UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No.1)
(Mark One)
x
|
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended September 30, 1999
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the transition period from
to
Commission File Number: 000-23593
VERISIGN, INC.
(Exact name of registrant as specified in its
charter)
| Delaware
(State or other jurisdiction of
incorporation or organization)
|
|
94-3221585
(I.R.S. Employer
Identification No.)
|
|
| 1350
Charleston Road, Mountain View, CA
(Address of principal executive offices)
|
|
94043-1331
(Zip Code)
|
|
Registrant’s telephone number, including area code: (650)
961-7500
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No
¨
Indicate
the number of shares outstanding of each of the issuer’s classes of
common stock, as of the latest practicable date:
Class
|
|
Shares Outstanding
October 31, 1999
|
| Common stock, $.001 par
value |
|
51,254,868
|
The
Registrant's Quarterly Report on Form 10-Q for the period ended September
30, 1999 which was originally filed on November 12, 1999 erroneously
contained a document in PDF format attached at the end of the report. The
purpose of this amendment is to refile the original report in its entirety,
without the document that was erroneously filed in the original
report.
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.
| Date: December 21,
1999
|
|
By:
/s/ STRATTON
D. SCLAVOS
Stratton D. Sclavos
President and
Chief Executive Officer
(Principal Executive Officer)
|
|
| Date: December 21,
1999
|
|
By:
/s/
DANA
L. EVAN
Dana L. Evan
Executive Vice President of Finance and Administration
and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
TABLE OF CONTENTS
|
|
|
Page
|
|
| PART I—FINANCIAL INFORMATION | |
| Item 1. Financial
Statements |
|
3 |
|
| Item 2. Management
’s Discussion and Analysis of Financial Condition and Results of
Operations |
|
10 |
|
| Item 3.
Quantitative and Qualitative Disclosures About Market
Risk |
|
23 |
|
| PART II—OTHER INFORMATION |
|
| |
|
|
| Item 2. Changes
in Securities and Use of Proceeds |
|
24 |
|
| Item 6. Exhibits
and Reports on Form 8-K |
|
24 |
|
| Signatures |
|
25 |
|
| Summary of Trademarks |
|
26 |
|
| EXHIBIT |
|
| |
|
|
| Exhibit 27.01
Financial Data Schedule (available in EDGAR format
only) |
|
|
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
The
consolidated financial statements included under this item are as
follows:
Financial Statement
Description
|
|
Sequentially
Numbered
Page
|
| Consolidated Balance
Sheets |
|
|
|
As of September 30, 1999 and December 31, 1998 |
|
4 |
|
| Consolidated Statements
of Operations |
|
|
|
For the Three and Nine Months Ended September 30, 1999 and
1998 |
|
5 |
|
| Consolidated Statements
of Cash Flows |
|
|
|
For the Nine Months Ended September 30, 1999 and 1998 |
|
6 |
|
| Notes to Consolidated
Financial Statements |
|
7 |
VERISIGN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| |
|
September 30,
1999
|
|
December 31,
1998
|
| Assets |
|
|
|
|
|
|
| Current
assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ 69,458 |
|
|
$ 22,786 |
|
|
Short-term investments |
|
90,634 |
|
|
18,959 |
|
|
Accounts receivable, net |
|
20,033 |
|
|
9,769 |
|
|
Prepaid expenses and other current assets |
|
4,807 |
|
|
2,174 |
|
| |
|
|
|
|
|
|
|
Total current assets |
|
184,932 |
|
|
53,688 |
|
| Property and equipment,
net |
|
9,810 |
|
|
9,234 |
|
| Long-term
investments |
|
45,576 |
|
|
436 |
|
| Other assets,
net |
|
2,703 |
|
|
937 |
|
| |
|
|
|
|
|
|
| |
|
$243,021 |
|
|
$ 64,295 |
|
| |
|
|
|
|
|
|
| Liabilities and
Stockholders’ Equity |
|
|
|
|
|
|
| Current
liabilities: |
|
|
|
|
|
|
|
Accounts payable |
|
$
6,369 |
|
|
$
5,472 |
|
|
Accrued liabilities |
|
4,379 |
|
|
4,035 |
|
|
Deferred revenue |
|
25,273 |
|
|
13,096 |
|
| |
|
|
|
|
|
|
|
Total current liabilities |
|
36,021 |
|
|
22,603 |
|
| |
|
|
|
|
|
|
| Minority interest in
subsidiary |
|
242 |
|
|
964 |
|
| |
|
|
|
|
|
|
| Commitments |
|
|
|
|
|
|
| Stockholders’
equity: |
|
|
|
|
|
|
Preferred stock, $.001 par value;
5,000,000
shares authorized; none issued |
|
— |
|
|
— |
|
|
Common stock, $.001 par value; |
|
|
|
|
|
|
|
Authorized: 200,000,000
shares; |
|
|
|
|
|
|
Issued and outstanding: 51,210,758
shares in 1999 and
46,173,384 shares in 1998 |
|
51 |
|
|
46 |
|
|
Additional paid-in capital |
|
223,870 |
|
|
92,774 |
|
|
Notes receivable from stockholders |
|
— |
|
|
(409 |
) |
|
Deferred compensation |
|
(199 |
) |
|
(276 |
) |
|
Accumulated other comprehensive income |
|
35,021 |
|
|
— |
|
|
Accumulated deficit |
|
(51,985 |
) |
|
(51,407 |
) |
| |
|
|
|
|
|
|
|
Total stockholders’ equity |
|
206,758 |
|
|
40,728 |
|
| |
|
|
|
|
|
|
| |
|
$243,021 |
|
|
$ 64,295 |
|
| |
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial
Statements
VERISIGN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
|
|
Three Months Ended
September 30,
|
|
Nine Months
Ended
September 30,
|
|
|
|
1999
|
|
1998
|
|
1999
|
|
1998
|
| Revenues |
|
$22,782 |
|
$10,505 |
|
|
$57,100 |
|
|
$ 25,719 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Costs and expenses: |
| Cost of
revenues |
|
8,405 |
|
5,190 |
|
|
22,379 |
|
|
13,467 |
|
| Sales and
marketing |
|
8,829 |
|
6,117 |
|
|
24,492 |
|
|
16,449 |
|
| Research
and development |
|
3,405 |
|
2,552 |
|
|
9,478 |
|
|
6,242 |
|
| General
and administrative |
|
2,142 |
|
1,673 |
|
|
6,122 |
|
|
5,842 |
|
| Special
charges |
|
— |
|
3,555 |
|
|
— |
|
|
3,555 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
22,781 |
|
19,087 |
|
|
62,471 |
|
|
45,555 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Operating
income (loss) |
|
1 |
|
(8,582 |
) |
|
(5,371 |
) |
|
(19,836 |
) |
| Other income |
|
1,272 |
|
628 |
|
|
4,071 |
|
|
1,677 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Income
(loss) before minority interest |
|
1,273 |
|
(7,954 |
) |
|
(1,300 |
) |
|
(18,159 |
) |
| Minority interest in net loss of
subsidiary |
|
294 |
|
237 |
|
|
722 |
|
|
950 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Net
income (loss) |
|
$ 1,567 |
|
$(7,717 |
) |
|
$
(578 |
) |
|
$(17,209 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
| Basic net income (loss) per
share |
|
$
0.03 |
|
$ (0.17 |
) |
|
$ (0.01 |
) |
|
$
(0.41 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Shares used in basic net income
(loss) per share computation |
|
50,757 |
|
45,232 |
|
|
49,861 |
|
|
42,084 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Diluted net income (loss) per
share |
|
$
0.03 |
|
$ (0.17 |
) |
|
$ (0.01 |
) |
|
$
(0.41 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Shares used in diluted net income
(loss) per share computation |
|
57,599 |
|
45,232 |
|
|
49,861 |
|
|
42,084 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial
Statements
VERISIGN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| |
|
Nine Months
Ended
September 30,
|
| |
|
1999
|
|
1998
|
| Cash flows from
operating activities: |
|
|
|
|
|
|
|
Net loss |
|
$
(578 |
) |
|
$(17,209 |
) |
|
Adjustments to reconcile net loss to net cash |
|
|
|
|
|
|
|
provided by (used in) operating activities: |
|
|
|
|
|
|
|
Depreciation and
amortization |
|
3,873 |
|
|
2,862 |
|
|
Minority interest in net loss of
subsidiary |
|
(722 |
) |
|
(950 |
) |
|
Stock-based compensation |
|
77 |
|
|
2,248 |
|
|
Loss on disposal of property and
equipment |
|
362 |
|
|
40 |
|
|
Changes in operating assets and
liabilities: |
|
|
|
|
|
|
|
Accounts receivable |
|
(10,264 |
) |
|
(5,080 |
) |
|
Prepaid expenses and other current assets |
|
(2,633 |
) |
|
(1,357 |
) |
|
Accounts payable |
|
897 |
|
|
2,001 |
|
|
Accrued liabilities |
|
344 |
|
|
1,678 |
|
|
Deferred revenue |
|
12,177 |
|
|
5,194 |
|
| |
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities |
|
3,533 |
|
|
(10,573 |
) |
| |
|
|
|
|
|
|
| Cash flows from
investing activities: |
|
|
|
|
|
|
|
Purchases of short-term investments |
|
(112,636 |
) |
|
(48,500 |
) |
|
Maturities and sales of short-term investments |
|
40,961 |
|
|
32,085 |
|
|
Purchases of long-term investments |
|
(10,119 |
) |
|
— |
|
|
Purchases of property and equipment |
|
(4,308 |
) |
|
(3,506 |
) |
|
Other assets |
|
(2,269 |
) |
|
(122 |
) |
| |
|
|
|
|
|
|
|
Net
cash used in investing activities |
|
(88,371 |
) |
|
(20,043 |
) |
| |
|
|
|
|
|
|
| Cash flows from
financing activities: |
|
|
|
|
|
|
|
Collections on notes receivable from stockholders |
|
409 |
|
|
62 |
|
|
Subchapter S distributions by SecureIT, Inc. |
|
— |
|
|
(199 |
) |
|
Net proceeds from issuance of common stock |
|
131,101 |
|
|
43,913 |
|
| |
|
|
|
|
|
|
|
Net
cash provided by financing activities |
|
131,510 |
|
|
43,776 |
|
| |
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
46,672 |
|
|
13,160 |
|
|
Cash and cash equivalents at beginning of period |
|
22,786 |
|
|
4,942 |
|
| |
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$
69,458 |
|
|
$ 18,102 |
|
| |
|
|
|
|
|
|
Noncash investing activity:
Unrealized
gain on long-term investments |
|
$
35,021 |
|
|
$
— |
|
| |
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial
Statements
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| (1)
|
Basis of Presentation
|
The accompanying interim
unaudited consolidated balance sheets and statements of operations and
cash flows reflect all normal recurring adjustments that are, in the
opinion of management, necessary for a fair presentation of the financial
position of VeriSign, Inc. at September 30, 1999, and the results of
operations and cash flows for the interim periods ended September 30,
1999 and 1998.
The accompanying unaudited
consolidated financial statements have been prepared in accordance with
the instructions for Form 10-Q and, therefore, do not include all
information and footnotes necessary for a complete presentation of
VeriSign’s results of operations, financial position and cash flows.
We filed audited consolidated financial statements that included all
information and footnotes necessary for a complete presentation for each
of the years in the three-year period ended December 31, 1998 in our 1998
Annual Report on Form 10-K. The consolidated financial statements for the
period ended September 30, 1998 have been restated to reflect the
acquisition of SecureIT , Inc. which was accounted for as a pooling of
interests.
The results of operations for any
interim period are not necessarily indicative of our results of
operations for any other future interim period or for a full fiscal
year.
| (2)
|
Fair Values of Financial
Instruments
|
The carrying amount of cash and cash
equivalents, investments, accounts receivable, and accounts payable
approximate their respective fair values.
In January 1999, VeriSign sold an
additional 3,195,000 shares of its common stock to the public for net
proceeds of approximately $121.4 million, after underwriting discounts
and commissions and expenses of the offering.
On May 28, 1999, VeriSign completed
a two-for-one stock split in the form of a stock dividend for
stockholders of record on May 14, 1999. On May 27, 1999, VeriSign’s
stockholders approved an increase in the number of authorized shares of
common stock which was required to effect the stock split. All share
numbers in these consolidated financial statements and notes thereto for
all periods presented have been retroactively restated to reflect the
two-for-one stock split.
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
|
(4)
|
Net
Income (Loss) per Share
|
Basic
net income (loss) per share is computed using the weighted-average number
of common shares outstanding during the period. Diluted net income (loss)
per share is computed using the weighted-average number of common stock
and, when dilutive, common equivalent shares from options to purchase
common stock using the treasury stock method. The following is a
reconciliation of the number of shares used in the basic and diluted
earnings per share computations for the periods presented:
| |
|
Three Months
Ended
September 30,
|
|
Nine Months
Ended
September 30,
|
| |
|
1999
|
|
1998
|
|
1999
|
|
1998
|
| |
|
(In
thousands) |
| Shares used in basic
net income (loss) per share computation |
|
50,757 |
|
45,232 |
|
49,861 |
|
42,084 |
| Effect of dilutive
potential common shares |
|
6,842 |
|
— |
|
— |
|
— |
| |
|
|
|
|
|
|
|
|
| Shares used in diluted
net income (loss) per share computation |
|
57,599 |
|
45,232 |
|
49,861 |
|
42,084 |
| |
|
|
|
|
|
|
|
|
Antidilutive common equivalent shares excluded from diluted net
income (loss) per share for the three months ended September 30, 1999
consisted of options to purchase 26,841 shares of common stock with a
weighted-average exercise price of $97.05 and in the three months ended
September 30, 1998 consisted of options to purchase 4,443,578 shares with
a weighted-average exercise price of $3.87. Antidilutive common
equivalent shares excluded from diluted net loss per share for the nine
months ended September 30, 1999 and 1998, consisted of options to
purchase 9,324,575 shares of common stock with a weighted-average
exercise price of $17.50 in the 1999 period, and options to purchase
4,559,844 shares of common stock with a weighted-average exercise price
of $2.50 in the 1998 period.
(5)
|
Comprehensive Income (Loss)
|
Comprehensive income consists of net income (loss) and other
comprehensive income. The components of comprehensive income (loss) are
as follows:
| |
|
Three Months
Ended
September 30,
|
|
Nine Months Ended
September 30,
|
| |
|
1999
|
|
1998
|
|
1999
|
|
1998
|
| |
|
(In
thousands) |
| Net income
(loss) |
|
$ 1,567 |
|
$(7,717 |
) |
|
$
(578 |
) |
|
$(17,209 |
) |
| Unrealized gain on
investments |
|
35,021 |
|
— |
|
|
35,021 |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Comprehensive income
(loss) |
|
$36,588 |
|
$(7,717 |
) |
|
$34,443 |
|
|
$(17,209 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income presented in the
accompanying consolidated balance sheets consists of the accumulated net
unrealized gain on available-for-sale investments.
VeriSign operates in the United States, Europe and Japan and
derives substantially all of its revenues from sales of Internet trust
services. There have been no significant changes in our operating segment
or in the geographic location of our long-lived assets since December 31,
1998.
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
(7)
|
Recent Accounting
Pronouncements
|
In
June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, “Accounting for
Derivative Instruments and Hedging Activities.” SFAS No. 133
established methods of accounting for derivative financial instruments
and hedging activities related to those instruments as well as other
hedging activities. Because VeriSign currently holds no derivative
instruments and does not engage in hedging activities, we expect that the
adoption of SFAS No. 133 will have no material impact on our financial
position, results of operations or cash flows. We will be required to
implement SFAS No. 133 for the year ending December 31, 2001.
In
December 1998, the AICPA issued SOP No. 98-9, “Modification of SOP
97-2, Software Revenue Recognition, with Respect to Certain Transactions.
” SOP No. 98-9 requires recognition of revenue using the
“residual method” in a multiple-element software arrangement
when fair value does not exist for one or more of the delivered elements
in the arrangement. Under the “residual method,” the total fair
value of the undelivered elements is deferred and recognized in
accordance with SOP No. 97-2. VeriSign will be required to implement SOP
No. 98-9 for the year ending December 31, 2000. We expect that the
adoption of SOP No. 98-9 will not have a material impact on our financial
position, results of operations or cash flows.
On
November 11, 1999, VeriSign announced a two-for-one stock split for
stockholders of record on November 22, 1999. This stock split has not
been reflected in the September 30, 1999 financial
statements.
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You
should read the following discussion in conjunction with the interim
unaudited consolidated financial statements and related
notes.
Except for historical information, this Report contains
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These forward-looking statements involve risks and uncertainties,
including, among other things, statements regarding our anticipated costs
and expenses and plans for addressing Year 2000 issues. Our actual
results may differ significantly from those projected in the
forward-looking statements. Factors that might cause or contribute to
these differences include, but are not limited to, those discussed in the
section below entitled “Factors That May Affect Future Results of
Operations.” You should carefully review the risks described in
other documents we file from time to time with the Securities and
Exchange Commission, including the Quarterly Reports on Form 10-Q that we
have filed or will file in 1999 and our Annual Report on Form 10-K, which
was filed on February 22, 1999. You are cautioned not to place undue
reliance on the forward-looking statements, which speak only as of the
date of this Quarterly Report on Form 10-Q. We undertake no obligation to
publicly release any revisions to the forward-looking statements or
reflect events or circumstances after the date of this
document.
Overview
VeriSign is the leading provider of Internet trust services for
websites, enterprises and individuals to conduct trusted and secure
electronic commerce and communications over IP networks. We have
established strategic relationships with industry leaders, including AT
&T, BT, Checkpoint Technologies, Cisco, Microsoft, Netscape, Network
Associates, Network Solutions, RSA Security and VISA, to enable
widespread utilization of our digital certificate services and to assure
interoperability with a wide variety of applications and network
equipment. We have used our secure online infrastructure to sell over
180,000 of our website digital certificates to date. In addition, we have
issued over 3.9 million of our digital certificates for individuals. Our
website certificates currently protect the websites of a predominant
number of leading online merchants, global financial institutions,
Fortune 500 companies and government agencies. We also offer VeriSign
OnSite, a managed service that allows an organization to leverage our
trusted data processing infrastructure to develop and deploy customized
digital certificate services for use by employees, customers and business
partners. Since its introduction in November 1997, we have sold over 600
OnSite service solutions to enterprises including Bank of America,
Barclays, Hewlett-Packard, the Internal Revenue Service, Kodak, Southwest
Securities, Sumitomo Bank, Texas Instruments and US West. We have also
begun to build an international network of affiliates who provide our
trust services under licensed co-branding relationships using our
proprietary technology and business practices. We currently have
affiliate relationships with 18 organizations including Arabtrust in the
Middle East, BT in the United Kingdom, CIBC of Canada, CertiSur of
Argentina, Certplus of France, eSign of Australia, HiTrust of Taiwan, KPN
Telecom of The Netherlands, Roccade of The Netherlands, the South African
Certification Agency in South Africa, and VPN Tech of Canada.
We
have derived substantially all of our revenues to date from fees for
services rendered in connection with deploying Internet trust services.
Revenues from these trust services consist of fees for the issuance of
digital certificates, fees for digital certificate service provisioning,
fees for technology and business process licensing to affiliates and fees
for consulting, implementation, training, support and maintenance
services. Each of these sources of revenue has different revenue
recognition methods. We defer revenues from the sale or renewal of
digital certificates and recognize these revenues ratably over the life
of the digital certificate, generally 12 months. We defer revenues from
the sale of our OnSite managed services and recognize these revenues
ratably over the term of the license, generally 12 months. We recognize
revenues from the sale of digital certificate technology and business
process licensing to affiliates upon delivery of the technology and
signing of an agreement, provided the fee is fixed and determinable,
collectibility is probable and the arrangement does not require
significant production, modification or customization of the software. We
recognize revenues from consulting and training services using the
percentage-of-completion method for fixed-fee development arrangements or
as the services are provided for time-and-materials arrangements. We
recognize revenues ratably over the term of the agreement for support and
maintenance services.
We
market our Internet trust services worldwide through multiple
distribution channels, including the Internet, direct sales, telesales,
value added resellers, systems integrators and our international
affiliates. A significant portion of our revenues to date has been
generated through sales from our website, but we intend to continue
increasing our direct sales force, both in the United States and abroad,
and to continue to expand our other distribution channels.
In
connection with the formation of VeriSign Japan, we licensed technology
and contributed other assets to VeriSign Japan. Subsequent to its
formation, additional investors purchased minority interests in VeriSign
Japan. As of September 30, 1999, we owned 50.5% of the outstanding
capital stock of VeriSign Japan. Accordingly, our consolidated financial
statements include the accounts of VeriSign Japan and our consolidated
statements of operations reflect the minority shareholders’ share of
the net losses of VeriSign Japan.
We
have experienced substantial net losses in each fiscal period since our
inception. As of September 30, 1999, we had an accumulated deficit of
$52.0 million. These net losses and accumulated deficit resulted from the
significant costs incurred in the development and sale of our Internet
trust services and in the establishment and deployment of our technology,
infrastructure and practices. Although our revenues have grown in recent
periods, we may be unable to sustain this growth. Therefore, you should
not consider our historical growth indicative of future revenue levels or
operating results. In addition, although we had a slight profit during
the quarter ended September 30, 1999, we may not be able to sustain
profitability on a quarterly or annual basis in the future. A more
complete description of these and other risks relating to our business is
set forth under the caption “Factors That May Affect Future Results
of Operations.”
Results of Operations
|
|
|
1999
|
|
1998
|
|
Change
|
|
|
|
(Dollars in
thousands) |
| Three-month period: |
|
|
|
|
|
|
|
|
Revenues |
|
$22,782 |
|
$10,505 |
|
117 |
% |
|
| Nine-month period: |
|
|
|
|
|
|
|
|
Revenues |
|
$57,100 |
|
$25,719 |
|
122 |
% |
Revenues increased significantly from the prior year primarily due
to increased sales of our Internet trust services, particularly our
website digital certificates and VeriSign OnSite services, the expansion
of our international affiliate network and delivery of more training and
consulting services.
No
customer accounted for 10% or more of revenues during the three months or
nine months ended September 30, 1999 or 1998. Revenues of VeriSign Japan
and revenues from international customers accounted for 29% of total
revenues in the third quarter of 1999, and 12% of total revenues in the
third quarter of 1998. During the first nine months of 1999, revenues of
VeriSign Japan and revenues from international customers accounted for
26% of total revenues, while during the same period in 1998 revenues of
VeriSign Japan and revenues from international customers accounted for
11% of total revenues.
Costs and Expenses
|
|
|
1999
|
|
1998
|
|
Change
|
|
|
|
(Dollars in
thousands) |
| Three-month period: |
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
$ 8,405 |
|
|
$ 5,190 |
|
|
62 |
% |
|
Percentage of revenues |
|
37 |
% |
|
49 |
% |
|
|
|
|
| Nine-month period: |
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
$22,379 |
|
|
$13,467 |
|
|
66 |
% |
|
Percentage of revenues |
|
39 |
% |
|
52 |
% |
|
|
|
Cost
of revenues consists primarily of costs related to providing digital
certificate enrollment and issuance services, customer support and
training, consulting and development services and costs of facilities and
computer equipment used in these activities. Cost of revenues also
includes fees paid to third parties to verify certificate applicants
’ identities, insurance premiums for our service warranty plan and
errors and omission insurance and the cost of software resold to
customers.
Growth
of revenues was the primary cause of the increase in cost of revenues
from 1998 to 1999. We hired more employees to support the growth of
demand for our products and services during the period and to support the
growth of our security consulting and training activities. The cost of
insurance premiums for our service warranty plan increased because of
greater certificate volume. In addition, we incurred increased expenses
for access to third-party databases, higher support charges for our
external disaster recovery program and increased expenses related to the
cost of software products resold to customers as part of network security
solution implementations.
Cost
of revenues as a percentage of revenue decreased from 1998 to 1999
primarily due to the overall increase in revenues, the continued
experience of economies of scale on our technology infrastructure and the
efficiency gains in the certificate enrollment and issuance
process.
Certain of our services, such as implementation consulting and
training, require greater initial personnel involvement and therefore
have higher costs than other types of services. As a result, we
anticipate that cost of revenues will vary in future periods depending on
the mix of services sold.
|
|
|
1999
|
|
1998
|
|
Change
|
|
|
|
(Dollars in
thousands) |
| Three-month period: |
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
$ 8,829 |
|
|
$ 6,117 |
|
|
44 |
% |
|
Percentage of revenues |
|
39 |
% |
|
58 |
% |
|
|
|
|
| Nine-month period: |
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
$24,492 |
|
|
$16,449 |
|
|
49 |
% |
|
Percentage of revenues |
|
43 |
% |
|
64 |
% |
|
|
|
Sales
and marketing expenses consist primarily of costs related to sales,
marketing, practices and external affair activities. These expenses
include salaries, sales commissions and other personnel-related expenses,
travel and related expenses, costs of computer and communications
equipment and support services, facilities costs, consulting fees and
costs of marketing programs.
Sales
and marketing expenses increased from 1998 to 1999 as a result of the
continued growth of our direct sales force and the expansion of our
marketing efforts, particularly in lead and demand generation
activities. The expansion of our international sales presence in Europe
during the third quarter of 1999 also contributed to the increase in
these expenses. Sales and marketing expenses as a percentage of revenues
decreased from 1998 to 1999 primarily due to the increase in recurring
revenue from existing customers, which tend to have lower acquisition
costs associated with them, the increase in the productivity of the
direct sales force, and the increase in the effectiveness of the
marketing lead and demand generation activities.
We
anticipate that sales and marketing expenses will continue to increase in
absolute dollars as we expand our direct sales force and increase our
marketing and demand generation activities both in the United States and
abroad.
|
|
|
1999
|
|
1998
|
|
Change
|
|
|
|
(Dollars in
thousands) |
| Three-month period: |
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$3,405 |
|
|
$2,552 |
|
|
33 |
% |
|
Percentage of revenues |
|
15 |
% |
|
24 |
% |
|
|
|
|
| Nine-month period: |
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$9,478 |
|
|
$6,242 |
|
|
52 |
% |
|
Percentage of revenues |
|
17 |
% |
|
24 |
% |
|
|
|
Research and development expenses consist primarily of costs
related to research and development personnel, including salaries and
other personnel-related expenses, consulting fees and the costs of
facilities, computer and communications equipment and support services
used in service and technology development.
Research and development expenses increased in absolute dollars in
the third quarter of 1999 from the third quarter of 1998 as we invested
in the design, testing and deployment of, and technical support for, our
expanded Internet trust service offerings and technology. The increase
reflects the expansion of our engineering staff and related costs
required to support our continued emphasis on developing new products and
services as well as enhancing existing products and services. During
1999, we continued to make significant investments in development of all
of our services. The decrease in research and development expenses as a
percentage of revenues from 1998 to 1999 is primarily due to the fact
that revenues increased faster than research and development
expenses.
We
believe that timely development of new and enhanced Internet trust
services and technology are necessary to remain competitive in the
marketplace. Accordingly, we intend to continue to recruit experienced
research and development personnel and to make other investments in
research and development. As a result, we expect research and development
expenses will continue to increase in absolute dollars. To date, we have
expensed all research and development expenditures as
incurred.
|
General and
administrative
|
|
|
|
1999
|
|
1998
|
|
Change
|
|
|
|
(Dollars in
thousands) |
| Three-month period: |
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
$2,142 |
|
|
$1,673 |
|
|
28 |
% |
|
Percentage of revenues |
|
9 |
% |
|
16 |
% |
|
|
|
|
| Nine-month period: |
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
$6,122 |
|
|
$5,842 |
|
|
5 |
% |
|
Percentage of revenues |
|
11 |
% |
|
23 |
% |
|
|
|
General and administrative expenses consist primarily of salaries
and other personnel-related expenses for our administrative, finance and
human relations personnel, facilities and computer and communications
equipment, support services and professional services fees.
Our
expenses increased from 1998 to 1999 primarily due to increased staffing
levels required to manage and support our expanded operations, the
implementation of additional management information systems and related
procedures, and the expansion of our corporate headquarters. The decrease
in general and administrative expenses as a percentage of revenues from
1998 to 1999 is primarily due to the fact that revenues increased faster
than general and administrative expenses as we begin to experience
economies of scale on our corporate infrastructure.
We
expect to continue to invest in a more comprehensive executive and
administrative infrastructure. As a result, we anticipate that general
and administrative expenses will increase in absolute
dollars.
|
|
|
1999
|
|
1998
|
|
Change
|
|
|
|
(Dollars in
thousands) |
| Three-month period: |
|
|
|
|
|
|
|
|
|
|
Special charges |
|
$— |
|
|
$3,555 |
|
|
(100 |
)% |
|
Percentage of revenues |
|
0 |
% |
|
34 |
% |
|
|
|
|
| Nine-month period: |
|
|
|
|
|
|
|
|
|
|
Special charges |
|
$— |
|
|
$3,555 |
|
|
(100 |
)% |
|
Percentage of revenues |
|
0 |
% |
|
14 |
% |
|
|
|
In
connection with the acquisition of SecureIT, we recorded in the third
quarter of 1998 a special charge to operating expenses for direct and
other merger-related costs pertaining to the merger transaction and
certain stock-based compensation charges of approximately $2.4 million
and $1.2 million, respectively. Merger transaction costs consisted
primarily of fees for investment bankers, attorneys, accountants, filing
fees and other related charges. The stock-based compensation charges
related to certain performance stock options held by Secure IT employees
whose vesting accelerated upon a change of control.
|
|
|
1999
|
|
1998
|
|
Change
|
|
|
|
(Dollars in thousands)
|
| Three-month period: |
|
|
|
|
|
|
|
|
|
|
Other income |
|
$1,272 |
|
|
$ 628 |
|
|
103 |
% |
|
Percentage of revenues |
|
6 |
% |
|
6 |
% |
|
| Nine-month period: |
|
|
|
|
|
|
|
|
|
|
Other income |
|
$4,071 |
|
|
$1,677 |
|
|
143 |
% |
|
Percentage of revenues |
|
7 |
% |
|
7 |
% |
|
|
|
Other
income consists primarily of interest earned on our cash, cash
equivalents and short-term investments and the net effect of foreign
currency transaction gains and losses. Other income also includes charges
for any gains or losses on the disposal of property and equipment and
other miscellaneous expenses.
The
increase in other income in 1999 compared to 1998 is primarily due to a
significantly higher average cash and short-term investment base in the
1999 period. This increase in the investment base was a result of the
cash generated from our follow-on public offering of 3,195,000 shares of
our common stock during January 1999. After deducting underwriting
discounts and commissions and offering expenses, proceeds from the
follow-on offering were approximately $121.4 million. The increase in
other income was slightly offset by the loss on disposal of property and
equipment and other miscellaneous expenses.
|
Provision
for Income Taxes
|
We
have not recorded any provision for federal and California income taxes
because we have experienced net losses since inception. As of December
31, 1998, we had federal net operating loss carryforwards of
approximately $52.3 million and California net operating loss
carryforwards of approximately $46.5 million. If we are not able to use
them, the federal net operating loss carryforwards will expire in 2010
through 2018 and the state net operating loss carryforwards will expire
in 2003. The Tax Reform Act of 1986 imposes substantial restrictions on
the utilization of net operating losses and tax credits in the event of a
corporation’s ownership change, as defined in the Internal Revenue
Code. Our ability to utilize net operating loss carryforwards may be
limited as a result of an ownership change. We do not anticipate that any
material limitation exists on our ability to use our carryforwards and
credits. We have provided a full valuation allowance on our deferred tax
assets because of the uncertainty regarding their
realization.
|
Minority
Interest in Net Loss of Subsidiary
|
Minority interest in the net loss of VeriSign Japan was $294,000 in
the third quarter of 1999 and $237,000 in the third quarter of 1998.
During the first nine months of 1999, the minority interest in the net
loss of VeriSign Japan was $722,000 compared to $950,000 during the first
nine months of 1998. The increase from the third quarter of 1998 to the
third quarter of 1999 was primarily due to VeriSign Japan’s higher
operating losses as compared to the prior year. The decrease from the
first nine months of 1999 to the first nine months of 1998 was primarily
due to VeriSign Japan’s lower operating losses as compared to the
prior year. As the VeriSign Japan business continues to develop and
evolve, we expect that the minority interest in net loss of subsidiary
will continue to fluctuate in future periods.
Factors That May Affect Future Results of
Operations
|
We have a
limited operating history.
|
VeriSign was incorporated in April 1995, and we began introducing
our Internet trust services in June 1995. Accordingly, we have only a
limited operating history on which to base an evaluation of our business
and prospects. Our prospects must be considered in light of the risks and
uncertainties encountered by companies in the early stages of
development. These risks and uncertainties are often worse for companies
in new and rapidly evolving markets. Our success will depend on many
factors, including, but not limited to, the following:
|
Ÿ
|
the rate and
timing of the growth and use of IP networks for electronic commerce and
communications;
|
|
Ÿ
|
the extent to
which digital certificates are used for electronic commerce and
communications;
|
|
Ÿ
|
the continued
evolution of electronic commerce as a viable means of conducting
business;
|
|
Ÿ
|
the demand for
our Internet trust services;
|
|
Ÿ
|
the perceived
security of electronic commerce and communications over IP
networks;
|
|
Ÿ
|
the perceived
security of our services, technology, infrastructure and practices;
and
|
|
Ÿ
|
our continued
ability to maintain our current, and enter into additional, strategic
relationships.
|
To address these risks
we must, among other things:
|
Ÿ
|
successfully
market our Internet trust services and our digital certificates to new
and existing customers;
|
|
Ÿ
|
attract,
integrate, train, retain and motivate qualified personnel;
|
|
Ÿ
|
respond to
competitive developments;
|
|
Ÿ
|
successfully
introduce new Internet trust services; and
|
|
Ÿ
|
successfully
introduce enhancements to our existing Internet trust services to
address new technologies and standards.
|
We
cannot be certain that we will successfully address any of these
risks.
|
Our
business depends on the adoption of IP networks .
|
To
date, many businesses and consumers have been deterred from utilizing IP
networks for a number of reasons, including, but not limited
to:
|
Ÿ
|
potentially
inadequate development of network infrastructure;
|
|
Ÿ
|
security
concerns including the potential for merchant or user impersonation and
fraud or theft of stored data and information communicated over IP
networks;
|
|
Ÿ
|
inconsistent
quality of service;
|
|
Ÿ
|
lack of
availability of cost-effective, high-speed service;
|
|
Ÿ
|
limited
numbers of local access points for corporate users;
|
|
Ÿ
|
inability to
integrate business applications on IP networks;
|
|
Ÿ
|
the need to
operate with multiple and frequently incompatible products;
and
|
|
Ÿ
|
a lack of
tools to simplify access to and use of IP networks.
|
The
adoption of IP networks will require a broad acceptance of new methods of
conducting business and exchanging information. Companies and government
agencies that already have invested substantial resources in other
methods of conducting business may be reluctant to adopt new methods.
Also, individuals with established patterns of purchasing goods and
services and effecting payments may be reluctant to change.
|
Our market
is new and evolving.
|
We
target our Internet trust services at the market for trusted and secure
electronic commerce and communications over IP networks. This is a new
and rapidly evolving market that may not continue to grow. Accordingly,
the demand for our Internet trust services is very uncertain. Even if the
market for electronic commerce and communications over IP networks grows,
our Internet trust services may not be widely accepted. The factors that
may affect the level of market acceptance of digital certificates and,
consequently, our Internet trust services, include the
following:
|
Ÿ
|
market
acceptance of products and services based upon authentication
technologies other than those we use;
|
|
Ÿ
|
public
perception of the security of digital certificates and IP
networks;
|
|
Ÿ
|
the ability of
the Internet infrastructure to accommodate increased levels of usage;
and
|
|
Ÿ
|
government
regulations affecting electronic commerce and communications over IP
networks.
|
Even
if digital certificates achieve market acceptance, our Internet trust
services may fail to address the market’s requirements adequately.
If digital certificates do not achieve market acceptance in a timely
manner and sustain acceptance, or if our Internet trust services in
particular, do not achieve or sustain market acceptance, our business
would be materially harmed.
|
System
interruptions and security breaches could harm our
business.
|
We
depend on the uninterrupted operation of our data centers and our other
computer and communications systems. We must protect these systems from
loss, damage or interruption caused by fire, earthquake, power
loss, telecommunications failure or other events beyond our control. Most
of our systems are located at, and most of our customer information is
stored in, our facilities in Mountain View, California and Kawasaki,
Japan, areas susceptible to earthquakes. Any damage or failure that
causes interruptions in our secure data centers and our other computer
and communications systems could materially harm our business. In
addition, our ability to issue digital certificates depends on the
efficient operation of the Internet connections from customers to our
secure data centers. These connections depend upon efficient operation of
web browsers, Internet service providers and Internet backbone service
providers, all of which have had periodic operational problems or
experienced outages in the past. Any of these problems or outages could
adversely affect customer satisfaction.
Our
success also depends upon the scalability of our systems. Our systems
have not been tested at the volumes that may be required in the future.
Thus, it is possible that a substantial increase in demand for our
Internet trust services could cause interruptions in our systems. Any
interruptions could adversely affect our ability to deliver our Internet
trust services and therefore could materially harm our
business.
Although we periodically perform, and retain accredited third
parties to perform, audits of our operational practices and procedures,
we may not be able to remain in compliance with our internal standards or
those set by third-party auditors. If we fail to maintain these
standards, we may have to expend significant time and money to return to
compliance and our business could be materially harmed.
We
retain certain confidential customer information in our secure data
centers. It is critical to our business strategy that our facilities and
infrastructure remain secure and are perceived by the marketplace to be
secure. Despite our security measures, our infrastructure may be
vulnerable to physical break-ins, computer viruses, attacks by hackers or
similar disruptive problems. It is possible that we may have to expend
additional financial and other resources to address these problems. Any
physical or electronic break-ins or other security breaches or
compromises of the information stored at our secure data centers might
jeopardize the security of information stored on our premises or in the
computer systems and networks of our customers. In this event, we could
face significant liability and customers could be reluctant to use our
Internet trust services. This type of occurrence could also result in
adverse publicity and therefore adversely affect the market’s
perception of the security of electronic commerce and communications over
IP networks as well as of the security or reliability of our
services.
|
We must
manage our growth and expansion.
|
Our
historical growth has placed, and any further growth is likely to
continue to place, a significant strain on our resources. VeriSign has
grown from 26 employees at December 31, 1995 to 371 employees at
September 30, 1999. We have also opened additional sales offices and have
significantly expanded our operations, both in the U.S. and abroad,
during this time period. We also expanded our operations by acquiring
SecureIT during 1998. To be successful, we will need to implement
additional management information systems, develop further our operating,
administrative, financial and accounting systems and controls and
maintain close coordination among our executive, engineering, accounting,
finance, marketing, sales and operations organizations. Any failure to
manage growth effectively could materially harm our business.
|
We must
establish and maintain strategic relationships.
|
One of
our significant business strategies has been to enter into strategic or
other similar collaborative relationships in order to reach a larger
customer base than we could reach through our direct sales and marketing
efforts. We may need to enter into additional relationships to execute
our business plan. We may not be able to enter into additional, or
maintain our existing, strategic relationships on commercially reasonable
terms. If we failed to do so, we would have to devote substantially more
resources to the distribution, sale and marketing of our Internet trust
services than we would otherwise need to do. Furthermore, as a result of
our emphasis on these relationships, our success in them will depend both
on the ultimate success of the other parties to these relationships,
particularly in the use and promotion of IP networks for trusted and
secure electronic commerce and communications, and on the ability of
certain of these parties to market our Internet
trust services successfully. Failure of one or more of our strategic
relationships to result in the development and maintenance of a market
for our Internet trust services could materially harm our
business.
Our
existing strategic relationships do not, and any future strategic
relationships may not, afford VeriSign any exclusive marketing or
distribution rights. In addition, the other parties may not view their
relationships with us as significant for their own businesses. Therefore,
they could reduce their commitment to VeriSign at any time in the future.
These parties could also pursue alternative technologies or develop
alternative products and services either on their own or in collaboration
with others, including our competitors. If we are unable to maintain our
strategic relationships or enter into additional strategic relationships,
our business could be materially harmed.
|
Certain of
our Internet trust services have lengthy sales and implementation
cycles.
|
We
market many of our Internet trust services directly to large companies
and government agencies. The sale and implementation of our services to
these entities typically involves a lengthy education process and a
significant technical evaluation and commitment of capital and other
resources. This process is also subject to the risk of delays associated
with customers’ internal budgeting and other procedures for
approving large capital expenditures, deploying new technologies within
their networks and testing and accepting new technologies that affect key
operations. As a result, the sales and implementation cycles associated
with certain of our Internet trust services can be lengthy. Our quarterly
and annual operating results could be materially harmed if orders
forecasted for a specific customer for a particular quarter are not
realized.
|
Our
international operations are subject to certain risks.
|
Revenues of VeriSign Japan and revenues from other international
affiliates and customers accounted for approximately 26% of our revenues
in the first nine months of 1999 and 14% of our revenues for the full
year of 1998. We intend to expand our international operations and
international sales and marketing activities. Expansion into these
markets has required and will continue to require significant management
attention and resources. We may also need to tailor our Internet trust
services for a particular market and to enter into international
distribution and operating relationships. We have limited experience in
localizing our Internet trust services and in developing international
distribution or operating relationships. We may not succeed in expanding
our Internet trust service offerings into international markets. Any of
these failures could harm our business. In addition, there are certain
risks inherent in doing business on an international basis, including,
among others:
|
Ÿ
|
regulatory
requirements;
|
|
Ÿ
|
export and
import restrictions on cryptographic technology and products
incorporating that technology;
|
|
Ÿ
|
tariffs and
other trade barriers;
|
|
Ÿ
|
difficulties
in staffing and managing foreign operations;
|
|
Ÿ
|
longer sales
and payment cycles;
|
|
Ÿ
|
problems in
collecting accounts receivable;
|
|
Ÿ
|
difficulties
in authenticating customer information;
|
|
Ÿ
|
seasonal
reductions in business activity; and
|
|
Ÿ
|
potentially
adverse tax consequences.
|
We
have licensed to certain international affiliates the VeriSign Processing
Center platform, which is designed to replicate our own secure data
centers and allows the affiliate to offer back-end processing of Internet
trust services. The VeriSign Processing Center platform provides these
affiliates with the knowledge and technology to offer Internet trust
services similar to those offered by VeriSign. It is critical to our
business strategy that the facilities and infrastructure used in issuing
and marketing digital certificates remain secure and be perceived by the
marketplace to be secure. Although we provide our affiliates with
training in security and trust practices, network management and customer
service and support, these practices are performed by our affiliates and
are outside of our control. Any failure of an affiliate to maintain the
privacy of confidential customer information could result in negative
publicity and therefore adversely affect the market’s perception of
the security of our services as well as the security of electronic
commerce and communication over IP networks generally. See “
—System interruptions and security breaches could harm our business.
”
All of
our international revenues from sources other than VeriSign Japan are
denominated in U.S. dollars. If additional portions of our international
revenues were to be denominated in foreign currencies, we could become
subject to increased risks relating to foreign currency exchange rate
fluctuations.
|
Acquisitions could harm our business.
|
We may
acquire additional businesses, technologies, product lines or service
offerings in the future. Acquisitions involve a number of risks
including, among others:
|
Ÿ
|
the difficulty
of assimilating the operations and personnel of the acquired
businesses;
|
|
Ÿ
|
the potential
disruption of our business;
|
|
Ÿ
|
our inability
to integrate, train, retain and motivate key personnel of the acquired
businesses;
|
|
Ÿ
|
the diversion
of our management from our day-to-day operations;
|
|
Ÿ
|
our inability
to incorporate acquired technologies successfully into our Internet
trust services;
|
|
Ÿ
|
the additional
expenses associated with completing acquisitions and amortizing any
acquired intangible assets;
|
|
Ÿ
|
the potential
impairment of relationships with our employees, customers and strategic
partners; and
|
|
Ÿ
|
the inability
to maintain uniform standards, controls, procedures and
policies.
|
If we
are unable to successfully address any of these risks, our business could
be materially harmed.
Year 2000 Compliance
|
Background
of Year 2000 Issues
|
Many
currently installed computer systems and software products are unable to
distinguish between twentieth century dates and twenty-first century
dates. This situation could result in system failures or miscalculations
causing disruptions of operations of any business, including, among other
things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities. As a result, many companies
’ software and computer systems may need to be upgraded or replaced
to comply with these “Year 2000” requirements.
Our
business depends on the operation of numerous systems that could
potentially be affected by Year 2000 related problems. The systems
include: hardware and software systems used to deliver our Internet trust
services, including our proprietary software systems as well as software
supplied by third parties; communications networks such as the Internet
and private intranets; the internal systems of our customers and
suppliers; digital certificates and software products sold to customers;
the computer and communications hardware and software systems we use
internally to manage our business; and non-information technology systems
and services we use to manage our business, such as telephone systems and
building systems.
Based
on an analysis of all systems potentially affected by conducting business
in the year 2000 and beyond, we have applied a phased approach to making
these systems, and accordingly our operations, ready for the year 2000.
Beyond awareness of the issues and scope of systems involved, the phases
of activities has included: an assessment of specific underlying computer
systems, programs and/or hardware; remediation or replacement of Year
2000 non-compliant technology; validation and testing of technologically
compliant Year 2000 solutions; and implementation of the Year 2000
compliant systems. The table below provides the status and timing of the
phased activities.
Impacted Systems
|
|
Status
|
|
Targeted
Implementation
|
Internet trust services sold to
customers |
|
Digital certificates
tested and
available for customer trial |
|
Completed |
|
Non-information technology
systems and services |
|
Systems upgraded or
replaced as
appropriate, testing and
implementation completed |
|
Completed |
|
Hardware and software systems
used to deliver services |
|
Systems upgraded or
replaced as
appropriate, testing and
implementation completed |
|
Completed |
|
Communication networks used to
provide services |
|
Systems upgraded or
replaced as
appropriate, testing and
implementation completed |
|
Completed |
|
Operability with internal systems
of customers and suppliers |
|
Systems upgraded or
replaced as
appropriate, testing and
implementation completed |
|
Completed |
|
Hardware and software systems
used to manage VeriSign’s
business |
|
Systems upgraded or
replaced as
appropriate, testing and
implementation completed |
|
Completed |
As a
trusted third-party certificate authority providing, among other
services, digital certificates and related life cycle services, we depend
on the hardware and software products from third parties used to deliver
these Internet trust services. Inoperability of these products due to
Year 2000 issues could harm our business. We have completed our
assessment of our third-party vendors and have received their Year 2000
compliance statements.
|
Costs to
Address Year 2000 Issues
|
We
expect that costs directly related to Year 2000 issues will not exceed
approximately $500,000 for both costs incurred to date and future costs,
including cases where non-compliant information technology systems have
been or need to be replaced. We would have incurred the replacement cost
of non-information technology systems regardless of the Year 2000 issue
due to technological obsolescence and/or our growth. We have and will
continue to expense all costs arising from Year 2000 issues, funding them
from working capital.
We do
not believe that future expenditures to upgrade internal systems and
applications will materially harm our business. In addition, while we do
not know the potential costs of redeployment of personnel and any delays
in implementing other projects, we anticipate the costs to be immaterial
and we expect minimal adverse impact to our business.
|
Risks of
the Year 2000 Issues
|
We
believe our digital certificates and Internet trust services are Year
2000 compliant; however, success of our Year 2000 compliance efforts may
depend on the success of our customers in dealing with Year 2000 issues.
We provide our Internet trust services to companies in a variety of
industries, each with different issues and Year 2000 compliance
challenges. Customer difficulties with Year 2000 issues could interfere
with the use of Year 2000 compliant digital certificates, which might
require us to devote additional resources to resolve underlying problems.
If problems exist within our digital certificate technology as it relates
to customers’ management information systems, business applications
or productivity tools, our business, financial condition and results of
operations could be materially harmed. This risk is minimized by our
current offering of Year 2000 compliant test digital certificates that
can validate the Year 2000 operation of customer applications and
systems. However, there is no method to determine which customers will
validate their applications and systems for Year 2000 compliance with our
technology.
Furthermore, the purchasing patterns of these customers or
potential customers may be affected by Year 2000 issues as companies
expend significant resources to become Year 2000 compliant. The costs of
becoming Year 2000 compliant for current or potential customers may
result in fewer funds being available to purchase and implement our
Internet trust services.
We
have developed a Year 2000 contingency plan in conjunction with
organizing a Year 2000 Team for the rollover weekend of January 1st and
2nd of the Year 2000. The Year 2000 Team consists of representatives from
the engineering, production, and customer service departments who are
responsible for responding to any potential internal or external problems
that may occur during rollover weekend. This contingency plan document
will be used during rollover weekend as a guidebook, should problems
occur. We have a comprehensive disaster recovery plan that can be enabled
in the event of a localized failure of our secure data centers. However,
failure to address any unforeseen Year 2000 issues could harm our
business.
Liquidity and Capital Resources
| |
|
September 30,
1999
|
|
December 31,
1998
|
|
Change
|
| |
|
(Dollars in
thousands) |
| Cash, cash equivalents
and short-term investments |
|
$160,092 |
|
$41,745 |
|
283 |
% |
| Working
capital |
|
$148,911 |
|
$31,085 |
|
379 |
% |
| Stockholders’
equity |
|
$206,758 |
|
$40,728 |
|
408 |
% |
Prior
to our initial public offering, we financed our operations primarily
through private sales of equity securities, raising approximately $46.1
million. Our initial public offering, which we completed in January 1998,
yielded net proceeds of approximately $43.7 million. In January 1999, we
sold an additional 1,597,500 shares of common stock to the public for net
proceeds of approximately $121.4 million. At September 30, 1999, our
principal source of liquidity was $160.1 million of cash, cash
equivalents and short-term investments, consisting principally of
commercial paper, medium term notes, corporate bonds and notes, market
auction securities, United States government agency securities and money
market funds.
Net
cash provided by operating activities was $3.5 million in the first nine
months of 1999 compared to net cash used in operating activities of $10.6
million in the first nine months of 1998. Net cash provided by operating
activities in the first nine months of 1999 was primarily the result of
increases in deferred revenue and accounts payable and the $3.9 million
reconciling adjustment for depreciation and amortization which were
partially offset by the $578,000 net loss and increases in accounts
receivable and prepaid expenses. Net cash used in operating activities in
the first nine months of 1998 was primarily the result of the $17.2
million net loss and the increase in accounts receivable and prepaid
expenses, which were partially offset by the
$2.2 million reconciling adjustment for stock-based compensation and the
increases in accounts payable, accrued liabilities and deferred
revenue.
Net
cash used in investing activities was $88.4 million in the first nine
months of 1999 compared to $20.0 million in the first nine months of
1998. Net cash used in investing activities in these periods was
primarily the result of net purchases of short-term investments of $71.7
million in the first nine months of 1999 and $16.4 million in the first
nine months of 1998. Capital expenditures for property and equipment
totaled $4.3 million in the first nine months of 1999 and $3.5 million in
the first nine months of 1998. Our planned capital expenditures for the
full year of 1999 are approximately $5 million to $7 million, primarily
for computer and communications equipment and leasehold improvements.
During the first nine months of 1999, VeriSign invested approximately
$10.1 million in long-term investments including Keynote Systems, Inc. an
Internet performance measurement company. As of September 30, 1999, we
also had commitments under noncancelable operating leases for our
facilities for various terms through 2005.
Net
cash provided by financing activities was $131.5 million in the first
nine months of 1999, primarily all from the sale of additional common
stock to the public. In the first nine months of 1998, net cash provided
by financing activities was $43.8 million, derived virtually all from our
initial public offering.
We
believe our existing cash, cash equivalents and short-term investments,
will be sufficient to meet our working capital and capital expenditure
requirements for at least the next 12 months. However, at some time, we
may need to raise additional funds through public or private financing,
strategic relationships or other arrangements. This additional funding,
if needed, might not be available on terms attractive to us, or at all.
If we have to enter into strategic relationships to raise additional
funds we might be required to relinquish rights to certain of our
technologies. Our failure to raise capital when needed could materially
harm our business. If additional funds are raised through the issuance of
equity securities, the percentage of our stock owned by our then-current
stockholders would be reduced. Furthermore, these equity securities might
have rights, preferences or privileges senior to those of our common
stock.
Recent Accounting Pronouncements
In
June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, “Accounting for
Derivative Instruments and Hedging Activities.” SFAS No. 133
established methods of accounting for derivative financial instruments
and hedging activities related to those instruments as well as other
hedging activities. Because VeriSign currently holds no derivative
instruments and does not engage in hedging activities, we expect that the
adoption of SFAS No. 133 will have no material impact on our financial
position, results of operations or cash flows. We will be required to
implement SFAS No. 133 for the year ending December 31, 2001.
In
December 1998, the AICPA issued SOP No. 98-9, “Modification of SOP
97-2, Software Revenue Recognition, with Respect to Certain Transactions.
” SOP No. 98-9 requires recognition of revenue using the
“residual method” in a multiple-element software arrangement
when fair value does not exist for one or more of the delivered elements
in the arrangement. Under the “residual method,” the total fair
value of the undelivered elements is deferred and recognized in
accordance with SOP No. 97-2. VeriSign will be required to implement SOP
No. 98-9 for the year ending December 31, 2000. We expect that the
adoption of SOP No. 98-9 will not have a material impact on our financial
position, results of operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Interest rate sensitivity
The
primary objective of VeriSign’s investment activities is to preserve
principal while at the same time maximizing the income we receive from
our investments without significantly increasing risk. Some of the
securities that we have invested in may be subject to market risk. This
means that a change in prevailing interest rates may cause the principal
amount of the investment to fluctuate. For example, if we hold a security
that was issued with a fixed rate equal to the then-prevailing interest
rate and the prevailing interest rate later rises, the fair value of our
investment will decline. To minimize this risk, we maintain our portfolio
of cash equivalents and short-term investments in a variety of
securities, including commercial paper, medium-term notes, corporate
bonds and notes, market auction securities and money market funds. In
general, money market funds are not subject to market risk because the
interest paid on these funds fluctuates with the prevailing interest
rate. In addition, we invest in relatively short-term securities. As of
September 30, 1999, 74% of our investments had maturity dates within one
year.
The
following table presents the amounts of our cash equivalents and
short-term investments that are subject to market risk by range of
expected maturity and weighted-average interest rates as of September 30,
1999. This table does not include money market funds because these funds
are not subject to market risk.
|
|
|
Maturing
in
|
|
Total
|
|
Fair
Value
|
|
|
|
One Year
or Less
|
|
Over
One Year
|
| Included in cash and cash
equivalents |
|
$41,423 |
|
|
$ None |
|
|
$41,423 |
|
$41,423 |
|
Weighted-average interest rates |
|
5.39 |
% |
|
|
|
|
|
|
|
| Included in short-term
investments |
|
$56,862 |
|
|
$33,772 |
|
|
$90,634 |
|
$90,634 |
|
Weighted-average interest rates |
|
5.41 |
% |
|
6.14 |
% |
|
|
|
|
Exchange rate sensitivity
VeriSign considers its exposure to foreign currency exchange rate
fluctuations to be minimal. Our recently established subsidiary in Sweden
has not had significant operations to date. All revenues derived from our
European affiliates are denominated in United States dollars and,
therefore, are not subject to exchange rate fluctuations.
Both
the revenues and expenses of our majority-owned subsidiary in Japan are
denominated in Japanese yen. This serves as a natural hedge since even
though an unfavorable change in the exchange rate of the Japanese yen
against the United States dollar results in lower revenues when the
subsidiary’s revenues are translated to United States dollars,
operating expenses will also be lower.
Because of our minimal exposure to foreign currencies, we have not
engaged in any hedging transactions to date.
PART II—OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF
PROCEEDS
(d) Use of Proceeds.
In
January 1998, VeriSign completed the initial public offering of its
common stock. The managing underwriters in the offering were Morgan
Stanley & Co. Incorporated, Hambrecht & Quist LLC and Wessels,
Arnold & Henderson L.L.C. We realized net proceeds from the offering
of approximately $43.7 million after deducting the underwriting discounts
and commissions and expenses of the offering. Through September 30, 1999,
we used approximately $14.9 million of the net proceeds from the offering
to fund operating expenses, the transaction charges related to the
acquisition of SecureIT and to increase working capital. Approximately
$8.7 million of the net proceeds was used to purchase and install
computers and peripheral equipment and leasehold improvements and
approximately $10.1 million was used to invest in certain companies as
long-term investments. The remaining $10.0 million has been invested in
short-term, interest-bearing, investment grade securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM
8-K
(a) Index to Exhibits
Exhibit
Number
|
|
Exhibit
Description
|
|
Incorporated by
Reference
|
|
Filed
Herewith
|
|
|
Form
|
|
Date
|
|
Number
|
| 27.01 |
|
Financial Data Schedule
(available in EDGAR format only) |
|
|
|
|
|
|
|
X |
(b) Reports on Form 8-K
No
reports on Form 8-K were filed in the quarter ended September 30,
1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
| Date: November
12, 1999
|
|
By:
/s/ STRATTON
D. SCLAVOS
Stratton D. Sclavos
President and
Chief Executive Officer
(Principal Executive Officer)
|
|
| Date: November
12, 1999
|
|
By:
/s/
DANA
L. EVAN
Dana L. Evan
Executive Vice President of Finance and
Administration
and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
SUMMARY OF TRADEMARKS
The
following trademarks and service marks of VeriSign, Inc., which may be
registered in certain jurisdictions, may be referenced in this Form
10-Q:
Trademarks
SecureIT
TM
VeriSign Logo
VeriSign is a registered trademark exclusively licensed to
VeriSign, Inc.
Service Marks
Digital ID
SM
Digital ID Center
SM
Go
Secure!
SM
NetSureSM Protection Plan
VeriSign OnSite
SM
VeriSign Trust Network
SM
VeriSign V-Commerce
SM
WebPass
SM
ID
WorldTrust
SM
All
other brand or product names are trademarks or registered trademarks of
their respective holders.
