
Investing activities totaled $79.3$34.6 million for the ninesix months ended SeptemberJune
30, 1998,1999, of which $67.7$5.7 million was the net purchasessale of short-term investmentsinvestments.
Investments during the period include a $2.0 million investment in a strategic
business partner which subsequently consummated its initial public offering
during the period.
Capital expenditures year to date were $38.3 million, primarily for
computer equipment and $6.0 millionsoftware to support Network Solutions' registry and
registrar efforts, as well as costs related to the opening of long-term investments. These investments are
primarily comprisedNetwork Solutions'
new call center. Network Solutions will continue to invest in the back office
infrastructure in advance of commercial investment grade securities.
The Companycontinued growth in domain name registrations and
as Network Solutions designs, builds, and operates the shared registration
system in accordance with the Cooperative Agreement.
Network Solutions believes that its existing cash balance, investments and
cash flows expected from future operations will be sufficient to meet the Company'sNetwork
Solutions' capital requirements for at least the next 12 months.
FACTORS AFFECTING OPERATING RESULTS.RESULTS
INDUSTRY RISKS
Ongoing Privatizationprivatization of Internet Administration. The Internet is not
bound by geography, and neither the U.S. Government nor any single organization
or entity currently has formal authority over all aspects of the Internet. There
is, however, a need for central policy decisions surrounding the coordination of
the administrative services required for theadministration could harm our registration
allocation and use of
TLDs and Internet Protocol ("IP") numbers, and for the effective global
operation of the Internet. This role has been filled through mutual cooperation
and interrelated informal agreements, historical leadership from an
unincorporated entity called the Internet Assigned Numbers Authority (the
"IANA") and growing involvement from the U.S. Government. With the onset of
increased commercial growth of the Internet, the U.S. Government has initiated
an activity directed at increased privatization of the policy making and central
administration of the Internet. Without authoritative policy making, it is
becoming increasingly more difficult to achieve consensus in the historical
manner. Failure to achieve consensus among the various groups who now informally
administer the Internet could disrupt Internet operations or delay
infrastructure improvements or changes in operations needed to maintain and
expand the Internet. The Company's business financial condition and results of
operations could be materially and adversely affected by such a failure.
Within the U.S. Government, leadership for the furthercontinued privatization of
Internet administration is currently provided by the NTIA.Department of Commerce.
After a series of draft proposals and public comment periods, on June 10, 1998,
the NTIADepartment of Commerce published in the Federal Register a plan referred to
as the Statement of Policy or "White Paper," calling for the formation of a
not-for-profit corporation to assume responsibility for administration ofcertain responsibilities relating to the
DNS,domain name system, but which is not expected to perform actual registration of domain names
either as a registrar or registry. The Statement of Policy invitescalled for increased
competition and invited private sector Internet stakeholders to work together to
form a new private, not-for-profit corporation to oversee policy for the
Internet name and address system.
The Statement of Policy calls for a separation ofdistinguished between the registry and registrar
functions of the DNS, both of which functionsdomain name system. We currently are currently performed
exclusively by the Companyexclusive registry in
the .com, .org, .net and .edu TLDs.top level domains and act as the leading registrar
in those domains. The technical structure of the Internet only permits one
registry for each top level domain. A registrar acts as the interface between
the registry and the end-user domain name registrants. Registrars submit to the
registry certain limited information for each of their customers that has a
second level domain name in that top level domain. A registrar can provide
value-added products and services
14
15
in addition to its basic registration service. Numerous registrars will be able
to operate within each top level domain.
As part of the process initiated by the Statement of Policy, several
proposals were put forward to the NTIADepartment of Commerce on the establishment
and governance of the not-for-profit corporation. ICANN hasThe proposals differed in
several respects including, among others, their approaches to the following
issues: place and form of incorporation; method for selection of the interim and
permanent board of directors; who should be eligible to become a member and on
what questions should the members vote; what authority should be granted to the
board of directors and what authority should be reserved to the members, if any;
and whether there should be separate supporting organizations and, if so, what
authority these organizations should have. A U.S. based private not-for-profit
corporation with an international board of directors, denoted the Internet
Corporation for Assigned Names and Numbers, or "ICANN," submitted a series ofvarious
proposals which is formingformed the basis of public discussion at a seriesnumber of meetings one of which
was held on November 14, 1998.public and private
meetings. As a result of these and other meetings and private negotiations, the
process initiated by the Statement of Policy may resulthas resulted in the entry by the
U.S. Government recognitioninto a Memorandum of Understanding, or "MOU," with ICANN. Under
the MOU, the parties will jointly design, develop and test the mechanisms,
methods and procedures that should be in place and the steps necessary to
transition management responsibility for certain domain name system functions to
a private-sector not-for-profit entity. The MOU provides that once testing is
successfully completed, it is contemplated that management of certain domain
name system functions will be transitioned to the mechanisms, methods and
procedures designed and developed in this joint project. The U.S. Government has
sent us a letter directing us to treat ICANN as the not-for-profit corporation
described in the October amendment to the Cooperative Agreement, in the
performance of ICANN's obligations under the MOU and until such time as the MOU
is terminated. We have taken the position that ICANN will become such not-
for-profit corporation, or "NewCo", only when responsibilities are transferred
to it in compliance with the Statement of Policy.Policy and that ICANN will be
"recognized" by us only pursuant to a mutually agreeable, bilateral, agreement.
We are actively negotiating such an agreement.
ICANN's bylaws called for the creation of supporting organizations that
will select some ICANN board members and provide policy recommendations in
particular areas. ICANN called for submission by February 5, 1999 of
applications from groups urging "recognition" of a domain name supporting
organization that would be charged with developing recommendations for policies
ICANN might apply. We submitted comments regarding the structure and function of
such a domain name supporting organization. On March 4, 1999, the ICANN Board
adopted a domain name supporting organization formation concept statement
reflecting some, but not all of our comments. On March 15, 1999, ICANN released
a staff draft of amendments to its bylaws based on the formation concept
statement to establish a domain name supporting organization. On March 31, 1999,
the ICANN Board adopted bylaw changes to govern establishment of the domain name
supporting organization. In May 1999, ICANN recognized a provisional Names
Council and six constituencies. We organized a global top level domain registry
constituency for the domain name supporting organization and may join other
constituencies. On August 12, 1999, ICANN further amended its bylaw provisions
relating to the domain name supporting organization.
We cannot be sure that ICANN will take positions favorable to us in the
process of implementing the final bylaws, recognizing domain name supporting
constituencies or in its further policy development, contract formation or other
actions.
The NTIA planStatement of Policy calls for a phased transition of itsthe Department of
Commerce's responsibilities for the DNSdomain name system to thea not-for-profit
corporation over the period ending onby September 30, 2000. There are severalWe face risks associated with the recognition of private sector
DNS administration and the establishment of, and transfer of DNS administration
from the NTIA to, the not-for-profit corporation. Some of those risks include:this transition,
including:
- failure to achieve consensus on the many issues relating to the
establishmentfunctioning and governance of the not-for-profit corporation could prevent or delay the transition and thereby result
in instability in DNSdomain name system administration,
- the not-for-profit corporation could fail to achieve consensus or gain legitimacy resulting in
instability in the operation of the Internet,domain name system administration,
15
16
- the U.S. Government could refuse to transfer somecertain responsibilities for
DNSdomain name system administration to the not-for-profit corporation therebydue
to security, stability or other reasons resulting in fragmentation or
other instability in DNSdomain name system administration,
14
15
- the Company might not succeed in establishing an acceptable contractual
agreement with the not-for-profit corporation, and
- the not-for-profit corporation could adopt or promote policies,
procedures or programs that are unfavorable to the Company'sour role in the
registration of domain names or that are not consistent with or
preclude, the Company'sour current
or future plans.
Despite the significant efforts undertaken to date, it is impossible to
predict at this time whether or when the process initiated by the Statement of
Policy will result in the full transition to the not-for-profit corporation of
DNS administrationdomain name system responsibilities as and to the extent contemplated in the
Statement of Policy and, if it does, the effect on the Companyus of such transition.
The Company's business, financial
condition and results of operations could be materially and adversely affected
by any of these events and the uncertainty regarding authoritative sources for
domain name registration policies.
Status of Cooperative Agreement. On January 1, 1993, the Company initiated
phase-in of the Cooperative Agreement. The three-month phase-in was followed by
a five year operations period (commencing April 1, 1993 and ending March 31,
1998) and a six-month "flexibility period" through September 30, 1998. Effective
in September 1998, the responsibility forOperations under, changes to or disputes under the Cooperative Agreement was
transferred to the NTIA. In October 1998, the Cooperative Agreement was amended
to extend its term through September 30, 2000.could
harm our business
As the U.S. Government transitions itscertain responsibilities for the DNSdomain name
system administration to the not-for-profit corporation, corresponding
obligations under the Cooperative Agreement may be terminated and, as
appropriate, covered in a contract between the not-for-profit corporation and
us. The U.S. Government sent us a letter directing us to treat ICANN as the
Company. Innot-for-profit corporation identified in the October 1998 Amendment,amended Cooperative Agreement in
the Companyperformance of ICANN's obligations under the MOU and until such time as the
NTIA agreedMOU is terminated. We have taken the position that ICANN will become such
not-for-profit corporation, or "NewCo", only when responsibilities are
transferred to it in compliance with the Statement of Policy and that ICANN will
be "recognized" by us only pursuant to a plan formutually agreeable, bilateral,
agreement. We are actively negotiating such an agreement. We have not yet
reached agreement with the U.S. Government or ICANN with respect to the terms of
the transition. We may not be able to reach agreement and either ICANN or the
U.S. Government may take positions that adversely affect us.
In the transition to a shared registration system under the Cooperative
Agreement, we are operationally separating our registry business from our
registrar business. Additional, competing registrars are now able to market
registration services in which multiple
registrars may registerthe .com, .net and .org top level domains, with the
domain names registered into the registry that we maintain for each of those top
level domains. Accordingly, persons registering second level domain names are
now able to choose among a number of different registrars, including us. We
began this transition on schedule, with the singlelaunch of a testbed phase involving
the following five registrars accredited by ICANN: America Online, Inc., CORE or
"Internet Council of Registrars", France Telecom/ Oleane, Melbourne IT and
Register.com. As the registry, forwe have contracts with each TLD,of these registrars
allowing them to directly register names into our registry database using our
proprietary shared registration system. Registrations of domain names by these
five testbed registrars have commenced. On August 6, 1999, we agreed with the
Department of Commerce to extend the testbed period through September 10, 1999,
and to consider additional accredited registrars eligible to participate in a
phased approach, the
first phase of which is scheduledtestbed. We have signed confidentiality agreements with 12 additional testbed
registrars and have shipped these new prospective registrars the software and
documentation to begin developing their system interfaces with the shared
registration system in order to begin providing registration services. These 12
prospective registrars are among the 59 companies accredited, or to be
completedaccredited, by March
31, 1999.the ICANN. All of these companies may be eligible to participate
in the testbed. Our registry services under the Cooperative Agreement will be
subject to a price cap. During the testbed phase, the cap was set at $18 for a
two-year registration and $9 for a one-year re-registration and our Registrar
License and Agreement under which we, as the registry, grant a license to use
the shared registration system, was approved for use by agreement with the
Department of Commerce under Amendment 13 to the Cooperative Agreement.
Registrar services, now competitive, are being priced in different ways than we
price for such services by resellers for at least one of the competing
registrars.
Termination, or a change in the terms, of the Cooperative Agreement could
harm our business. While the Cooperative Agreement by its terms expires in
September 2000, it may be terminated earlier byearlier. We are currently in discussions
with the NTIA. The Company's business, financial
conditionU.S. Government regarding adequate testing and results of operations could be materially and adversely affected
by a termination or a change in the termsfull implementation of
the Cooperative Agreement. There is
alsoshared registration system and a risk that the U.S. Government'swide range of contractual issues. The
Department of Commerce's interpretation of certain provisions of the Cooperative
Agreement could differdiffers from ours. For example, the
Company's.16
17
Department of Commerce has publicly expressed concerns about our use of the
WHOIS service, the internic.net website and our access policy to our top level
domain name zone file. The Department of Commerce has asserted a right to
recompete the Cooperative Agreement in certain circumstances and has claimed
government ownership of the intellectual property rights associated with our
performance of the Cooperative Agreement to date, including the WHOIS database.
We have reached agreements with the U.S. Government concerning the temporary
provision of access to the top level domain zone file. We have agreed with the
Department of Commerce to provide access to the WHOIS database, including for
third-party development of value-added products and services, subject to certain
conditions, pending resolution of outstanding issues with the Department of
Commerce and ICANN. Congress has held two hearings in which various issues about
the domain name system have been raised, including our claim of ownership to the
intellectual property associated with our performance under the Cooperative
Agreement, including the WHOIS database, and our dot com directory service
offering. Additionally, we have received letters from members of Congress
regarding these and other subjects, and urging us to promptly resolve issues now
in dispute with the Department of Commerce and ICANN. These differences in
interpretation or opinion have led to disputes between us and the Department of
Commerce and ICANN, which may or may not be resolved in our favor or which may
result in unfavorable action by Congress. Certain aspects of implementation of
the Cooperative Agreement also remain to be negotiated.fully negotiated, including the maximum
price we will charge after the testbed period for registry services in the top
level domains for which we now act as registry. If the
Company iswe are unsuccessful in
negotiating acceptable terms of implementation, the costs of implementation of
the Cooperative Agreement, the Company'sour relationship with the not-for-profit corporation
and other matters affecting the Company'sour position in a more competitive DNSdomain name
system environment could all be materially and
adversely affected.
There is a risk that withdrawalharmed.
Challenges to authority over domain name administration could harm our business
Withdrawal of or challenges to the government'sU.S. Government's sponsorship or
authorization of certain functions that the Company performswe perform could create a public
perception or result in a legal finding that the Company
lackswe lack authority to continue in
the Company'sour current role as registry or registrar within the .com, .org, .net and .edu
TLDs.top level domains. The legal authority underlying the roles of NTIAthe Department of
Commerce and the not-for-profit corporation with regard to the DNSdomain name
system also could be challenged. The impact, if any, of any such public
perception or finding is unknown, but it could materially and adversely affect
the Company'sbe harmful to our business.
Increased competition could harm our domain name registration business
financial condition and resultsThe introduction of operations.
Increased Competition in Domain Name Registration Business. A principal
objective of the Statement of Policy is to introduce additional competition and
global participationinto the domain name
registration business could be harmful to our business. This includes, in
the management of Internet names and addresses,
includingparticular, competition among registrars within a single TLDtop level domain, like
.com, and competition among registrars and registries of existing and potential
new TLDs. The October 1998 Amendment reflects this objective with
the transition to a shared registration system in a phased approach, the first
phase of which is scheduled to be completed by March 31, 1999. Many aspects of
how competition will work in the DNS, however, remain unsettled and could be
impacted by, among other things, actions of the not-for-profit corporation.
Although the Statement of Policy contemplates establishment of additional
competition, the Company currently facestop level domains. We already face competition in the domain name
registration business from registriesother registrars in the top level domains for country codes,which
we act as registry, third level domain name providers such as Internet access
providers and registrars and registries of TLDstop level domains other than those
TLDstop level domains for which we act as registry. Our shared registration system
is now being used by the Company currently registers. A number of entities have
already begunfive testbed registrars in the .com, .org and .net top
level domains to register domain names. More competing registrars are
anticipated to offer competing registration services using other TLDs and whenin these top level domains
in the shared registration system takes effect the Company will no longer be the
exclusive registrar in .com, .org and .net TLDs.
15
16near future.
Future competition in the Company's domain name registration business as a registry
or registrar could come from many different companies, including:
- domain name registration resellers,
- country code registries,
- Internet access providers, and
- major telecommunications firms, and
- cable companies.firms.
Many of these entities have core capabilities to deliver registrationregistry and/or
registrar services, such as help desks, billing services and network management,
along with strong name recognition and Internet industry experience. The Company's
position as the leading registrar of domain names could be materially and
adversely affected by the emergence of any of these competitors and potential
competitors, many of which have longer operating histories and significantly
greater name recognition and greater financial, technical, marketing,
distribution and other resources than the Company. The Company'sOur revenue from
registration fees
could be reduced due to increased competition, pricing pressures or a
modification of
17
18
billing practices. For example,Some resellers for at least one competing registrar in the
.com, .net and .org top level domains are already charging lower prices for
domain name registration services in those domains. In addition, other entities
are bundling and may, in the future bundle domain name registrations with other
products or services.
The
introductionWe depend on future growth of additional competition into the domain name registration
business could have a material adverse effectInternet and Internet infrastructure
Our future success substantially depends on the Company's business,
financial condition and results of operations.
Limited Service Offerings to Date; Reliance on Domain Name Registration
Services for a Significant Portion of Revenues. The Company's domain name
registration services business generates over 90% of the Company's revenue and
is expected to continue to account for a very significant portion of the
Company's revenue in at least the near term. The Company's future success will
depend largely on:
- the continued increase in domain name registrations,
- re-registration rates of the Company's customers,
- the Company's ability to maintain its current position as a leading
registrar of domain names, and
- the successful development, introduction and market acceptance of new
services that address the demands of Internet users.
Although the Company has experienced revenue growth in recent periods, the
Company may not be able to sustain it and such growth may not be indicative of
future operating results. For example, the Company may not be able to maintain
its current position in providing domain name registration services or develop
or market additional services. The Company's failure to do so could materially
and adversely affect the Company's business, financial condition and results of
operations.
Limited Operating History. Prior to September 14, 1995, the Company was
paid directly by the NSF for providing registration services on a cost
reimbursement plus fixed fee basis. Accordingly, the Company has only a limited
operating history for its current domain name registration business upon which
to base an evaluation of the Company and its prospects. The Company's prospects
must be considered in light of the risks frequently encountered by companies in
their early stages of development, particularly companies in new and rapidly
evolving markets. To address these risks, the Company must, among other things:
- respond to competitive developments,
- increase its sales and marketing operations,
- continue to identify, attract, retain and motivate qualified persons, and
- continue to upgrade and integrate technologies, products and services.
Due to the rapidly evolving nature of Internet technologies, the Company's
enterprise network consulting services business faces similar risks. The Company
may not be successful in addressing such risks.
Evolving Sales and Marketing Organization and Distribution Channels. The
Company will need to effectively manage its growing sales and marketing
organization if the Company wants to achieve future
16
17
revenue growth. The Company does not know if it will be able to identify,
attract and retain experienced sales and marketing personnel with relevant
experience. Further, the Company's sales and marketing organization may not be
able to successfully compete against the significantly more extensive and
well-funded sales and marketing operations of its current or potential
competitors.
In addition to establishing direct sales channels, the Company is also
developing multiple distribution channels. The Company's ability to achieve
future revenue growth will also depend on its establishing and maintaining
relationships with Internet access providers and other third parties and on
effective use
of the Internet as a medium of distribution.Internet. If the Company fails to manageuse of and grow its new sales and marketing
organization, develop and expand its distribution channels or effectively useinterest in the Internet as a mediumdoes not continue to
grow, our business would be harmed. Continued growth of distribution, the Company's business, financial
condition and results of operationsInternet could be
materiallyslowed by:
- inadequate infrastructure,
- lack of availability of cost-effective, high speed systems and adversely affected.
Relianceservice,
- delays in developing or adopting new standards and protocols to handle
increased levels of Internet activity, or
- government regulation.
We rely on Third Parties. The functioning of the DNS is facilitated
through a hierarchy of domain name servers (specialized software programs
resident in network computers). Thethird parties who maintain and control root zone and top level of this hierarchy consists of 13
globally distributeddomain
zone servers
(ten in the United States, two in EuropeWe currently administer and one in
Asia), which together are referred to as the Root Server System. These root
servers function as the equivalent of master "white pages" of the Internet. The
Company administers and operatesoperate only two of the 13 root zone servers
(designated by the
letters A and J). Root Server A has special significance. Every night the
Company updates the Root Server A database by adding the newly registered secondfour top level domain nameszone servers. The others are administered and updating existing domain name records. The 12 other root
servers then copy the updated database.
All 13 root servers contain information with respect to all TLDs, including
country code TLDs. Also, nine of the 13 root servers currently are populated
with the domain names registered by the Company. When communication with a
particular host within a domain name is required and the IP address of that host
is not known locally, the root servers make that information available or
"point" to a direct or indirect source of the information. Multiple root servers
are required for purposes of load balancing and redundancy.
The location and control of these root servers historically has been
determined by consensus of various members of the Internet community. The eleven
root servers that the Company does not maintain and control are maintained and
controlledoperated
by independent operators on a volunteer basis. IfBecause of the importance to the
functioning of the Internet of these root zone servers and top level domain zone
servers, our registration business could be harmed if these volunteer operators at any time, for any reason,
fail to properly maintain such servers or abandon such servers, the Company'sservers.
Further, our registration business financial condition and results of
operations could be materially and adversely affected.
Further, as no single organization or entity currently has formal authority
over all aspectsharmed if any of the Internet, neither the U.S. Government nor any
organization or entity has clear legal authority to direct root server
operations including where the root servers are to be pointed. If any or all of
the root serversthese
volunteer operators fail to include or provide accessibility to the Company's data that we
maintain in the Internetroot zone servers and the Company's business, financial condition and results of
operations would be materially and adversely affected.
The Company's success and ability to compete also depend upon its
relationships withtop level domain zone servers that we
control.
We rely on Internet service providers
("ISPs") worldwide. The Company'sOur registration business financial condition and results of operations wouldcould be materially and
adversely affectedharmed if enough ISPsInternet service
providers decided not to route Internet communications to or from domain names
registered by the Companyus or if enough ISPsInternet service providers decided to provide
routing to a set of accepted rootdomain name servers which did not point to the
Company's TLDour top level
domain zone servers.
System Interruption and Security Risks.failure or interruption, security breaches or our failure to meet
increasing demands on our systems could harm our business
Any significant problem with our systems or operations could result in lost
revenue, customer dissatisfaction or lawsuits against us. A failure in the
operation of the
Company'sour registration system or other events could result in deletion of
one or more domain names from the Internet for a period of time. A failure in
the 17
18operation 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 Root Server Athe master database that we
maintain could result in deletion of one or more TLDstop level domains from the
Internet and the discontinuation of second level domain names in those TLDstop level
domains for a period of time. The Company'sinability of our registration system,
including our back office billing and collections infrastructure, and
telecommunications systems to meet the demands of the increasing number of
domain name registration requests and corresponding customer e-mails and
telephone calls could result in substantial degradation in our customer support
service and our ability to process, bill and collect registration requests in a
timely manner.
Our operations depend on itsour ability to maintain itsour computer and
telecommunications equipment in effective working order and to reasonably
protect itsour systems against interruption. Such interruptionsinterruption and potentially on such maintenance and
protection by other registrars in the shared registration system. The root zone
servers and top
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19
level domain zone servers that we operate are critical hardware to our
operations. Interruptions could result from:
- fire, natural disaster, sabotage, power loss, telecommunication failure,
human error or similar events,
- computer viruses, hackers or similar disruptive problems caused by
employees, customers or other Internet users, and
- systems strain caused by the growth of the Company'sour customer base and the Company'sour
inability to sufficiently maintain or upgrade itsour systems.
We may lose revenue or incur significant costs if Year 2000 compliance issues
are not properly addressed
Our failure, or the failure of third parties on which we rely, to
adequately address Year 2000 compliance issues may cause us to lose revenue or
to incur significant costs. The Company'sprimary risks that we face with regard to Year
2000 failures are those which impact our domain name registration business.
These risks include:
- significant and protracted interruption of electrical power to data and
systems in our engineering and customer service facilities,
- significant and protracted interruption of telecommunications and data
network services in any of our headquarters, engineering or customer
service facilities,
- the failure of components of our current back office and domain name
registration related systems,
- the occurrence of a Year 2000 problem with respect to third-party
suppliers', vendors' and outsourcing service providers' products and
services, and
- the occurrence of a Year 2000 problem with respect to one of the other
registrars in the shared registration system.
If we fail to solve a Year 2000 compliance problem with our mission
critical business financial conditionsystems and results of operationsprocesses, including the domain name servers under
our control, telecommunications systems, facilities, data-networking
infrastructure, commercial-off-the-shelf hardware or software and components
used by our employees, the result could be materiallya failure of or interruption to
normal business operations. Furthermore, our business depends on the continued
operation of, and adversely affected by any damage, failurewidespread access to, the Internet. This, in turn, depends to
a large extent on the software and systems of third parties on which our systems
rely or delayto which they are connected. These third parties include, among others,
Internet-related companies, including Internet web hosting companies, Internet
access providers and Internet domain name server operators.
We have no responsibility for, nor control over, other Internet domain name
server operators that causes
significant interruptionsare critical to the efficient operation of the Internet.
We do not know whether such domain name server operators have hardware, software
or firmware that is Year 2000 compliant.
COMPANY RISKS
We must attract, integrate, train and retain key personnel knowledgeable about
our business
Given the relative "newness" and rapid growth of the Internet, there is
intense competition for the limited supply of people qualified to work for us.
Our future success depends on the continued service of key engineering, sales,
marketing, executive and administrative personnel, and our ability to attract,
hire, integrate, train and retain such personnel. Competition for engineering,
sales, marketing and executive personnel is intense, particularly in the
Company's systems.
Regulation. In the United States, apart from the Company's obligations
under the Cooperative Agreement, the Company is not currently subject to direct
regulation other than federaltechnology and state regulation applicable to businesses
generally. However, if there are changesInternet sectors and in the regulatory environment,regions where our facilities are
located. We cannot be certain that we will be able to retain existing personnel
or attract, hire or retain additional qualified personnel. The loss of the
Companyservices of any of our senior management team or other key employees or our
failure to attract, integrate, train and retain additional key employees could
become subject to direct regulation by U.S. regulatory agencies.
For example, the Company is aware that certain industry requests have been made
to the Federal Communications Commission (the "FCC") to review the impact of
Internet usageharm our business.
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20
Our near term success depends on the U.S. telecommunications service providers,growth of our domain name registration
business
We may not be able to sustain the revenue growth we have experienced in
particular,
the generally lower cost for data transmission versus voice.recent periods. In addition, past revenue growth may not be indicative of future
operating results. If we do not successfully maintain our current position as the
Internet becomes more widespread internationally, international regulation
becomes more likely. The Company cannot predict whether or to what extent any
such new regulation will occur; however, such regulation could have a
material
adverse effect on the Company's business, financial condition and results of
operations.
Additionally, the Company is not certain how existing laws governing issues
such as intellectual property ownership would be applied to it. The Company also
is not certain how courts will interpret the obligationleading provider of domain name registration providers to prevent trademark infringement and other legal issues.
See "-- Legal Proceedings."
Legal Proceedings. The Company is involved in several legal proceedings.
As of November 1, 1998, the Company was named as a defendant in two active
lawsuits involving domain name disputes between trademark owners and domain name
holders. In addition, on March 20, 1997, PG Media, Inc., a New York-based
corporation, filed a lawsuit (the "PG Media suit"), alleging that the Company
had violated the Sherman Act by restricting access to the Internet by not adding
PG Media's requested TLDs to the Internet root zone system. In its complaint, PG
Media has, in addition to requesting damages, asked that the Companyservices or develop or market
additional services, our business could be ordered
to include reference to PG Media's TLDs and name servers in the root zone file
that the Company administers under the Cooperative Agreement. The Company
received written direction from the NSF not to take any action which would
create additional TLDs or to add any new TLDs to the Internet root zone until
the NSF provides further guidance. On September 17, 1997, PG Media filed a
Second Amended Complaint adding the NSF as a defendant. On May 14, 1998, PG
Media served the Company with a motion for a preliminary injunction against both
defendants. The motion sought a hearing before the court on June 8, 1998 to
compel both defendants to add PG Media's TLDs to the Internet root zone within
30 days. In response, both the Company and the NSF filed cross motions for
summary judgment against PG Media. On July 20, 1998, all motions were heard. The
basic issue before the court was the NSF's authority to control the Internet's
root zone system. The court has taken the issue under advisement and no date has
been indicated for the issuance of a decision.
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19
On October 17, 1997, a group of six plaintiffs filed a lawsuit (the "Thomas
suit") against the Company and the NSF. The lawsuit:
- challenged the legality of fees charged by the Company forharmed.
Our domain name registration services;services business generates over 90% of our
revenue and - sought restitution of fees collected from domain name registrants in an
amount in excess of $100 million.
The plaintiffs alleged violations of the Administrative Procedures Act,
Independent Offices Appropriations Act, the Sherman Act and the U.S.
Constitution. In August 1998, the court dismissed all of the plaintiffs' claims
against the Company. In October 1998, however, the plaintiffs appealed the
court's dismissal of their claims.
While the Company cannot reasonably estimate the potential impact of the
claims advanced in the PG Media or Thomas suits, a successful claim against the
Company in either of these proceedings could have a material adverse effect on
the Company's business, financial condition and results of operations.
In addition, on June 27, 1997, SAIC received a Civil Investigative Demand
("CID") from the U.S. Department of Justice ("DOJ") issued in connection with an
investigation regarding possible antitrust violations under the Sherman Act
relating to Internet registration products and services. The Company cannot
reasonably estimate the potential impact of the investigation nor can the
Company predict whether a civil action will ultimately be filed by the DOJ or
the form of relief that might be sought. Any such relief could have a material
adverse effect on the Company's business, financial condition and results of
operations.
On August 17, 1998, the Company received notice from the Commission of the
European Communities (the "EC") of an investigation concerning the Company's
Premier Domain Registration Service Program ("Premier Program") in Europe. The
EC requested production of these agreements and related materials for review.
The Company cannot reasonably estimate the potential impact of the investigation
nor can the Company predict whether an action will ultimately be brought by the
EC or the form of relief that might be sought. Any such relief could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Legal proceedings in which the Company is involved have resulted and likely
will result in, and any future legal proceedings can be expected to resultcontinue to account for a very significant portion of
our revenue in substantial legal and other expenses toat least the Company and a diversion of the
efforts of the Company's personnel.
Technological Change and Additional Technology, Products and Services. The
Company'snear term. Our future financial success will depend upon itslargely
on:
- the continued increase in domain name registrations,
- re-registration rates of our customers,
- our ability to develop,
integrate or commercialize inmaintain our current position as a timely mannerleading registrar of
domain names,
- the successful development, introduction and market acceptance of new technology, products and
services that can be offered withaddress the Company's currentdemands of Internet users,
- our ability to provide a robust domain name registration system, and
enterprise network- our ability to provide a superior customer service infrastructure.
We must effectively manage our marketing organization and establish and maintain
distribution channels
We will need to effectively manage our growing sales and marketing
organization if we want to achieve future revenue growth. We do not know if we
will be able to identify, attract and retain experienced sales and marketing
personnel with relevant experience. Further, our sales and marketing
organization may not be able to successfully compete against the significantly
more extensive and well-funded sales and marketing operations of our current or
potential competitors for registration or consulting servicesservices.
Our ability to achieve future revenue growth will also depend on our
ability to continue to establish direct sales channels and to develop multiple
distribution channels. To do this we must maintain relationships with Internet
access providers and other third parties.
We have a high level of uncollectible receivables
Because of our high level of uncollectible receivables, we continually
review our billing practices. Any modifications that can meet the changing
requirementswe may implement as a
result of the Company's current and future customers. The market for such
technology, products and services is characterized by rapidly changing
technology and evolving industry standards. Generally, the successful
development and commercialization of new technology, products and services
involves many risks, including:
- identifying opportunitiesthese reviews, including prepayment or pre-approved credit limits for
new products or services,
- identifying, hiring and retaining appropriate research and development
personnel,
- successfully completing the development process, and
- customer acceptance of the product or service.
Uncollectible Receivables; Modificationsregistration orders, which will occur later during 1999, could have
unanticipated harmful consequences to Billing Practices. Currently,
the Company invoices a majority of its customers and permits them to pay their
services fee after the domain name is registered. The Company believes it hasour business. We believe we have
experienced a high level of uncollectible receivables due to, among other
factors, the large number of individuals and corporations that have registered
multiple domain names with the apparent intention of resellingtransferring such names at
a profit. The Company'sOur experience has been that such speculative resellers have a greater
tendency than other customers to default on their services fees. The Company hasWe have
established a
19
20 provision for uncollectible accounts which the Company believeswe believe to be
adequate to cover anticipated uncollectible receivables; however, actual results
could differ from the Company'sour estimates.
The Company continually reviews its billing practices for modificationWe are party to respond to market conditions and to implement operational improvements. These
modificationsseveral legal proceedings which could have unanticipated consequences which could materially and
adversely affect the Company's business,a negative financial
condition and results of
operations.
Competitionimpact on us
We are involved in Internet-Based Businesses and Enterprise Network Consulting
Services. In developing and distributing products and services for the
Internet-based services markets, the Company faces intense competition and
expects to have multiple competitors for each of the products or services the
Company develops or sells. Many of the Company's potential competitors for these
products have longer operating histories, greater name recognition and
significantly greater financial, technical, marketing, distribution and other
resources than the Company does. In addition, the Company's industry is
characterized by rapid changes and frequent product and service introductions.
To the extent a competitor introduces a competitive product or service before
the Company introduces the same or similar product or service, market acceptance
of the competitor's product or service may adversely affect the Company's
competitive position.
The Company's current and potential competitors in its enterprise network
consulting services business are companies with Internet expertise including
systems integrators and consulting firms, such as Andersen Consulting, IBM
Global Services and International Network Services. The Company also competes
with certain companies that have developed products that automate the management
of IP addresses and name maps throughout enterprise-wide networks and with
companies with internally-developed systems integration efforts. Many of these
competitors and potential competitors have longer operating histories, greater
name recognition and significantly greater financial, technical, marketing,
distribution and other resources than the Company does.
Management of Growth; Dependence on Key Personnel. The Company continues
to experience growth in the number of its employees and in the scope of its
operating and financial systems. This growth has increased the responsibilities
for both existing and new management personnel. To manage growth, the Company
will have to successfully integrate its management team, continue to implement
and improve its operational, financial and management information systems and to
train, motivate, manage and retain its employees. If the Companyseveral legal proceedings. We cannot manage
its growth, its business, financial condition and results of operations could be
materially and adversely affected. In addition, growth of the Company's customer
base may strain the capacity of its computers and telecommunications systems.
Therefore, the Company must maintain or upgrade its systems or risk degradation
in performance or system failure.
The Company's future success also depends on the continued service of its
key engineering, sales, marketing, executive and administrative personnel, and
its ability to identify, hire and retain additional personnel. On November 16,
1998, the Company announced the resignation of Gabriel A. Battista from his
positions as Chief Executive Officer and Director of the Company. While the
Company conducts a search for a new Chief Executive Officer, Michael A. Daniels,
Chairman of the Board, will assume the executive responsibilities previously
performed by Mr. Battista. In addition, Robert J. Korzeniewski, Chief Financial
Officer, will also be acting as the Company's Chief Operating Officer, assuming
responsibility for day-to-day operations. In addition, the future success of the
Company's enterprise network consulting services business depends in large part
on its ability to hire, train and retain engineers who have expertise in a wide
array of network and computer systems and a broad understanding of the
industries the Company serves. If the Company fails to hire, train and retain a
sufficient number of qualified engineers, the Company's ability to adequately
manage and complete its existing projects or to obtain new projects, as well as
expanding its business, could be impaired. Competition for engineering, sales,
marketing and executive personnel is intense. The Company cannot be certain that
it will be able to retain existing personnel or identify, hire or retain
additional qualified personnel. It is impossible to reasonably estimate
the potential financial impact of hiring a new Chief Executive Officer at this time.
Intellectual Property Rights. As required under the Cooperative Agreement,
on or before November 6, 1998, the Company submitted to the U.S. Government an
electronic copyany of all softwarethese proceedings. An adverse determination in
any of these proceedings, however, could harm our business. Legal proceedings in
which we are involved are expensive and data generated
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under the Cooperative Agreement through September 30, 1998. By December 6, 1998,
the Company must submit to the U.S. Government a copy of all existing
documentation for that software and data generated through September 30, 1998.
The U.S. Government is required to take appropriate measuresdivert our personnel. See "Part II --
Item 1 -- Legal Proceedings."
We may not be able to protect the
confidentiality of such data, softwareour intellectual property rights and documentation. The Company's
business, financial condition and results of operations could be materially and
adversely affected if:
- the Company's ownership rights in its data, software and documentation
were to be successfully challenged,
- the Company cannot protect such rights,
- the Company is required to share its data, software and documentation
with potential competitors, or
- the Company's potential competitors were otherwise able to obtain its
data, software or documentation.
The Company reliesproprietary
information
We rely on a combination of nondisclosure and other contractual
arrangements with itsthe U.S. Government, our employees, and third parties, as well
as privacy and trade secret laws, to protect its proprietary rights and
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limit the distribution of itsour proprietary data, computer software,
documentation, and processes used in conducting our domain name registration
business. If we fail to adequately protect our intellectual property rights and
proprietary information, or if we are subject to adverse results in litigation
relating to our intellectual property rights and proprietary information, our
business could be harmed. Any actions we take may not be adequate to protect our
intellectual property rights and proprietary information. Although these actions are considered reasonable and adequate, no
controls can guarantee the protection of the Company's proprietary rights.
Furthermore, even if these steps are successful, otherOther companies may
develop technologiescompeting technology that areis similar or superior to our technology. The
U.S. Government has taken positions adverse to our claims regarding proprietary
rights over the Company'sWHOIS database and other intellectual property associated with
our performance under the Cooperative Agreement and could attempt to require us
to enter into agreements limiting such claims. In addition, members of Congress
during hearings and otherwise have raised similar issues concerning our claims
of proprietary technology.rights. If these issues are not resolved in our favor, there
could be a material adverse effect on our business. See "-- Operations under,
changes to or disputes under the Cooperative Agreement could harm our business."
Although the Company believeswe have no reason to believe that its services do notour domain name registration business
activities infringe on the intellectual property rights of others, and we
believe that the Company haswe have all rights needed to use the intellectual property employed in itsconduct our business, it is possible
that the Companywe could become subject to claims alleging infringement of third party
intellectual property rights. Any such claims could subject the Companyus to costly
litigation, and mayany adverse final rulings on any such claims could require the Companyus to
pay damages, andseek to develop non-infringing intellectual property alternative technology, and/or seek to acquire
licenses to the intellectual property that is the subject of theany such alleged
infringement. If the Company fails
to adequately protect its proprietary rightsinfringement, and any such rulings could have a material adverse effect on our
business.
Unsuccessful future acquisitions and investments could decrease operating
income, cause operational problems
or if the Company becomes involved
in litigation relating to intellectual property rights, the Company'sotherwise disrupt our business
financial condition and results of operations could be materially and adversely
affected.
Dependence on Future Growth of the Internet and Internet
Infrastructure. The Company's future success substantially depends on the
continued growth in the use of the Internet. If the use of and interest in the
Internet does not continue to grow at its current pace, the Company's business,
financial condition and results of operations would be materially and adversely
affected. Continued growth of the Internet could be slowed by:
- inadequate infrastructure,
- lack of availability of cost-effective, high speed systems and service,
- failure to maintain a reliable network system,
- delays in developing or adopting new standards and protocols to handle
increased levels of Internet activity, or
- government regulation.
If the use of the Internet does not continue to grow, if the necessary
infrastructure or complementary products are not developed or do not effectively
support growth that may occur, or if the Internet does not become a viable
information medium or commercial marketplace, the Company's business, financial
condition and results of operations would be materially and adversely affected.
Uncertainty of Future Acquisitions and Investments. The Company evaluatesWe evaluate potential acquisitions and investments on an ongoing basis. The Companybasis for
various reasons including, among others, diversification of our domain name
registration and Internet Technology Services businesses. Our acquisition and
investment strategy poses many risks, including:
- we may not be able to compete successfully for available acquisition
candidates, complete future acquisitions and investments or accurately
estimate the financial effect on the Companyour company of any businesses the Company acquireswe acquire
or investments the Company
makes. Futurewe make,
- future acquisitions and investments may require the Companyus to spend significant
cash amounts or may decrease our operating income,
either of which could- we may have a material adverse effect ontrouble integrating the Company'sacquired business financial
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22
condition and results of operations. The Company's failure to implement
successfully its acquisition and investment strategy could materially and
adversely affect the Company's business, financial condition and results of
operations. The Company may also make futureretaining
personnel,
- acquisitions or investments in
companies which are in the early stages of development. Tomay disrupt our business and distract our
management from other responsibilities, and
- to the extent that any of thesethe companies which we acquire or in which we
invest fail, itour business could be harmed.
Whether or when pooling of interests accounting for acquisitions might
become available to us depends on many factors beyond our control.
We face increasing risks associated with our international business
While substantially all of our operations, facilities, and personnel are
located within the United States, our revenues from sources outside the U.S.
have increased significantly and may continue to increase in the future. As a
material adverse effectresult, we are subject to the risks of conducting business internationally,
including unexpected changes in regulatory requirements, competition from
foreign companies, fluctuations in the U.S. dollar, tariffs and other barriers
and restrictions and the burdens of complying with a variety of foreign laws. We
do not know what the impact of such regulatory, geopolitical and other factors
will be on our business in the Company's financial condition.
Potential Fluctuations in Quarterly Results. The Company'sfuture or if we will have to modify our business
practice. In addition, the laws of certain foreign countries may not protect our
proprietary rights to the same extent as do the laws of the United States.
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22
Our quarterly operating results may fluctuate; our future revenue and
profitability are uncertain
Our quarterly operating results may fluctuate significantly in the future
due to a variety of factors, manysome of which are beyond the Company'sour control. Such factorsFactors that
may include, but are not limited to:
- developments in Internet governance including establishment of the
not-for-profit corporation and the effect of the October 1998 Amendment,
- increased competition, through the introduction of competing TLDs or
competing registrars in .com, .net or .org,affect our revenue include:
- variations in the number of requests for domain name registrations or
demand for the Company'sour services,
- introduction or enhancements of servicessuccessful competition by the Company or its
competitors,
- market acceptance of new service offerings,
- costs associated with developing or providing domain name registration or
other services,
- litigation costs,
- adverse results of litigation,others,
- termination or completion of contracts in the Company's enterprise
network consulting servicesour Internet Technology
Services business or failure to obtain additional contracts in that
business, and
- patternsmarket acceptance of growth in the use of and interest in the Internet, or
- general economic conditions.new service offerings.
In addition, the Company expectswe expect a significant increase in itsour operating expenses as
it:we:
- increasesincrease our sales and marketing operations and activities, and
- updatescontinue to update our systems and infrastructure,
- funds greater levels of product and services development,
- develops new distribution channels,
- broadens customer support capabilities, and
- expands facilities.infrastructure.
If the increase in the Company'sour expenses is not followed by an increase in our
revenue, our operating results will be harmed. The fact that in the Company's business, financial conditionpast our
revenues have increased and we have been profitable on a quarterly and annual
basis is not indicative of whether our revenues will increase or whether we will
be profitable on a quarterly or annual basis in the future.
INVESTMENT RISKS
Our stock price, like that of many Internet companies, is highly volatile
The market price of our common stock has been and is likely to continue to
be highly volatile and significantly affected by factors such as:
- general market and economic conditions and market conditions affecting
technology and Internet stocks generally,
- actual or anticipated fluctuations in our quarterly or annual
registrations or operating results,
- announcements of operations
could be materiallytechnological innovations, acquisitions or investments,
developments in Internet governance or corporate actions such as stock
splits, and
adversely affected.
In addition, a majority- industry conditions and trends.
The stock market has experienced significant price and volume fluctuations
that have particularly affected the market prices of the Company's enterprise network consulting
services operating expenses, particularly personnelstocks of technology
companies, especially Internet-related companies. These broad market or
technology or Internet sector fluctuations may adversely affect the market price
of our common stock. Recently, the market price of our common stock, like that
of many Internet-related companies, has experienced significant fluctuations.
For instance, from January 1, 1999 through August 3, 1999, the reported sales
price for our common stock ranged from $51.75 per share to $144 per share. On
August 3, 1999, the reported last sale price of our common stock was $57 per
share.
The market price of our common stock also has been and related costs,
depreciationis likely to
continue to be significantly affected by expectations of analysts and rent, are substantially fixed before anyinvestors.
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, following periods of volatility in the market price of a
particular quarter. As
a result, any under-utilization of engineers may cause the Company's operating
results to vary significantly in any particular quarter andcompany's securities, securities class action litigation has often
been brought. Such litigation could result in losses for such quarter.
Control by SAIC. Assubstantial costs and a diversion
of November 6, 1998,our management's attention and resources.
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23
Future sales of common stock could affect our stock price
SAIC owned 100%owns 14,850,000 of the Company's
outstanding Class B Common Stock, representing approximately 74.1%shares of our common stock. A
decision by SAIC to sell such stock could depress the market price of the Company's outstanding Common Stockcommon
stock.
SAIC may maintain significant influence over us
SAIC owns approximately 45% of our common stock and approximately 96.6% of the combined
voting power of the Company's outstanding Common Stock. The Class B Common Stock
is convertible into Class A Common Stock, subject to certain limitations set
forth in the Company's Second Amended and Restated Certificate of Incorporation
(the "Certificate of Incorporation"). As a result, SAIC effectively controls all
mattersremains our largest
shareholder. Matters requiring approval by the Company'sour stockholders,
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23 including the
election of members of the Company's Boardour board of Directors,directors, changes in the size and
composition of the Boardboard of Directorsdirectors and a change in control.
The Company doescontrol, may need SAIC's
approval to be effected. We do not have an agreement with SAIC which restricts
its rights to convert, distribute or sell its shares of the Company's Common Stockour common stock.
Certain directors may have conflicts of interest
Certain of our directors currently serve as directors, officers and
employees of SAIC. Therefore, there canmay be no assurancevarious conflicts of interest or
conflicting duties for these individuals. Since our directors and officers may
also own stock of SAIC, there may be conflicts of interest when directors and
officers are faced with decisions that SAIC will maintain its ownership of the Company's Class
B Common Stock.
Reliancecould have different implications for us
and SAIC.
We rely on SAIC for Certain Corporate Services. The Company has entered
into certain intercompany agreements with SAIC, includingcorporate services and employee benefits
We currently receive corporate services under an agreement pursuant
to whichwith SAIC. Were
SAIC will provide various corporate services to the Company that may be
material to the conduct of the Company's business (the "Corporate Services
Agreement"). These services include certain routine and ordinary corporate
services, including business insurance, accounting systems, employee benefits,
payroll, tax and legal services as well as assistance in government relations
and corporate quality assurance services as described in the Corporate Services
Agreement. With respect to matters covered by the Corporate Services Agreement,
the Company's relationship with SAIC is intended to continue in a manner
generally consistent with past practices. If SAIC's ownership of the Company's
outstanding Common Stock drops below 50%, the Corporate Services Agreement will
be terminable by either party upon 180 days' prior written notice. Certain
individual services are also terminable by either party upon 180 days' prior
written notice, regardless of SAIC's ownership interests. Although neither the
Company nor SAIC currently intends to terminate the Corporate Services
Agreement, if SAIC did elect to terminate the Corporate Services Agreement, the
Companythese services, we may not be able to secure alternative
sources for such services within
180 days or such services may only be available to us at prices
higher than those charged by SAIC.
Certain Charter ProvisionsOur employees are currently eligible to participate in certain SAIC
employee benefit plans through the end of calendar year 1999. However, due to
SAIC's sale of some of its shares, SAIC now owns less than 50% of our common
stock and Limitations on Liability. The Company's
Certificateas a result we will have to establish certain employee benefit plans
of Incorporationour own which could result in incremental costs to us.
Our certificate of incorporation contains provisions relating to SAIC that may
adversely affect us
or our stockholders
Our certificate of incorporation includes provisions relating to
competition by SAIC with the Company,us, allocations of corporate opportunities,
transactions with interested parties and intercompany agreements and provisions
limiting the liability of certain people. It is unclear whether such provisions
are enforceable under Delaware corporate law. The Company's CertificateOur certificate of Incorporationincorporation
provides that any person purchasing or acquiring an interest in shares of the Company'sour
capital stock shall be deemed to have consented to the provisions in the
Certificatecertificate of Incorporationincorporation relating to competition with SAIC, conflicts of
interest, corporate opportunities and intercompany agreements, and such consent
may restrict such person's ability to challenge transactions carried out in
compliance with such provisions. The corporate charter of SAIC does not include
similar provisions. Therefore, persons who are directors and/or officers of the Companyours
and who are also directors and/or officers of SAIC may choose to take action in
reliance on such provisions rather than act in a manner that might be favorable
to the Companyus but adverse to SAIC.
Under the Company's Certificate of Incorporation, the personal monetary
liability of the Company's directors for breach of their fiduciary duty of care,
including actions involving gross negligence, is eliminated to the fullest
extent permitted under Delaware law.
International Revenues. While substantially all of the Company's
operations, facilities, and personnel are located within the United States, the
Company's revenues from sources outside the U.S. have increased significantly
and may continue to increase in the future. As a result, the Company is subject
to the risks of conducting business internationally, including unexpected
changes in regulatory requirements, fluctuations in the U.S. dollar, tariffs and
other barriers and restrictions and the burdens of complying with a variety of
foreign laws. The Company does not know what the impact of such regulatory,
geopolitical and other factors will be on its business in the future or if the
Company will have to modify its business practice. In addition, the laws of
certain foreign countries may not protect the Company's proprietary rights to
the same extent as do the laws of the United States.
Possible Volatility of Stock Price. The market price of the Company's
Class A Common Stock has been and is likely to continue to be highly volatile
and may be significantly affected by factors such as actual or anticipated
fluctuations in the Company's quarterly operating results, announcements of
technological innovations, industry conditions and trends, changes in or the
Company's failure to meet the expectations of securities analysts and investors,
general market conditions and other factors. It is possible that in some future
quarter, the Company's operating results may be below the expectations of
securities analysts and investors. If this occurs, the price of the Company's
Class A Common Stock would likely decline, perhaps substantially. In
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24
addition, the stock market has experienced significant price and volume
fluctuations that have particularly affected the market prices of the stocks of
technology companies, including Internet-related companies. These broad market
fluctuations may adversely affect the market price of the Company's Class A
Common Stock. In the past, following periods of volatility in the market price
of a particular company's securities, securities class action litigation has
often been brought. Such litigation could result in substantial costs and a
diversion of management's attention and resources, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
YEAR 2000 COMPLIANCE
The CompanyNetwork Solutions is in the process ofcontinually assessing the potential effects of the
Year 2000"Year 2000" millennium change on the Company'sNetwork Solutions' business systems and
processes, including the Internet rootdomain name servers under the Company'sNetwork Solutions'
control, telecommunications systems, facilities, data-networking infrastructure,
commercial-off-the-shelf hardware, software and components used by its employees
and its outsourcing vendors. The Company'sNetwork Solutions' Year 2000 project is proceeding
on schedule. The project goal is to ensure that the Company'sNetwork Solutions' business is
not impacted by the date transitions associated with the Year 2000.
The Company'sNetwork Solutions' Year 2000 project plan is coordinated by a team that
reports directly to senior management. The project team is evaluating the Year
2000 compliance of the Company'sNetwork Solutions' business
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24
systems and processes, including the Internet rootdomain name servers under the Company'sNetwork
Solutions' control, telecommunications systems, facilities, data-networking
infrastructure, commercial-off-the-shelf hardware, software and components used
by its employees and its outsourcing vendors whom provide services relating to
the Company'sNetwork Solutions' domain name registration business. The Company'sNetwork Solutions' Year
2000 project is comprised of the following parallel phases:
- Phase 1 -- Inventory all of the Company'sNetwork Solutions' business systems and
processes, including the Internet rootdomain name servers under the Company'sNetwork
Solutions' control, telecommunications systems, facilities, data-networkingdata-
networking infrastructure, commercial-off-the-shelf hardware, software
and components used by its employees in order to assign priorities to
potentially impacted systems and services. This phase is expected to be completed in November 1998;has been completed;
- Phase 2 -- Assess the Year 2000 compliance of all inventoried business
systems and processes, including the Internet rootdomain name servers under
the
Company'sNetwork Solutions' control, telecommunications systems, facilities,
data-networking infrastructure, commercial-off-the-shelf hardware,
software and components used by its employees and determine whether to
renovate or replace any non-Year 2000 compliant systems and services. This phase is expected to be completed by December 1998;The
assessment of mission critical systems has been completed; however,
assessment continues as a life cycle development activity;
- Phase 3 -- Complete remediation if any is required, of any non-Year 2000 compliant business
systems and processes, including the Internet rootdomain name servers under
the Company'sNetwork Solutions' control, telecommunications systems, facilities,
data-networking infrastructure, commercial-off-the-shelf hardware,
software and components used by its employees. Conduct procurements to
replace any other non-Year 2000 compliant business systems and processes,
telecommunications systems, facilities, data-networking infrastructure,
commercial-off-the-shelf hardware, software and components used by its
employees that won'twill not be remediated. All remediation efforts if any are required, are expected to be
completed by April 30, 1999;have been
completed;
- Phase 4 -- Test and validate remediated and replacement systems if any
such remediation or replacement is required, to ensure inter-system
compliance and mission critical system functionality. The testing and
validation efforts, if any are required, are expected to be completed by
May 31,has
begun. As remediated code is successfully tested, it is released into
production incrementally, a process which will last until October 30,
1999;
- Phase 5 -- Deploy and implement remediated and replacement systems if
any deployment or implementation is required, after
the completion of successful testing and validation. The deployment and
implementation of the remediated or replacement systems if any is required, are expected to
be completed by October 31,30, 1999; and
- Phase 6 -- Design contingency and business continuation plans in the
event of the failure of business systems and processes,
telecommunications systems, facilities, data-networking infrastructure,
commercial-off-the-shelf hardware, software and components used by
the
Company'sNetwork Solutions' employees due to the
24
25 Year 2000 millennium change. The
initial contingency and business continuation plan is expected tohas been completed and it will be in place by December 31, 1998.updated
throughout the year as appropriate.
Based on its inventory and assessment, to date,Network Solutions found that less
than one-half of one percent of the Company believes thatsoftware code of its internal mission critical
systems areneeded to be remediated to be made Year 2000 compliant. The Company,However, Network
Solutions, in its normal course of business, anticipates replacing or upgrading,
prior to the millennium change, portions of these systems with new systems which
will also be Year 2000 compliant. Currently, the CompanyNetwork Solutions is enhancing its
back-office"back-office" and registration-related systems and the software relating to its
core domain name registration services business. When complete in 1999, this enhancement effort
will result in replacing portions of the existing registration-related systems
which will be procured from vendors as Year 2000 compliant and will be subjected
to both component and end-to-end testing and validation to ensure the Year 2000
compliance of such systems prior to acceptance and deployment in the Company's
business. This enhancement effort is a
function of the Company'sNetwork Solutions' business growth and not a Year 2000 remediation
effort.
Based on its inventory and assessment, to date, the Company believes thatNetwork Solutions has found no
material Year 2000 problems with its facilities and telecommunications systems are Year 2000 compliant. The
Companysystems.
Network Solutions has conducted detailed assessments ofand tested the components
of its telecommunications infrastructure and is working to identify appropriate system
testing guidelines.infrastructure. In addition, the CompanyNetwork Solutions is
seeking assurances from its facilities' landlords and telecommunications
equipment vendors and data circuit providers regarding the Year 2000 compliance
of their facilities and equipment. In the event of electrical power interruption
outside of the Company'sNetwork Solutions' control, the CompanyNetwork Solutions has deployed back-up
power systems capable of operating its core business indefinitely.
At this time,24
25
Network Solutions is now in the Companytesting phase of its project cycle. Network
Solutions believes that its incremental remediation costs
if any, needed to make its current
business systems and processes, including the Internet rootdomain name servers under
the Company'sNetwork Solutions' control, telecommunications systems, facilities, data-networkingdata-
networking infrastructure, commercial-off-the-shelf hardware, software and
components used by its employees Year 2000 compliant are not material. While
the CompanyNetwork Solutions is incurring some incremental costs directly relating to staff
augmentation for the Year 2000 program management and technical assessment, the
costs expended by the CompanyNetwork Solutions through October 31, 1998June 30, 1999 are less than
$100,000. The Company's$1,000,000. Network Solutions' expected total costs, including remediation and
replacement costs, if any, are estimated to be between $500,000$2,000,000 and $1,000,000$2,375,000 over
the life of the Year 2000 project. Since portions of the mission critical back office"back
office" and domain name registration-related systems will generally be replaced
as a function of business growth, the labor and capital costs associated with
such replacement systems are not directly attributed to achieving Year 2000
compliance. The CompanyNetwork Solutions will also incur costs for extending its software
testing architecture which, in addition to testing remediated systems, will be
used as a normal component of Network Solutions' quality assurance
infrastructure. As such these costs are not directly categorized as Year 2000
project costs but as normal business development and engineering costs.
Network Solutions is contacting its other hardware and software vendors, other
significant suppliers, outsourcing service providers and other contracting parties to
determine the extent to which the CompanyNetwork Solutions is vulnerable to any such third
party's failure to achieve Year 2000 compliance for theirits own systems. At the
present time, the CompanyNetwork Solutions does not expect Year 2000 issues of any such
third parties to materially affect the Company'sNetwork Solutions' business. Furthermore,
the Company'sNetwork Solutions' business depends on the continued operation of, and
widespread access to, the Internet. This, in turn, depends to a large extent on
the software and systems of third parties on which the
Company'sNetwork Solutions' systems
rely or to which they are connected or of otherconnected. These third parties include, among others,
Internet-related companies, including Internet web hosting companies, Internet
access providers and Internet rootdomain name server operators. The CompanyNetwork Solutions
can give no assurances that the software or systems of such companiesthird parties will
be Year 2000 compliant or that the failure of such third parties to achieve Year
2000 compliance will not have a material adverse effect on the Company.Network Solutions. To
the extent that the normal operation of the Internet is disrupted by the Year
2000 millennium change, the
Company'sNetwork Solutions' business, financial condition or
results of operations could be materially and adversely affected.
Should the CompanyNetwork Solutions fail to solve a Year 2000 compliance problem
related to its mission critical business systems and processes, including the
Internet rootdomain name servers under the Company'sNetwork Solutions' control,
telecommunications systems, facilities, data-networking infrastructure,
commercial-off-the-shelf hardware, software and components used by its
employees, the result could be a failure or interruption to normal business
operations. The CompanyNetwork Solutions believes that, with the deployment of the new
back office"back office" and domain name registration related systems in 1999, the
potential for significant interruptions to normal operations should be
minimized. The
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Company'sNetwork Solutions' primary risks with regard to Year 2000 failures
are those which impact its domain name registration business. The reasonably
likely worst case risks inherent in the Company'sNetwork Solutions' business are as follows:
- Significant and protracted interruption of electrical power to data and
call-center operationssystems in the Company'sNetwork Solutions' engineering facilityand customer support facilities
could materially and negatively impact the Company'sNetwork Solutions' ability to
provide data and call-center operations. To mitigate this risk, the CompanyNetwork
Solutions has deployed back-up power systems capable of operating
indefinitely. However, electrical power interruptions that impact
Internet connectivity providers could adversely impact the CompanyNetwork Solutions
because of the Company'sNetwork Solutions' reliance upon Internet-based operations for
its day to day business.
- Significant and protracted interruption of telecommunications and data
network services in eitherany of the Company'sNetwork Solutions' headquarters, engineering
or engineeringcustomer support facilities could materially and negatively impact
the Company'sNetwork Solutions' ability to provide data and call-center operations.
The CompanyNetwork Solutions has conducted detailed assessments of the components of
its telecommunications infrastructure and is working to identify
appropriate system testing guidelines. As part of theits technical
assessment, scheduled for completion
by the end of 1998, the Company will haveNetwork Solutions identified the compliance status of its
data networking infrastructure and developed plans for
remediation, if necessary.implemented remediation. Finally,
the CompanyNetwork Solutions has plans to seek additional assurances and
25
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a better understanding of the compliance programs of its
telecommunications and data circuit providers.
- The failure of components of the Company'sNetwork Solutions' current back office"back office" and
domain name registration related systems could materially and negatively
impact the Company'sNetwork Solutions' business. However, as a function of business
growth, these systems are planned to be retired before the end of 1999.
As a contingency planning measure, the Company is conductingNetwork Solutions has conducted a
technical assessment of the current systems and their software
applications in the
event that the deployment of the new systemsand is delayed beyond December
1999.currently testing such systems.
- Despite the assurances of the Company'sNetwork Solutions' third-party suppliers,
hardware and software vendors, and outsourcing service providers
regarding the Year 2000 compliance of their products and services, the
potential exists that a Year 2000 problem relating to such third-party
suppliers, vendors and outsourcing service providersproviders' products and
services could have a material impact on the Company'sNetwork Solutions' business.
The CompanyNetwork Solutions is conducting monthly discussions with its mission
critical outsourcing service providers to determine the progress of their
Year 2000 compliance programs.
Despite the Company's beliefAlthough Network Solutions found that it only has had to remediate a small
portion of its software code in its internal mission critical computer software
applicationssystems and
systems are Year 2000 compliant and thedespite Network Solutions' expectation that its enhancement effort will result
in Year 2000 compliant back-office"back-office" and registration-related systems and
software relating to its core domain name registration services business,
the Company is currently developingNetwork Solutions has developed a business continuation contingencycontinuity plan and is performing a
test on the existing core registration-related systems that are being replaced.
The Company expects to
finalize its initial contingencyfinal business continuity plan has been completed and to completewill be updated as
appropriate throughout the testing of all
existing systems by December 31, 1998.year.
Although the CompanyNetwork Solutions is taking appropriate steps relative to ensuringso that the Company'sNetwork
Solutions' business is not impacted by the date transitions associated with the
Year 2000, the CompanyNetwork Solutions has no responsibility for, nor control over other
Internet rootdomain name server operators or tens of thousands of lower level domain
name system server operators that are critical to the efficient operation of the
Internet. The CompanyNetwork Solutions has no way of knowingnot determined whether such rootdomain name server
operators or other server operators have hardware, software or firmware that is
Year 2000 compliant. The Company is notifying various federal government authoritiesNetwork Solutions has notified the Department of Commerce
of this issue and requesting that the necessary steps be taken to ensure the
uninterrupted and efficient operation of the Internet.issue.
Forward-Looking Statements
The foregoing Year 2000 discussion and the information contained herein is
provided as a "Year 2000 Readiness Disclosure" as defined in the Year 2000
Information and Readiness Disclosure Act of 1998 (Public Law 105-271, 112 Stat.
2386) enacted on October 19, 1998 and contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, including without limitation, anticipated costs and the dates by
which the CompanyNetwork Solutions expects to complete certain actions, are based on
management's best current estimates, which were derived utilizing numerous
assumptions about future events, including the continued availability of certain
resources, representations received from third parties and other factors.
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However, there can be no guarantee that these estimates will be achieved, and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
ability to identify and remediate all relevant systems, results of Year 2000
testing, adequate resolution of Year 2000 issues by governmental agencies,
businesses and other third parties who are outsourcing service providers,
suppliers, and vendors of the Company,Network Solutions, unanticipated system costs, the
adequacy of and ability to implement contingency plans and similar
uncertainties. The "forward-looking statements" made in the foregoing Year 2000
discussion speak only as of the date on which such statements are made, and
the CompanyNetwork Solutions undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.Network Solutions is exposed to the impact of interest rate changes and
change in the market values of its investments.
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Interest Rate Risk. Network Solutions' exposure to market rate risk for
changes in interest rates relates primarily to the Company's investment
portfolio. Network Solutions has not used derivative financial instruments in
its investment portfolio. Network Solutions invests its excess cash in debt
instruments of the U.S. Government and its agencies, and in high-quality
corporate issuers and, by policy, limits the amount of credit exposure to any
one issuer. The Company protects and preserves its invested funds by limiting
default, market and reinvestment risk.
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, the Company's future investment income
may fall short of expectations due to changes in interest rates or the Company
may suffer losses in principal if forced to sell securities which have declined
in market value due to changes in interest rates.
Investment Risk. The Company has invested in the equity instruments of a
privately-held, information technology company for business and strategic
purposes. This investment is included in other long-term assets and is accounted
for under the cost method which approximates fair value. Network Solutions is
also exposed to equity price risks on the marketable portion of its equity
securities. Network Solutions' available-for-sale securities include investments
in publicly-held companies in the Internet industry sector, many of which have
experienced significant historical volatility in their stock prices.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.PROCEEDINGS
As of NovemberAugust 1, 1998, the Company was1999, we were a defendant in twofour active lawsuits involving
domain name disputes between trademark owners and domain name holders. The Company isWe are
drawn into such disputes, in part, as a result of claims by trademark owners
that the Company iswe are legally required, upon request by a trademark owner, to terminate
the right the Companywe granted to a domain name holder to register a domain name which is
alleged to be similar to the trademark in question. The holders of the domain
name registrations in dispute have, in turn, questioned the Company'sour right, absent a
court order, to take any action which suspends their use of the domain names in
question. Although 4351 out of approximately 4,0006,600 of these situations have
resulted in suits actually naming the Companyus as a defendant, as of NovemberAugust 1, 1998,1999, no
adverse judgment has been rendered and no award of damages has ever been made
against the Company. The
Company believesus. We believe that it haswe have meritorious defenses and vigorously defends itselfdefend
ourselves against these claims.
On March 20, 1997, PG Media, Inc., a New York-based corporation, ("PG
Media"), filed a
lawsuit against the Companyus in the United States District Court, Southern District of New
York alleging that the Companywe had restricted access to the Internet by not adding PG
Media's requested TLDstop level domains to the Internet root zone system in
violation of the Sherman Act. In its complaint, PG Media, has, in addition to
requesting damages, asked that the Companywe be ordered to include reference to PG Media's
TLDstop level domains and name servers in the root zone file administered by the Companyus
under the Cooperative Agreement. The Company
answered the complaint. In June 1997, the Companywe received written direction
from the NSFNational Science Foundation not to take any action which would create
additional TLDstop level domains or to add any new TLDstop level domains to the Internet
root zone until the NSFNational Science Foundation provides further guidance. On
September 17, 1997, PG Media filed a Second Amended Complaint adding the
NSFNational Science Foundation as a defendant. On May 14, 1998, PG Media served the Companyus
with a motion for a preliminary injunction against both defendants. The motion sought a hearing
before the court on June 8, 1998defendants to compel
both defendants to add PG Media's TLDstop level domains to the Internet root zone
within 30 days. In response, both defendants filed cross-motions for summary
judgment against PG Media. On July 20, 1998, a hearing on all parties' motions
occurred. The basic issue before the court iswas the NSF'sNational Science Foundation's
authority to control the Internet's root zone system. TheOn March 16, 1999, the
court granted both our and the National Science Foundation's motions for summary
judgment, holding that the National Science Foundation does have authority over
the root zone system and that the federal instrumentality immunity doctrine
immunizes us against liability under both sections 1 and 2 of the Sherman Act.
PG Media noticed its appeal on April 15, 1999. Our brief was filed in the
appellate court on July 26, 1999. No oral argument has taken the
issue under advisement and no date hasyet been indicated for the issuance of a
decision. Although the Companyscheduled. While
we cannot reasonably estimate the potential impact of suchthe claims advanced in
this lawsuit, a successful claim under the plaintiff's theory could have a
material adverse effect on the Company's business, financial condition and
results of operations.harm our business.
On October 17, 1997, a group of six plaintiffs filed a lawsuit (the "Thomas
suit")the Thomas suit
against the Companyus and the NSFNational Science Foundation in the United States District
Court, District of Columbia, challenging the legality of fees defendants charge
for the registration of domain names on the Internet and seeking restitution of
fees collected from domain name registrants in an amount in excess of $100
million, damages, and injunctive and other relief. Plaintiffs originally alleged violations
of the Competition in Contracting Act ("CICA"), the Sherman Act, and
the U.S. Constitution. Following the filing of motions to dismiss by the
defendants, the plaintiffs filed an amended complaint on January 30, 1998,
dropping the cause of action based upon CICA, but adding alleged violations ofConstitution, the Administrative Procedures Act and
the Independent Offices Appropriations Act. The plaintiffs also filed a motion for preliminary injunctive relief
against the NSF concerning the "Intellectual Infrastructure Fund." On February
2, 1998, the United States District Court, District of Columbia, issued an order
granting the plaintiffs' motion for a preliminary injunction, enjoining the NSF
from spending any of the money collected by the Company for the Intellectual
Infrastructure Fund. On February 10, 1998, the plaintiffs
filed a motion for preliminary injunction against the Companyus seeking several items of
relief. On
February 24, 1998, the Company and the NSF filed motions to dismiss the amended
complaint. Also on February 24, the plaintiffs filed a motion for partial
summary judgment concerning the Intellectual Infrastructure Fund. The
plaintiffs' motion for preliminary injunction against the Company and partial
summary judgment against the NSF, and both motions to dismiss were heard before
the Court on March 17, 1998. On April 6, 1998, the Court issued its opinion granting summary judgment
in favor of the plaintiffs on the Intellectual Infrastructure Fund, ruling it an
"unlawful tax." The court also granted the
Company'sour motion to dismiss all other counts
(II through X) and simultaneously denied the plaintiffs' preliminary injunction
motion against the Company.
Subsequently, the NSF appealed the February 2, 1998 preliminary injunction
against it.us. On April 30, 1998, Congress passed H.R. 3579 which was signed
into law by
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29 the President on May 1, 1998. Section 8003 of H.R. 3579 legalized,
ratified and confirmed the entire Intellectual Infrastructure Fund and
authorized and directed the NSFNational Science Foundation to deposit the entire
fund into the U.S. Treasury. On May 5,
1998, the NSF filed a motion to vacate the preliminary injunction and to dismiss
the case. On June 4, 1998, the plaintiffs filed a notice of appeal on the
Court's dismissal of counts II through X and on the plaintiff's motion for
preliminary injunction against the Company. On June 27, 1998, the United States
Court of Appeals for the District of Columbia Circuit dismissed the plaintiffs'
appeal of the Court's dismissal of counts II through X at this juncture in the
case. On August 28, 1998, the District Court dismissed
the entire case, issuing a final judgment in the matter. Following that decision,In October 1998, the
plaintiffs dismissed all pending appeals inappealed the court's dismissal of their claims, and oral argument
occurred on February 25, 1999. On May 14, 1999, the Court of Appeals. The plaintiffs, however,
on October 23, 1998, filed a new noticeAppeals ruled in
favor of appeal from the final order filedNetwork Solutions by unanimously affirming the District Court's
decision. The Court of Appeals denied the plaintiffs' motion for reconsideration
and entered final judgment on AugustJuly 20, 1999.
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1998. 29
On June 27, 1997, SAIC received a CIDCivil Investigative Demand, or "CID,"
from the DOJU.S. Department of Justice issued in connection with an investigation
to determine whether there is, has been, or may be any antitrust violation under
the Sherman Act relating to Internet registration products and services. The CID
seekssought documents and information from SAIC and the
Companyus relating to theirour Internet
registration business. The CompanyOn April 29, 1999, we received a second CID seeking
additional information and documents relating to our ownership rights in,
policies relating to access to, and our use of, data that we compile in the
course of operating our Internet registration business. We are providing
information responsive to the CID. On June 23, 1999, the Department of Justice
formally notified us that SAIC had been removed as a subject of the
investigation. Because the investigation, as currently focused, is still at a
preliminary stage, we cannot reasonably estimate the potential impact of the
investigation nor can itwe predict whether a civil action maymight ultimately be
filed by the DOJDepartment of Justice or the form of relief that might be sought.
Any such relief from such a suit could have a material
adverseharmful effect on the Company's business, financial condition and results of
operations.our business.
On August 17, 1998, the Companywe received notice from the Commission of the European
Communities, or "EC," of an investigation concerning the Company's Premier
Program agreements in Europe. The EC requested production of these agreements
and related materials for review. The Companyreview and we complied. On June 17, 1999, we received
a second inquiry from the EC concerning our registrar licensing agreements with
the five newly-accredited testbed registrars and we responded to this inquiry on
July 9, 1999. We cannot reasonably estimate the potential impact of the
investigation nor can the Companywe predict whether an action will ultimately be brought by
the EC or the form of relief that might be sought. Any such relief could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company isharm
our business.
We are involved in various other investigations, claims and lawsuits
arising in the normal conduct of itsour business, none of which, in theour opinion
of the Company's management, will have a material adverse effect on its
financial position, results of operations, cash flows or its ability to conductharm our business.
LitigationLegal proceedings in which the Company iswe are involved hashave resulted and likely will
result in, and any future litigationlegal proceedings can be expected to result in,
substantial legal and other expenses to the Company and a diversion of the efforts of the
Company'sour
personnel.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The Company's Registration Statement on Form S-1 (Registration No.
333-30705) was declared effective September 25, 1997 by the Securities and
Exchange Commission. The managing underwriters of the Class A common stock
offering commencing September 26, 1997 were Hambrecht & Quist, J.P. Morgan & Co.
and PaineWebber Incorporated. The Company registered and sold 3,220,000 shares
(pre-split) for its own account at an aggregate price of $57,960,000 and the
selling stockholder (SAIC) registered and sold 575,000 shares (pre-split) for
its account at an aggregate price of $10,350,000, for a combined total of
3,795,000 shares (pre-split) at an aggregate price of $68,310,000. The offering
has since terminated.
The total amount of expenses incurred for the Company's account in
connection with the offering werewas $5,555,200, which is comprised of $4,057,200
for underwriting discounts and commissions and $1,498,000 of other expenses. No
expenses were paid to directors, officers or persons owning more than ten
percent of any class of the Company's equity securities. The resultant Company's
net offering proceeds were $52,404,800. The net proceeds to SAIC for its account
were $9,625,500 after deducting the associated underwriting discounts and
commissions of $724,500.
On October 1, 1997, the Company received the offering proceeds from which a
$10,000,000 dividend was paid to SAIC. SAIC owns ten percent or more of a class
of the Company's equity securities and is an affiliate of the Company. The
remaining proceeds have been invested in investment grade government discount
notes, commercial paper and corporate bonds.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Stockholders was held on May 18, 1999 (the
"Annual Meeting"). At the Annual Meeting, stockholders voted on three matters:
(i) the election of eight directors; (ii) the approval of a proposal to amend
the Company's Second Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") to reclassify the Company's Class A common
stock, par value $0.001 per
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share, and Class B common stock, par value $0.001 per share, as shares of the
Company's common stock, par value $0.001 per share (the "Common Stock"); and
(iii) the approval of a proposal to amend the Company's Certificate of
Incorporation to increase the number of authorized shares of the Company's
Common Stock from 130,000,000 to 210,000,000. The stockholders elected
management's nominees as the directors in an uncontested election and approved
the amendments to the Certificate of Incorporation by the following votes,
respectively:
(i) Election of directors:
DIRECTOR VOTES FOR VOTES WITHHELD
- -------- ---------- --------------
Michael A. Daniels.......................................... 81,911,557 71,776
Donald N. Telage............................................ 81,914,148 69,185
J. Robert Beyster........................................... 81,908,815 74,518
Craig I. Fields............................................. 81,913,130 70,203
John E. Glancy.............................................. 81,911,257 72,076
J. Dennis Heipt............................................. 81,912,656 70,677
William A. Roper, Jr........................................ 81,913,757 69,576
Stratton D. Sclavos......................................... 81,926,509 56,824
(ii) Approval of a proposal to amend the Company's Certificate of
Incorporation to reclassify the Company's Class A common stock, par value $0.001
per share, and Class B common stock, par value $0.001 per share, as shares of
Common Stock, par value $0.001 per share:
VOTES FOR VOTES AGAINST ABSTENTIONS
---------- ------------- -----------
Amendment to Reclassify Shares................. 81,905,816 69,345 8,172
(iii) Approval of a proposal to amend the Certificate of Incorporation to
increase the number of authorized shares of Common Stock from 130,000,000 to
210,000,000:
VOTES FOR VOTES AGAINST ABSTENTIONS
---------- ------------- -----------
Amendment to Increase Authorized Shares........ 81,735,582 241,231 6,520
For further discussion of these matters, see the Company's definitive Proxy
Statement for the May 18, 1999 Annual Meeting of Stockholders, which was filed
with the Commission on April 16, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits -- See Exhibit Index
(b) The Company filed a reportReports on Form 8-K on October 6, 1998 announcing
that it had entered into an amendment to its Cooperative Agreement with
the United States Department of Commerce (the "Amendment"). A copy of
the Amendment and a press release related thereto were filed as
exhibits to the Form 8-K.-- None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETWORK SOLUTIONS, INC.
By: /s/ ROBERT J. KORZENIEWSKI
------------------------------------
Robert J. Korzeniewski
Chief Financial Officer Acting
Chief Operating Officer and
Authorized Signatory
Date: NovemberAugust 16, 19981999
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EXHIBIT INDEX TO EXHIBITS
NETWORK SOLUTIONS, INC.
THREE MONTHS ENDED JUNE 30, 1999
EXHIBIT SEQUENTIAL
NO. DESCRIPTION OF EXHIBITS -PAGE NO.
- ------- ----------------------- ----------
10.22
3(iii) Certificate of Amendment of Second Amended and Restated
Certificate of Incorporation
10.27 Amendment No. 1014 to the Cooperative Agreement dated September 29, 1998July 13,
1999
10.28 Amendment No. 15 to the Cooperative Agreement dated July 16,
1999
10.29 Offer Letter between James Rutt and Network Solutions, Inc.
dated May 18, 1999
10.30 Separation Agreement between James Rutt and Network
Solutions, Inc. dated May 19, 1999
10.31 Non-Statutory Stock Option Agreement Between James Rutt and
Network Solutions, Inc. dated June 7, 1999
10.32 Non-Statutory Stock Option Agreement Between James Rutt and
Network Solutions, Inc. dated May 21, 1999
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
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