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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2000
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
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VERISIGN, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3221585
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1350 Charleston Road, Mountain View, CA 94043-1331
(Address of principal executive offices) (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:
Shares Outstanding
Class October 31, 2000
----- ------------------
Common stock, $.001 par value 197,423,288
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TABLE OF CONTENTS
Page
----
PART I--FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)........ 3
Management's Discussion and Analysis of Financial Condition and
Item 2. Results of Operations.......................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 36
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 37
Item 6. Exhibits and Reports on Form 8-K............................... 38
Signatures.............................................................. 39
Summary of Trademarks................................................... 40
Exhibits................................................................ 41
PART I--FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
As required under Item 1-Condensed Consolidated Financial Statements
(Unaudited) included in this section are as follows:
Financial Statement Description Page
------------------------------- ----
. Condensed Consolidated Balance Sheets
As of September 30, 2000 and December 31, 1999........................ 4
. Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2000 and 1999....... 5
. Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2000 and 1999................. 6
. Notes to Condensed Consolidated Financial Statements.................. 7
3
VERISIGN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
2000 1999
------------- ------------
Assets
Current assets:
Cash and cash equivalents......................... $ 497,549 $ 70,382
Short-term investments............................ 593,751 86,098
Accounts receivable, net.......................... 83,507 22,727
Refundable income taxes........................... 32,829 --
Prepaid expenses and other current assets......... 55,356 3,635
----------- --------
Total current assets............................ 1,262,992 182,842
Property and equipment, net......................... 86,479 10,194
Goodwill and other intangible assets, net........... 18,930,810 --
Long-term investments............................... 243,643 144,751
Other assets, net................................... 1,555 3,379
----------- --------
$20,525,479 $341,166
=========== ========
Liabilities And Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities.......... $ 161,397 $ 10,902
Accrued merger costs.............................. 79,591 --
Deferred revenue.................................. 422,726 31,777
----------- --------
Total current liabilities....................... 663,714 42,679
----------- --------
Deferred income taxes, net.......................... 133,169 --
Long-term deferred revenue.......................... 68,137 --
Other long-term liabilities......................... 557 128
----------- --------
Total long-term liabilities..................... 201,863 128
----------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock--par value $.001 per share
Authorized shares: 5,000,000
Issued and outstanding shares: none.............. -- --
Common stock--par value $.001 per share
Authorized shares: 1,000,000,000
Issued and outstanding shares: 196,933,693
(excluding 40,000 shares held in treasury) at
September 30, 2000
103,482,841 at December 31, 1999................. 197 103
Additional paid-in capital........................ 21,492,174 258,239
Notes receivable from stockholders................ (242) --
Unearned compensation............................. (95) (172)
Accumulated deficit............................... (1,850,731) (47,452)
Accumulated other comprehensive income............ 18,599 87,641
----------- --------
Total stockholders' equity...................... 19,659,902 298,359
----------- --------
$20,525,479 $341,166
=========== ========
See accompanying Notes to Condensed Consolidated Financial Statements
4
VERISIGN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
--------------------- --------------------
2000 1999 2000 1999
----------- -------- ----------- -------
Revenues.......................... $ 173,086 $ 22,782 $ 277,411 $57,100
----------- -------- ----------- -------
Costs and expenses:
Cost of revenues................ 59,939 8,405 94,971 22,379
Sales and marketing............. 57,974 8,829 100,492 24,492
Research and development........ 14,485 3,405 26,028 9,478
General and administrative...... 23,869 2,142 35,705 6,122
Write-off of acquired in-process
research and development....... -- -- 54,000 --
Amortization of goodwill and
other intangible assets........ 1,362,606 -- 1,832,836 --
----------- -------- ----------- -------
Total costs and expenses...... 1,518,873 22,781 2,144,032 62,471
----------- -------- ----------- -------
Operating income (loss)....... (1,345,787) 1 (1,866,621) (5,371)
Other income:
Interest and investment income.. 22,870 1,902 64,977 5,282
Other expense, net.............. (1,268) (336) (1,635) (489)
----------- -------- ----------- -------
Total other income............ 21,602 1,566 63,342 4,793
----------- -------- ----------- -------
Net income (loss)............. $(1,324,185) $ 1,567 $(1,803,279) $ (578)
=========== ======== =========== =======
Net income (loss) per share:
Basic........................... $ (6.78) $ .02 $ (12.33) $ (.01)
=========== ======== =========== =======
Diluted......................... $ (6.78) $ .01 $ (12.33) $ (.01)
=========== ======== =========== =======
Shares used in per share
computation:
Basic........................... 195,346 101,514 146,307 99,722
=========== ======== =========== =======
Diluted......................... 195,346 115,198 146,307 99,722
=========== ======== =========== =======
See accompanying Notes to Condensed Consolidated Financial Statements
5
VERISIGN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
Sept. 30,
----------------------
2000 1999
----------- ---------
Cash flows from operating activities:
Net loss............................................. $(1,803,279) $ (578)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment......................................... 17,329 3,873
Amortization of goodwill and other intangible
assets, net....................................... 1,831,112 --
Write-off of acquired in-process research and
development....................................... 54,000 --
Gain on sale of marketable securities.............. (34,996) --
Minority interest in net loss of subsidiary........ 40 (722)
Stock-based compensation........................... 77 77
Loss on disposal of property and equipment......... 635 362
Changes in operating assets and liabilities:
Accounts receivable.............................. (38,368) (10,264)
Prepaid expenses and other current assets........ 4,376 (2,633)
Refundable income taxes.......................... 20,053 --
Accounts payable and accrued liabilities......... 61,373 1,241
Deferred revenue................................. 38,707 12,177
----------- ---------
Net cash provided by operating activities........ 151,059 3,533
----------- ---------
Cash flows from investing activities:
Purchases of short-term investments.................. (584,222) (112,636)
Proceeds from maturities and sales of short-term
investments......................................... 86,019 40,961
Purchases of long-term investments................... (158,859) (10,119)
Proceeds from maturities and sales of long-term
investments......................................... 63,652 --
Purchases of property and equipment.................. (32,146) (4,308)
Cash acquired in purchase transactions, less amounts
paid................................................ 852,412 --
Transaction costs.................................... (14,407) --
Other assets......................................... 2,188 (2,269)
----------- ---------
Net cash provided by (used in) investing
activities...................................... 214,637 (88,371)
----------- ---------
Cash flows from financing activities:
Collections on notes receivable from stockholders.... 524 409
Net proceeds from issuance of common stock........... 60,559 131,101
----------- ---------
Net cash provided by financing activities........ 61,083 131,510
----------- ---------
Effect of exchange rate changes on cash................ 388 --
----------- ---------
Increase in cash and cash equivalents.................. 427,167 46,672
Cash and cash equivalents at beginning of period....... 70,382 22,786
----------- ---------
Cash and cash equivalents at end of period............. $ 497,549 $ 69,458
=========== =========
Supplemental schedule of non-cash investing and
financing activities:
Unrealized gain (loss) on long-term investments...... $ (69,430) $ 35,021
=========== =========
Non-cash consideration issued in connection with
purchase transactions............................... $21,109,865 $ --
=========== =========
See accompanying Notes to Condensed Consolidated Financial Statements
6
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying interim unaudited condensed consolidated balance sheets,
statements of operations and cash flows reflect all adjustments, consisting of
normal recurring adjustments and other adjustments as explained in Note 2--
Business Combinations, that are, in the opinion of management, necessary for a
fair presentation of the financial position of VeriSign, Inc. and its
subsidiaries, (VeriSign or the Company), at September 30, 2000, and the results
of operations and cash flows for the interim periods ended September 30, 2000
and 1999.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions for Form 10-Q and, therefore,
do not include all information and notes normally provided in audited financial
statements and should be read in conjunction with the financial statements of
the Company for the year ended December 31, 1999 included in the annual report
previously filed on Form 10-K. In addition, we recently acquired Network
Solutions, Inc., (Network Solutions). Network Solutions previously filed
audited financial statements for the three-year period ended December 31, 1999
in its 1999 Annual Report on Form 10-K.
The results of operations for any interim period are not necessarily
indicative, nor comparable to the results of operations for any other interim
period or for a full fiscal year. Prior periods have been reclassified for
comparative purposes.
The carrying amount of cash and cash equivalents, investments, accounts
receivable, and accounts payable approximate their respective fair values.
Note 2. Business Combinations
THAWTE Consulting (Pty) Ltd. Acquisition
On February 1, 2000, VeriSign completed its acquisition of THAWTE Consulting
(Pty) Ltd., or THAWTE, a privately held South African company that provides
digital certificates to website owners and software developers. VeriSign issued
approximately 4.4 million shares of its common stock in exchange for all of the
outstanding shares of THAWTE. The acquisition has been accounted for as a
purchase and, accordingly, the total purchase price of approximately $652
million has been allocated to the tangible and intangible assets acquired and
the liabilities assumed based on their respective fair values on the
acquisition date. Goodwill and other intangible assets are being amortized on a
straight-line basis over two to three years. THAWTE's results of operations
have been included in the consolidated financial statements from its date of
acquisition.
Signio, Inc. Acquisition
On February 29, 2000, VeriSign completed its acquisition of Signio, Inc., or
Signio, a privately held company that provides payment services that connect
online merchants, business-to-business exchanges, payment processors and
financial institutions on the Internet. VeriSign issued approximately 5.6
million shares of its common stock in exchange for all the outstanding shares
of Signio and also assumed all of Signio's outstanding stock options. The
acquisition has been accounted for as a purchase and, accordingly, the total
purchase price of approximately $876 million has been allocated to the tangible
and intangible assets acquired and the liabilities assumed based on their
respective fair values on the acquisition date. Goodwill and other intangible
assets are being amortized on a straight-line basis over three years. Signio's
results of operations have been included in the consolidated financial
statements from its date of acquisition.
7
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Network Solutions, Inc. Acquisition
On June 8, 2000, VeriSign completed its acquisition of Network Solutions, a
publicly traded company that provides Internet domain name registration and
global registry services. The total consideration of approximately $19.6
billion was based on: the fair value of VeriSign's common stock issued; stock
options assumed; and merger related costs. At the closing, VeriSign issued
approximately 78.3 million shares of its common stock valued at approximately
$18.0 billion, based on an exchange ratio of 1.075 shares of VeriSign's common
stock for each outstanding share of Network Solutions common stock. VeriSign
assumed outstanding options to purchase Network Solutions common stock, which
were converted into options to acquire approximately 9.1 million shares of
VeriSign's common stock, with a fair value of approximately $1.6 billion, based
on the same exchange ratio, subject to terms and conditions, including
exercisability and vesting schedules, of the original options.
As part of the purchase price, VeriSign recorded a provision for merger
related costs of $96.4 million. Merger related costs are incremental and non-
recurring expenses. Merger related costs are necessary to integrate Network
Solutions and VeriSign. The provision is associated with the activities of
integration teams responsible for merging the two companies and includes such
items as investment banker fees, legal fees, filing fees, provision for
acceleration of stock option vesting, and employee relocation expenses. For the
period from June 8, 2000 to June 30, 2000, approximately $8.9 million was paid
for filing fees, legal fees and consulting fees related to the acquisition. An
additional $7.9 million was recorded against the provision in the third quarter
for the write-off of duplicative information systems and prepaid director and
officer insurance premiums. It is anticipated that further amounts will be
expended over the course of the next nine months.
This transaction was accounted for as a purchase. Accordingly, the purchase
consideration of $19.6 billion has been preliminarily allocated to the
estimated fair value of the assets acquired and liabilities assumed based on
their estimated fair values as of the date of the acquisition. Goodwill and
other intangible assets are being amortized on a straight-line basis over
useful lives of three to four years. Network Solutions results of operations
have been included in the consolidated financial statements from its date of
acquisition.
Purchase Price Allocations
The purchase consideration for THAWTE, Signio and Network Solutions was
allocated to the assets acquired and liabilities assumed based on fair values
as follows:
Straight -Line
Network Amortization
THAWTE Signio Solutions Period
-------- -------- ----------- --------------
(Dollars in thousands) (Years)
Net tangible assets.......... $ 566 $ 2,888 $ 705,715 --
ISP hosting relationships.... 11,389 -- -- 2.0
Customer relationships....... 2,815 15,402 -- 3.0
Technology in place.......... 2,963 5,680 29,500 3.0
Non-compete agreement........ 939 -- -- 3.0
Trade name................... 913 4,501 67,400 3.0
Workforce in place........... 342 1,353 16,900 3.0-4.0
Contracts with ICANN and
customer lists.............. -- -- 800,700 3.4
In-process research and
development................. -- -- 54,000 --
Goodwill..................... 632,087 854,635 18,273,709 3.0-4.0
Deferred income tax
liabilities attributable to
identifiable intangible
assets...................... -- (8,732) (365,800) --
-------- -------- -----------
Net assets acquired.......... $652,014 $875,727 $19,582,124
======== ======== ===========
8
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Purchased In-Process Research and Development
The portion of the Network Solutions purchase price allocated to in-process
research and development ("IPR&D") was $54 million and was expensed during the
quarter ended June 30, 2000. Network Solution's IPR&D efforts focused on
significant and substantial improvements and upgrades to its shared
registration system ("SRS"). The SRS is the system that provides shared
registration interface to the accredited and licensed registrars into the .com,
.net, and .org generic top level domain ("gTLD") name registry. It is through
this system that registrars from all over the world are able to register domain
names with the central database. Given the high demand on the SRS, it is in
need of improvements and upgrades in the area of scalability, security, non-
english language capability and next generation resource provisioning protocol.
As of the acquisition date, Network Solutions was in the process of
developing technology that would add substantial functionality and features to
the SRS. The IPR&D had not yet reached technological feasibility and had no
alternative uses. The IPR&D under development may not achieve technical or
commercial viability. The technological feasibility of the in-process
development efforts is established when the enterprise has completed all
planning, designing, coding, and testing activities that are necessary to
establish that the technology can be utilized to meet its design specifications
including functions, features, and technical performance requirements. This
estimate was based on the project costs and milestones. As of September 30,
2000, efforts related to upgrades and improvements in the SRS are continuing in
particular related to non-english language capabilities and security. These
efforts are expected to be significantly completed by the end of 2000.
The fair value assigned to IPR&D was estimated by discounting, to present
value, the cash flows attributable to the technology once it has reached
technological feasibility. A discount rate consistent with the risks of the
project was used to estimate the present value of cash flows. The value
assigned to IPR&D was the amount attributable to the efforts of the seller up
to the time of acquisition. This amount was estimated through application of
the "stage of completion" calculation by multiplying the estimated present
value of future cash flows, excluding costs of completion, by the percentage of
completion of the purchased research and development project at the time of
acquisition.
Note 3. Commitments and Contingencies
As of October 31, 2000, Network Solutions, Inc. was a defendant in seventeen
active lawsuits involving domain name disputes between trademark owners and
domain name holders. Network Solutions is drawn into such disputes, in part, as
a result of claims by trademark owners that Network Solutions is legally
required, upon request by a trademark owner, to terminate the contractual right
between Network Solutions and a domain name holder that registered a domain
name, which is alleged to be similar to the trademark in question. On October
25, 1999, however, the Ninth Circuit Court of Appeals ruled in Network
Solutions' favor and against Lockheed Corporation, holding that Network
Solutions' services do not make Network Solutions liable for contributory
infringement to trademark owners. Thus, Network Solutions believes, this type
of suit should decline in frequency. The holders of the domain name
registrations in dispute have, in turn, questioned Network Solutions' right,
absent a court order, to take any action that affects their contractual rights
to the domain names in question. Although 82 of these kinds of situations over
the past six and a half years have resulted in suits actually naming Network
Solutions as a defendant, as of October 31, 2000, no adverse judgment has been
rendered and no award of damages has ever been made against Network Solutions.
Network Solutions believes that it has meritorious defenses and vigorously
defends itself against these claims.
On January 13, 2000, the Department of Justice Antitrust Division issued a
Civil Investigative Demand seeking information and documents concerning the
then-pending acquisition by VeriSign of THAWTE. VeriSign provided certain
information and documents to the Department of Justice, and closed the THAWTE
transaction on February 1, 2000. VeriSign completed its initial response to the
Civil Investigative Demand on
9
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 1, 2000, and a supplemental production of documents was completed May 9,
2000. On September 14, 2000, VeriSign was notified that senior officials at the
Department of Justice had reviewed a report by the investigatory staff
regarding the transaction, and that the Department had concerns about the
potential competitive effects of the transaction. Representatives of VeriSign
met with and provided additional information to the Department of Justice
during October 2000. The Department of Justice ultimately may raise objections
to the transaction that would require VeriSign to negotiate a settlement with
the Department of Justice to resolve such objections, or to defend against a
legal action challenging the transaction.
On March 15, 2000, a group of eight plaintiffs filed suit against the United
States Department of Commerce, the National Science Foundation and Network
Solutions, Inc. in the United States District Court for the Northern District
of California. The case, entitled William Hoefer et al. v. U.S. Department of
Commerce, et al., Civil Action No. 000918-VRW, challenged the lawfulness of the
registration fees that Network Solutions was authorized to charge for domain
name registrations from September 1995 to November 1999. The suit purports to
be brought on behalf of all domain name registrants who paid registration fees
during that period and seeks approximately $1.7 billion in damages. On June 19,
2000 the plaintiffs filed their first amended complaint, adding two plaintiffs
and naming VeriSign as a defendant.
All of the defendants filed motions to transfer the suit to the Federal
District Court in the District of Columbia and the court granted those motions
on June 28, 2000. The same attorney who unsuccessfully challenged Network
Solutions in a similar action known as Thomas, et al. v. Network Solutions, et
al., filed this new action on behalf of eight former and current domain name
registrants. The suit contains eight causes of action against the defendants
based on alleged violations of Art. I, Section 8 and the Fifth Amendment of the
U.S. Constitution, the Independent Offices Appropriations Act (31 U.S.C.
Section 9701), the Administrative Procedure Act, the Sherman Act, and the
California Unfair Competition Act, Section 17200. The case was docketed with
the Federal District Court in the District of Columbia on July 28, 2000 and on
August 4, 2000 the plaintiffs dismissed the case. Four days later, the same
attorney refiled the same case in the United States District Court for the
Eastern District of Virginia. Network Solutions filed a motion to dismiss the
case and the plaintiffs responded by filing a First Amended Complaint on
September 7, 2000. We now have refiled another Motion to Dismiss. The current
versions of the suit does not name VeriSign as a defendant. The suit contains
fourteen causes of action against the Appropriations Act (31 U.S.C. Section
9701), the Administrative Procedure Act, the Chief Financial Officer's Act (31
U.S.C. Section 902), and the Sherman Act. On October 10, 2000, Network
Solutions filed its motion to dismiss the case. On October 24, 2000, the
National Science Foundation filed a motion to transfer the case back to the
Federal District Court in the District of Columbia.
On June 15, 2000, plaintiff David Moran filed a putative shareholder
derivative complaint on behalf of himself and others similarly situated against
Charles Stuckey, Jr., James Bidzos, Richard L. Earnest, Dr. Taher Elgamal,
James K. Sims, Joseph B. Lassiter III, Robert P. Badavas, and against nominal
defendant VeriSign, Inc. The case is captioned Moran v. Stuckey, et.al., No.
1810 NC (Del. Ch. 2000). The complaint alleges, among other things, that the
directors of RSA Security mismanaged RSA's business, failed to protect its
intellectual property or enforce the terms of its license agreement with
VeriSign, and that VeriSign violated the terms of the licensing agreement and
competed against RSA. On August 2, 2000, a second shareholder complaint was
filed against the Company and the aforementioned directors of RSA Security,
Inc. by plaintiff James V. Biglan. That case is captioned Biglan v. Stuckey, et
al. Civ. Action No. 18190NC (Del. Ch. 2000). On September 25, 2000 the Court
ordered the cases consolidated under the Moran caption and named lead counsel
for plaintiffs in this matter. Defendants are to respond to the Complaint no
later than December 11, 2000. While VeriSign cannot ascertain the outcome of
this matter presently, VeriSign believes that the claims against it are without
merit and intends to vigorously defend itself against these claims.
10
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
VeriSign is involved in various other investigations, claims and lawsuits
arising in the normal conduct of our business, none of which, in our opinion
will harm our business. VeriSign cannot assure that it will prevail in any
litigation. Regardless of the outcome, any litigation may require VeriSign to
incur significant litigation expense and may result in significant diversion of
management attention. An unfavorable outcome may have a material adverse effect
on VeriSign's financial position or results of operations.
Note 4. Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other
comprehensive income (loss). The components of comprehensive income (loss) are
as follows:
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
-------------------- --------------------
2000 1999 2000 1999
----------- ------- ----------- -------
(In thousands)
Net income (loss)............... $(1,324,185) $ 1,567 $(1,803,279) $ (578)
Unrealized gain (loss) on
investments.................... (23,139) 35,021 (69,430) 35,021
Translation adjustments......... 211 -- 388 --
----------- ------- ----------- -------
Comprehensive income (loss)..... $(1,347,113) $36,588 $(1,872,321) $34,443
=========== ======= =========== =======
Note 5. Calculation of 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. In the periods where the Company has a
net loss, net loss per share on a diluted basis is equivalent to basic net loss
per share because the effect of converting outstanding stock options would be
anti-dilutive. In addition, options to purchase shares of common stock were not
included in the computation of diluted earnings per share in periods where the
options exercise price was greater than the average market price of the common
shares and therefore, the effect would be anti-dilutive. For the three-month
period ended September 30, 2000, options to purchase 28,136,475 shares of
common stock were outstanding, and for the three-month period ended September
30, 1999, options to purchase 18,608,450 shares of common stock were
outstanding.
11
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table represents the computation of basic and diluted net
income (loss) per share.
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
--------------------- --------------------
2000 1999 2000 1999
----------- -------- ----------- -------
(In thousands, except per share data)
Basic net income (loss) per share:
Net income (loss)............... $(1,324,185) $ 1,567 $(1,803,279) $ (578)
=========== ======== =========== =======
Determination of basic shares:
Weighted average shares
outstanding................... 195,369 101,514 146,510 99,722
Weighted average shares issued
and subject to repurchase
agreements.................... (23) -- (203) --
----------- -------- ----------- -------
Basic average common shares
outstanding.................... 195,346 101,514 146,307 99,722
=========== ======== =========== =======
Basic net income (loss) per
share............................ $ (6.78) $ .02 $ (12.33) $ (.01)
=========== ======== =========== =======
Diluted net income (loss) per
share:
Net income (loss)............... $(1,324,185) $ 1,567 $(1,803,279) $ (578)
=========== ======== =========== =======
Determination of diluted shares:
Weighted average shares
outstanding................... 195,369 101,514 146,510 99,722
Weighted average shares issued
and subject to repurchase
agreements.................... (23) -- (203) --
Assumed conversion of employee
stock options................. -- 13,684 -- --
----------- -------- ----------- -------
Diluted average common shares
outstanding.................... 195,346 115,198 146,307 99,722
----------- -------- ----------- -------
Diluted net income (loss) per
share............................ $ (6.78) $ .01 $ (12.33) $ (.01)
=========== ======== =========== =======
Note 6. Segment Information
VeriSign operates in the Americas, Europe, Middle East and Africa, Asia-
Pacific and Japan and derives substantially all of its revenues from sales of
Internet infrastructure and web presence services. For the three months ended
September 30, 2000, the Company derived 10% of its revenue from international
subsidiaries and affiliates and for the three months ended September 30, 1999,
the Company derived 29% of its revenue from international subsidiaries and
affiliates. For the nine months ended September 30, 2000, the Company derived
16% of its revenue from international subsidiaries and affiliates and for the
nine months ended September 30, 1999, the Company derived 26% of its revenue
from international subsidiaries and affiliates. The decline in the percentage
of revenue from international subsidiaries and affiliates during the quarter
and nine months ended September 30, 2000 as compared to the quarter and nine
months ended September 30, 1999 is primarily due to the inclusion of the
Network Solutions' revenue.
VeriSign has completed the integration of the THAWTE and Signio
acquisitions. The activities of both companies have been blended into the
legacy activities of VeriSign. As a result of the acquisition of Network
Solutions, the Company is reorganizing its lines of business and internal
reporting to improve the data reviewed by the chief operating decision maker.
The Company is establishing two segments that will be customer focused and
based on sales activity to customers. The Mass Markets Division will focus on
delivering all of our products and services to small and medium size
enterprises as well as to consumers looking to build a presence on the web. The
Enterprise and Service Provider Division will focus on large enterprises and
service providers around the globe who are looking to establish and deliver
secure Internet infrastructure services for their customers in both business to
consumer and business to business environments. The Company is currently
implementing this structure as part of its organizational strategy and such
implementation will occur over the next three to six months. The Company will
modify its segment reporting as necessary as its strategy is developed and
implemented.
12
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 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. 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.
13
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. 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 2000 and our Annual Report on Form 10-K, which was filed
on March 22, 2000. 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 trusted infrastructure services to
website owners, enterprises, electronic commerce service providers and
individuals. The Company's domain name, digital certificate and payment
services provide the critical web identity, authentication and transaction
infrastructure that online businesses need to conduct secure e-commerce and
communications.
VeriSign's core authentication service offerings were established as the
cornerstone of the business in 1995 with the introduction of website digital
certificates. Through our secure online infrastructure we sell our website
digital certificates to online businesses, large enterprises, government
agencies and other organizations. We have established strategic relationships
with industry leaders, including AOL/Netscape, British Telecommunications plc,
Cisco, Microsoft, 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 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.
We market our authentication 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 authentication services revenues to date have 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. We continue to build an
international network of affiliates who provide our trust services under
licensed co-branding relationships using our proprietary technology and
business practices. The VeriSign Trust Network now consists of affiliated
organizations including British Telecommunications plc in the United Kingdom,
Canadian Imperial Bank of Commerce (CIBC) of Canada, Certplus of France, eSign
of Australia, HiTrust of Taiwan, Roccade of The Netherlands, and Telia in
Sweden. These international service providers utilize common technology,
operating practices and infrastructure to deliver interoperable trust services
for a specific geographic region or vertical market.
We expanded our authentication service offerings on February 1, 2000, when
we completed our acquisition of THAWTE Consulting (Pty) Ltd., a privately held
South African company that provides digital certificates to website owners and
software developers. In connection with this acquisition, we issued
approximately 4.4 million shares of our common stock in exchange for all of the
outstanding shares of THAWTE. The transaction has been accounted for as a
purchase and, accordingly, the results of THAWTE's operations are
14
included in our consolidated financial statements from the date of acquisition.
As a result of our acquisition of THAWTE, we recorded goodwill and other
intangible assets of approximately $.7 billion. These amounts will be amortized
over a two to three year period.
On February 29, 2000, we completed our acquisition of Signio, Inc., a
privately held company that provides payment services that connect online
merchants, business-to-business exchanges, payment processors and financial
institutions on the Internet. During the second quarter of 2000 the product
offering was extended to include new business-to-business payment services,
including support for Automated Clearing House (ACH) and purchasing card
transactions. In connection with this acquisition, we issued approximately 5.6
million shares of our common stock in exchange for all of the outstanding
shares of Signio and we also assumed Signio's outstanding employee stock
options. The transaction has been accounted for as a purchase and, accordingly,
the results of Signio's operations are included in our consolidated financial
statements from the date of acquisition. As a result of our acquisition of
Signio, we recorded goodwill and other intangible assets of approximately
$.9 billion. These amounts will be amortized over a two to three year period.
We market our payment services worldwide through multiple distribution
channels, including the Internet, direct sales, telesales, value added
resellers, and systems integrators. A significant portion of our payment
services 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.
On June 8, 2000, we completed our acquisition of Network Solutions, Inc., a
publicly traded company that provides Internet domain name registration and
global registry services. We issued approximately 72.9 million shares of our
common stock for all of the outstanding shares of Network Solutions and we also
assumed all of Network Solutions' outstanding stock options. The acquisition
has been accounted for as a purchase and, accordingly, the total purchase price
of approximately $19.6 billion has been allocated to the tangible and
intangible assets acquired and the liabilities assumed based on their
respective fair values on the acquisition date. Network Solutions' results of
operations have been included in the consolidated financial statements from its
date of acquisition. As a result of our acquisition of Network Solutions, we
recorded goodwill and other intangible assets of approximately $19.2 billion.
These amounts will be amortized over a three to four year period. Therefore, we
will report losses as we incur charges relating to the amortization of acquired
intangible assets.
Network Solutions is the exclusive registry and the leading registrar for
second level domain names within the .com, .net and .org generic top-level
domains (gTLD) under agreements with ICANN and the Department of Commerce
(DOC). Internet domain names are unique identities that enable businesses,
other organizations and individuals to communicate and conduct commerce on the
Internet. As a registry, Network Solutions maintains the master directory of
all second level domain names in the .com, .net and .org top-level domains.
Network Solutions owns and maintains the shared registration system that allows
all registrars, including our own, to enter new second level domain names into
the master directory and to submit modifications, transfers, re-registrations
and deletions for existing second level domain names.
As a registrar, Network Solutions markets second level domain name
registration services and other value-added services that enable our customers
to establish their identities on the web. The Network Solutions Registrar ("the
Registrar") markets its services through a number of distribution channels,
including the Internet, premier partner and business account partner programs,
and strategic alliances. The Registrar has approximately 13.7 million
cumulative domain names in the .com, .net and .org top-level domain. Recently,
the Registrar signed a key marketing alliance with America Online (AOL) to
offer the Registrar's domain name registration and value-added services across
AOL brands on a global basis.
In December 1992, Network Solutions entered into the Cooperative Agreement
with the National Science Foundation under which Network Solutions was to
provide Internet domain name registration services for five top level domains:
.com, .net, .org, .edu and .gov. These registration services include the
initial two-year
15
domain name registration and annual re-registration, and throughout the
registration term, maintenance of and unlimited modifications to individual
domain name records and updates to the master file of domain names. In
September 1998, the DOC took over the administration of the Cooperative
Agreement from the National Science Foundation. In October 1998, the
Cooperative Agreement was amended to extend the flexibility period until
September 30, 2000 and to transition to a shared registration system.
On November 10, 1999, Network Solutions, the DOC and ICANN entered into a
series of wide-ranging agreements relating to the domain name system. Under
these agreements Network Solutions recognized ICANN as the not-for-profit
corporation described in the Cooperative Agreement as amended; became an ICANN-
accredited registrar and agreed to operate the registry in accordance with the
provisions of the registry agreement and the consensus policies established by
ICANN in accordance with the terms of that agreement. Network Solutions will be
an accredited registrar through November 9, 2004 with a right to renew
indefinitely in accordance with the cooperative agreement. As the registry,
Network Solutions charges registrars $6 per registration per year unless
increased to cover increases in registry costs under circumstances described in
the cooperative agreement.
The term of the registry agreement extends until November 9, 2003, except in
the event that Network Solutions effects the legal separation of the ownership
of its registry business from its registrar business by May 9, 2001 as
described in the cooperative agreement, then the term will be extended until
November 9, 2007.
Results of Operations
We have experienced substantial net losses in the past. As of September 30,
2000, we had an accumulated deficit of approximately $1.9 billion, due in part
to $1.8 billion of goodwill and other intangible asset amortization related to
acquisitions.
Revenues
Revenues from authentication 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.
Revenues from payment services primarily consist of service revenues from
transaction processing services. We recognize service revenue ratably over the
periods in which the services are provided. Advance customer deposits received
are deferred and allocated ratably to revenue over the periods the services are
provided.
Domain name registration revenues consist primarily of registration fees
charged to customers and registrars for domain name registration services. We
defer revenues from the sale or renewal of domain name registration services
and recognize these revenues ratably over the registration term.
We accounted for the June 8, 2000 Network Solutions acquisition as a
purchase and Network Solutions' revenues, which are derived primarily from web
presence services, have been included in our results of operations commencing
June 9, 2000. In addition, we also acquired THAWTE in January 2000 and Signio
in February 2000. Therefore, comparisons of revenues for the three and nine
months ended September 30, 2000 and 1999 may not be relevant, as the businesses
of the combined company were not equivalent.
16
A comparison of revenues for the three-month periods and the nine-month
periods ended September 30, 2000 and 1999 is presented below.
2000 1999 Change
-------- ------- ------
(Dollars in thousands)
Three-month period:
Revenues........................................... $173,086 $22,782 660%
Nine-month period:
Revenues........................................... $277,411 $57,100 386%
Revenues increased significantly from the prior year primarily due to the
acquisition of THAWTE, Signio and Network Solutions, increased sales of our
authentication 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. As of September 30, 2000
we have sold over 400,000 website digital certificates, and over 1,400 OnSite
service solutions to enterprises, and we now have over 30 affiliates in our
international network of affiliates.
A small portion of our revenue mix is from payment transaction services
provided by Signio. By the end of the first nine months of 2000, the customer
base for these services grew to in excess of 10,600 online merchants using
Signio, now VeriSign Payment Services, to payment-enable their online stores
and business-to-business commerce activities.
The current quarter results reflect a full quarter of activity from Network
Solutions which VeriSign acquired on June 8, 2000. For the three months ended
September 30, 2000, the Registrar added nearly 2.2 million new names and the
Registry, now VeriSign Global Registry, accounted for 5.1 million new domain
names and over 650,000 renewed or extended domain names. The Registry also
completed the transfer of over 400,000 domain names between accredited
registrars thereby supporting over 6.1 million domain name transactions in the
quarter.
No customer accounted for 10% or more of revenues during the three months
ended, or during the nine months ended September 30, 2000 or 1999. Revenues
from international subsidiaries and affiliates accounted for 10% of revenues in
the third quarter of 2000, and 29% of revenues in the third quarter of 1999.
For the first nine months of the year, revenues from international subsidiaries
and affiliates accounted for 16% of revenues in 2000, and 26% of revenues in
1999.
Costs and Expenses
We accounted for the Network Solutions acquisition as a purchase and Network
Solutions' costs and expenses have been included in our results of operations
commencing June 9, 2000. In addition, we also acquired THAWTE in January 2000
and Signio in February 2000. Therefore, comparisons of costs and expenses for
the three and nine months ended September 30, 2000 and 1999 may not be
relevant, as the businesses of the combined company were not equivalent.
Cost of revenues
Cost of revenues consists primarily of costs related to providing digital
certificate enrollment and issuance services, payment services, domain name
registration services, customer support and training, consulting and
development services and costs of facilities and computer equipment used in
these activities. In addition, with respect to our digital certificate
services, cost of revenues also includes fees paid to third parties to verify
certificate applicants' identities, insurance premiums for our service warranty
plan and errors and omission insurance and the cost of software resold to
customers.
17
A comparison of cost of revenues for the three-month periods and the nine-
month periods ended September 30, 2000 and 1999 is presented below.
2000 1999 Change
------- ------- ------
(Dollars in thousands)
Three-month period:
Cost of revenues................................. $59,939 $ 8,405 613%
Percentage of revenues........................... 35% 37%
Nine-month period:
Cost of revenues................................. $94,971 $22,379 324%
Percentage of revenues........................... 34% 39%
During the third quarter of 2000 and during the first nine months of 2000
cost of revenues increased due to an increase in headcount required to support
the growth in demand for our products and services and to support the growth of
our security consulting and training activities during the period. The cost of
insurance premiums for our service warranty plan increased because of greater
levels of sales of digital certificates. 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. Additionally, acquisitions, such as THAWTE, Signio and Network
Solutions, have resulted in an increase in our cost of revenues over prior
quarters. Future acquisitions, further expansion into international markets and
introductions of additional products will result in further increases in cost
of revenues, due to additional personnel and related expenses and other
factors.
Cost of revenues as a percentage of revenue decreased from 1999 to 2000
primarily due to the overall mix of revenues, the experience of economies of
scale on our technology infrastructure and the efficiency gains in the
certificate enrollment and issuance process. In addition, revenues derived from
our recent acquisitions of THAWTE, Signio and Network Solutions, have a
different cost structure from our authentication services. We anticipate that
cost of revenues will continue to increase in absolute dollars as a result of
continued growth in all of our lines of business.
Sales and marketing
Sales and marketing expenses consist primarily of costs related to sales,
marketing, 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, such as
Internet, television, radio and print advertising.
A comparison of sales and marketing expenses for the three-month periods and
the nine-month periods ended September 30, 2000 and 1999 is presented below.
2000 1999 Change
-------- ------- ------
(Dollars in thousands)
Three-month period:
Sales and marketing............................. $ 57,974 $ 8,829 557%
Percentage of revenues.......................... 33% 39%
Nine-month period:
Sales and marketing............................. $100,492 $24,492 310%
Percentage of revenues.......................... 36% 43%
The Network Solutions acquisition was the primary reason for the increase in
sales and marketing expenses in the three and nine month periods of 2000 as
compared to those periods in 1999. The Registrar
18
continues to incur expenses promoting the value of the .com, .net and .org web
addresses as well as value-added services including web site design tools and
other enhanced service offerings. The remainder of the increase was driven by
lead and demand generation activities in our authentication businesses,
expansion of our sales force, an increase in international sales expenses, and
the effect of a full quarter of sales and marketing expenses from THAWTE and
Signio. While the absolute dollar spending increased for sales and marketing
expenses, we continue to realize a decline in spending from 1999 to 2000 as a
percentage of revenue. This is primarily due to the increase in recurring
revenue from existing customers, which tend to have lower acquisition costs
associated with them, and the increase in the productivity of the direct and
inside sales forces. However, we cannot forecast that these sales and marketing
expenses will continue to decline as a percentage of revenues.
We do expect sales and marketing expenses to continue to increase on an
absolute dollar basis in the future, primarily related to an expanded sales
force, expanded marketing and demand generation activities, development and
enhancement of partner and distribution channels and promotional activities for
web presence products and services.
Research and development
Research and development expenses consist primarily of costs related to
research and development personnel, including salaries and other personnel-
related expenses, consulting fees and the costs of facilities, computer and
communications equipment and support services used in service and technology
development.
A comparison of research and development expenses for the three-month
periods and the nine-month periods ended September 30, 2000 and 1999 is
presented below.
2000 1999 Change
------- ------ ------
(Dollars in
thousands)
Three-month period:
Research and development............................ $14,485 $3,405 325%
Percentage of revenues.............................. 8% 15%
Nine-month period:
Research and development............................ $26,028 $9,478 175%
Percentage of revenues.............................. 9% 17%
Research and development expenses increased in absolute dollars in the third
quarter of 2000 from the third quarter of 1999 primarily due to the acquisition
of Network Solutions and from continued investment 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. The decrease in research and development expenses as a percentage
of revenues from 1999 to 2000 is primarily due to different cost structures
related to new acquisitions.
We believe that timely development of new and enhanced authentication
services, transaction services, web presence services and technology are
necessary to maintain our position in the marketplace. Accordingly, we intend
to continue to recruit experienced research and development personnel and to
make other investments in research and development. As a result, we expect
research and development expenses will continue to increase in absolute
dollars. To date, we have expensed all research and development expenditures as
incurred.
General and administrative
General and administrative expenses consist primarily of salaries and other
personnel-related expenses for our executive, administrative, legal, finance
and human resources personnel, facilities and computer and communications
equipment, support services and professional services fees.
19
A comparison of general and administrative expenses for the three-month
periods and the nine-month periods ended September 30, 2000 and 1999 is
presented below.
2000 1999 Change
------- ------ ------
(Dollars in
thousands)
Three-month period:
General and administrative......................... $23,869 $2,142 1,014%
Percentage of revenues............................. 14% 9%
Nine-month period:
General and administrative......................... $35,705 $6,122 483%
Percentage of revenues............................. 13% 11%
The increase in general and administrative expenses for the third quarter,
as well as for the first nine months of 2000, over the third quarter and first
nine months of 1999 was related to the acquisition of Network Solutions in June
2000 and the acquisition of THAWTE and Signio in the first quarter of 2000.
Expenses also increased due to additional staffing levels required to manage
and support our expanded operations, the implementation of additional
management information systems, and the expansion of our corporate
headquarters.
We anticipate that general and administrative expenses will continue to
increase on an absolute dollar basis in the future as we expand our
administrative and executive staff, add infrastructure, expand facilities and
assimilate acquired technologies and businesses.
Write-off of acquired in-process research and development
The portion of the Network Solutions purchase price allocated to in-process
research and development ("IPR&D") was $54 million and was expensed during the
quarter ended June 30, 2000. Network Solutions' IPR&D efforts focused on
significant and substantial improvements and upgrades to its shared
registration system ("SRS"). The SRS is the system that provides shared
registration interface to the accredited and licensed registrars into the .com,
.net, and .org generic top level domain ("gTLD") name registry. It is through
this system that registrars from all over the world are able to register domain
names with the central database. Given the high demand on the SRS, it is in
need of improvements and upgrades in the area of scalability, security, non-
english language capability and next generation resource provisioning protocol.
As of the acquisition date, Network Solutions was in the process of
developing technology that would add substantial functionality and features to
the SRS. The IPR&D had not yet reached technological feasibility and had no
alternative uses. The IPR&D under development may not achieve technical or
commercial viability. The technological feasibility of the in-process
development efforts is established when the enterprise has completed all
planning, designing, coding, and testing activities that are necessary to
establish that the technology can be utilized to meet its design specifications
including functions, features, and technical performance requirements. This
estimate was based on the project costs and milestones. As of September 30,
2000, efforts related to upgrades and improvements in the SRS are continuing,
in particular related to non-english language capabilities and security. These
efforts are expected to be significantly completed by the end of 2000.
The fair value assigned to IPR&D was estimated by discounting, to present
value, the cash flows attributable to the technology once it has reached
technological feasibility. A discount rate consistent with the risks of the
project was used to estimate the present value of cash flows. The value
assigned to IPR&D was the amount attributable to the efforts of Network
Solutions up to the time of acquisition. This amount was estimated through
application of the "stage of completion" calculation by multiplying the
estimated present value of future cash flows, excluding costs of completion, by
the percentage of completion of the purchased research and development project
at the time of acquisition.
20
Amortization of goodwill and other intangible assets
Goodwill and other intangible assets resulted primarily from our
acquisitions of THAWTE in January 2000, Signio in February 2000 and Network
Solutions in June 2000. We expect to recognize goodwill and other intangible
asset amortization charges related to these acquisitions of up to $1.4 billion
per quarter until the goodwill and other intangible asset balances from these
acquisitions become fully amortized ending in 2004. In addition, in the event
we complete future acquisitions, we expect to incur additional goodwill and
other intangible asset amortization charges.
Other Income
Other income consists primarily of interest earned on our cash, cash
equivalents and short-term and long-term investments, gains on sale of equity
investments and as well as 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.
A comparison of other income for the three-month periods and the nine-month
periods ended September 30, 2000 and 1999 is presented below.
2000 1999 Change
------- ------ ------
(Dollars in
thousands)
Three-month period:
Other income...................................... $21,602 $1,566 1,279%
Percentage of revenues............................ 12% 7%
Nine-month period:
Other income...................................... $63,342 $4,793 1,222%
Percentage of revenues............................ 23% 8%
The increase in other income in the third quarter of 2000 compared to the
third quarter of 1999 is primarily due to increased earnings on funds invested.
Investments have increased in part due to our net proceeds of $121.4 million
generated from the follow-on public offering of our common stock during January
1999 and investment of cash generated from operations. The investment base was
also significantly increased through the acquisition of Network Solutions,
which added over $875 million of cash and investments. For the first nine
months of 2000 the increase over the first nine months of 1999 was also due to
a $32.6 million gain from the sale of shares of Keynote Systems, Inc. We may
from time to time derive gains from the sale of our equity investments as
considered necessary.
Provision for Income Taxes
No provision has been made for income taxes due to cumulative book losses.
As discussed above under Note 2-- Business Combinations -- Purchase Price
Allocations, we recorded deferred tax liabilities for Network Solutions and
Signio for identifiable intangibles assets that are not deductible for federal
and state income tax purposes. As a result of recording the deferred tax
liabilities and considering their effect on the combined entity, a
corresponding amount of deferred tax asset valuation allowance was reduced and
offset against goodwill. Amortization of goodwill for these acquisitions is not
deductible for tax purposes.
The Company has elected to treat the acquisition of THAWTE's South African
operation as an asset acquisition together with a federal election to include
the South African operation in the federal tax return of VeriSign. These
elections will allow the goodwill and other intangibles of THAWTE in South
Africa to be amortized over 15 years in the United States federal tax return of
VeriSign.
21
Factors That May Affect Future Results of Operations
We have a limited operating history under our current business structure.
We were incorporated in April 1995, and we began introducing our trusted
infrastructure services in June 1995. In addition, we have completed four
acquisitions in 2000, including the acquisition of Network Solutions.
Therefore, we have only a limited operating history on which to base an
evaluation of our consolidated 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 and for companies integrating
many businesses. Our success will depend on many factors, including, but not
limited to, the following:
. the successful integration of THAWTE, Signio, and Network Solutions;
. the rate and timing of the growth and use of internet protocol (IP)
networks for electronic commerce and communications;
. the extent to which digital certificates and domain names are used for
these communications and/or e-commerce;
. the continued growth in the number of web sites;
. the growth in demand for our payment services;
. the continued evolution of electronic commerce as a viable means of
conducting business;
. the demand for our Internet infrastructure services and web presence
services;
. the competition for any of our services;
. the perceived security of electronic commerce and communications over IP
networks;
. the perceived security of our services, technology, infrastructure and
practices; and
. our continued ability to maintain our current, and enter into additional,
strategic relationships
To address these risks we must, among other things:
. successfully market our Internet infrastructure services, our digital
certificates and our web presence services to new and existing customers;
. attract, integrate, train, retain and motivate qualified personnel;
. respond to competitive developments;
. successfully introduce new Internet infrastructure services and web
presence services; and
. successfully introduce enhancements to our existing Internet
infrastructure services and web presence services to address new
technologies and standards and changing market conditions.
We cannot be certain that we will successfully address these risks.
Our business depends on the future growth of the Internet and adoption and
continued use of IP networks.
Our future success substantially depends on the continued growth in the use
of the Internet and IP networks. If the use of and interest in the Internet and
IP networks does not continue to grow, our business would be harmed. To date,
many businesses and consumers have been deterred from utilizing the Internet
and IP networks for a number of reasons, including, but not limited to:
. potentially inadequate development of network infrastructure;
. security concerns, particularly for online payments, including the
potential for merchant or user impersonation and fraud or theft of stored
data and information communicated over IP networks;
22
. other security concerns such as attacks on popular websites by "hackers;"
. inconsistent quality of service;
. lack of availability of cost-effective, high-speed systems and service;
. limited number of local access points for corporate users;
. inability to integrate business applications on IP networks;
. the need to operate with multiple and frequently incompatible products;
. government regulation; and
. a lack of tools to simplify access to and use of IP networks.
The widespread acceptance of the Internet and IP networks will require a
broad acceptance of new methods of conducting business and exchanging
information. Organizations that already have invested substantial resources in
other methods of conducting business may be reluctant to adopt new methods.
Also, individuals with established patterns of purchasing goods and services
and effecting payments may be reluctant to change.
Our near-term success depends, in part, on the growth of the web presence
services business
VeriSign may not be able to sustain the revenue growth it has experienced in
recent periods. In addition, past revenue growth may not be indicative of
future operating results. If VeriSign does not successfully maintain its
current position as a leading provider of domain name registration services or
develop or market additional value-added products and services, our business
could be harmed.
Web presence services will account for a very significant portion of our
revenue in at least the near term. Its future success will depend largely on:
. continued new domain name registrations;
. re-registration rates of our customers;
. our ability to maintain our current position as a leading registrar of
domain names;
. the successful development, introduction and market acceptance of new
services that address the demands of Internet users;
. our ability to provide robust domain name registration systems; and
. our ability to provide a superior customer service infrastructure as a
registry and registrar.
Issues arising from implementation agreements with ICANN and the Department
of Commerce could harm its registration business
The Department of Commerce has adopted a plan for a phased transition of the
Department of Commerce's responsibilities for the domain name system to ICANN.
VeriSign faces risks from this transition, including:
. ICANN could adopt or promote policies, procedures or programs that are
unfavorable to our role in the registration of domain names or that are
inconsistent with our current or future plans;
. The Department of Commerce or ICANN could terminate our agreements to be
the registry and/or a registrar in the .com, .net and .org top level
domains if they find that it is in violation of our agreements with them;
. If we do not separate ownership of our registry and registrar by May 2001
in accordance with the registry agreement, the term of the registry
agreement will expire in November 2003 and we may not be chosen as the
successor registry;
23
. The terms of the registrar accreditation contract could change, as a
result of an ICANN-adopted policy, in a manner that is unfavorable to us;
. The Department of Commerce's or ICANN's interpretation of provisions of
our agreements with either of them described above could differ from
ours;
. The Department of Commerce could revoke its recognition of ICANN, as a
result of which the Department of Commerce would take the place of ICANN
for purposes of the various agreements described above, and could take
actions that are harmful to us;
. ICANN may approve new top level domains and we may not be selected to act
as a registrar or registry with respect to those top level domains;
. The U.S. Government could refuse to transfer certain responsibilities for
domain name system administration to ICANN due to security, stability or
other reasons, resulting in fragmentation or other instability in domain
name system administration; and
. Our registry business could face legal or other challenges resulting from
the activities of other registrars.
Challenges to ongoing privatization of Internet administration could harm
VeriSign's web presence services business
Risks VeriSign faces from challenges by third parties, including other
domestic and foreign governmental authorities, to our role in the ongoing
privatization of the Internet include:
. Legal, regulatory or other challenges, including challenges to the
agreements governing our relationship with, or to the legal authority
underlying the roles and actions of, the Department of Commerce, ICANN
and/or us, could be brought;
. Congress has held two hearings in which various issues about the domain
name system have been raised and Congress could take action that is
unfavorable to us;
. Congress has issued a Conference Report directing the General Accounting
Office to review the relationship between the Department of Commerce and
ICANN and the adequacy of security arrangements under existing Department
of Commerce cooperative agreements. An adverse report could cause
Congress to take action that is unfavorable to us or the stability of the
domain name system;
. ICANN could fail to maintain its role, potentially resulting in
instability in domain name system administration; and
. Some foreign governments and governmental authorities have in the past
disagreed with, and may in the future disagree with, the actions,
policies or programs of ICANN, the U.S. Government and us relating to the
domain name system. These foreign governments or governmental authorities
may take actions or adopt policies or programs that are harmful to our
business.
Our quarterly operating results may fluctuate and our future revenues and
profitability are uncertain.
Our quarterly operating results have varied and may fluctuate significantly
in the future as a result of a variety of factors, many of which are outside
our control. These factors include the following:
. continued market acceptance of our trusted infrastructure services;
. the long sales and implementation cycles for, and potentially large order
sizes of, some of our Internet trust services and the timing and
execution of individual contracts;
. volume of domain name registrations through our web presence services
business and VeriSign's Global Registry Service business;
. customer renewal rates for our Internet infrastructure services and web
presence services;
24
. competition in the web presence services business from competing
registrars and registries;
. the additional introduction of alternative Internet naming systems:
. the timing of releases of new versions of Internet browsers or other
third-party software products and networking equipment that include our
digital certificate service interface technology;
. the mix of all our offered services sold during a quarter;
. our success in marketing other internet infrastructure services and web
presence value added services to our existing customers and to new
customers;
. continued development of our direct and indirect distribution channels,
both in the U.S. and abroad;
. market acceptance of our Internet infrastructure services and new service
offerings or our competitors' products and services;
. our ability to expand operations;
. our success in assimilating the operations and personnel of any acquired
businesses;
. the amount and timing of expenditures related to expansion of our
operations;
. the impact of price changes in our Internet infrastructure services and
web presence services or our competitors' products and services; and
. general economic conditions and economic conditions specific to IP
network and Internet industries.
In addition, we expect a significant increase in our operating expenses as
we:
. amortize goodwill and other intangible assets from our prior
acquisitions;
. increase our sales and marketing operations and activities, and
. continue to update our systems and infrastructure.
If the increase in our expenses is not accompanied by a corresponding
increase in our revenue, our operating results will suffer, particularly as
revenues from many of our services are recognized ratably over the term of the
service, rather than immediately when the customer pays for them, unlike our
sales and marketing expenditures which are expensed in full when incurred.
Due to all of the above factors, our quarterly revenues and operating
results are difficult to forecast. Therefore, we believe that period-to-period
comparisons of our operating results will not necessarily be meaningful, and
you should not rely upon them as an indication of future performance. Also,
operating results may fall below our expectations and the expectations of
securities analysts or investors in one or more future quarters. If this were
to occur, the market price of our common stock would likely decline.
We face significant competition.
We anticipate that the market for services that enable trusted and secure
electronic commerce and communications over IP networks will remain intensely
competitive. We compete with larger and smaller companies that provide products
and services that are similar to some aspects of our Internet infrastructure
services. We expect that competition will increase in the near term, and that
our primary long-term competitors may not yet have entered the market.
Increased competition could result in pricing pressures, reduced margins or the
failure of our Internet trust services to achieve or maintain market
acceptance, any of which could harm our business. Several of our current and
potential competitors have longer operating histories and significantly greater
financial, technical, marketing and other resources. As a result, we may not be
able to compete effectively.
The introduction of additional competition into the web presence services
business could harm our business. This includes, in particular, competition
among registrars within a single top-level domain, such as .com, and
competition among registrars and registries of existing and potential new top-
level domains. We
25
currently face competition in the web presence services business from other
registrars in the top level domains in which we act as the registry, third
level domain name providers such as Internet access providers and registrars
and registries of top level domains other than those top level domains for
which we act as the registry. As of September 30, 2000, 66 accredited
registrars (in addition to us) in the .com, .net and .org top level domains
used VeriSign's Global Registry Services shared registration system to register
domain names. ICANN has accredited approximately 70 additional registrars as of
that date. VeriSign expects these and additional accredited registrars to offer
competing web presence services in these top-level domains in the future.
The introduction of potential new top-level domains is currently under
review. At its November 2000 meeting in Los Angeles, the ICANN Board of
Directors is expected to select the finalists from prospective parties that
submitted proposals seeking to sponsor or operate one or more new top-level
domains and December 31, 2000 is the target date for completion of negotiations
with the new top-level domain registry sponsors or operators.
Future competition in the web presence services business as a registry or
registrar could come from many new sources, including:
. domain name registration resellers;
. country code registries;
. Internet access providers; and
. major telecommunications firms.
Many of these entities have core capabilities to deliver registry and/or
registrar services, such as help desks, billing services and network
management, along with strong name recognition and Internet industry
experience. The recent agreements among ICANN, the Department of Commerce, the
Company and other registrars permit flexibility in pricing for and term of
registrations. VeriSign's revenue, therefore, could be reduced due to pricing
pressures, bundled service offerings and variable terms resulting from
increased competition. Some registrars and resellers in the .com, .net and .org
top-level domains are already charging lower prices for web presence services
in those domains. In addition, other entities are bundling, and may in the
future bundle, domain name registrations with other products or services at
reduced rates or for free.
Our Internet infrastructure services market is new and evolving.
We target our Internet infrastructure 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 infrastructure services is very uncertain. Even if the
market for electronic commerce and communications over IP networks grows, our
Internet infrastructure services may not be widely accepted. The factors that
may affect the level of market acceptance of digital certificates and,
consequently, our Internet infrastructure services include the following:
. market acceptance of products and services based upon authentication
technologies other than those we use;
. public perception of the security of digital certificates and IP
networks;
. the ability of the Internet infrastructure to accommodate increased
levels of usage; and
. government regulations affecting electronic commerce and communications
over IP networks.
Even if digital certificates achieve market acceptance, our Internet
infrastructure services may fail to address the market's requirements
adequately. If digital certificates do not sustain or increase their
acceptance, or if our Internet infrastructure services in particular do not
achieve or sustain market acceptance, our business would be materially harmed.
26
System interruptions and security breaches could harm our business.
We depend on the uninterrupted operation of our various registration
systems, secure 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, both of which are susceptible to earthquakes, and Herndon,
Virginia. All of our web presence services systems, including those used in our
domain name registry and registrar business are located at our Herndon,
Virginia facilities. Any damage or failure that causes interruptions in any of
these facilities or our other computer and communications systems could
materially harm our business. In addition, our ability to issue digital
certificates and register domain names depends on the efficient operation of
the Internet connections from customers to our secure data centers and our
various registration systems as well as from customers to our registrar and
from our registrar and other registrars to the shared registration system.
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 decrease customer satisfaction.
A failure in the operation of our various registration systems or other
events could result in deletion of one or more domain names from the Internet
for a period of time. A failure in the operation of our shared registration
system could result in the inability of one or more other registrars to
register and maintain domain names for a period of time. A failure in the
operation or update of the master database that we maintain could result in
deletion of one or more top-level domains from the Internet and the
discontinuation of second level domain names in those top level domains for a
period of time. The inability of our registrar systems, including our back
office billing and collections infrastructure, and telecommunications systems
to meet the demands of the increasing number of domain name registration
requests and corresponding customer e-mails and telephone calls, including
speculative, otherwise abusive and repetitive e-mail domain name registration
and modification requests, could result in substantial degradation in our
customer support service and our ability to process, bill and collect
registration requests in a timely manner.
We retain certain confidential customer information in our secure data
centers and various registration systems. It is critical to our business
strategy that our facilities and infrastructure remain secure and are perceived
by the marketplace to be secure. Our domain name registration operations also
depends on our ability to maintain our computer and telecommunications
equipment in effective working order and to reasonably protect our systems
against interruption and potentially on such maintenance and protection by
other registrars in the shared registration system. The root zone servers and
top-level domain name zone servers that VeriSign operates are critical hardware
to our web presence operations. Therefore, we may have to expend significant
time and money to maintain or increase the security of our facilities and
infrastructure.
Despite our security measures, our infrastructure may be vulnerable to
physical break-ins, computer viruses, and attacks by hackers or similar
disruptive problems. It is possible that we may have to expend additional
financial and other resources to address such problems. Any physical or
electronic break-ins or other security breaches or compromises of the
information stored at our secure data centers and domain name registration
systems may jeopardize the security of information stored on our premises or in
the computer systems and networks of our customers. In such an event, we could
face significant liability and customers could be reluctant to use our Internet
infrastructure services and web presence services. Such an 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.
27
Acquisitions could harm our business.
We acquired THAWTE and Signio in February 2000 and Network Solutions in June
2000. We could experience difficulty in integrating the personnel, products,
technologies or operations of these companies. In addition, assimilating
acquired businesses involves a number of other risks, including, but not
limited to:
. the potential disruption of our business;
. the potential impairment of relationships with our employees, customers
and strategic partners;
. the additional expenses associated with the amortization of goodwill and
other intangible assets, which we expect will be an aggregate of
approximately $20 billion for the three acquisitions and will be
amortized straight-line generally from two to four years;
. unanticipated costs or the incurrence of unknown liabilities;
. the need to manage more geographically-dispersed operations, such as
Network Solutions' offices in Virginia and THAWTE's offices in North
Carolina and South Africa;
. diversion of management's resources from other business concerns;
. the inability to retain the employees of the acquired businesses;
. adverse effects on existing customer relationships of THAWTE, Signio or
Network Solutions;
. the difficulty of assimilating the operations and personnel of the
acquired businesses;
. our inability to incorporate acquired technologies successfully into our
Internet infrastructure services; and
. the inability to maintain uniform standards, controls, procedures and
policies.
If we are unable to successfully address any of these risks for future
acquisitions, our business could be harmed.
Our equity investments in other companies may not yield any returns
We have equity investments in a number of companies. In most instances these
investments are in the form of equity securities of private companies for which
there is no public market. These companies are typically in the early stage of
development and may be expected to incur substantial losses. Therefore, these
companies may never become publicly traded companies. Even if they do, an
active trading market for their securities may never develop and we may never
realize any return on these investments. Although, we have realized gains on
the sale of equity investments in the past, we can not expect to experience
similar levels of other income in the future. Further, if these companies are
not successful, we could incur charges related to write-downs or write-offs of
these types of assets. Losses or charges resulting from these investments could
harm our operating results.
Technological changes will affect our business.
The emerging nature of the Internet, digital certificate business and the
domain name registration business, and their rapid evolution, requires us to
continually improve the performance, features and reliability of our Internet
infrastructure services and web presence services, particularly in response to
competitive offerings. We must also introduce any new Internet infrastructure
services and web presence services, as quickly as possible. The success of new
Internet infrastructure services and web presence services depends on several
factors, including proper new service definition and timely completion,
introduction and market acceptance of our new Internet infrastructure services
or web presence services. We may not succeed in developing and marketing new
Internet infrastructure services and web presence services that respond to
competitive and technological developments and changing customer needs. This
could harm our business.
28
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. We have grown from 26
employees at December 31, 1995 to over 1,800 employees at September 30, 2000.
In addition to internal growth, our employee base grew through acquisitions. We
have also opened additional sales offices and have significantly expanded our
operations, both in the U.S. and abroad, during this time period. To be
successful, we will need to implement additional management information
systems, 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 harm our
business.
We depend on key personnel.
We depend on the performance of our senior management team and other key
employees. Our success will also depend on our ability to attract, integrate,
train, retain and motivate these individuals and additional highly skilled
technical and sales and marketing personnel, both in the U.S. and abroad. There
is intense competition for these personnel. In addition, our stringent hiring
practices for some of our key personnel, which consist of background checks
into prospective employees' criminal and financial histories, further limit the
number of qualified persons for these positions. We have no employment
agreements with any of our key executives that prevent them from leaving us at
any time. In addition, we do not maintain key person life insurance for any of
our officers or key employees other than our President and Chief Executive
Officer. The loss of the services of any of our senior management team or other
key employees or failure to attract, integrate, train, retain and motivate
additional key employees could harm our business.
VeriSign relies on third parties who maintain and control root zone servers
and route Internet communications.
VeriSign currently administers and operates only two of the 13 root zone
servers. The others are administered and operated by independent operators on a
volunteer basis. Because of the importance to the functioning of the Internet
of these root zone servers, VeriSign's web presence services could be harmed if
these volunteer operators fail to properly maintain such servers or abandon
such servers.
Further, VeriSign's web presence services could be harmed if any of these
volunteer operators fail to include or provide accessibility to the data that
it maintains in the root zone servers that it controls.
In the event and to the extent that ICANN is authorized to set policy with
regard to an authoritative root server system, as provided in the registry
agreement, it is required to ensure that the authoritative root will point to
the top level domain zone servers designated by it. If ICANN does not do this,
VeriSign's business could be harmed.
VeriSign's web presence services also could be harmed if a significant
number of Internet service providers decided not to route Internet
communications to or from domain names registered by it or if a significant
number of Internet service providers decided to provide routing to a set of
domain name servers that did not point to its top level domain zone servers.
We must establish and maintain strategic and other relationships.
One of our significant business strategies has been to enter into strategic
or other similar collaborative relationships in order to reach a larger
customer base than we could reach through our direct sales and marketing
efforts. Examples of these types of relationships include AOL/Netscape, Cisco,
Microsoft and RSA Security. 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
29
we fail to enter into additional relationships, we would have to devote
substantially more resources to the distribution, sale and marketing of our
Internet infrastructure services and web presence services than we would
otherwise. As a result of our emphasis on these relationships, our success in
these relationships will depend both on the ultimate success of the other
parties to these relationships, particularly in the use and promotion of IP
networks for trusted and secure electronic commerce and communications, and on
the ability of these parties to market our Internet infrastructure services
successfully. Furthermore, our ability to achieve future growth will also
depend on our ability to continue to establish direct seller channels and to
develop multiple distribution channels, particularly with respect to our web
presence services business. To do this we must maintain relationships with
Internet access providers and other third parties. Failure of one or more of
our strategic relationships to result in the development and maintenance of a
market for our Internet infrastructure services or web presence services could
harm our business.
Many of our existing relationships do not, and any future relationships may
not, afford us any exclusive marketing or distribution rights. In addition, the
other parties may not view their relationships with us as significant for their
own businesses. Therefore, they could reduce their commitment to us at any time
in the future. These parties could also pursue alternative technologies or
develop alternative products and services either on their own or in
collaboration with others, including our competitors. If we are unable to
maintain our relationships or to enter into additional relationships, this
could harm our business.
Some of our Internet infrastructure services have lengthy sales and
implementation cycles.
We market many of our Internet infrastructure 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
infrastructure services can be lengthy, potentially lasting from three to six
months. Our quarterly and annual operating results could be materially harmed
if orders forecasted for a specific customer for a particular quarter are not
realized.
Our services could have unknown defects.
Services as complex as those we offer or develop frequently contain
undetected defects or errors. Despite testing, defects or errors may occur in
our existing or new services, which could result in loss of or delay in
revenues, loss of market share, failure to achieve market acceptance, diversion
of development resources, injury to our reputation, tort or warranty claims,
increased insurance costs or increased service and warranty costs, any of which
could harm our business. Furthermore, we often provide implementation,
customization, consulting and other technical services in connection with the
implementation and ongoing maintenance of our services, which typically
involves working with sophisticated software, computing and communications
systems. Our failure or inability to meet customer expectations in a timely
manner could also result in loss of or delay in revenues, loss of market share,
failure to achieve market acceptance, injury to our reputation and increased
costs.
Public key cryptography technology is subject to risks.
Our Internet infrastructure services depend on public key cryptography
technology. With public key cryptography technology, a user is given a public
key and a private key, both of which are required to encrypt and decode
messages. The security afforded by this technology depends on the integrity of
a user's private key and that it is not stolen or otherwise compromised. The
integrity of private keys also depends in part on the application of specific
mathematical principles known as "factoring." This integrity is predicated on
the assumption that the factoring of large numbers into their prime number
components is difficult. Should an easy factoring method be developed, the
security of encryption products utilizing public key cryptography technology
would be reduced or eliminated. Furthermore, any significant advance in
techniques for attacking
30
cryptographic systems could also render some or all of our existing Internet
infrastructure services obsolete or unmarketable. If improved techniques for
attacking cryptographic systems were ever developed, we would likely have to
reissue digital certificates to some or all of our customers, which could
damage our reputation and brand or otherwise harm our business. In the past
there have been public announcements of the successful decoding of some types
of cryptographic messages and of the potential misappropriation of private
keys. This type of publicity could also hurt the public perception as to the
safety of the public key cryptography technology included in our digital
certificates. This negative public perception could harm our business.
Our international operations are subject to certain risks.
Revenues from international subsidiaries and affiliates accounted for
approximately 27% of our revenues in the full year of 1999 and 10% of our
revenues in the third quarter of 2000. We intend to expand our international
operations and international sales and marketing activities. For example, with
our acquisition of THAWTE we have additional operations in South Africa and
with our acquisition of Network Solutions we have additional operations in Asia
and Europe. Expansion into these markets has required and will continue to
require significant management attention and resources. We may also need to
tailor our Internet infrastructure trust services and web presence services for
a particular market and to enter into international distribution and operating
relationships. We have limited experience in localizing our services and in
developing international distribution or operating relationships. We may not
succeed in expanding our services into international
markets. Failure to do so could harm our business. In addition, there are risks
inherent in doing business on an international basis, including, among others:
. competition with foreign companies;
. regulatory requirements;
. legal uncertainty regarding liability and compliance with foreign laws;
. export and import restrictions on cryptographic technology and products
incorporating that technology;
. tariffs and other trade barriers and restrictions;
. difficulties in staffing and managing foreign operations;
. longer sales and payment cycles;
. problems in collecting accounts receivable;
. currency fluctuations;
. difficulty of authenticating customer information;
. political instability;
. failure of foreign laws to adequately protect our U.S. proprietary
rights;
. seasonal reductions in business activity; and
. potentially adverse tax consequences.
We have licensed to 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 infrastructure services.
The VeriSign Processing Center platform provides an affiliate with the
knowledge and technology to offer Internet infrastructure services similar to
those offered by us. It is critical to our business strategy that the
facilities and infrastructure used in issuing and marketing digital
certificates remain secure and we are perceived by the marketplace to be
secure. Although we provide the affiliate with training in security and trust
practices, network management and customer service and support, these practices
are performed by the affiliate and are outside of our control. Any failure of
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
31
the security of electronic commerce and communication over IP networks
generally. For further information, please 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.
Our Internet infrastructure services could be affected by government
regulation.
Exports of software products utilizing encryption technology are generally
restricted by the United States and various non-United States governments.
Although we have obtained approval to export our Global Server digital
certificate service, and none of our other Internet infrastructure services are
currently subject to export controls under United States law, the list of
products and countries for which export approval is required could be revised
in the future to include more digital certificate products and related
services. If we do not obtain required approvals we may not be able to sell
specific Internet infrastructure services in international markets. There are
currently no federal laws or regulations that specifically control certificate
authorities, but a limited number of states have enacted legislation or
regulations with respect to certificate authorities. If the market for digital
certificates grows, the United States federal or state or non-United States
governments may choose to enact further regulations governing certificate
authorities or other providers of digital certificate products and related
services. These regulations or the costs of complying with these regulations
could harm our business.
On July 3, 2000, President Bill Clinton signed a bill, as passed by
Congress, known as the Electronic Signatures in Global and National Commerce
Act, or "E-Sign." E-Sign is intended to render digital signatures legally
equivalent to those signed on paper. The execution of E-Sign could materially
and adversely affect our digital certificates services business. For example,
there may be an increasing demand for digital signatures and certificates as a
result of the new E-Sign law. However, due to competition or other reasons, our
services may not be adopted. If we cannot meet market expectations or demand
for our products and services does not increase, our business may be materially
and adversely affected. Furthermore, a successful implementation of E-Sign may
further encourage competitors to enter the marketplace because of the possible
increase in demand for digital signatures and certificates. This could
effectively lower barriers to entry and increasingly flood the marketplace with
competitors. While we cannot assure you that E-Sign will be effectively
implemented or how this implementation will affect our business, we must
continue to meet the demand and expectations of our customers, our failure to
do so could materially and adversely harm our business.
We face risks related to intellectual property rights.
Our success depends on our internally developed technologies and other
intellectual property. Despite our precautions, it may be possible for a third
party to copy or otherwise obtain and use our intellectual property or trade
secrets without authorization. In addition, it is possible that others may
independently develop substantially equivalent intellectual property. If we do
not effectively protect our intellectual property, our business could suffer.
In the future we may have to resort to litigation to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. This type of
litigation, regardless of its outcome, could result in substantial costs and
diversion of management and technical resources.
We also license third-party technology, such as public key cryptography
technology licensed from RSA and other technology that is used in our products,
to perform key functions. These third-party technology licenses may not
continue to be available to us on commercially reasonable terms or at all. Our
business could suffer if we lost the rights to use these technologies. A third
party could claim that the licensed software infringes a patent or other
proprietary right. Litigation between the licensor and a third party or between
us and a third party could lead to royalty obligations for which we are not
indemnified or for which indemnification is insufficient, or we may not be able
to obtain any additional license on commercially reasonable terms or at all.
32
The loss of, or our inability to obtain or maintain, any of these technology
licenses could delay the introduction of our Internet infrastructure services
until equivalent technology, if available, is identified, licensed and
integrated. This could harm our business.
From time to time, we have received, and may receive in the future, notice
of claims of infringement of other parties' proprietary rights. Infringement or
other claims could be made against us in the future. Any claims, with or
without merit, could be time-consuming, result in costly litigation and
diversion of technical and management personnel, cause product shipment delays
or require us to develop non-infringing technology or enter into royalty or
licensing agreements. Royalty or licensing agreements, if required, may not be
available on acceptable terms or at all. If a successful claim of product
infringement were made against us and we could not develop non-infringing
technology or license the infringed or similar technology on a timely and cost-
effective basis, our business could be harmed.
In addition, legal standards relating to the validity, enforceability, and
scope of protection of intellectual property rights in Internet-related
businesses are uncertain and still evolving. Because of the growth of the
Internet and Internet related businesses, patent applications are continuously
and simultaneously being filed in connection with Internet-related technology.
There are a significant number of U.S. and foreign patents and patent
applications in our areas of interest, and we believe that there has been, and
is likely to continue to be, significant litigation in the industry regarding
patent and other intellectual property rights.
VeriSign is party to legal proceedings that could have a negative financial
impact on it.
We are involved in a number of legal proceedings. We cannot reasonably
estimate the potential impact of any of these proceedings. An adverse
determination in these cases or any other of these proceedings, however, could
harm our business. Legal proceedings in which we are involved are expensive and
divert the attention of our personnel.
Our stock price, like that of many Internet companies, is highly volatile.
The market price of our common stock has been and is likely to continue to
be highly volatile and significantly affected by factors such as:
. general market and economic conditions and market conditions affecting
technology and Internet stocks generally;
. actual or anticipated fluctuations in its quarterly or annual
registrations or operating results;
. announcements of technological innovations, acquisitions or investments,
developments in Internet governance or corporate actions such as stock
splits; and
. industry conditions and trends.
The stock market has experienced significant price and volume fluctuations
that have particularly affected the market prices of the stocks of technology
companies, especially Internet-related companies. These broad market or
technology or Internet sector fluctuations may adversely affect the market
price of our common stock. Recently, the market price of our common stock, like
that of many Internet-related companies, has experienced significant
fluctuations. For instance, between January 1, 1999, and October 31, 2000, the
reported last sale price for our split-adjusted common stock ranged from $15.00
per share to $258.50 per share. On October 31, 2000, the reported last sale
price of our split-adjusted common stock was $132 per share.
The market price of our common stock also has been and is likely to continue
to be significantly affected by expectations of analysts and investors. Reports
and statements of analysts do not necessarily reflect our views. The fact that
we have in the past met or exceeded analyst or investor expectations does not
necessarily mean that it will do so in the future.
33
In the past, securities class action lawsuits have often followed periods of
volatility in the market price of a particular company's securities. This type
of litigation could result in substantial costs and a diversion of its
management's attention and resources.
We have implemented anti-takeover provisions.
Provisions of our Amended and Restated Certificate of Incorporation and
Bylaws contain provisions that could make it more difficult for a third party
to acquire us without the consent of our board of directors. These provisions
include:
. our stockholders may only take action at a meeting and not by written
consent;
. our board must be given advance notice regarding stockholder-sponsored
proposals for consideration at annual meetings and for stockholder
nominations for the election of directors;
. we have a classified board of directors, with the board being divided
into three classes that serve staggered three-year terms;
. vacancies on our board may be filled until the next annual meeting of
stockholders only by majority vote of the directors then in office; and
. special meetings of our stockholders may only be called by the Chairman
of the Board, the President or by the board, not by our stockholders.
While we believe these provisions provide for an opportunity to receive a
higher bid by requiring potential acquirors to negotiate with our board of
directors, these provisions may apply even if the offer may be considered
beneficial by some stockholders.
Liquidity and Capital Resources
Sept. 30, December 31,
2000 1999 Change
----------- ------------ ------
(Dollars in thousands)
Cash, cash equivalents and short-term
investments.............................. $ 1,091,300 $156,480 597%
Working capital........................... $ 599,278 $140,163 328%
Stockholders' equity...................... $19,659,902 $298,359 6,489%
At September 30, 2000, our principal source of liquidity was approximately
$1.1 billion 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. In addition, we hold $243.6 million of long-term equity minority
investments and corporate debt securities.
Net cash provided by operating activities was $151.1 million in the first
nine months of 2000 compared to net cash provided by operating activities of
$3.5 million in the first nine months of 1999. The increase was primarily due
to an overall increase in accounts payable and accrued liabilities and our
deferred revenue balance in which we receive payment in advance for many of our
products and services.
Net cash provided by investing activities was $214.6 million in the first
nine months of 2000 compared to net cash used of $88.4 million in the first
nine months of 1999. In the first nine months of 2000, net cash provided by
investing activities was primarily the result of the cash acquired in our
acquisitions, partially offset by increased purchases of short and long-term
investments, and costs relating to our acquisitions. Capital expenditures for
property and equipment totaled $32.1 million in the first nine months of 2000
and $4.3 million in the first nine months of 1999. As of September 30, 2000, we
also had commitments under noncancelable operating leases for our facilities
for various terms through 2005. During October 2000, the Company entered into
three new noncancelable operating leases for facilities with commitment terms
through 2011.
34
Net cash provided by financing activities was $61.1 million in the first
nine months of 2000 resulting primarily from the issuance of common stock for
stock option exercises. In the first nine months of 1999, net cash provided by
financing activities was $131.5 million, primarily from the sale of additional
common stock to the public.
We believe our existing cash, cash equivalents and short-term investments
and operating cash flows will be sufficient to meet our working capital and
capital expenditure requirements for at least the next 12 months. 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. Failure to raise capital when needed could materially harm our business.
If we raise additional funds through the issuance of equity securities, the
percentage of our stock owned by our then-current stockholders will be reduced.
Furthermore, these equity securities might have rights, preferences or
privileges senior to those of our common stock.
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. 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.
35
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
interest rate at the then-prevailing rate and the prevailing interest rate
later rises, the principal amount of our investment will probably decline in
value. To minimize this risk, we maintain our portfolio of cash equivalents
and short-term investments in a variety of securities, including commercial
paper, medium-term notes, corporate bonds and notes, market auction
securities, U.S. government and agency securities and money market funds. In
general, money market funds are not subject to market risk because the
interest paid on such funds fluctuates with the prevailing interest rate. In
addition, we generally invest in relatively short-term securities. As of
September 30, 2000, 98% of our non-strategic investments mature in less than
one year.
The following table presents the amounts of our cash equivalents and
investments that are subject to market risk by range of expected maturity and
weighted-average interest rates as of September 30, 2000. This table does not
include money market funds because those funds are not subject to market risk.
Maturing in
----------------------------
More
Six Six Months than Estimated
Months to One One Fair
or Less Year Year Total Value
-------- ---------- ------- -------- ---------
(Dollars in thousands)
Included in cash and cash
equivalents............. $283,145 $ -- $ -- $283,145 $283,097
Weighted-average interest
rate.................... 6.90% -- --
Included in short-term
investments............. $585,732 $ 8,000 $ -- $593,732 $593,751
Weighted-average interest
rate.................... 7.00% 7.33% --
Included in long-term
investments............. $ 23,244 $37,820 $15,157 $ 76,221 $ 76,120
Weighted-average interest
rate.................... 6.14% 6.52% 7.15%
Exchange rate risk
VeriSign considers its exposure to foreign currency exchange rate
fluctuations to be minimal. All revenues derived from affiliates other than
VeriSign Japan 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, and the revenues and expenses of our
activities conducted through South Africa are denominated in South African
Rand. In both regions, we believe this serves as a natural hedge against
exchange rate fluctuations because although an unfavorable change in the
exchange rate of the foreign currency against the United States Dollar will
result in lower revenues when translated to United States Dollars, operating
expenses will also be lower in these circumstances. Our subsidiaries in Sweden
and Hong Kong have not had significant operations to date.
Because of our minimal exposure to foreign currencies, we have not engaged
in any hedging transactions to date.
Equity price risk
We own shares of common stock of certain public companies. We value these
investments using the closing fair market value stated in the Wall Street
Journal for the last day of each month. These investments are subject to
market price volatility. We reflect these investments in our balance sheet at
their market value, with the unrealized gains and losses excluded from
earnings and reported in the "Accumulated other comprehensive income"
component of stockholders' equity. As a result of recent market price
volatility of our publicly traded investments, we experienced a $23.1 million
unrealized loss on these investments during the third quarter of 2000. In
addition, we have invested in equity instruments of several privately held
companies many of which can still be considered in the startup or development
stages. These investments are accounted for under the cost method. We do not
hedge against equity price changes.
36
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of October 31, 2000, Network Solutions, Inc. was a defendant in seventeen
active lawsuits involving domain name disputes between trademark owners and
domain name holders. Network Solutions is drawn into such disputes, in part, as
a result of claims by trademark owners that Network Solutions is legally
required, upon request by a trademark owner, to terminate the contractual right
between Network Solutions and a domain name holder that registered a domain
name, which is alleged to be similar to the trademark in question. On October
25, 1999, however, the Ninth Circuit Court of Appeals ruled in Network
Solutions' favor and against Lockheed Corporation, holding that Network
Solutions' services do not make Network Solutions liable for contributory
infringement to trademark owners. Thus, Network Solutions believes, this type
of suit should decline in frequency. The holders of the domain name
registrations in dispute have, in turn, questioned our right, absent a court
order, to take any action that affects their contractual rights to the domain
names in question. Although 82 of these kinds of situations over the past six
and a half years have resulted in suits actually naming Network Solutions as a
defendant, as of October 31, 2000, no adverse judgment has been rendered and no
award of damages has ever been made against Network Solutions. Network
Solutions believes that it has meritorious defenses and vigorously defends
itself against these claims.
On January 13, 2000, the Department of Justice Antitrust Division issued a
Civil Investigative Demand seeking information and documents concerning the
then-pending acquisition by VeriSign of THAWTE. VeriSign provided certain
information and documents to the Department of Justice, and closed the THAWTE
transaction on February 1, 2000. VeriSign completed its initial response to the
Civil Investigative Demand on March 1, 2000, and a supplemental production of
documents was completed May 9, 2000. On September 14, 2000, VeriSign was
notified that senior officials at the Department of Justice had reviewed a
report by the investigatory staff regarding the transaction, and that the
Department had concerns about the potential competitive effects of the
transaction. Representatives of VeriSign met with and provided additional
information to the Department of Justice during October 2000. The Department of
Justice ultimately may raise objections to the transaction that would require
VeriSign to negotiate a settlement with the Department of Justice to resolve
such objections, or to defend against a legal action challenging the
transaction. While VeriSign believes the transaction does not violate the
antitrust laws, it is possible for there to be a settlement or adverse court
ruling that could have an adverse material effect on the Company, and may
include the licensing or divestiture of assets acquired in the transaction.
On March 15, 2000, a group of eight plaintiffs filed suit against the United
States Department of Commerce, the National Science Foundation and Network
Solutions, Inc. in the United States District Court for the Northern District
of California. The case, entitled William Hoefer et al. v. U.S. Department of
Commerce, et al., Civil Action No. 000918-VRW, challenged the lawfulness of the
registration fees that Network Solutions was authorized to charge for domain
name registrations from September 1995 to November 1999. The suit purports to
be brought on behalf of all domain name registrants who paid registration fees
during that period and seeks approximately $1.7 billion in damages. On June 19,
2000 the plaintiffs filed their first amended complaint, adding two plaintiffs
and naming VeriSign as a defendant.
All of the defendants filed motions to transfer the suit to the Federal
District Court in the District of Columbia and the court granted those motions
on June 28, 2000. The same attorney who unsuccessfully challenged Network
Solutions in a similar action known as Thomas, et al. v. Network Solutions, et
al., filed this new action on behalf of eight former and current domain name
registrants. The suit contains eight causes of action against the defendants
based on alleged violations of Art. I, Section 8 and the Fifth Amendment of the
U.S. Constitution, the Independent Offices Appropriations Act (31 U.S.C.
Section 9701), the Administrative Procedure Act, the Sherman Act, and the
California Unfair Competition Act, Section 17200. The case was docketed with
the Federal District Court in the District of Columbia on July 28, 2000 and on
August 4, 2000 the plaintiffs dismissed the case. Four days later, the same
attorney refiled the same case in the United States District Court for the
Eastern District of Virginia. Network Solutions filed a motion to dismiss the
case and the
37
plaintiffs responded by filing a First Amended Complaint on September 7, 2000.
We now have refiled another Motion to Dismiss. The current versions of the suit
does not name VeriSign as a defendant. The suit contains fourteen causes of
action against the Appropriations Act (31 U.S.C. Section 9701), the
Administrative Procedure Act, the Chief Financial Officer's Act (31 U.S.C.
Section 902), and the Sherman Act. On October 10, 2000, Network Solutions filed
its motion to dismiss the case. On October 24, 2000, the National Science
Foundation filed a motion to transfer the case back to the Federal District
Court in the District of Columbia.
On June 15, 2000, plaintiff David Moran filed a putative shareholder
derivative complaint on behalf of himself and others similarly situated against
Charles Stuckey, Jr., James Bidzos, Richard L. Earnest, Dr. Taher Elgamal,
James K. Sims, Joseph B. Lassiter III, Robert P. Badavas, and against nominal
defendant VeriSign, Inc. The case is captioned Moran v. Stuckey, et.al., No.
1810 NC (Del. Ch. 2000). The complaint alleges, among other things, that the
directors of RSA Security mismanaged RSA's business, failed to protect its
intellectual property or enforce the terms of its license agreement with
VeriSign, and that VeriSign violated the terms of the licensing agreement and
competed against RSA. On August 2, 2000, a second shareholder complaint was
filed against the Company and the aforementioned directors of RSA Security,
Inc. by plaintiff James V. Biglan. That case is captioned Biglan v. Stuckey, et
al. Civ. Action No. 18190NC (Del. Ch. 2000). On September 25, 2000 the Court
ordered the cases consolidated under the Moran caption and named lead counsel
for plaintiffs in this matter. Defendants are to respond to the Complaint no
later than December 11, 2000. While VeriSign cannot ascertain the outcome of
this matter presently, VeriSign believes that the claims against it are without
merit and intends to vigorously defend itself against these claims.
VeriSign is involved in various other investigations, claims and lawsuits
arising in the normal conduct of our business, none of which, in our opinion
will harm our business. VeriSign cannot assure that it will prevail in any
litigation. Regardless of the outcome, any litigation may require VeriSign to
incur significant litigation expense and may result in significant diversion of
management attention. An unfavorable outcome may have a material adverse effect
on VeriSign's financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
Incorporated by
Reference
Exhibit ---------------- Filed
Number Exhibit Description Form Date Number Herewith
------- ------------------- ---- ---- ------ --------
10.01 Lease between Ellis-Middlefield Business X
Park and VeriSign, Inc. at Building 1
455 East Middlefield Road dated October
27, 2000
10.02 Lease between Ellis-Middlefield Business X
Park and VeriSign, Inc. at Buildings 2
and 3 487 and 501 East Middlefield Road
dated October 27, 2000
10.03 Lease between Ellis-Middlefield Business X
Park and VeriSign, Inc. at Building 4
575 East Middlefield Road dated October
27, 2000
10.04 Lease between Sobrato Development X
Companies #792 and VeriSign, Inc. at
Building 5 685 East Middlefield Road
dated October 27, 2000
27.01 Financial Data Schedule X
(Available in EDGAR version only)
(b) Reports on Form 8-K
The following reports were filed on Form 8-K/A, during the quarter ended
September 30, 2000:
. Amended Current Report on Form 8-K/A dated August 22, 2000 was filed
August 22, 2000 pursuant to Item 7--Financial Statements, Pro Forma
Financial Information and Exhibits.
38
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.
VERISIGN, INC.
/s/ Stratton D. Sclavos
Date: November 13, 2000 By: _________________________________
Stratton D. Sclavos
President and Chief Executive
Officer (Principal Executive
Officer)
/s/ Dana L. Evan
Date: November 13, 2000 By: _________________________________
Dana L. Evan
Executive Vice President of
Finance and Administration and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
39
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
Authenticated Payment(TM)
Authenticated Payment Services(TM)
Authenticated Payment Solution(TM)
Commerce Site(TM)
dot com biz card(TM)
dot com directory(TM)
dot com essentials(TM)
dot com mail(TM)
dot com people(TM)
dot com promotions(TM)
dot com toolkit(TM)
Global Site(TM)
ImageCafe(TM)
idNames(TM)
Internet Trust Company(TM)
Network Solutions(R)
OnSite(R)
Secure Site(TM)
SecureIT(TM)
THAWTE(TM)
The Sign of Trust on the Internet(R)
VeriSign(R)
VeriSign Logo
VeriSign Service Center(TM)
VeriSign Processing Center(TM)
WebPass(R)
Service Marks
Authentication Services BureauSM
Digital ID CenterSM
Digital NotarizationSM ServiceSM
Electronic Credentials For SMSM
Global Trust NetworkSM
GoSecure!SM
NetSure Protection Plan
PayFlowSM
SignioSM
The Internet Trust CompanySM
V-CommerceSM
"V" Checkmark DesignSM
VeriSign Trust NetworkSM
WebTrustSM
WorldtrustSM
All other brand or product names are trademarks or registered trademarks of
their respective holders.
40
EXHIBITS
As required under Item 6--Exhibits and Reports on Form 8-K, the exhibits
filed as part of this report are provided in this separate section. The
exhibits included in this section is as follows:
Exhibit
Number Exhibit Description
------- -------------------
10.01 Lease between Ellis-Middlefield Business Park and VeriSign, Inc. at
Building 1 455 East Middlefield Road dated October 27, 2000
10.02 Lease between Ellis-Middlefield Business Park and VeriSign, Inc. at
Buildings 2 and 3 487 and 501 East Middlefield Road dated October
27, 2000
10.03 Lease between Ellis-Middlefield Business Park and VeriSign, Inc. at
Building 4 575 East Middlefield Road dated October 27, 2000
10.04 Lease between Sobrato Development Companies #792 and VeriSign, Inc.
at Building 5 685 East Middlefield Road dated October 27, 2000
27.01 Financial Data Schedule (Available in EDGAR version only)
41