UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended 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 x 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
|
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/ S
TRATTON
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.
