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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the year ended December 31, 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)
94-3221585
Delaware (I.R.S. Employer
(State or other jurisdiction of Identification No.)
incorporation or organization)
94043-1331
1350 Charleston Road, Mountain View, CA (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (650) 961-7500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
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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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. [_]
The aggregate market value of the common stock held by non-affiliates of the
registrant as of February 28, 2001 was approximately $9,530,149,847
The number of shares outstanding of the registrant's common stock as of
February 28, 2001 was 199,843,773.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to stockholders
in connection with the 2001 Annual Meeting of Stockholders are incorporated by
reference into Part III.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business............................................................................... 3
Item 2. Properties............................................................................. 29
Item 3. Legal Proceedings...................................................................... 30
Item 4. Submission of Matters to a Vote of Security Holders.................................... 31
Item 4A. Executive Officers of the Registrant................................................... 32
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters................... 34
Item 6. Selected Financial Data................................................................ 35
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 35
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 45
Item 8. Financial Statements and Supplementary Data............................................ 47
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure... 47
PART III
Item 10. Directors and Executive Officers of the Registrant..................................... 48
Item 11. Executive Compensation................................................................. 48
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 48
Item 13. Certain Relationships and Related Transactions......................................... 48
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K........................ 49
Signatures...................................................................................... 53
Summary of Trademarks........................................................................... 54
Financial Statements............................................................................ 57
Exhibits........................................................................................ 88
PART I
ITEM 1. BUSINESS
Overview
VeriSign is a leading provider of trusted infrastructure services to website
owners, enterprises, electronic commerce service providers and individuals. Our
domain name registration, digital certificate, global registry and payment
services provide the critical web identity, authentication and transaction
infrastructure that online businesses need to establish their web identities
and to conduct secure electronic commerce, or e-commerce, and communications.
Our services support businesses and consumers from the moment they first
establish an Internet presence through the entire lifecycle of e-commerce
activities.
We market our products and services through our direct sales force, our
telesales operation, our global affiliate network, resellers, service providers
and our websites. Our core authentication service offerings were established as
the cornerstone of our business in 1995 with the introduction of website
digital certificates.
Effective January 1, 2001, we organized our company into two customer-
focused lines of business. The Mass Markets Division focuses on delivering all
of our products and services to small and medium size enterprises, as well as
to consumers who wish to establish a presence on the World Wide Web. The
Enterprise and Service Provider Division focuses on delivering all of our
products and services to larger enterprises and service providers around the
world who want to establish and deliver secure Internet-based services to their
customers in both business-to-consumer and business-to-business environments.
VeriSign was incorporated in Delaware on April 12, 1995. Our principal
executive offices are located at 1350 Charleston Road, Mountain View,
California 94043. Our telephone number at that address is (650) 961-7500 and
our common stock is traded on the Nasdaq National Market under the ticker
symbol VRSN. Our primary website is www.verisign.com. The information on our
websites is not incorporated by reference into this annual report.
Mass Markets Division
Our Mass Markets Division provides two general service offerings comprised
of Web Presence Services and Business-to-Consumer Payment Services.
Web Presence Services
Our Web Presence Services include our domain name registration services, our
web server digital certificate services and our other value-added web presence
services.
Domain Name Registration Services. Through our registrar services we
register second-level domain names in the .com, .net and .org top-level
domains, enabling individuals, companies and organizations to establish a
unique identity on the Internet. Our customers apply to register second-level
domain names either directly through our web sites and e-mail-based
registration templates or indirectly through Internet access providers and
others. We accept registrations and re-registrations in one-year increments for
periods up to ten years.
Country Code and Secondary Market Name Services. Through our idNames
services, we have continued to expand our domain name registration services to
the country code top-level domains. We provide search and registration services
for domain names in country code top-level domains around the world.
Our secondary market domain name service offerings include GreatDomains.com,
a leading marketplace to transfer and appraise domain names. Through our
GreatDomains.com website, we provide a comprehensive set of related services,
including contract generation, escrow, appraisal and trademark registration
searches.
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Web Server Digital Certificate Services. Our family of web server
certificate services allows organizations to implement and operate secure
websites that utilize the Secure Sockets Layer, or "SSL" protocol or the
Wireless Transport Layer Security, or "WTLS," protocol to establish their
identities to customers and other websites during electronic commerce
transactions and communications over wired or wireless IP networks. Without a
digital certificate installed on the website server the SSL and WTLS protocols
cannot be utilized.
We currently offer three core versions of our web server digital certificate
services and content signing certificates. Each is differentiated by the target
application of the server that hosts the digital certificate.
Secure Site and Secure Site Plus. Secure Site is our standard service
offering that enables websites to implement basic SSL security features
between their sites and individual end-user browsers. We also offer an
upgraded version of this service, called Secure Site Plus, that includes
security monitoring, security assessment, site performance monitoring and
additional warranty protection.
Global Site and Global Site Plus. Global Site is an advanced version of
Secure Site that incorporates all of the features and functionality of our
Secure Site services. In addition, our Global Site Services allow U.S. and
international enterprises to offer stronger, 128-bit encrypted, SSL
sessions between their websites and end-user browsers from Netscape and
Microsoft. We also offer an upgraded version of this service, called Global
Site Plus, that includes security monitoring, security assessment, site
performance monitoring and additional warranty protection.
WAP Server Certificates. WAP Server Certificates provide authentication
and encryption between wireless web servers and mobile devices utilizing
WTLS. Our WAP server certificate service is compatible with many WAP
servers including Motorola, Nokia, and Openwave.
Content Signing Certificates. In addition to our core Web Server Digital
Certificate services, we offer content signing certificates. Content
Signing digital certificates enable developers, content providers,
publishers and vendors to digitally sign their content in order to
authenticate the source and provide assurance of the integrity of the
content delivered to end-users.
Other Value-Added Products and Services. We also provide other web identity
and web presence value-added products and services through our website, which
serves as a one-stop shop for our customers at a very early point in the
establishment of their web identities. We offer an expanding set of value-added
products and services that can extend our relationship with our customers as we
help them maximize the value of their web identities over time. Some of our
most popular value-added offerings are:
. NSI-hosted domain names. Through this service our customers can reserve a
domain name for future use and activate it later through our provision of
domain name record hosting.
. ImageCafe. The ImageCafe website creation tool is an automated tool that
allows users to build websites efficiently, at an economical price point.
. dot com biz card. dot com biz card is a one-page website that can be used
as a "virtual business card" by domain name registrants to promote their
businesses on the Internet.
. dot com forwarding. dot com forwarding is a service that enables domain
name registrants to "point" or forward users from multiple domain names
to one website.
. dot com mail. dot com mail is a portable, personalized e-mail service
designed primarily for small businesses. The service allows for
individuals and businesses to use their domain names as their e-mail
addresses.
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Business-to-Consumer Payment Services. Our Business-to-Consumer Payment
Services provide online stores with secure, reliable and affordable credit
card, debit card, purchase card, and electronic check processing services. Our
business-to-consumer payment services include the following services:
Payflow Link. Payflow Link is a HyperText Transfer Protocol, or HTTP,
based service that enables merchants to connect their consumers through an
HTML hyperlink on their existing website to a secure VeriSign-hosted order
form and to use it to automate order acceptance, authorization, processing
and transaction management.
Payflow Pro. Payflow Pro is a payment processing service for merchants
that enables payment processing through a small SSL transmission control
protocol/Internet protocol, or TCP/IP, enabled messaging agent that
controls communications between the merchant's application and the Payflow
Platform.
Payflow Fraud Screen. Payflow Fraud Screen is a fraud screening service
that works with the Payflow Pro service to provide online merchants with a
method to differentiate between legitimate shoppers and fraudulent users in
real time. This service uses the technology of HNC Software. Payflow Fraud
Screen enables merchants to complete authorization and fraud evaluation of
Internet credit card purchases in a single transaction request.
Commerce Site Services. Commerce Site Services are integrated
electronic-commerce services for online merchants and online stores.
Enterprise and Service Provider Division
The Enterprise and Service Provider Division provides products and services
to Fortune 5000 enterprises and service providers who want to establish and
deliver secure Internet-based services for their customers in both business-to-
consumer and business-to-business environments. Our enterprise services, global
registry services, and Internet technology consulting services generally
comprise the service offerings of the Enterprise and Service Provider Division.
Enterprise Services
Our Enterprise Services includes our traditional public key infrastructure,
or "PKI," services for enterprises or members of our affiliate program as well
as enterprise naming services, business-to-business payment services and
services for emerging markets, such as wireless and broadband. The group's
product and service offerings include:
Enterprise PKI Services. Our Enterprise PKI services are sold under the
VeriSign OnSite and VeriSign Go Secure! brands, and are tailored to meet the
specific needs of enterprises that wish to issue digital certificates to
employees, customers, citizens or trading partners.
OnSite Services. VeriSign OnSite is a managed service that allows an
organization to leverage our trusted data processing infrastructure to
develop and deploy customized digital certificate services for its user
communities. OnSite can be used by our customers to provide digital
certificates for a variety of applications, including: controlling access
to sensitive data and account information, enabling digitally-signed e-
mail, encryption of e-mail, or SSL sessions. Our Onsite services can help
customers create an online electronic trading community, manage supply
chain interaction or facilitate and protect online credit card
transactions.
Go Secure! Services. VeriSign Go Secure! Services are a set of managed
application services that enable enterprises to quickly build digital
certificate-based security into their transaction and communication
applications. Go Secure! services are similar in functionality to our
OnSite Services and are designed to incorporate digital certificates into
existing e-mail, browsing applications, directory and virtual private
network devices.
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To expand and complement our Enterprise PKI services, we provide a
professional services group that includes experts in digital certificate
architecture and application integration. Our professional services group
provides a variety of design, development and implementation services. These
services include integrating with existing applications and databases,
consulting on policies and procedures related to the management and deployment
of digital certificates, training classes on the latest developments in
security technology and selecting the necessary software and hardware to
complement a digital certificate solution.
VeriSign Affiliate PKI Services. VeriSign Affiliate PKI Services are
targeted at a wide variety of organizations that provide large-scale electronic
commerce and communications services over wired and wireless IP networks. We
designate these types of organizations as "VeriSign Affiliates" and provide
them with a combination of technology, support and marketing services to
facilitate their initial deployment and on-going delivery of digital
certificate services.
VeriSign Affiliate PKI Services are delivered through either our VeriSign
Service Center or VeriSign Processing Center offerings. Both offerings are
based on our WorldTrust software platform and enable a licensed VeriSign
Affiliate to offer one or more types of digital certificate services.
VeriSign Service Center. The VeriSign Service Center provides a VeriSign
Affiliate with all of the capabilities needed to perform subscriber
enrollment and authentication, digital certificate application approval,
directory hosting, customer support, billing integration and report
generation from within their facilities or act as an outsource provider of
OnSite services, while leveraging VeriSign's secure data centers for back-
end processing.
VeriSign Processing Center. The VeriSign Processing Center provides a
VeriSign Affiliate with all of the capabilities of the Service Center plus
the WorldTrust modules required to perform all certificate life cycle
services of issuance, management, revocation and renewal from within its
own secure data center.
We also provide each VeriSign Affiliate with the appropriate business
readiness services to facilitate the efficient and timely rollout of their
digital certificate offerings. These readiness services may include Service
Center or Processing Center installation and integration services, facility and
network design consulting, technical and customer support documentation and
training, sales and marketing support, operating practice templates and local
market customization. VeriSign Affiliates that agree to conform to certain
standards are also offered membership in the VeriSign Trust Network, a global
network of digital certificate service providers that operate with common
technology, infrastructure and practices to enable digital certificate
interoperability on a worldwide basis.
Enterprise Naming Services. Our enterprise naming services are the same as
our idNames services discussed in "Mass Markets Division--Country Code and
Secondary Market Name Services" above. In addition, we provide a confidential
domain name reservation service, a domain name modification assistance service
and a multi-year domain name maintenance program for registrants that have
registered second-level domain names in the .com, .net and .org top level
domains and in many of the available country code top level domains.
Business-to-Business Payment Services. Our business-to-business payment
services are similar to those offered as business-to-consumer payment services
discussed in "Mass Markets Division--Business-to-Consumer Payment Services"
above. The services include Payflow Link, Payflow Pro, Payflow Fraud Screen and
Commerce Site Services.
Emerging Market Services. Emerging market services include services to
provide authentication, payment and validation in wireless and broadband modes.
These services are designed to allow users, carriers and content providers to
be confident that they can reliably identify each other before engaging in a
transaction, that payment information is secure and that digital transaction
records are readily accessible.
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Our end-to-end Wireless Trust Services platform allows wireless carriers and
service providers to offer individuals and businesses the authentication,
secure payment and validation capabilities they require to engage in wireless
transactions with confidence. Through the use of our platform, wireless
carriers are able to provide a secure mobile commerce environment for
conducting authenticated logon, digitally signed transactions, digital
payments, profile management, digital notarization and digital receipting
through a broad array of handheld devices and applications.
Global Registry Services
Domain Name Registry Services. We are the exclusive registry of domain names
within the .com, .net and .org global top-level domains under agreements with
ICANN and the Department of Commerce, or "DOC." As a registry, we maintain the
master directory of all second level domain names in the .com, .net and .org
top-level domains. We own and maintain 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 part of our domain name registry services, we operate twelve global top-
level domain name servers that answer domain name lookups in the .com, .net,
and .org zones. These name servers provide the associated Internet protocol
address for every .com, .net, or .org domain name on the Internet, resulting in
over 2.5 billion responses per day. These name servers are located around the
world, providing local domain name service throughout North America, in Europe,
and in Asia. Each server facility is a carefully controlled and monitored
environment, with the latest in security and system maintenance technology.
This network of name servers is one of the cornerstones of the Internet's
infrastructure.
Through an outsourcing agreement with the operator of the .tv top-level
domain, we also provide domain name registry services for the .tv country code.
Under this agreement, we provide registry infrastructure support that includes
the use of our proprietary shared registry system for registrars of .tv.
We also offer a comprehensive suite of managed domain name system, or DNS,
services and tools that fortify and simplify DNS management. The first such
offering, Secondary Name Server Hosting, is an outsourced DNS solution for
companies faced with the considerable time, expense, and risk of building and
operating an extensive DNS infrastructure. A company's DNS information is
hosted on secondary name servers co-located at our domain name server sites,
taking the load off the company's primary name server, improving DNS
availability and geographical distribution.
Other Global Registry Services. We recently expanded our service offering to
include non-domain name registration related applications. In December 2000, we
announced the opening of the trial project for testing services and
applications using the technology that transforms e.164 numbers to domain name
system names, otherwise known as ENUM. The ENUM standard uses the Internet's
domain name system to map telephone numbers to service addresses. In February,
2001, we announced the availability of an online number registration system for
use by ComoreTel's new Global 269 toll-free telephone service. The registration
system was developed and will be operated by us and enables subscribers to
reserve, set up and manage their chosen Global 269 toll-free numbers.
Internet Technology Consulting Services
We also deliver Internet technology consulting services to some of the
world's leading businesses that are utilizing Internet technologies for their
internal enterprise networks, or intranets. Customers are offered a life cycle
approach to their professional services needs. Our consulting services are
comprised of seven general practice areas that support a wide range of network
infrastructure and E-Business service needs that include strategic consulting,
design and architecture, implementation, training, and in the future, managed
services. Our consulting services provide a full range of information
technology consulting services including: (i) IT Business Services; (ii)
Internet Infrastructure--design and build the infrastructure to support
Internet initiatives;
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(iii) E-Business Solutions--develop web presence and interactive
personalization to support various user communities; (iv) Enterprise
Management--optimize platforms, applications and databases through
monitoring/network management; (v) Network Engineering--tune your network to
meet performance demands; (vi) IP Services--manage protocols to enable multiple
networks to communicate; and (vii) Security--safeguard operations from unwanted
intruders.
Operations Infrastructure
Our operations infrastructure consists of secure data centers in Mountain
View, California, Herndon, Virginia and Kawasaki, Japan. Our international
affiliates also operate secure data centers in their geographic areas. These
centers operate on a 24-hour, 7 days per week basis and support all aspects of
our Internet-based trust services. By leveraging our WorldTrust platform, we
can distribute certain functionality of our secure data centers in optimum
configurations based on customer requirements for availability and capacity.
As part of our domain name registry services, we create operate twelve
global top-level domain name servers that answer domain name lookups in the
.com, .net, and .org zones. These name servers provide the associated Internet
protocol address for every .com, .net, or .org domain name on the Internet,
resulting in over 2.5 billion responses per day. These name servers are located
around the world, providing local domain name service throughout North America,
in Europe, and in Asia. Each server facility is a carefully controlled and
monitored environment, with the latest in security and system maintenance
technology. This network of name servers is one of the cornerstones of the
Internet's infrastructure.
Key features of our operations infrastructure include:
Distributed Servers. We deploy a large number of high-speed servers to
support capacity and availability demands. The WorldTrust platform provides
automatic fail-over, load balancing and threshold monitoring on critical
servers.
Advanced Telecommunications. We deploy and maintain redundant
telecommunications and routing hardware and maintain high-speed connections
to multiple Internet service providers, or ISPs and throughout our internal
network to ensure that our mission critical services are readily accessible
to customers at all times.
Network Security. We incorporate architectural concepts such as
protected domains, restricted nodes and distributed access control in our
system architecture. We have also developed proprietary communications
protocols within and between the WorldTrust platform modules that we
believe can prevent most known forms of electronic attacks. In addition, we
employ the latest network security technologies including firewalls and
intrusion detection software, and contract with security consultants who
perform periodic attacks and security risk assessments.
Call Center and Help Desk. We provide a wide range of customer support
services through phone-based call centers, e-mail help desks and web-based
self-help systems. Our California based call center is staffed from 5 a.m.
to 6 p.m. PST and employs an automated call directory system to support our
Enterprise and Service Provider Division service offerings. Our Virginia
based call centers are staffed 24 hours, 7 days a week to support our Mass
Markets Division and Global Registry Services service offerings. All call
centers also have web-based support services which are available on a 24-
hour, 7 days per week basis, utilizing customized auto response systems to
provide self-help recommendations and a staff of trained customer support
agents.
Disaster Recovery Plans. Although we believe our operations facilities
are highly resistant to systems failure and sabotage, we have developed a
disaster recovery and contingency operation plan. We also have an agreement
with Comdisco Corporation to provide replication of customer data,
facilities and systems at another site so that all of our services can be
re-instated within 24 hours of a failure. In addition, all of our digital
certificate services are linked to advanced storage systems that provide
data protection through techniques such as mirroring and replication. We
also contract for a back-up facility to a third party's secure facility in
California to provide redundancy and enhanced reliability for our Internet
root zone administration. Additionally, the Registry has a disaster
recovery program with IBM.
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Marketing, Sales and Distribution
We market our services worldwide through multiple distribution channels,
including the Internet, direct sales, telesales, value-added resellers, systems
integrators and our international affiliates. A significant portion of our
revenues to date 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.
Our direct sales and marketing organization at December 31, 2000 consisted
of approximately 500 individuals, including managers, sales representatives and
technical support personnel. We have field sales offices globally providing
coverage throughout the world. Additionally, our sales are currently being made
through multiple channels including wholesale and retail distributors,
resellers and direct sales throughout the world.
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
approximately 35 organizations including Arabtrust in the Middle East, British
Telecommunications plc in the United Kingdom, Canadian Imperial Bank of
Commerce of Canada, CertiSur of Argentina, Certplus of France, eSign of
Australia, HiTrust of Taiwan, KPN Telecom of The Netherlands, Roccade of The
Netherlands, the South African Certification Agency in South Africa, and 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.
The VeriSign customer base is not concentrated in any particular industry
and in each of the past three fiscal years, no single customer has accounted
for 10 percent or more of our net sales.
Research and Development
As of December 31, 2000, VeriSign had 228 employees dedicated to research
and development. Research and development expenses were $41.3 million in 2000,
$13.3 million in 1999 and $8.4 million in 1998. To date, all development costs
have been expensed as incurred. We believe that timely development of new and
enhanced Internet-based trust services and technology are necessary to remain
competitive in the marketplace. Accordingly, we intend to continue recruiting
and hiring experienced research and development personnel and to make
additional investments in research and development.
We believe that our future success will depend in large part on our ability
to continue to maintain and enhance our current technologies, Internet-based
trust services and registration services. To this end, we leverage the modular
nature of our WorldTrust platform to enable us to develop enhancements rapidly
and to deliver complementary new Internet-based trust services. In the past, we
have developed Internet-based trust services both independently and through
efforts with leading application developers and major customers. We have also,
in certain circumstances, acquired or licensed technology from third parties,
including public key cryptography technology from RSA. Although we will
continue to work closely with developers and major customers in our development
efforts, we expect that most of our future enhancements to existing services
and new Internet-based trust services will be developed internally.
The markets for Internet-based trust services and web identity services are
emerging markets characterized by rapid technological developments, frequent
new product introductions and evolving industry standards. The emerging nature
of these markets and their rapid evolution will require that we continually
improve the performance, features and reliability of our Internet-based trust
services and web identity services, particularly in response to competitive
offerings and that we introduce both new and enhanced Internet-based trust
services and web identity services as quickly as possible and prior to our
competitors.
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Competition
Competition in Internet Trust Services. Our Internet-based trust services
are targeted at the new and rapidly evolving market for trusted services,
including authentication, validation and payment, that enable secure electronic
commerce and communications over wired and wireless IP networks. Although the
competitive environment in this market has yet to develop fully, we anticipate
that it will be intensely competitive, subject to rapid change and
significantly affected by new product and service introductions and other
market activities of industry participants.
Our principal competitors generally fall within one of three categories: (1)
companies such as Baltimore Technologies, Certicom Corp., Diversinet Corp. and
Entrust Technologies, which offer software applications and related digital
certificate products that customers operate themselves; (2) companies such as
Digital Signature Trust Company (a subsidiary of Zions Bancorporation) that
primarily offer digital certificate and certificate authority or "CA" related
services; and (3) companies focused on providing a bundled offering of products
and services such as GTE CyberTrust (recently acquired by Baltimore
Technologies) and IBM (working jointly with Equifax). We also experience
competition from a number of smaller companies, and we believe that our primary
long-term competitors may not yet have entered the market. Furthermore,
Netscape and Microsoft have introduced software products that enable the
issuance and management of digital certificates, and we believe that other
companies could introduce such products. Additional companies could offer
digital certificate solutions that are competitive with ours.
In addition, browser companies that embed our interface technologies or
otherwise feature us as a provider of digital certificate products and services
in their web browsers or on their websites could also promote our competitors
or charge us substantial fees for promotions in the future. New technologies
and the expansion of existing technologies may increase the competitive
pressures on us. We can not assure you that competing technologies developed by
others or the emergence of new industry standards will not adversely affect our
competitive position or render our Internet-based trust services or
technologies noncompetitive or obsolete. In addition, the market for digital
certificates is emerging and is characterized by announcements of collaborative
relationships involving our competitors. The existence or announcement of any
relationships could adversely affect our ability to attract and retain
customers. As a result of the foregoing and other factors, we may not be able
to compete effectively with current or future competitors and competitive
pressures that we face could materially harm our business.
In connection with our first round of financing, RSA contributed certain
technology to us and entered into a non-competition agreement with us under
which RSA agreed that it would not compete with our CA business for a period of
five years. This non-competition agreement expired in April 2000. We believe
that, because RSA, which is now a wholly-owned subsidiary of RSA Security, has
already developed expertise in the area of cryptography, its barriers to entry
would be lower than those that would be encountered by our other potential
competitors should RSA choose to enter any of our markets. If RSA were to enter
into the digital certificate market, our business could be materially harmed.
Competition in Web Presence Services. We currently face competition among
registrars within a single top level domain like .com, and in the future face
competition among registrars within all new top level domains. As of February
28, 2001, there were over 140 ICANN-accredited registrars, including us,
America Online, BulkRegister.com, CORE or "Council of Internet Registrars,"
Deutsche Telekom, France Telecom/Transpac, iDirections, Internet Domain
Registars, interQ Incorporated, Melbourne IT, NameSecure.com, NetBenefit,
PSINet, Register.com, Tucows.com, Inc., Talk.com and Verio. As of February 28,
2001, our shared registration system was being used by 77 accredited
registrars, in addition to us, in the .com, .net and .org top level domains to
register second level domain names. We also face competition from third level
domain name providers such as Internet access providers and registrars of top
level domains other than those top level domains for which we act as exclusive
registry. Although we currently act as the exclusive registry for second level
domain names within the .com, .net and .org top level domains, we face
competition from registries of country code top level domains and from new top
level domains.
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The process to introduce new top level domains is currently in progress. On
November 16, 2000, ICANN announced its selections for registry operators for
seven new top level domains. The applicants selected for further negotiation
are the following:
. .aero--Societe Internationale de Telecommunications Aeronautiques SC;
. .biz--JVTeam, LLC;
. .coop--National Cooperative Business Association;
. .info--Afilias, LLC;
. .museum--Museum Domain Management Association;
. .name--Global Name Registry, Ltd; and
. .pro--RegistryPro, Ltd.
As a result, we could have additional competition.
Competition in Internet Technology Consulting Services. Companies with
Internet expertise are current or potential competitors to our Internet
technology services. These companies include systems integrators and consulting
firms, such as Accenture, formerly Andersen Consulting, IBM Global Services and
Lucent NetCare. We also compete with some companies that have developed
products that automate the management of Internet protocol addresses and name
maps throughout enterprise-wide intranets, and with companies with internally-
developed systems integration efforts.
Several of our current and potential competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than we do and therefore may be able to respond more quickly than we
can to new or changing opportunities, technologies, standards and customer
requirements. Many of these competitors also have broader and more established
distribution channels that may be used to deliver competing products or
services directly to customers through bundling or other means. If such
competitors were to bundle competing products or services for their customers,
the demand for our products and services might be substantially reduced and our
ability to distribute our products successfully and the utilization of our
services would be substantially diminished.
Industry Regulation
Export. Exports of software products utilizing encryption technology are
generally restricted by the U.S. and various foreign governments. Although we
have obtained U.S. government approval to export our Global Server digital
certificates and none of our other Internet-based trust services are currently
subject to export controls under U.S. 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 and more countries. If
we do not obtain required approvals we may not be able to sell certain
Internet-based trust services in international markets.
Internet Commerce. There are currently no federal laws or regulations that
specifically control certification authorities, or CAs, but a limited number of
states have enacted legislation or regulations with respect to CAs. If the
market for digital certificates grows, the U.S. federal or state or foreign
governments may choose to enact further regulations governing CAs or other
providers of digital certificate products and related services. Regulations or
the costs of complying with these regulations could harm our business.
Many companies conducting electronic commerce over IP networks do not
collect sales or other similar taxes with respect to shipments of goods into
other states or foreign countries or with respect to other transactions
conducted between parties in different states or countries. It is possible that
the U.S. federal or state or foreign governments may seek to impose sales taxes
on companies that engage in electronic commerce
11
over IP networks. In the event that government bodies succeed in imposing sales
or other taxes on electronic commerce, the growth of the use of IP networks for
electronic commerce could slow substantially, which could materially harm our
business.
Due to the increasing popularity of IP networks, it is possible that
domestic or foreign laws and regulations may be enacted covering issues such as
user privacy, information handling practices, consumer protection, and the
pricing, content and quality of products and services. The increased attention
focused upon these issues as a result of the adoption of other laws or
regulations may reduce the rate of growth of IP networks, which in turn could
result in decreased demand for our Internet-based trust services or could
otherwise materially harm our business.
Domain Name Registration. The cooperative agreement, which Network Solutions
entered into with the National Science Foundation in December 1992, provided
that we would perform Internet domain name registration services for the top
level domains .com, .net, .org, .edu and .gov . These registration services
included the initial two-year domain name registration and annual re-
registration, and throughout the registration term, maintenance of and
unlimited modifications to individual domain name records and updates to the
master file of domain names. The cooperative agreement became effective January
1, 1993. Effective September 9, 1998, the Department of Commerce took over the
administration of the cooperative agreement from the National Science
Foundation.
With the onset of increased commercial growth of the Internet, the U.S.
Government initiated activity directed at increased privatization of the
policy-making and central administration of the Internet. Within the U.S.
Government, leadership for the continued privatization of Internet
administration is currently provided by the Department of Commerce. On June 10,
1998, the Department of Commerce published in the Federal Register a plan
referred to as the Statement of Policy, calling for increased competition and
the formation of a corporation to assume certain responsibilities relating to
the domain name system.
The process initiated by the Statement of Policy resulted in the entry by
the U.S. Government into a Memorandum of Understanding, or MOU, with ICANN, a
U.S.-based private not-for-profit corporation with an international board of
directors. The U.S. Government has recognized ICANN as the corporation
described in amendment 11 to our December 1992 cooperative agreement, in the
performance of ICANN's obligations under the MOU, and until such time as the
MOU is terminated.
Currently, the technical structure of the Internet only permits one registry
for each top-level domain. A registrar acts as the interface between the
registry and the end-user domain name registrants. Registrars submit to the
registry certain limited information for each of their customers that has a
second-level domain name in a given top level domain. A registrar can provide
value-added products and services in addition to its basic registration
service. Numerous registrars are able to operate within each top-level domain.
We currently are the exclusive registry in the .com, .net and .org top-level
domains and the leading registrar in those domains.
On November 10, 1999, a series of wide-ranging agreements were entered into.
These agreements include the following:
. a registry agreement between us and ICANN under which we will continue
to act as the exclusive registry for the .com, .net and .org top level
domains for at least four years from that date;
. a revised registrar accreditation agreement between ICANN and all
registrars registering names in the .com, .net and .org domains;
. a revised registrar license and agreement between us as registry and all
registrars registering names in the .com, .net and .org domains using
our proprietary shared registration system;
. an amendment to the cooperative agreement; and
. an amendment to the MOU.
12
Under these agreements we have: (i) recognized ICANN as the not-for-profit
corporation described in amendment 11 to the cooperative agreement, (ii) become
an ICANN-accredited registrar and (iii) 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.
These agreements provide that we will be an accredited registrar through
November 9, 2004 with a right to renew indefinitely in accordance with the
agreement.
We have implemented modifications to the shared registration system that
enable a registrar to (a) accept registrations and re-registrations in one-year
increments and (b) add one year to a registrant's registration period upon
transfer of a registration from one registrar to another. The unexpired term of
any registration may not exceed ten years. We are contractually obligated to
provide equivalent access to the shared registration system to all ICANN-
accredited registrars and to ensure that the revenues and assets of the
registry are not utilized to advantage our registrar to the detriment of other
registrars. We have agreed to and implemented an organizational conflict of
interest compliance plan that includes organizational, physical and procedural
safeguards in connection with these obligations.
The term of the registry agreement extends until November 9, 2003, except
that in the event that we complete the legal separation of the ownership of our
registry business from our registrar business by divesting all the assets and
operations of one of those businesses by May 9, 2001 to an unaffiliated third
party that enters an agreement enforceable by ICANN and the Department of
Commerce (1) not to be both a registry and a registrar in the .com, .net and
.org top-level domains and (2) not to control, own or have as an affiliate any
individual(s) or entity(ies) that, collectively, act as both a registry and a
registrar in the .com, .net and .org top-level domains, the term will be
extended for an additional four years, resulting in a total term of eight
years. For the purposes of this provision, "unaffiliated third party" means any
entity in which we (including our successors and assignees, subsidiaries and
divisions, and their respective directors, officers, employees, agents and
representatives) do not have majority equity ownership or the ability to
exercise managerial or operational control, either directly or indirectly
through one or more intermediaries. "Control," as used in this provision, means
any of the following: (1) ownership, directly or indirectly, or other interest
entitling us to exercise in the aggregate 25% or more of the voting power of an
entity; (2) the power, directly or indirectly, to elect 25% or more of the
board of directors (or equivalent governing body) of an entity; or (3) the
ability, directly or indirectly, to direct or cause the direction of the
management, operations, or policies of an entity. Department of Commerce
approval would be required for the transfer of our registry operations and for
the designation of a successor registry by ICANN. Upon expiration of the
agreement, ICANN will conduct a process for selecting a successor registry, in
which case we may compete on an equal basis. If, during the term of the
agreement, we fail to remedy any breach by us of the agreement, we may be
terminated as the registry for the .com, .net and .org top level domains.
ICANN is contractually obligated to the registry and to all accredited
registrars to comply with specified procedural requirements governing the
exercise of its authority. The agreements also explicitly define the subjects
within the scope of ICANN's authority with respect to both the registry and
registrars. ICANN's authority to set policy for the registry may be terminated
if (a) ICANN breaches the registry agreement and fails to remedy that breach;
(b) the Department of Commerce withdraws its recognition of ICANN; or (c) the
Department of Commerce concludes that ICANN has not made sufficient progress
towards entering into agreements with other registries and we are competitively
disadvantaged. In the event ICANN's authority is terminated, the Department of
Commerce will assume the policy-setting function for registry services for the
.com, .net and .org top level domains.
We have agreed to pay annual fees to ICANN as set by ICANN at levels
currently not to exceed $2 million for our registrar and $250,000 for our
registry. We have agreed to provide to the Department of Commerce control over
the content and use of the internic.net website, subject to transition
arrangements set forth in the agreements.
All accredited registrars are obligated to provide query-based access to
registration data and are barred from placing conditions upon any legal use of
that data, except to prohibit use of the data to enable the
13
transmission of mass unsolicited commercial solicitations via e-mail (spam) or
to enable high volume, automated electronic processes that apply to the
registrar (or its systems). In addition, all accredited registrars are required
to provide third-party bulk access to registration data (subject to the
restrictions described above) for an annual fee not to exceed $10,000. This
obligation would remain in effect until replaced by a different policy adopted
by ICANN or a finding by the Department of Commerce that no individual or
entity is able to exercise market power with respect to data used for
development of third-party value-added products and services.
On October 24, 1999, ICANN adopted the Uniform Domain Name Dispute
Resolution Policy, commonly known as the dispute policy, and accompanying rules
of procedure required to be used by all accredited registrars in the .com, .net
and .org top level domains. We implemented this policy on January 1, 2000.
Registrars do not participate in the administration or conduct of any
proceeding brought under the dispute policy. Each registrant agrees in its
contract with a registrar to be bound by the terms and conditions found in the
dispute policy. If a complaint is brought by a trademark owner under the
dispute policy and the trademark owner prevails, the registrar is required
under the dispute policy to implement the decision within ten days after being
notified of a decision. The registrant can suspend implementation of the
decision by filing suit against the trademark owner within that ten-day period.
On November 29, 1999, the Anticybersquatting Consumer Protection Act was
signed into law by the President, making it illegal under certain circumstances
for persons to register domain names which conflict with personal names or
trademarks. The remedies under this Act are forfeiture, cancellation, and
transfer of the domain name registration to the trademark owner or the
individual. Except in cases of bad faith, reckless disregard or willful failure
to comply with a court order, the registry and registrar are not liable for
injunctive or monetary relief as long as the registry and registrar comply with
the procedural requirements of the statute.
Intellectual Property
We rely primarily on a combination of copyrights, trademarks, service marks,
trade secret laws, restrictions on disclosure and other methods to protect our
intellectual property and trade secrets. We also enter into confidentiality
agreements with our employees, consultants and current and potential
affiliates, customers and business partners. We also generally control access
to and distribution of our documentation and other proprietary information.
Despite these 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, we cannot assure you others will not independently
develop substantially equivalent intellectual property. We cannot assure you
that the precautions we take will prevent misappropriation or infringement of
our technology. We have also filed over twenty-five applications for patents
with respect to certain of our technology. However, the U.S. Patent and
Trademark Office may not award any patents with respect to these applications.
Even if patents are issued, they may not provide us with any competitive
advantage or adequately protect this technology from infringement or prevent
others from claiming our technology infringes that of third parties.
Furthermore, the laws of foreign countries may not protect our proprietary
rights in those countries to the same extent as U.S. law protects these rights
in the U.S.
We have obtained federal trademark protection of a few of our marks,
including VeriSign, Network Solutions, Network Solutions' globe and gear design
and we have common law trademark rights in the U.S. and abroad in many other
proprietary names.
With regard to our Internet trust services, we also rely on certain licensed
third-party technology, such as public key cryptography technology licensed
from RSA and other technology that is used in our Internet-based trust services
to perform key functions. In particular, RSA has granted us a perpetual,
royalty free, nonexclusive, worldwide license to distribute Internet-based
trust services we develop that contain or incorporate the RSA BSAFE and TIPEM
products and that relate to digital certificate-issuing software, software for
the management of private keys and for digitally signing computer files on
behalf of others, software for customers to preview and forward digital
certificate requests to us, or such other services that, in
14
RSA's reasonable discretion, are reasonably necessary for the implementation of
a digital certificate business. Our agreement with RSA also requires RSA to
provide us maintenance and technical support for these services. RSA's BSAFE
product is a software tool kit that allows for the integration of encryption
and authentication features into software applications. TIPEM is a secure e-
mail development tool kit that allows for secure e-mail messages to be sent
using one vendor's e-mail product and read by another vendor's e-mail product.
These third-party technology licenses may not continue to be available to us on
commercially reasonable terms or at all. The loss of any of these technologies
could materially harm our business. Moreover, in many of our current license
agreements, the licensor has agreed to defend, indemnify and hold us harmless
with respect to any claim by a third party that the licensed software infringes
any patent or other proprietary right. Although these licenses are fully paid,
we cannot assure you that the outcome of any litigation between the licensor
and a third party or between us and a third party will not lead to obligations
for us to pay royalties for which we are not indemnified or for which such
indemnification is insufficient, or that we will be able to obtain any
additional license on commercially reasonable terms or at all. In the future,
we may seek to license additional technology to incorporate in our Internet-
based trust services. Third party technology licenses that we may need to
obtain in the future may not be available to us on commercially reasonable
terms or at all.
With regard to our domain name registration services, our principal
intellectual property consists of, and our success is dependent upon, our
proprietary software used in our registration service business and certain
methodologies and technical expertise we use in both the design and
implementation of our current and future registration services and Internet-
based products and services businesses. We own our proprietary shared
registration system through which competing registrars, including our
registrar, submit .com, .net and .org second-level domain name registrations.
Some of the software and protocols we use in our registration services are in
the public domain or are otherwise available to our competitors. We also have
compiled a database of information relating to customers in our registration
business. While a portion of this database is available to the public in the
form of a directory service, we believe that we have certain ownership rights
in this database, and we intend to protect these rights.
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 asserted or prosecuted against us in the future, and it
is possible that past or future assertions or prosecutions could harm our
business. Any such claims, with or without merit, could be time-consuming,
result in costly litigation and diversion of technical and management
personnel, cause delays in the release of new Internet-based trust services 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 terms acceptable to us, or at all. In the event of a successful
claim of infringement against us and our failure or inability to develop non-
infringing technology or license the infringed or similar technology on a
timely basis, our business could be materially harmed.
Employees
As of December 31, 2000, we had 2,291 full-time employees. Of the total,
1,017 were employed in operations, 492 in sales and marketing, 228 in research
and development and 554 in finance and administration, including information
services personnel. We have never had a work stoppage, and no employees are
represented under collective bargaining agreements. We consider our relations
with our employees to be good. Our ability to achieve our financial and
operational objectives depends in large part upon our continued ability to
attract, integrate, train, retain and motivate highly qualified sales,
technical and managerial personnel, and upon the continued service of our
senior management and key sales and technical personnel, none of whom is bound
by an employment agreement. Competition for qualified personnel in our industry
and in some of our geographical locations, such as the San Francisco Bay Area,
is intense, particularly in software development and product management
personnel.
15
Acquisitions and Investments
During 2000, we acquired several companies that expanded and enhanced our
product and service offerings and expanded our marketing reach. In February
2000, we acquired THAWTE Consulting (Pty) Ltd., a privately held South African
company that provides digital certificates to website owners and software
developers. Also in February 2000, we acquired 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.
In June 2000, we acquired Network Solutions, Inc., a publicly traded company
that provides Internet domain name registration and global registry services
for aggregate consideration of approximately $19.6 billion. Network Solutions
expanded VeriSign's product and service offerings through the addition of the
leading domain name registrar and the exclusive registry of domain names within
the .com, .net and .org global top-level domain names. The acquisition of
Network Solutions is a key component of VeriSign's vision of expanding our
service offerings for the Internet infrastructure.
In October 2000, we acquired GreatDomains.com, Inc., a privately held
company that provides services in the secondary domain name market for domain
name registrants that wish to transfer their domain name registration to
another party. We also acquired several other smaller companies in 2000 that
added new technology, new products and services or new distribution channels.
In 2000, we also made minority investments in several companies that build
technology or provide products and services that are complementary to our
products and services.
Segment Information
Segment information is set forth in Note 10 of the Notes to Consolidated
Financial Statements referred to in Item 8(a) below and is incorporated herein
by reference.
16
RISK FACTORS
In addition to other information in this Form 10-K, the following risk
factors should be carefully considered in evaluating us and our business
because these factors currently have a significant impact or may have a
significant impact on our business, operating results or financial condition.
Actual results could differ materially from those projected in the forward-
looking statements contained in this Form 10-K as a result of the risk factors
discussed below and elsewhere in this Form 10-K.
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 several
large 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 the acquired companies;
. the rate and timing of the growth and use of internet protocol, or IP,
networks for electronic commerce and communications;
. the extent to which digital certificates and domain names are used for
these communications 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, digital
certificates 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, digital certificates 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.
17
Our business depends on the future growth of the Internet and adoption and
continued use of IP networks.
Our future success substantially depends on the continued growth in the use
of the Internet and IP networks. If the use of and interest in the Internet and
IP networks does not continue to grow, our business would be harmed. To date,
many businesses and consumers have been deterred from utilizing the Internet
and IP networks for a number of reasons, including, but not limited to:
. potentially inadequate development of network infrastructure;
. security concerns, particularly for online payments, including the
potential for merchant or user impersonation and fraud or theft of stored
data and information communicated over IP networks;
. privacy concerns, including the potential for third parties obtaining
personally identifiable information about users to disclose or sell data
without notice to or the consent of such users;
. 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.
We may not be able to sustain the revenue growth we have experienced in
recent periods. In addition, past revenue growth may not be indicative of
future operating results. If we do not successfully maintain our current
position as a leading provider of domain name registration services or continue
to develop or market additional value-added web presence products and services,
our business could be harmed.
Our web presence services will account for a significant portion of our
revenue in at least the near term. Our 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 web
presence 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 for our
web presence services.
18
Issues arising from implementing agreements with ICANN and the Department of
Commerce could harm our registration and other businesses.
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.
We face risks from this transition, including the following:
. ICANN could adopt or promote policies, procedures or programs that are
unfavorable to our role in the registration of domain names or that are
inconsistent with our current or future plans;
. the Department of Commerce or ICANN could terminate our agreements to be
the registry or a registrar in the .com, .net and .org top-level domains
if they find that we are in violation of our agreements with them;
. 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;
. if we divest our registrar business in order to receive an extension of
the registry agreement to November 2007, we may not be able to sustain
the revenue growth we have experienced in recent periods;
. the terms of the registrar accreditation contract could change, as a
result of an ICANN-adopted policy, in a manner that is unfavorable to us;
. the 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 has approved new top-level domains and we may not be permitted to
act as a registrar 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 registrars.
Challenges to ongoing privatization of Internet administration could harm our
web presence services business.
Risks we face from challenges by third parties, including other domestic and
foreign governmental authorities, to our role in the ongoing privatization of
the Internet include:
. legal, regulatory or other challenges, 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 or
us, could be brought;
. Congress has held several hearings in which various issues about the
domain name system and ICANN's practices have been raised and Congress
could take action that is unfavorable to us;
. 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
19
. 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 our Global Registry Service business;
. customer renewal rates for our Internet infrastructure services and web
presence services;
. competition in the web presence services business from competing
registrars and registries;
. the introduction of additional 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;
. a decrease in the level of spending for IT related products and services
by enterprise customers;
. 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 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 revenues, our operating results will suffer, particularly as
revenues from many of our services are recognized ratably over the term of the
service, rather than immediately when the customer pays for them, unlike our
sales and marketing expenditures, which are expensed in full when incurred.
Due to all of the above factors, our quarterly revenues and operating
results are difficult to forecast. Therefore, we believe that period-to-period
comparisons of our operating results will not necessarily be
20
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. Our competitors may develop new technologies in the future that are
perceived as being more secure, effective or cost efficient than the technology
underlying our trust services. We expect that competition will increase in the
near term, and that our primary long-term competitors may not yet have entered
the market.
Increased competition could result in pricing pressures, reduced margins or
the failure of our 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. See Business-Competition.
The recent agreements among ICANN, the Department of Commerce, us and other
registrars permit flexibility in pricing for and term of registrations. Our
revenues, therefore, could be reduced due to pricing pressures, bundled service
offerings and variable terms 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.
System interruptions and security breaches could harm our business.
We depend on the uninterrupted operation of our various domain name
registration systems, domain name zone servers, domain name root servers,
secure data centers and our other computer and communications
21
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. Though we have back-up power resources, our California locations are
susceptible to recent electric power shortages. 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 our domain
name zone servers, the domain name root servers 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
depend on our ability to maintain our computer and telecommunications equipment
in effective working order and to reasonably protect our systems against
interruption and potentially 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 we operate 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.
We rely on a continuous power supply to conduct our operations, and
California's current energy crisis could disrupt our operations and increase
our expenses
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for the State of California fall below
22
1.5%, California has on some occasions implemented, and may in the future
continue to implement, rolling blackouts throughout the state. If blackouts
interrupt our power supply, we may be temporarily unable to operate. Any such
interruption in our ability to continue operations could damage our reputation,
harm our ability to retain existing customers and to obtain new customers, and
could result in lost revenue, any of which could substantially harm our
business and results of operations.
Furthermore, the deregulation of the energy industry instituted in 1996 by
the California government and shortages in wholesale electricity supplies have
caused power prices to increase. If wholesale prices continue to increase, our
operating expenses will likely increase, as our headquarters and many of our
employees are based in California.
Acquisitions could harm our business.
We acquired THAWTE and Signio in February 2000, Network Solutions in June
2000, GreatDomains in October 2000 and Nanobiz, DomainNames.com and NameSecure
in December 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 seven acquisitions and will be
amortized on a straight-line basis generally over two to four years;
. the additional expense associated with a write-off of a portion of
goodwill and other intangible assets due to changes in market
conditions, the U.S. and global economy or the economy in the markets in
which we compete or because acquisitions are not providing the benefits
expected;
. unanticipated costs or the incurrence of unknown liabilities;
. the need to manage more geographically-dispersed operations, such as
Network Solutions' offices in Virginia, THAWTE's offices in North
Carolina and South Africa and DomainNames in the UK;
. 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 acquired
companies;
. 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 investments in other companies may not yield any returns.
We have equity and debt investments in a number of companies. In most
instances, these investments are in the form of equity and debt securities of
private companies for which there is no public market. These companies are
typically in the early stage of development and may be expected to incur
substantial losses. Therefore, these companies may never become publicly traded
companies. Even if they do, an active trading market for their securities may
never develop and we may never realize any return on these investments.
Although, we have realized gains on the sale of equity investments in the past,
we cannot expect to experience
23
similar levels of other income in the future, particularly in light of current
stock market conditions. 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, the
domain name registration business and payment services business, and their
rapid evolution, requires us continually to 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. 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.
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 2,200 employees at December 31, 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, continue the development of our operating, administrative, financial
and accounting systems and controls and maintain close coordination among our
executive, engineering, accounting, finance, marketing, sales and operations
organizations. Any failure to manage growth effectively could harm our
business.
We depend on key personnel.
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.
We rely on third parties who maintain and control root zone servers and route
Internet communications.
We currently administer and operate only two of the 13 root zone servers.
The others are administered and operated by independent operators on a
volunteer basis. Because of the importance to the functioning of the Internet
of these root zone servers, our registry services business could be harmed if
these volunteer operators fail to maintain such servers properly or abandon
such servers which would place additional capacity on the two root zone servers
we operate.
Further, our registry services business could be harmed if any of these
volunteer operators fails to include or provide accessibility to the data that
it maintains in the root zone servers that it controls. In the event and to the
extent that ICANN is authorized to set policy with regard to an authoritative
root server system, as provided in 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, our business could be
harmed.
24
Our web presence services and registry services businesses also could be
harmed if a significant number of Internet service providers decided not to
route Internet communications to or from domain names registered by us or if a
significant number of Internet service providers decided to provide routing to
a set of domain name servers that did not point to our domain name zone
servers.
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 our arrangements with
AOL-Time Warner, 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 we fail to enter into additional
relationships, we would have to devote substantially more resources to the
distribution, sale and marketing of our services than we would otherwise. Our
success in obtaining results from these relationships will depend both on the
ultimate success of the other parties to these relationships, particularly in
the use and promotion of IP networks for trusted and secure electronic commerce
and communications, and on the ability of these parties to market our 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 trust services have lengthy sales and implementation
cycles.
We market many of our Internet trust services directly to large companies
and government agencies. The sale and implementation of our services to these
entities typically involves a lengthy education process and a significant
technical evaluation and commitment of capital and other resources. This
process is also subject to the risk of delays associated with customers'
internal budgeting and other procedures for approving large capital
expenditures, deploying new technologies within their networks and testing and
accepting new technologies that affect key operations. As a result, the sales
and implementation cycles associated with certain of our Internet trust
services can be lengthy, 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 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.
25
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 perform encryption and
decryption operations. The security afforded by this technology depends on the
integrity of a user's private key and that it is not lost, stolen or otherwise
compromised. The integrity of private keys also depends in part on the
application of specific mathematical principles known as "factoring." This
integrity is predicated on the assumption that the factoring of large numbers
into their prime number components is difficult. Should an easy factoring
method be developed, the security of encryption products utilizing public key
cryptography technology would be reduced or eliminated. Furthermore, any
significant advance in techniques for attacking cryptographic systems could
also render some or all of our existing Internet trust services obsolete or
unmarketable. If improved techniques for attacking cryptographic systems were
ever developed, we would likely have to reissue digital certificates to some or
all of our customers, which could damage our reputation and brand or otherwise
harm our business. In the past there have been public announcements of the
successful attack upon cryptographic keys of certain kinds and lengths and of
the potential misappropriation of private keys and other activation data. This
type of publicity could also hurt the public perception as to the safety of the
public key cryptography technology included in our digital certificates. This
negative public perception could harm our business.
Our international operations are subject to certain risks.
Revenues from international subsidiaries and affiliates accounted for
approximately 14% of our revenues in the full year 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 or other domestic companies entering
the foreign markets we are in;
. 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 protect our U.S. proprietary rights
adequately;
. more stringent privacy policies in foreign countries;
26
. seasonal reductions in business activity; and
. potentially adverse tax consequences.
We have licensed to our 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 the security of electronic commerce and communication over
IP networks generally. For further information, please see "Risk Factors--
System interruptions and security breaches could harm our business."
All of our international revenues from sources other than VeriSign Japan and
THAWTE Consulting 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.
In July 2000, the Electronic Signatures in Global and National Commerce Act,
or "E-Sign," was passed. 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, which could, among other
things, result in price erosion. 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 trade secrets or other
27
forms of our intellectual property 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.
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.
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.
28
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.
ITEM 2. PROPERTIES
VeriSign's principal administrative, sales, marketing, research and
development and operations facilities are leased and located in Mountain View,
California and Herndon, Virginia. In 2000, we entered into new facilities
leases for space that we believe will be adequate to meet our needs for the
foreseeable future. The facilities include five buildings in Mountain View with
a combined area of approximately 395,000 square feet under leases that expire
in 2011 and approximately 160,000 square feet in Dulles, Virginia under leases
that expire in 2011.
VeriSign also leases space for sales and support, and training offices in
various locations throughout the United States. Internationally, we lease space
in Kawasaki, Japan; Durbanville, South Africa; Sunderland, United Kingdom;
Woluwe-Saint-Pierre, Belgium; Buenos Aires, Argentina; and Sao Paulo, Brazil.
The significant sites are listed below, including approximate square footage.
Our success is largely dependent on the uninterrupted operation of our
secure data centers and computer and communications systems. See "Risk
Factors--System interruptions and security breaches could harm our business."
Approximate
Square
Major Locations Footage Use
--------------- ----------- ---
United States:
455-685 East Middlefield 395,000 Engineering, Sales and Marketing,
Road........................ Customer Service, Finance, Production
Mountain View, CA Production Services
21355 Ridgetop Circle........ 160,000 VeriSign Global Registry Services
Dulles, VA
505 Huntmar Park Drive....... 115,000 Finance, Engineering, Legal and
Herndon, VA Administrative
625 Herndon Parkway.......... 61,000 Sales and Marketing, Engineering
Herndon, VA
1350 Charleston Road......... 52,000 Engineering; Sales; Finance;
Mountain View, CA Marketing; Customer Service
365 Herndon Parkway.......... 40,765 Engineering, Sales and Marketing
Herndon, VA
5550 Triangle Parkway........ 59,000 Sales and Support
Norcross, GA
Europe:
Sunderland Solar Building.. 38,750 VeriSign DomainNames.com
Phase VI, Sunderland
United Kingdom
Japan:
Kawasaki Tech Center....... 19,250 Japan Headquarters & Customer Support
11th & 19th Floors, 580-16
Horikawacho
Saiwai-ku, Kawasaki-shi
212-0013
Japan
29
ITEM 3. LEGAL PROCEEDINGS
As of February 28, 2001, through our Network Solutions subsidiary, we were a
defendant in 16 active lawsuits involving domain name disputes between
trademark owners and domain name holders. We are drawn into such disputes, in
part, as a result of claims by trademark owners that we are legally required,
upon request by a trademark owner, to terminate the contractual right we
granted to a domain name holder to register a domain name which is alleged to
be similar to the trademark in question. On October 25, 1999, however, the
Ninth Circuit Court of Appeals ruled in our favor and against Lockheed
Corporation, holding that our services do not make us liable for contributory
infringement to trademark owners. Since that time, the frequency of this type
of suit has continued to decline. The holders of the domain name registrations
in dispute have, in turn, questioned our right, absent a court order, to take
any action regarding their contractual rights to the domain names in question.
Although 83 of these kinds of situations have resulted in suits actually naming
Network Solutions as a defendant, as of February 28, 2001, no adverse judgment
has been rendered and no award of damages has ever been made, and no such suits
are currently pending against Network Solutions. We believe that we have
meritorious defenses and we intend to vigorously defend ourselves against these
claims.
On February 2, 2001, Leon Stambler filed a complaint against us alleging
patent infringement in the United States District Court for the District of
Delaware. The other co-defendants in the suit are RSA Security Inc., First Data
Corporation, Openwave Systems Inc., and Omnisky Corporation. The complaint
alleges that our Secure Site service infringes claim 12 of Mr. Stambler's U.S.
Patent No. 5,793,302 and that our Payflow products infringe claims 1, 28, and
34 of Mr. Stambler's U.S. Patent No. 5,974,148. The complaint seeks judgment
declaring that the defendants have infringed the asserted claims of the
patents-in-suit, preliminary and permanent injunctions against the defendants
from infringing the asserted claims, an order requiring the defendants to pay
damages to compensate Mr. Stambler for the alleged infringement, and an order
awarding Mr. Stambler treble damages for any willful infringement as well as
attorney fees and costs. While we cannot predict the outcome of this matter
presently, we currently believe that the claims against us are without merit
and we intend to vigorously defend ourselves against these claims.
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 Elgamel,
James K. Sims, Joseph B. Lassuter III, Robert P. Badavas, and against us as a
nominal defendant. 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 us, and that we
violated the terms of the licensing agreement and competed against RSA. On
August 2, 2000, a second shareholder complaint was filed against us and the
aforementioned directors of RSA Security Inc. by plaintiff James V. Biglan. The
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. We filed a
Motion to Dismiss on November 20, 2000. While we cannot predict the outcome of
this matter presently, we currently believe that the claims against us are
without merit and we intend to vigorously defend ourselves against these
claims.
On March 15, 2000, a group of eight plaintiffs filed suit against the U.S.
Department of Commerce, the National Science Foundation and us 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, challenges the lawfulness of the registration fees that
we were 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 additional plaintiffs.
All of the defendants filed motions to transfer the suit to Federal District
Court in the District of Columbia and the court granted those motions on June
28, 2000. The same attorney who unsuccessfully challenged us in a similar
action, known as Thomas, et al. v. Network Solutions, et al., has filed this
new action on behalf of
30
eight former and current domain name registrants. The suit contains eight
causes of action against the defendants based on alleged violations of Art. I,
(S) 8 and the Fifth Amendment of the U.S. Constitution, the Independent Offices
Appropriations Act (31 U.S.C. (S) 9701), the Administrative Procedures Act, the
Sherman Act, and the California Unfair Competition Act, (S) 17200. The case was
docketed with the Federal District Court in the District of Columbia on July
28, 2000 and on August 4, 2000 the plaintiffs dismissed the case. Four days
later, the same attorney refiled the same case in the United States District
Court for the Eastern District of Virginia. We filed a motion to dismiss the
case and the plaintiffs responded by filing a First Amended Complaint on
September 7, 2000. The current suit contains fourteen causes of action alleging
violations of the Appropriations Act (31 U.S.C. 9701), the Administrative
Procedures Act, the Sherman Act, and the Chief Financial Officer's Act (31
U.S.C. 902). On October 10, 2000, we filed another motion to dismiss the case.
On October 24, 2000, the National Science Foundation filed a motion to transfer
the case back to the Federal District Court in the District of Columbia. A
hearing on the motion to transfer the case back to the Federal District Court
for the District of Columbia was held on November 17, 2000. The Court ruled
from the bench that the case should be transferred back to the District of
Columbia. Our pending motion to dismiss the complaint also was transferred
under the Order. No judge has been appointed to the matter, and no hearing date
has yet been set on our motion to dismiss.
On January 13, 2000, the Department of Justice Antitrust Division issued a
Civil Investigative Demand, or "CID," seeking information and documents
concerning the then-pending acquisition by us of THAWTE. We provided certain
information and documents to the Department of Justice, and closed the THAWTE
transaction on February 1, 2000. We completed our initial response to the CID
on March 1, 2000, and a supplemental production of documents was completed May
9, 2000. On September 14, 2000, we were notified that senior officials at the
Department of Justice had reviewed a report by the investigatory staff
regarding the transaction, and that the Department had concerns about the
potential competitive effects of the transaction. Our representatives met with
and provided additional information to the Department of Justice during October
2000. While we believe that the transaction does not violate the antitrust
laws, it is possible that the Department may ultimately raise an objection.
Formal objection could lead to further proceedings or litigation that could
have an adverse material effect on us, and could include the licensing or
divestiture of assets acquired in the transaction.
We are involved in various other investigations, claims and lawsuits arising
in the normal conduct of our business, none of which, in our opinion will harm
our business. We cannot assure that we will prevail in any litigation.
Regardless of the outcome, any litigation may require us to incur significant
litigation expense and may result in significant diversion of management
attention. An unfavorable outcome may have a material adverse effect on our
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 2000.
31
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of VeriSign as of December 31, 2000.
Name Age Position
---- --- --------
Stratton D. Sclavos....... 39 President, Chief Executive Officer and
Director
James P. Rutt............. 47 President, Mass Market Division and Chief
Strategy Officer
Dana L. Evan.............. 41 Executive Vice President, Finance and
Administration and Chief Financial Officer
Robert J. Korzeniewski.... 43 Executive Vice President, Corporate and
Business Development
Quentin P. Gallivan....... 43 Executive Vice President, Worldwide Sales
Diana S. Keith............ 41 Senior Vice President, Customer Advocacy
Douglas L. Wolford........ 39 Senior Vice President and Group General
Manager, Web Presence Services and acting
President, Mass Markets Division
Anil H.P. Pereira......... 37 Senior Vice President and Group General
Manager, Enterprise and Service Provider
Division
Bruce L. Chovnick......... 40 Senior Vice President and General Manager,
Global Registry Services
James M. Ulam............. 44 Vice President, General Counsel and Secretary
Stratton D. Sclavos has served as President and Chief Executive Officer and
as a director of VeriSign since he joined VeriSign in July 1995. From October
1993 to June 1995, he was Vice President, Worldwide Marketing and Sales of
Taligent, Inc., a software development company that was a joint venture among
Apple Computer, Inc., IBM and Hewlett-Packard. From May 1992 to September 1993,
Mr. Sclavos was Vice President of Worldwide Sales and Business Development of
GO Corporation, a pen-based computer company. Prior to that time, he served in
various sales and marketing capacities for MIPS Computer Systems, Inc. and
Megatest Corporation. Mr. Sclavos serves as a director of Juniper Networks,
Inc., Keynote Systems, Inc. and Marimba, Inc. Mr. Sclavos holds a B.S. degree
in Electrical and Computer Engineering from the University of California at
Davis.
James P. Rutt has served as President, Mass Markets Division and Chief
Strategy Officer since joining VeriSign upon its acquisition of Network
Solutions, Inc. in June 2000. Effective April 1, 2001 Mr. Rutt will be leaving
the company and he has resigned from his position with VeriSign. From May 1999
to June 2000, he served as Chief Executive Officer and Director of Network
Solutions. Prior to joining Network Solutions, from 1993 to May 1999 he served
in various senior management positions with the Thomson Corporation, one of the
world's leading information publishing companies, and, most recently, he served
as Chief Technology Officer. Prior to that Mr. Rutt was a co-founder of First
Call, an investment information service. Mr. Rutt received a B.S. from the
Massachusetts Institute of Technology--Sloan School of Management.
Dana L. Evan has served as Executive Vice President of Finance and
Administration and Chief Financial Officer of VeriSign since January 1, 2001.
From June 1996 until December 31, 2000 she served as Vice President of Finance
and Administration and Chief Financial Officer of VeriSign. From 1988 to June
1996, she worked as a financial consultant in the capacity of chief financial
officer, vice president of finance or corporate controller for various public
and private companies and partnerships, including VeriSign from November 1995
to June 1996, Delphi Bioventures, a venture capital firm, from 1988 to June
1995, and Identix Incorporated, a manufacturer of biometric identity
verification and imaging products, from 1991 to August 1993. Prior to 1988, she
was employed by KPMG LLP, most recently as a senior manager. Ms. Evan serves as
a director of Liberate Technologies. Ms. Evan is a certified public accountant
and holds a B.S. degree in Commerce with a concentration in Accounting and
Finance from the University of Santa Clara.
Robert J. Korzeniewski has served as Executive Vice President, Corporate and
Business Development since joining VeriSign upon its acquisition of Network
Solutions, Inc. in June 2000. He served as Chief
32
Financial Officer of Network Solutions from March 1996 to June 2000. Prior to
joining Network Solutions, he held various senior financial positions at SAIC,
the largest employee owned research and engineering company in the United
States, from 1987 to March 1996. Mr. Korzeniewski is a certified public
accountant and received a B.S. degree in Business Administration from Salem
State College.
Quentin P. Gallivan has served as Executive Vice President, Worldwide Sales
and Services since April 1, 1999. From October 1997 to April 1, 1999, he served
as Vice President of Worldwide Sales of VeriSign. From April 1996 to October
1997, he was Vice President for Asia Pacific and Latin America of Netscape, a
software company. Prior to that time, from 1983 to March 1996, Mr. Gallivan was
with General Electric Information Services, an electronic commerce services
company, in several general management roles most recently as Vice President,
Sales and Services for the Americas.
Diana S. Keith has served as Senior Vice President, Customer Advocacy since
January 1, 2001. From August 1998 to December 31, 2000, she served as Vice
President of Customer Services and from June 1996 to August 1998 she was
Director of Customer Services for VeriSign. From May 1988 to June 1996 she was
employed by Apple Computer, Inc., a computer hardware manufacturer, most
recently as the Senior Manager of Worldwide Operations of Apple Online Systems.
Ms. Keith holds a B.S. degree in Business Management and Administration from
San Jose State University.
Douglas L. Wolford has served as Senior Vice President and Group General
Manager, Web Presence Services since joining VeriSign upon its acquisition of
Network Solutions, Inc. in June 2000. In March 2001, he became Acting
President, Mass Markets Division of VeriSign. He served as Senior Vice
President and General Manager of the Registrar for Network Solutions from
August 1999 to June 2000 and as Senior Vice President, Marketing and Sales of
Network Solutions from December 1997 until August 1999. Prior to joining
Network Solutions, he was General Manager, Marketing for General Electric
Information Services, Inc., an electronic commerce services company, from
December 1994 to November 1997. Mr. Wolford holds a B.S. degree in Mechanical
Engineering from North Carolina State University and an MBA from the University
of Maryland.
Anil H.P. Pereira has served as Senior Vice President and Group General
Manager, Enterprise and Service Provider Division since October 15, 2000. From
August 1, 2000 to October 15, 2000 he served as Senior Vice President of the
Internet Services Group and Worldwide Corporate Marketing; from February 1,
1999 to August 1, 2000 as Vice President of the Internet Services Group and
Worldwide Corporate Marketing; and from March 1997 to February 1, 1999 as
Director of Corporate Marketing. Prior to joining VeriSign, from May 1990 to
March 1997, he held a variety of marketing positions at American Express
Corporation, a diversified financial and travel services company, most recently
as Vice President of the Affinity Card Group. Mr. Pereira serves as a director
of SF Interactive. He holds a B. Mgt. degree from the University of Lethbridge
in Alberta and an MBA from the Wharton School of the University of
Pennsylvania.
Bruce L. Chovnick has served as Senior Vice President and General Manager,
VeriSign Global Registry Services since joining VeriSign upon its acquisition
of Network Solutions, Inc. in June 2000. He served as Senior Vice President and
General Manager, Registry Business of Network Solutions from August 1999 to
June 2000. He served as Senior Vice President and General Manager of the
Internet Technology Services Division of Network Solutions from September 1997
to August 1999. Prior to joining Network Solutions, he was Vice President of
Global Internet Solutions at General Electric Information Services, Inc., an
electronic commerce services company, from October 1993 to September 1997. Mr.
Chovnick holds a B.S. degree in Computer Sciences from the University of
Florida and has completed graduate studies in Electrical Engineering at the
University of Florida.
James M. Ulam has served as Vice President, General Counsel since joining
VeriSign upon its acquisition of Network Solutions, Inc. in June 2000 and as
Secretary of VeriSign since November 2000. From October 1996 to June 2000, he
served in a variety of positions for Network Solutions, including Corporate
Counsel and Assistant General Counsel. Prior to joining Network Solutions, he
was a Contracts Attorney for SAIC, the largest employee owned research and
engineering company in the United States, from April 1995 until October 1996.
Prior to that he was in the private practice of law at Wells, Moore,
Stubblefield and Neeld from March 1994 to March 1995 and at Ott & Purdy from
March 1992 until March 1994. Mr. Ulam holds a B.S. degree in Business
Administration from the University of Maryland and a J.D. from the Mississippi
College School of Law.
33
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
VeriSign's common stock is traded on the Nasdaq National Market under the
symbol "VRSN." The following table sets forth, for the periods indicated, the
high and low closing prices for our common stock as reported by the Nasdaq
National Market as adjusted for two-for-one stock splits on May 29, 1999 and
December 6, 1999.
Price Range
---------------
High Low
------- -------
Year ended December 31, 2001:
First Quarter (though March 15, 2001)................... $ 91.94 $ 34.44
Year ended December 31, 2000:
First Quarter........................................... $253.00 $149.50
Second Quarter.......................................... 196.19 97.80
Third Quarter........................................... 208.38 140.31
Fourth Quarter.......................................... 195.38 68.13
Year ended December 31, 1999:
First Quarter........................................... $ 38.50 $ 15.00
Second Quarter.......................................... 44.13 24.63
Third Quarter........................................... 58.00 29.47
Fourth Quarter.......................................... 190.94 51.16
On March 15, 2001, there were 856 holders of record of our common stock
although we believe there are in excess of 150,000 beneficial owners.
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. During 2000, the reported last sale price for our split-adjusted
common stock ranged from $68.13 per share to $253.00 per share. On March 15,
2001, the reported last sale price of our split-adjusted common stock was
$34.44 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.
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 our
management's attention and resources.
34
We have never declared or paid any cash dividends on our common stock or
other securities and we do not anticipate paying cash dividends in the
foreseeable future. We currently intend to retain our earnings, if any, for
future growth.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data are derived from
VeriSign's consolidated financial statements. This data should be read in
conjunction with the consolidated financial statements and notes thereto, and
with Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Year Ended December 31,
---------------------------------------------------
2000 1999 1998 1997 1996
----------- -------- -------- -------- --------
(In thousands, except per share data)
Consolidated Statement of
Operations Data:
Revenues................. $ 474,766 $ 84,776 $ 38,930 $ 13,356 $ 1,356
Total costs and
expenses................ 3,675,075 88,086 62,075 34,657 12,415
Operating loss........... (3,200,309) (3,310) (23,145) (21,301) (11,059)
Minority interest in net
(income)loss of
subsidiary.............. (1,334) 836 1,282 1,538 838
Net income (loss)........ (3,115,474) 3,955 (19,743) (18,589) (10,288)
Basic net income (loss)
per share............... (19.57) .04 (.24) (.65) (.52)
Diluted net income (loss)
per share............... (19.57) .03 (.24) (.65) (.52)
December 31,
---------------------------------------------------
2000 1999 1998 1997 1996
----------- -------- -------- -------- --------
(In thousands)
Consolidated Balance
Sheet Data:
Cash, cash equivalents
and short-term
investments............. $ 1,026,275 $156,480 $ 41,745 $ 12,893 $ 30,006
Working capital.......... 520,953 140,163 31,085 6,160 24,788
Total assets............. 19,195,222 341,166 64,295 26,904 36,537
Stockholders' equity..... 18,470,608 298,359 40,728 13,541 28,520
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Except for historical information, this Report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements involve risks and uncertainties, including, among other things,
statements regarding our anticipated costs and expenses and revenue mix.
Forward-looking statements include, among others, those statements including
the words "expects," "anticipates," "intends," "believes" and similar language.
Our actual results may differ significantly from those projected in the
forward-looking statements. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed in the section
"Business--Risk Factors." 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 will file in
2001. You are cautioned not to place undue reliance on the forward-looking
statements, which speak only as of the date of this Annual Report on Form 10-K.
We undertake no obligation to publicly release any revisions to the forward-
looking statements or reflect events or circumstances after the date of this
document.
35
Overview
VeriSign is a leading provider of trusted infrastructure services to website
owners, enterprises, electronic commerce service providers and individuals. Our
domain name registration, digital certificate, global registry and payment
services provide the critical web identity, authentication and transaction
infrastructure that online businesses need to establish their web identities
and to conduct secure e-commerce and communications. Our services support
businesses and consumers from the moment they first establish an Internet
presence through the entire lifecycle of e-commerce activities.
Our 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-Time Warner, 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 approximately 35
affiliated organizations including British Telecommunications plc in the United
Kingdom, Canadian Imperial Bank of Commerce 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 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. 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 three year
period.
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 78.3 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,
36
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.
Network Solutions is the exclusive registry and the leading registrar for
second level domain names within the .com, .net and .org top-level domains
(TLD) 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 15.1 million
cumulative domain names in the .com, .net and .org top-level domain.
In addition, during 2000, we completed acquisitions of several other
privately held companies, each of which was individually not significant. We
issued approximately 661,000 shares of our common stock and approximately $33.3
million in cash in exchange for all of the outstanding shares of these
companies. We also assumed certain of the companies' outstanding stock options.
We also escrowed shares of our common stock which will be released to the
principal stockholders as they meet employment commitments. Each of these
transactions has been accounted for as a purchase and, accordingly, the results
of the acquired companies' operations are included in our consolidated
financial statements from their respective dates of acquisition. As a result of
these acquisitions, we recorded goodwill and intangible assets of approximately
$100.0 million and unearned compensation of approximately $37.9 million. The
goodwill and intangible assets will be amortized generally over a two to three
year period, while the unearned compensation will be amortized over the
remaining vesting period for stock options assumed or the employment term for
the shares escrowed.
We expect to report losses as we incur charges for the amortization of
acquired intangible assets related to these acquisitions.
Results of Operations
We have experienced substantial net losses in the past. As of December 31,
2000, we had an accumulated deficit of approximately $3.2 billion, primarily
due to $3.2 billion of amortization of goodwill and other intangible assets
related to acquisitions.
Revenues
The Company recognizes revenue in accordance with SOP 97-2, "Software
Revenue Recognition," as modified by SOP 98-9. SOP 97-2, as modified, generally
requires revenue earned on software arrangements involving multiple elements
such as software products, upgrades, enhancements, post contract customer
support, or PCS, installation, training, etc. to be allocated to each element
based on the relative fair values of the elements. The fair value of an element
must be based on evidence that is specific to the vendor. If evidence of fair
value does not exist for all elements of a license agreement and PCS is the
only undelivered element, then all revenue for the license arrangement is
recognized ratably over the term of the agreement. If evidence of fair value of
all undelivered elements exists but evidence does not exist for one or more
delivered elements,
37
then revenue is recognized using the residual method. Under the residual
method, the fair value of the undelivered elements is deferred, and the
remaining portion of the arrangement fee is recognized as revenue.
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.
Revenues from the sale or renewal of digital certificates are deferred and
recognized ratably over the life of the digital certificate, generally 12
months. Revenues from the sale of OnSite managed services are deferred and
recognized ratably over the term of the license, generally 12 months.
Revenues from the licensing of digital certificate technology and business
process technology are sold in arrangements involving multiple elements
including PCS, training and other services. PCS can be renewed annually for an
additional fee. We use the PCS renewal rate as evidence of fair value of PCS.
The Company establishes evidence of fair value for training and other services
through the price charged when the same element is sold separately. Since we
have established evidence of fair value for all undelivered elements of the
arrangement, revenue is recognized under the residual method. The fair value
of PCS is recognized over the PCS term, training and other service revenue is
recognized when delivered and the remaining portion of the arrangement fee is
recognized after the execution of a license agreement and the delivery of the
product to the customer, provided that there are no uncertainties surrounding
the product acceptance, fees are fixed and determinable, collectibility is
probable, and the Company has no remaining obligations other than the delivery
of PCS.
Revenues from consulting and training services are recognized using the
percentage-of-completion method for fixed-fee development arrangements or as
the services are provided for time-and-materials arrangements.
Revenues from payment services primarily consist of a set-up fee and a
monthly service fee for the transaction processing services. In accordance
with the SEC Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements," revenues from the set-up fee are deferred and
recognized ratably over the period that the fees are earned. Revenues from the
service fees are recognized ratably over the periods in which the services are
provided. Advance customer deposits received are deferred and allocated
ratably to revenue over the periods the services are provided.
Domain name registration revenues consist primarily of registration fees
charged to customers and registrars for domain name registration services.
Revenues from the sale or renewal of domain name registration services are
deferred and recognized ratably over the registration term, generally two
years. 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 and Signio in February
2000. Therefore, comparisons of revenues for the year ended December 31, 2000
to the years ended December 31, 1999 and 1998 may not be relevant, as the
businesses of the combined company were not equivalent.
A comparison of revenues for the years ended December 31, 2000, 1999 and
1998 is presented below.
2000 Change 1999 Change 1998
-------- ------ ------- ------ -------
(Dollars in thousands)
Revenues.............................. $474,766 460% $84,776 118% $38,930
The increase in revenues in 2000 from 1999 is primarily due to the
acquisition of THAWTE, Signio and Network Solutions. In addition, we increased
sales of our authentication services, particularly our website digital
certificates and VeriSign OnSite services, expanded our international
affiliate network and delivered
38
more training and consulting services. As of December 31, 2000 we have sold
over 485,000 website digital certificates, and over 1,600 OnSite service
solutions to enterprises, and we have 35 affiliates in our international
network of affiliates.
A small portion of our revenue mix is from payment transaction services
provided by Signio (now VeriSign Payment Services). At December 31, 2000, the
customer base for these services had grown to more than 15,100 online merchants
using our payment services, to payment-enable their online stores and business-
to-business commerce activities.
The year ended December 31, 2000 reflects approximately six and one-half
months of activity from Network Solutions. At December 31, 2000, the cumulative
base of name registrations totaled 15.1 million, an increase of 8.0 million
from December 31, 1999. For the full year of 2000, the Registrar completed
10.4 million transactions supporting the addition, transfer, renewal and
extension of .com, .net and .org domain names. The Registry, now VeriSign
Global Registry, added 19.2 million names during the full year of 2000,
bringing total unique names to 28.2 million at December 31, 2000. During the
full year of 2000, the Registry completed 23.8 million transactions supporting
the addition, transfer, renewal and extension of .com, .net and .org domain
names.
Revenues increased significantly in 1999 from 1998 due to higher sales of
our Internet-based trust services, particularly our website digital
certificates, affiliate processing and service centers, VeriSign OnSite
services, and the delivery of more training and services. In addition, in 1999,
we expanded our international affiliate network and experienced significant
growth in international markets. In 1998, we completed certain work required
under various consulting contracts and recognized the related portion of
revenues. There were no significant increases in our per-unit prices in 2000
compared to 1999 or in 1999 compared to 1998.
No customer accounted for 10% or more of revenues in 2000, 1999 or 1998.
Revenues from international subsidiaries and affiliates accounted for 14% of
total revenues in 2000, 27% in 1999 and 14% in 1998.
Costs and Expenses
We accounted for all of our acquisitions in 2000 as purchase transactions.
Accordingly, the acquired companies' costs and expenses have been included in
our results of operations beginning with their dates of acquisition. Therefore,
comparisons of costs and expenses for the year ended December 31, 2000 to the
years ended December 31, 1999 and 1998 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.
A comparison of cost of revenues for the years ended December 31, 2000, 1999
and 1998 is presented below.
2000 Change 1999 Change 1998
-------- ------ ------- ------ -------
(Dollars in thousands)
Cost of revenues.................. $163,049 411% $31,898 64% $19,454
Percentage of revenues............ 34% 38% 50%
Growth of revenues was the primary factor in the increase of cost of
revenues in 2000 from 1999 and in 1999 from 1998. We hired more employees to
support the growth of demand for our products and services
39
during the period and to support the growth of our security consulting and
training activities. We incurred increased expenses for access to third-party
databases, higher support charges for our external disaster recovery program,
increased customer service costs related to our larger customer base and
increased expenses related to the cost of software products resold to customers
as part of network security solution implementations. Our acquisitions of
THAWTE, Signio and Network Solutions have resulted in an increase in our cost
of revenues in 2000 over prior years. 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. 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.
Cost of revenues as a percentage of revenues decreased in 2000 from 1999 and
in 1999 from 1998 primarily due to the continued realization of economies of
scale from 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.
Certain of our services, such as implementation consulting and training,
require greater initial personnel involvement and therefore have higher costs
than other types of services. As a result, we anticipate that cost of revenues
as a percentage of revenues will vary in future periods depending on the mix of
services sold.
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 years ended December
31, 2000, 1999 and 1998 is presented below.
2000 Change 1999 Change 1998
-------- ------ ------- ------ -------
(Dollars in thousands)
Sales and marketing............... $167,148 390% $34,145 49% $22,943
Percentage of revenues............ 35% 40% 59%
The Network Solutions acquisition was the primary reason for the increase in
sales and marketing expenses in 2000 as compared to 1999. The Web Presence
Services group 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 in 2000 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 sales and marketing expenses
from THAWTE and Signio. Sales and marketing expenses increased in 1999 from
1998 as a result of the continued growth of our direct sales force and the
expansion of our marketing efforts, particularly in lead and demand generation
activities. The expansion of our international sales presence in Europe during
the second half of 1999 also contributed to the increase from 1998.
While the absolute dollar spending increased for sales and marketing
expenses, we continue to realize a decline in sales and marketing expenses as a
percentage of revenues over the three-year period. This is primarily due to the
increase in recurring revenues from existing customers, which tend to have
lower acquisition costs and the increase in the productivity of our direct
sales forces. However, we cannot forecast that these sales and marketing
expenses will continue to decline as a percentage of revenues.
We 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,
40
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 years ended
December 31, 2000, 1999 and 1998 is presented below.
2000 Change 1999 Change 1998
------- ------ ------- ------ ------
(Dollars in thousands)
Research and development............. $41,256 210% $13,303 58% $8,435
Percentage of revenues............... 9% 16% 22%
Research and development expenses increased in absolute dollars in 2000 from
1999 primarily due to the acquisition of Network Solutions. In addition, the
increase in 2000 from 1999, as well as the increase in 1999 from 1998, is also
due to 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 in
2000 from 1999 and in 1999 from 1998 is largely due to the fact that revenues
increased faster than research and development expenses in these periods. The
decrease in 2000 from 1999 is also due in part to different cost structures
related to our 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.
A comparison of general and administrative expenses for the years ended
December 31, 2000, 1999 and 1998 is presented below.
2000 Change 1999 Change 1998
------- ------ ------ ------ ------
(Dollars in thousands)
General and administrative............ $60,672 594% $8,740 14% $7,688
Percentage of revenues................ 13% 10% 20%
The increase in general and administrative expenses in 2000 over 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 in 2000 from 1999, as well as in 1999 from 1998, 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. The increase in general and administrative
expenses as a percentage of revenues in 2000 from 1999 is primarily due to
incremental expenses related to integrating our acquisitions and different cost
structures of those acquisitions.
41
The decrease in general and administrative expenses as a percentage of
revenues in 1999 from 1998 is primarily due to the fact that revenues increased
faster than general and administrative expenses as we began to experience
economies of scale in our corporate infrastructure.
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, or 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 , or SRS. The SRS is the system that provides shared
registration interface to the accredited and licensed registrars into the .com,
.net, and .org top level domain , or TLD, 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. As of
December 31, 2000, the development efforts related to upgrades and improvements
in the SRS and other systems are ongoing and expected to be completed by March
31, 2001.
The fair value assigned to IPR&D was estimated by discounting, to present
value, the cash flows attributable to the technology once it has reached
technological feasibility. A discount rate of 22% was used to estimate the
present value of cash flows. 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.
Amortization of goodwill and other intangible assets
Goodwill and other intangible assets resulted primarily from our
acquisitions of THAWTE and Signio in February 2000, Network Solutions in June
2000 and other individually insignificant acquisitions in 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
which we currently anticipate ending in 2004. In addition, in the event we
complete future acquisitions, we expect to incur additional goodwill and other
intangible asset amortization charges.
Special charges
In connection with our acquisition of SecureIT, which was accounted for as a
pooling-of-interests, we recorded a special charge of $3.6 million to operating
expenses in the third quarter of 1998. The expenses included $2.4 million for
direct and other merger-related costs pertaining to the merger transaction.
Merger transaction costs consisted primarily of fees for investment bankers,
attorneys, accountants, filing fees and other related charges. The remaining
$1.2 million related to stock-based compensation charges in connection with the
acceleration of certain performance stock options held by SecureIT employees.
42
Other income
Other income consists primarily of interest earned on our cash, cash
equivalents and short-term and long-term investments and gains on sale of
equity investments, 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 years ended December 31, 2000, 1999
and 1998 is presented below.
2000 Change 1999 Change 1998
------- ------ ------ ------ ------
(Dollars in thousands)
Other income......................... $86,169 1240% $6,429 203% $2,120
Percentage of revenues............... 18% 8% 5%
The increase in other income in 2000 from 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 $925
million of cash and investments. The increase in 2000 over 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 sales of our equity investments
although due to current market conditions, we do not expect any such gains to
be material in amount.
Provision for Income Taxes
We have not recorded any provision for federal and state income taxes
because we have experienced an accumulated deficit since inception. As of
December 31, 2000, we had federal net operating loss carryforwards of
approximately $340.1 million related to stock compensation expense and $394.8
million related to continuing operations. We also had state net operating loss
carryforwards of approximately $190.7 million related to stock compensation
expense and $133.4 million related to continuing operations. If we are not
able to use them, the federal net operating loss carryforwards will expire in
2010 through 2020 and the state net operating loss carryforwards will expire
in 2004 through 2020. The Tax Reform Act of 1986 imposes substantial
restrictions on the utilization of net operating losses and tax credits in the
event of a corporation's ownership change, as defined in the Internal Revenue
Code. Our ability to utilize net operating loss carryforwards may be limited
as a result of such ownership change. We do not anticipate that any material
limitation exists on our ability to use our carryforwards and credits.
We have provided a full valuation allowance on the remaining deferred tax
assets because of the uncertainty regarding their realization. Our accounting
for deferred taxes under Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," involves the evaluation of a number of factors
concerning the realizability of our deferred tax assets. In concluding that a
full valuation allowance was required, we considered such factors as our
history of operating losses and expected future losses and the nature of our
deferred tax assets. Although our operating plans assume taxable and operating
income in future periods, our evaluation of all of the available evidence in
assessing the realizability of the deferred tax assets indicated that such
plans were not considered sufficient to overcome the available negative
evidence. The current year increase to the valuation allowance offsets
deferred tax assets which arose as the result of ongoing operations.
Accordingly, the reversal of this year's incremental increase to the valuation
allowance will result in future income statement benefit. The remaining
valuation allowance relates to stock option exercises. Reversal of the
valuation allowance related to stock option exercises will result in a credit
to additional paid in capital and will not result in future income statement
benefit. See Note 7 of Notes to Consolidated Financial Statements.
43
Minority Interest in Net (Income) Loss of Subsidiary
Minority interest in the net (income) loss of VeriSign Japan K.K. was $(1.3)
million in 2000, $.8 million in 1999 and $1.3 million in 1998. The year-to-year
changes are primarily due to VeriSign Japan's increased revenue as compared to
the prior years. As the VeriSign Japan business continues to develop and
evolve, we expect that the minority interest in net (income) loss of subsidiary
will fluctuate.
Liquidity and Capital Resources
2000 1999 Change
----------- -------- ------
(Dollars in thousands)
Cash, cash equivalents and short-term
investments.................................. $ 1,026,275 $156,480 556%
Working capital............................... $ 520,953 $140,163 272%
Stockholders' equity.......................... $18,470,608 $298,359 6091%
Prior to our initial public offering, we financed our operations primarily
through private sales of equity securities, raising approximately $46.1
million. Our initial public offering, which we completed in January 1998,
yielded net proceeds of approximately $43.7 million on the sale of 13.8 million
shares of common stock. In January 1999, we sold an additional 6.4 million
shares of common stock to the public for net proceeds of approximately $121.4
million. The acquisition of Network Solutions added an additional
$867.3 million of liquidity. At December 31, 2000, our principal source of
liquidity was $1.0 billion of cash, cash equivalents and short-term
investments, consisting principally of commercial paper, medium term corporate
notes, corporate bonds and notes, market auction securities, U.S. government
and agency securities and money market funds. In addition, we hold $209.1
million of long-term equity minority investments and corporate debt securities.
Net cash provided by operating activities was $192.0 million in 2000 and
$14.7 million in 1999. The increase was primarily due to an overall increase in
net income after adjustment for non-cash items such as depreciation and
amortization and the write-off of in-process research and development, an
overall increase in accounts payable, accrued liabilities, refundable taxes and
our deferred revenue balance in which we receive payment in advance for many of
our products and services. In 1998, cash used for operating activities was
$11.8 million that was primarily the result of net losses and an increase in
accounts receivable.
Net cash provided by investing activities was $124.0 million in 2000,
primarily as a 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. Net cash used in investing activities was $103.2
million in 1999 and $16.0 million in 1998. In 1999, net cash used in investing
activities primarily related to net purchases of investments. In 1998, net cash
used in investing activities was primarily the result of capital expenditures
for property and equipment and net purchases of investments. Capital
expenditures for property and equipment totaled $58.8 million in 2000, $6.0
million in 1999 and $4.4 million in 1998. Our planned capital expenditures for
2001 are approximately $135 million to $145 million, primarily for computer and
communications equipment and leasehold improvements. As of December 31, 2000,
we also had commitments under noncancelable operating leases for our facilities
for various terms through 2011. See Note 8 of Notes to Consolidated Financial
Statements.
Net cash provided by financing activities was $73.5 million in 2000, $136.2
million in 1999 and $45.7 million in 1998. In 2000, cash was provided primarily
from common stock issuances as a result of stock option exercises. In 1999, we
received net cash proceeds of $121.4 million from the public offering of our
stock and in 1998, we received net cash proceeds of $43.7 million from our
initial public offering.
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
44
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.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities". The new
standard establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Accounting for changes in the values of those derivatives depends on the
intended use of the derivatives and whether they qualify for hedge accounting.
SFAS 133, as amended by SFAS 137 and SFAS 138, is effective for fiscal years
beginning after June 15, 2000. Historically, the Company has not entered into
derivatives contracts either to hedge existing risks or for speculative
purposes. Adoption of the new standard will not have a material affect on the
Company's consolidated financial statements.
ITEM 7A. 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. If market interest rates were to increase immediately and uniformly by
10 percent from levels at December 31, 2000, this would not materially change
the fair market value of our portfolio. To minimize this risk, we maintain our
portfolio of cash equivalents and short-term investments in a variety of
securities, including commercial paper, medium-term notes, corporate bonds and
notes, market auction securities, U.S. government and agency securities and
money market funds. In general, money market funds are not subject to interest
rate risk because the interest paid on such funds fluctuates with the
prevailing interest rate. In addition, we generally invest in relatively short-
term securities. As of December 31, 2000, 94% 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 December 31, 2000. This table does not
include money market funds because those funds are not subject to market risk.
Maturing in
-------------------------------
Six Months
Six Months to One More than Estimated
or Less Year One Year Total Fair Value
---------- ---------- --------- ------- ----------
(Dollars in thousands)
Included in cash and cash
equivalents............... 204,803 -- -- 204,803 204,737
Weighted-average interest
rate...................... 7.14% -- --
Included in short-term
investments............... 546,853 19,097 -- 565,950 565,591
Weighted-average interest
rate...................... 6.98% 6.82% --
Included in long-term
investments............... -- -- 50,880 50,880 50,997
Weighted-average interest
rate...................... -- -- 6.81%
45
Exchange rate sensitivity
VeriSign considers its exposure to foreign currency exchange rate
fluctuations to be minimal. All revenues derived from affiliates other than
VeriSign Japan and THAWTE Consulting 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 subsidiary in Sweden has 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 several public companies. We value these
investments using the closing fair market value 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
$88.9 million unrealized loss, net of tax on these investments during 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.
Intangible Asset Risk
We have a substantial amount of intangible assets. Although at December 31,
2000 we believe our intangible assets are recoverable, changes in the economy,
the business in which we operate and our own relative performance could change
the assumptions used to evaluate intangible asset recoverability. We continue
to monitor those assumptions and their consequent effect on the estimated
recoverability of our intangible assets.
46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements
VeriSign's financial statements required by this item are set forth as a
separate section of this Form 10-K. See Item 14.(a)1 for a listing of financial
statements provided in the section titled "FINANCIAL STATEMENTS."
Supplemental Data (Unaudited)
The following tables set forth quarterly supplementary data for each of the
years in the two-year period ended December 31, 2000.
2000
----------------------------------------------------------
Quarter Ended
---------------------------------------------
September Year Ended
March 31 June 30 30 December 31 December 31
-------- --------- ----------- ----------- -----------
(In thousands, except per share data)
Revenues................ $ 34,071 $ 70,254 $ 173,086 $ 197,355 $ 474,766
Total costs and
expenses............... 95,220 529,939 1,518,873 1,531,041 3,675,075
Operating income
(loss)................. (61,149) (459,685) (1,345,787) (1,333,686) (3,200,309)
Minority interest in net
(income) loss of
subsidiary............. 147 (57) (130) (1,294) (1,334)
Net income (loss)....... (26,155) (452,938) (1,324,185) (1,312,195) (3,115,474)
Basic net income (loss)
per share.............. (.24) (3.37) (6.78) (6.64) (19.57)
Diluted net income
(loss) per share....... (.24) (3.37) (6.78) (6.64) (19.57)
1999
-------------------------------------------------------
Quarter Ended
------------------------------------------- Year Ended
March 31 June 30 September 30 December 31 December 31
-------- ------- ------------ ----------- -----------
(In thousands, except per share data)
Revenues................ $15,582 $18,736 $22,782 $27,676 $84,776
Total costs and
expenses............... 19,011 20,679 22,781 25,615 88,086
Operating income
(loss)................. (3,429) (1,943) 1 2,061 (3,310)
Minority interest in net
loss of subsidiary..... 250 178 294 114 836
Net income (loss)....... (1,993) (152) 1,567 4,533 3,955
Basic net income (loss)
per share.............. (.02) .00 .02 .04 .04
Diluted net income
(loss) per share....... (.02) .00 .01 .04 .03
Our quarterly revenues and operating results are difficult to forecast.
Therefore, we believe that period-to-period comparisons of our operating
results will not necessarily be meaningful, and should not be relied upon as an
indication of future performance. Also, operating results may fall below our
expectations and the expectations of securities analysts or investors in one or
more future quarters. If this were to occur, the market price of our common
stock would likely decline.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements on any matter of accounting principles,
financial statement disclosure or auditing scope or procedure to be reported
under this item.
47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item may be found in the section captioned
"Directors and Executive Officers of the Registrant" appearing in the
definitive Proxy Statement to be delivered to stockholders in connection with
the 2001 Annual Meeting of Stockholders. This information is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item may be found in the section captioned
"Executive Compensation" appearing in the definitive Proxy Statement to be
delivered to stockholders in connection with VeriSign's 2001 Annual Meeting of
Stockholders. This information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item may be found in the section captioned
"Security Ownership of Certain Beneficial Owners and Management" appearing in
the definitive Proxy Statement to be delivered to stockholders in connection
with the 2001 Annual Meeting of Stockholders. This information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item may be found in the section captioned
"Certain Transactions" appearing in the definitive Proxy Statement to be
delivered to stockholders in connection with the 2001 Annual Meeting of
Stockholders. This information is incorporated herein by reference.
48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULE AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
1. Financial statements
. Management's Report
. Independent Auditors' Report
. Consolidated Balance Sheets
As of December 31, 2000 and 1999
. Consolidated Statements of Operations
Years Ended December 31, 2000, 1999 and 1998
. Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2000, 1999 and 1998
. Consolidated Statements of Comprehensive Income (Loss)
Years Ended December 31, 2000, 1999 and 1998
. Consolidated Statements of Cash Flows
Years Ended December 31, 2000, 1999 and 1998
. Notes to Consolidated Financial Statements
2. Financial statement schedules
. Financial statement schedules are omitted because the information
called for is not required or is shown either in the consolidated
financial statements or the notes thereto.
3. Exhibits
(a) Index to Exhibits
Incorporated by
Reference
Exhibit ------------------- Filed
Number Exhibit Description Form Date Number Herewith
------- ------------------- ---- ------- ------ --------
2.01 Agreement and Plan of Reorganization
dated as of July 6, 1998 by and
between the Registrant, VeriSign
Merger Corp., SecureIT and the
shareholders of SecureIT 8-K 7/6/98 2.01
2.02 Agreement and Plan of Reorganization
dated as of December 17, 1999 by and
among the Registrant, Signio, Inc.
and BEHAD Acquisition Corp. 8-K 3/7/00 2.1
2.03 Exchange Agreement dated as of
December 19, 1999 by and between the
Registrant and Mark Shuttleworth 8-K 2/16/00 2.1
2.04 Agreement and Plan of Reorganization
dated as of March 6, 2000 by and
among the Registrant, Nickel
Acquisition Corporation and Network
Solutions, Inc. 8-K 3/8/00 2.1
3.02 Third Amended and Restated Certificate
of Incorporation of the Registrant S-1 1/29/98 3.02
3.04 Amended and Restated Bylaws of the
Registrant S-1 1/29/98 3.04
3.05 Amendment to Third Amended and
Restated Certificate of Incorporation
of the Registrant S-8 7/15/99 4.03
49
Incorporated by
Reference
Exhibit ------------------- Filed
Number Exhibit Description Form Date Number Herewith
------- ------------------- ---- ------- ------ --------
4.01 Investors' Rights Agreement, dated
November 15, 1996, among the
Registrant and the parties indicated
therein S-1 1/29/98 4.01
4.04 First Amendment to Amended and
Restated Investors' Rights Agreement
dated as of July 7, 1998 by and
between the Registrant and certain
stockholders of the Registrant 8-K 7/6/98 4.01
4.05 Registration Rights Agreement dated as
of July 6, 1998 by and between the
Registrant and the former
shareholders of SecureIT S-8 7/7/98 4.09
4.06 Registration Rights Agreement dated as
of December 19, 1999 by and between
the Registrant and Mark Shuttleworth 10-K 3/22/00 4.06
4.07 Voting Agreement dated as of March 6,
2000 among the Registrant and the
parties indicated therein 8-K 3/8/00 9.1
4.08 Registration Rights Agreement dated as
of March 6, 2000 among the Registrant
and the parties indicated therein 8-K 3/8/00 99.1
10.01 Registrant's 1998 Equity Incentive
Plan S-8 7/15/99 4.04
10.02 Registrant's 1998 Employee Stock
Purchase Plan S-8 7/15/99 4.05
10.03 Form of Non-Plan Stock Option for
options granted to certain non-
executive officer employees S-8 7/15/99 4.06
10.05 Form of Indemnification Agreement
entered into by the Registrant with
each of its directors and executive
officers S-1 1/29/98 10.05
10.06 Registrant's 1995 Stock Option Plan
and related documents S-1 1/29/98 10.06
10.07 Registrant's 1997 Stock Option Plan S-1 1/29/98 10.07
10.08 Registrant's 1998 Directors' Stock
Option Plan and related documents S-1 1/29/98 10.08
10.09 Registrant's 1998 Equity Incentive
Plan and related documents S-1 1/29/98 10.09
10.10 Registrant's 1998 Employee Stock
Purchase Plan and related documents S-1 1/29/98 10.10
10.11 Registrant's Executive Loan Program of
1996 S-1 1/29/98 10.11
10.14 Form of Full Recourse Secured
Promissory Note and Form of Pledge
and Security Agreement entered into
between the Registrant and certain
executive officers S-1 1/29/98 10.14
10.15 Assignment Agreement, dated April 19,
1995 between the Registrant and RSA
Data Security, Inc. S-1 1/29/98 10.15
10.16 BSAFE/TIPEM OEM Master License
Agreement, dated April 18, 1995,
between the Registrant and RSA Data
Security, Inc., as amended S-1 1/29/98 10.16
10.17 Non-Compete and Non-Solicitation
Agreement, dated April 18, 1995,
between the Registrant and RSA
Security, Inc. S-1 1/29/98 10.17
50
Incorporated by
Reference
Exhibit -------------------- Filed
Number Exhibit Description Form Date Number Herewith
------- ------------------- ---- -------- ------ --------
10.18* Microsoft/VeriSign Certificate
Technology Preferred Provider
Agreement, effective as of May 1,
1997, between the Registrant and
Microsoft Corporation S-1 1/29/98 10.18
10.19* Master Development and License
Agreement, dated September 30, 1997,
between the Registrant and Security
Dynamics Technologies, Inc. S-1 1/29/98 10.19
10.20 License Agreement, dated December 16,
1996, between the Registrant and
VeriSign Japan K.K. S-1 1/29/98 10.20
10.21 Loan Agreement, dated January 30,
1997, between the Registrant and
Venture Lending & Leasing, Inc. S-1 1/29/98 10.21
10.22 Security Agreement, dated January 30,
1997, between the Registrant and
Venture Lending & Leasing, Inc. S-1 1/29/98 10.22
10.23* VeriSign Private Label Agreement,
dated April 2, 1996, between the
Registrant and VISA International
Service Association S-1 1/29/98 10.23
10.24* VeriSign Private Label Agreement
dated October 3, 1996, between the
Registrant and VISA International
Service Association S-1 1/29/98 10.24
10.25 Lease Agreement, dated August 15,
1996, between the Registrant and
Shoreline Investments VII S-1 1/29/98 10.25
10.26 Lease Agreement, dated September 18,
1996, between the Registrant and
Shore-line Investments VII S-1 1/29/98 10.26
10.27 Sublease Agreement, dated September
5, 1996, between the Registrant and
Security Dynamics Technologies, Inc. S-1 1/29/98 10.27
10.28 Employment Offer Letter Agreement,
between the Registrant and Stratton
Sclavos, dated June 12, 1995, as
amended October 4, 1995 S-1 1/29/98 10.28
10.30 Amendment Number One to Master
Development and License Agreement
dated as of December 31, 1998
between the Registrant and Security
Dynamics Technologies, Inc. S-1 1/5/99 10.30
10.31 Amendment Number Two to BSAFE/TIPEM
OEM Master License Agreement dated
as of December 31, 1998 between the
Registrant and RSA Data Security,
Inc. S-1 1/5/99 10.31
10.32 Sublease dated as of September 25,
1998 between the Registrant and
Silicon Graphics, Inc. S-1 1/5/99 10.32
10.33 Lease between Ellis-Middlefield
Business Park and VeriSign, Inc. at
Building 1 455 East Middlefield Road
dated October 27, 2000 10-Q 11/13/00 10.1
10.34 Lease between Ellis-Middlefield
Business Park and VeriSign, Inc. at
Buildings 2 and 3 487 and 501East
Middlefield Road dated October 27,
2000 10-Q 11/13/00 10.2
10.35 Lease between Ellis-Middlefield
Business Park and VeriSign, Inc. at
Building 4 575 East Middlefield Road
dated October 27, 2000 10-Q 11/13/00 10.3
51
Incorporated by
Reference
Exhibit -------------------- Filed
Number Exhibit Description Form Date Number Herewith
------- ------------------- ---- -------- ------ --------
10.36 Lease between Sobrato Development
Companies #792 and VeriSign, Inc. at
Building 5 685 East Middlefield Road
dated October 27, 2000 10-Q 11/13/00 10.4
10.37 Separation Letter Agreement between
James P. Rutt and VeriSign, Inc.
dated February 23, 2001 X
21.01 Subsidiaries of the Registrant X
23.01 Consent of KPMG LLP X
- --------
* Confidential treatment was received with respect to certain portions of this
agreement. Such portions were omitted and filed separately with the
Securities and Exchange Commission.
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the quarter ended December
31, 2000.
52
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, in the City of Mountain View, State of
California, on the 27th day of March 2001.
VeriSign, Inc.
/s/ Stratton D. Sclavos
By __________________________________
Stratton D. Sclavos
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints Stratton D. Sclavos, Dana L. Evan and
James M. Ulam, and each of them, his or her true lawful attorneys-in-fact and
agents, with full power of substitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments to
this Annual Report on Form 10-K and to file the same, with all exhibits thereto
and all documents in connection therewith, with the Securities and Exchange
Commission, granted unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intends and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, or
his, her or their substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
In accordance with the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities indicated on the 27th day of March 2001.
Signature Title
--------- -----
/s/ Stratton D. Sclavos President, Chief Executive Officer and
____________________________________________ Director
Stratton D. Sclavos
/s/ Dana L. Evan Executive Vice President of Finance and
____________________________________________ Administration and Chief Financial Officer
Dana L. Evan
/s/ D. James Bidzos Chairman of the Board
____________________________________________
D. James Bidzos
/s/ William Chenevich Director
____________________________________________
William Chenevich
/s/ Kevin R. Compton Director
____________________________________________
Kevin R. Compton
/s/ David J. Cowan Director
____________________________________________
David J. Cowan
/s/ Scott G. Kriens Director
____________________________________________
Scott G. Kriens
/s/ Timothy Tomlinson Director
____________________________________________
Timothy Tomlinson
53
SUMMARY OF TRADEMARKS
VeriSign and/or its Affiliates and subsidiaries hold trademark registrations
for the following trademarks and service marks from the United States Patent
and Trademark Office and other trademark offices around the world:
.COM FUELED BY NETWORK SOLUTIONS
ACME BYTE & WIRE
DOT COM MAIL
DOT COM TOOLKIT
EXTRAGRATION
GLOBE GEAR [DESIGN]
GREATDOMAINS
IDNAMES
IMAGECAFE
MAKE A NAME FOR YOURSELF
NAMESECURE.COM
NETSOL
NETSURE
NETWORK SOLUTIONS
NETWORK SOLUTIONS W/DIAMOND DESIGN
ONSITE
PAYFLOW
REGISTRATION PLUS
SECUREIT
SECURETEST
SECUREVIEW
SIGNIO
THAWTE (Stylized)
THE .COM SERIES
THE DOT COM PEOPLE
THE SIGN OF TRUST ON THE INTERNET
V AND DESIGN
VERISIGN
WEBPASS
WORLDNIC
WORLDNIC AND [DESIGN]
VeriSign and/or its Affiliates and subsidiaries have applied to register the
following trademarks and service marks with the United States Patent and
Trademark Office and other trademark offices around the world:
.COM FUELED BY NETWORK SOLUTIONS
AUTHENTICATED PAYMENT
AUTHENTICATED PAYMENT SERVICES
AUTHENTICATED PAYMENT SOLUTION
AUTHENTICATION SERVICES BUREAU
DOMAIN MAGISTRATE
DOMAIN NAME SECURE
DOT COM BIZ CARD
DOT COM CLUB
DOT COM DASHBOARD
DOT COM DIRECTORY
54
DOT COM ESSENTIALS
DOT COM FORWARDING
DOT COM MAIL
DOT COM PAGES
DOT COM TOOLKIT
ECENTRECOM
ELECTRONIC CREDENTIALS FOR THE INTERNET
ENUM WORLD
EZDOMAIN AUCTION.COM
FAST SALE
FASTSALE
G DESIGN
GLOBAL TRUST NETWORK
GLOBE GEAR [DESIGN]
GREATDOMAINS
GREATNAMES
GREATTITLE
GREATWEBSITES
IDNAMES
IDNAMES.COM
IMAGECAFE
IMAGECAFE.COM
INTERNET TRUST COMPANY
MAKE A NAME FOR YOURSELF
ME@MYNAME
N AND DESIGN
NAME SECURE
NAME SECURE AND DESIGN
NANOBIZ
NANOBIZ.COM
NETSOL
NETWORK SOLUTIONS
NETWORK SOLUTIONS AND [DESIGN]
NSI
NSIRATED
NSIRATED AND [DESIGN]
PAYFLOW
REGISTRATION PLUS
SIGNIO
STARBURST DESIGN
STOP SEARCHING, START FINDING
THAWTE
THE .COM SERIES
THE DOT COM PEOPLE
TRUSTEDDNS
V CHECKMARK DESIGN
V-COMMERCE
VERISIGN
VERISIGN WPN
WHERE NAMES MEAN BUSINESS
WORLDNIC
WORLDNIC AND [DESIGN]
55
WORLDTRUST
XML PAY
ZNUM
VeriSign and/or its Affiliates and subsidiaries claim common law rights in
the following trademarks and service marks:
@CHECK
BUSINESS WEBNUM
COUNTRY WEBNUM
DOMAIN ASSOCIATE
DOT COM ASSURANCE
DOT COM PROMOTION
DOT COM TOOLKIT
DOT COM VALET
ETN
GLOBAL WEBNUM
GOSECURE!
IN SEARCH OF MY DOT COM
INDIVIDUAL WEBNUM
LOCAL WEBNUM
LOGO NUMBERS
NANOX
PAYFLOW LINK
PAYFLOW PRO
PAYGRAM.COM
RESERVED WEBNUM
THE DOT COM NEWS
TOLL FREE WEBNUM
VERISIGN GLOBAL REGISTRY SERVICES
WEBNUM
WEBNUM & DESIGN
WIRELESS WEBNUM
56
FINANCIAL STATEMENTS
As required under Item 8--Financial Statements and Supplementary Data, the
consolidated financial statements of the Company are provided in this separate
section. The consolidated financial statements included in this section are as
follows:
Financial Statement Description Page
------------------------------- ----
. Management's Report................................................... 58
. Independent Auditors' Report.......................................... 59
. Consolidated Balance Sheets
As of December 31, 2000 and 1999...................................... 60
. Consolidated Statements of Operations
For the Years Ended December 31, 2000, 1999 and 1998.................. 61
. Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2000, 1999 and 1998.................. 62
. Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2000, 1999 and 1998.................. 64
. Consolidated Statements of Cash Flows
For the Years Ended December 31, 2000, 1999 and 1998.................. 65
. Notes to Consolidated Financial Statements............................ 66
57
MANAGEMENT'S REPORT
VeriSign's management is responsible for the preparation, integrity and
objectivity of the consolidated financial statements and other financial
information presented in this report. The accompanying consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles and reflect the effects of certain estimates and judgments made by
management.
VeriSign's management maintains an effective system of internal control that
is designed to provide reasonable assurance that assets are safeguarded and
transactions are properly recorded and executed in accordance with management's
authorization. The system is continuously monitored by direct management
review. VeriSign selects and trains qualified people who are provided with and
expected to adhere to our standards of business conduct. These standards, which
set forth the highest principles of business ethics and conduct, are a key
element of our control system.
VeriSign's consolidated financial statements have been audited by KPMG LLP,
independent auditors. Their audits were conducted in accordance with auditing
standards generally accepted in the United States of America, and included a
review of financial controls and tests of accounting records and procedures as
they considered necessary in the circumstances.
The Audit Committee of the Board of Directors, which consists of outside
directors, meets regularly with management and the independent auditors to
review accounting, reporting, auditing and internal control matters. The
committee has direct and private access to external auditors.
VeriSign, Inc.
/s/ Stratton D. Sclavos
By __________________________________
Stratton D. Sclavos,
President and Chief Executive
Officer
/s/ Dana L. Evan
By __________________________________
Dana L. Evan,
Executive Vice President of
Finance and Administration and
Chief Financial Officer
Mountain View, California
January 23, 2001
58
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
VeriSign, Inc.:
We have audited the accompanying consolidated balance sheets of VeriSign,
Inc. and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, comprehensive
income (loss) and cash flows for each of the years in the three-year period
ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of VeriSign,
Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Mountain View, California
January 23, 2001
59
VERISIGN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
---------------------
2000 1999
----------- --------
ASSETS
------
Current assets:
Cash and cash equivalents............................. $ 460,362 $ 70,382
Short-term investments................................ 565,913 86,098
Accounts receivable, net of allowance for doubtful
accounts of $5,261 in 2000 and $1,108 in 1999........ 128,011 22,727
Prepaid expenses and other current assets............. 32,146 3,635
----------- --------
Total current assets................................ 1,186,432 182,842
Property and equipment, net............................. 105,602 10,194
Goodwill and other intangible assets, net............... 17,656,641 --
Long-term investments................................... 209,145 144,751
Other assets, net....................................... 37,402 3,379
----------- --------
$19,195,222 $341,166
=========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued liabilities.............. $ 193,952 $ 10,902
Accrued merger costs.................................. 18,814 --
Deferred revenue...................................... 452,713 31,777
----------- --------
Total current liabilities........................... 665,479 42,679
----------- --------
Long-term deferred revenue.............................. 55,575 --
Other long-term liabilities............................. 3,560 128
----------- --------
Total long-term liabilities......................... 59,135 128
----------- --------
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: 198,639,497 (excluding
40,000 shares held in treasury) at December 31, 2000
103,482,841 at December 31, 1999..................... 199 103
Additional paid-in capital.............................. 21,670,647 258,239
Notes receivable from stockholders...................... (245) --
Unearned compensation................................... (36,365) (172)
Accumulated deficit..................................... (3,162,926) (47,452)
Accumulated other comprehensive income (loss)........... (702) 87,641
----------- --------
Total stockholders' equity.......................... 18,470,608 298,359
----------- --------
$19,195,222 $341,166
=========== ========
See accompanying notes to consolidated financial statements.
60
VERISIGN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
-------------------------------
2000 1999 1998
----------- -------- --------
Revenues...................................... $ 474,766 $ 84,776 $ 38,930
----------- -------- --------
Costs and expenses:
Cost of revenues............................ 163,049 31,898 19,454
Sales and marketing......................... 167,148 34,145 22,943
Research and development.................... 41,256 13,303 8,435
General and administrative.................. 60,672 8,740 7,688
Write-off of acquired in-process research
and development............................ 54,000 -- --
Amortization of goodwill and other
intangible assets.......................... 3,188,950 -- --
Special charges............................. -- -- 3,555
----------- -------- --------
Total costs and expenses.................. 3,675,075 88,086 62,075
----------- -------- --------
Operating loss................................ (3,200,309) (3,310) (23,145)
Other income:
Gain on sale of marketable securities....... 34,996 -- --
Interest income............................. 52,651 7,365 2,280
Other expense, net.......................... (1,478) (936) (160)
----------- -------- --------
Total other income........................ 86,169 6,429 2,120
----------- -------- --------
Income (loss) before minority interest........ (3,114,140) 3,119 (21,025)
Minority interest in net (income) loss of
subsidiary................................... (1,334) 836 1,282
----------- -------- --------
Net income (loss)............................. $(3,115,474) $ 3,955 $(19,743)
=========== ======== ========
Net income (loss) per share:
Basic....................................... $ (19.57) $ .04 $ (.24)
=========== ======== ========
Diluted..................................... $ (19.57) $ .03 $ (.24)
=========== ======== ========
Shares used in per share computation:
Basic....................................... 159,169 100,531 83,492
=========== ======== ========
Diluted..................................... 159,169 114,610 83,492
=========== ======== ========
See accompanying notes to consolidated financial statements.
61
VERISIGN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Year Ended
December 31,
----------------
2000 1999 1998
----- ----- ----
Preferred stock:
Balance, beginning of year:
No shares at January 1, 2000
No shares at January 1, 1999
40,124,024 shares at January 1, 1998..................... $ -- $ -- $ 40
Conversion of preferred stock to common stock (40,124,024)
shares in 1998............................................ -- -- (40)
----- ----- ----
Balance, end of year:
No shares at December 31, 2000, 1999 or 1998............. -- -- --
----- ----- ----
Common stock:
Balance, beginning of year:
103,482,841 shares at January 1, 2000
92,346,768 shares at January 1, 1999
35,145,704 shares at January 1, 1998..................... 103 92 36
Issuance of common stock:
81,600 shares in 1998.................................... -- -- --
Issuance of common stock through public offerings:
6,390,000 shares in 1999
13,800,000 shares in 1998................................ -- 6 13
Conversion of preferred stock to common stock:
40,124,024 shares in 1998................................ -- -- 40
Issuance of common stock for business combinations:
88,948,676 shares in 2000................................ 89 -- --
Issuance of common stock under employee stock purchase
plan:
550,724 shares in 2000
547,896 shares in 1999
232,900 shares in 1998................................... 1 1 --
Exercise of common stock options:
5,657,256 shares in 2000
4,198,177 shares in 1999
2,962,540 shares in 1998................................. 6 4 3
----- ----- ----
Balance, end of year:
198,639,497 shares at December 31, 2000
103,482,841 shares at December 31, 1999
92,346,768 shares at December 31, 1998................... 199 103 92
----- ----- ----
(Continued)
See accompanying notes to consolidated financial statements.
62
VERISIGN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued)
(In thousands, except share data)
Year Ended December 31,
-------------------------------
2000 1999 1998
----------- -------- --------
Additional paid-in capital:
Balance, beginning of year.................. $ 258,239 $ 92,728 $ 45,360
Issuance of common stock.................... -- -- 70
Issuance of common stock through public
offerings, net of offering expenses of
$7,239 in 1999 and $4,561 in 1998.......... -- 121,354 43,729
Issuance of common stock and common stock
options for business combinations.......... 21,273,280 -- --
Issuance of common stock under employee
stock purchase plan........................ 4,696 1,989 693
Unearned compensation related to common
stock options.............................. -- -- 1,176
Income tax benefit from exercise of employee
stock options.............................. 67,448 29,778 --
Exercise of common stock options............ 66,984 12,390 1,700
----------- -------- --------
Balance, end of year........................ 21,670,647 258,239 92,728
----------- -------- --------
Notes receivable from stockholders:
Balance, beginning of year.................. -- (409) (644)
Loans acquired through business
combinations............................... (766) -- --
Payments on notes receivable................ 521 409 235
----------- -------- --------
Balance, end of year........................ (245) -- (409)
----------- -------- --------
Unearned compensation:
Balance, beginning of year.................. (172) (276) (380)
Unearned compensation resulting from
business combinations ..................... (37,915) -- --
Amortization of unearned compensation....... 1,722 104 104
----------- -------- --------
Balance, end of year........................ (36,365) (172) (276)
----------- -------- --------
Accumulated deficit:
Balance, beginning of year.................. (47,452) (51,407) (30,871)
Net income (loss)........................... (3,115,474) 3,955 (19,743)
Subchapter S distributions of SecureIT,
Inc........................................ -- -- (793)
----------- -------- --------
Balance, end of year........................ (3,162,926) (47,452) (51,407)
----------- -------- --------
Accumulated other comprehensive income:
Balance, beginning of year.................. 87,641 -- --
Translation adjustments..................... 525 -- --
Change in unrealized gain on investments,
net of tax................................. (88,868) 87,641 --
----------- -------- --------
Balance, end of year........................ (702) 87,641 --
----------- -------- --------
Total stockholders' equity.................... $18,470,608 $298,359 $ 40,728
=========== ======== ========
See accompanying notes to consolidated financial statements.
63
VERISIGN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Year Ended December 31,
-----------------------------
2000 1999 1998
----------- ------- --------
Net income (loss)............................... $(3,115,474) $ 3,955 $(19,743)
Other comprehensive income:
Translation adjustments....................... 525 -- --
Change in unrealized gain on investments, net
of tax....................................... (88,868) 87,641 --
----------- ------- --------
Comprehensive income (loss)..................... $(3,203,817) $91,596 $(19,743)
=========== ======= ========
See accompanying notes to consolidated financial statements.
64
VERISIGN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
--------------------------------
2000 1999 1998
----------- --------- --------
Cash flows from operating activities:
Net income (loss).......................... $(3,115,474) $ 3,955 $(19,743)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization of property
and equipment........................... 27,855 5,404 3,946
Amortization of goodwill and other
intangible assets....................... 3,188,950 -- --
Write-off of acquired in-process research
and development......................... 54,000 -- --
Provision for bad debt................... 5,797 859 590
Gain on sale of marketable securities.... (34,996) -- --
Minority interest in net loss of
subsidiary.............................. 1,334 (836) (1,282)
Amortization of unearned compensation.... 1,722 104 1,280
Loss on disposal of property and
equipment............................... 520 381 42
Changes in operating assets and
liabilities:
Accounts receivable...................... (87,965) (13,817) (6,969)
Prepaid expenses and other current
assets.................................. 29,359 (1,461) (1,180)
Accounts payable and accrued
liabilities............................. 71,803 1,395 3,657
Deferred revenue......................... 49,092 18,681 7,829
----------- --------- --------
Net cash provided by (used in)
operating activities.................. 191,997 14,665 (11,830)
----------- --------- --------
Cash flows from investing activities:
Purchases of short-term investments........ (1,007,634) (132,238) (63,383)
Proceeds from maturities and sales of
short-term investments.................... 537,269 65,099 52,375
Purchases of long-term investments......... (197,536) (26,896) (436)
Proceeds from maturities and sales of long-
term investments.......................... 103,534 -- --
Purchases of property and equipment........ (58,778) (6,019) (4,413)
Cash acquired in purchase transactions,
less amounts paid......................... 835,758 -- --
Transaction costs.......................... (62,594) -- --
Other assets............................... (26,015) (3,168) (119)
----------- --------- --------
Net cash provided by (used in)
investing activities.................. 124,004 (103,222) (15,976)
----------- --------- --------
Cash flows from financing activities:
Net proceeds from issuance of common
stock..................................... 71,687 135,744 46,208
Collections on notes receivable from
stockholders.............................. 521 409 235
Investment in VeriSign KK.................. 1,246 -- --
Subchapter S distributions by SecureIT,
Inc....................................... -- -- (793)
----------- --------- --------
Net cash provided by financing
activities............................ 73,454 136,153 45,650
----------- --------- --------
Effect of exchange rate changes on cash...... 525 -- --
----------- --------- --------
Net increase in cash and cash equivalents.... 389,980 47,596 17,844
Cash and cash equivalents at beginning of
year........................................ 70,382 22,786 4,942
----------- --------- --------
Cash and cash equivalents at end of year..... $ 460,362 $ 70,382 $ 22,786
=========== ========= ========
Supplemental cash flow disclosures:
Noncash investing and financing activities:
Issuance of common stock for business
combinations............................ $21,273,369 $ -- $ --
=========== ========= ========
Income tax benefit from exercise of stock
options................................. $ 67,448 $ 29,778 $ --
=========== ========= ========
Unrealized gain (loss) on investments,
net of tax.............................. $ (88,868) $ 87,641 $ --
=========== ========= ========
Cash paid for income taxes............... $ 1,267 $ 698 $ --
=========== ========= ========
See accompanying notes to consolidated financial statements.
65
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
Note 1. Description of Business and Summary of Significant Accounting Policies
Business
VeriSign, Inc., a Delaware corporation, provides trusted infrastructure
services to website owners, enterprises, electronic commerce service providers
and individuals. Its domain name registration, digital certificate, global
registry and payment services provide the critical web identity, authentication
and transaction infrastructure that online businesses need to establish their
web identities and to conduct secure e-commerce and communications. Its
services support businesses and consumers from their first establishment of an
Internet presence throughout the lifecycle of e-commerce activities.
Consolidation
The accompanying consolidated financial statements include the accounts of
VeriSign and its subsidiaries after elimination of intercompany accounts and
transactions. As of December 31, 2000, VeriSign owned approximately 69.2% of
the outstanding shares of capital stock of its subsidiary, VeriSign Japan K.K.
The minority interest in VeriSign Japan K.K. is included in other long-term
liabilities in the accompanying consolidated balance sheets. Changes in
VeriSign's proportionate share of the net assets of VeriSign Japan resulting
from sales of capital stock by the subsidiary are accounted for as equity
transactions.
Foreign Currency Translation
The functional currency for substantially all of VeriSign's international
subsidiaries is the U.S. dollar; however, the subsidiaries' books of record are
maintained in local currency. As a result, the subsidiaries' financial
statements are remeasured into U.S. dollars using a combination of current and
historical exchange rates and any transaction gains and losses, which have not
been significant, are included in operating results.
The financial statements of the subsidiaries for which the local currency is
the functional currency are translated into U.S. dollars using the current rate
for assets and liabilities and a weighted average rate for the period for
revenues and expenses. The cumulative translation adjustment that results from
this translation is included in accumulated other comprehensive income.
Cash, Cash Equivalents, and Short and Long-Term Investments
VeriSign considers all highly liquid investments with maturities of three
months or less at the date of acquisition to be cash equivalents. Cash and cash
equivalents include money market funds, commercial paper, market auction
securities, and various deposit accounts.
VeriSign's investments are classified as "available-for-sale" and are
carried at fair value based on quoted market prices. These investments consist
of commercial paper, medium term notes, U.S. government and agency securities
and corporate bonds and notes. Those investments with maturities greater than
three months and less than twelve months at the date of acquisition are
considered short-term investments and those with maturities greater than twelve
months are considered long-term investments. Realized gains and losses upon
sale or maturity of these investments are determined using the specific
identification method.
VeriSign invests in debt and equity securities of technology companies for
business and strategic purposes. These investments are included in long-term
investments. Investments in non-public companies are accounted for under the
cost method. For these non-quoted investments, VeriSign regularly reviews the
assumptions underlying the operating performance and cash flow forecasts in
assessing each investment's carrying value. Investments in public companies are
recorded at fair market value with the associated unrealized gain or loss
66
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000, 1999 AND 1998
included in accumulated other comprehensive income. VeriSign identifies and
records impairment losses on its investments when circumstances indicate that a
decline in the fair value of an investment is other than temporary.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets, generally three to five years. Leasehold
improvements are amortized using the straight-line method over the lesser of
the estimated useful lives or remaining lease terms.
Capitalized Software
Costs incurred in connection with the development of software products are
accounted for in accordance with Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased or
Otherwise Marketed." Development costs incurred in the research and development
of new software products and enhancements to existing software products are
expensed as incurred until technological feasibility in the form of a working
model has been established. To date, the Company's software has been available
for general release concurrent with the establishment of technological
feasibility, and accordingly no costs have been capitalized to date.
Costs of internal use software are accounted for in accordance with the
American Institute of Certified Public Accountants Statement of Position No.
98-1. SOP 98-1, requires that software developed for internal use be
capitalized once certain criteria have been met. To date, no costs related to
internally developed software have been capitalized. Software purchases for
internal use, along with the costs of implementation services, are capitalized
and amortized over the estimated useful life of the software, generally three
years.
Revenue Recognition
The Company recognizes revenue in accordance with SOP 97-2, "Software
Revenue Recognition," as modified by SOP 98-9. SOP 97-2, as modified, generally
requires revenue earned on software arrangements involving multiple elements
such as software products, upgrades, enhancements, post contract customer
support ("PCS"), installation, training, etc. to be allocated to each element
based on the relative fair values of the elements. The fair value of an element
must be based on evidence that is specific to the vendor. If evidence of fair
value does not exist for all elements of a license agreement and PCS is the
only undelivered element, then all revenue for the license arrangement is
recognized ratably over the term of the agreement. If evidence of fair value of
all undelivered elements exists but evidence does not exist for one or more
delivered elements, then revenue is recognized using the residual method. Under
the residual method, the fair value of the undelivered elements is deferred,
and the remaining portion of the arrangement fee is recognized as revenue.
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. Revenues
from the sale or renewal of digital certificates are deferred and recognized
ratably over the life of the digital certificate, generally 12 months. Revenues
from the sale of OnSite managed services are deferred and recognized ratably
over the term of the license, generally 12 months.
Revenues from the licensing of digital certificate technology and business
process technology are sold in arrangements involving multiple elements
including PCS, training and other services. PCS can be renewed
67
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000, 1999 AND 1998
annually for an additional fee. The Company uses the PCS renewal rate as
evidence of fair value of PCS. The Company establishes evidence of fair value
for training and other services through the price charged when the same element
is sold separately. Since the Company has established evidence of fair value
for all undelivered elements of the arrangement, revenue is recognized under
the residual method. The fair value of PCS is recognized over the PCS term,
training and other service revenue is recognized when delivered and the
remaining portion of the arrangement fee is recognized after the execution of a
license agreement and the delivery of the product to the customer, provided
that there are no uncertainties surrounding the product acceptance, fees are
fixed and determinable, collectibility is probable, and the Company has no
remaining obligations other than the delivery of PCS.
Revenues from consulting and training services are recognized using the
percentage-of-completion method for fixed-fee development arrangements or as
the services are provided for time-and-materials arrangements.
Revenues from payment services primarily consist of a set-up fee and a
monthly service fee for the transaction processing services. VeriSign adopted
SEC Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," beginning October 1, 2000. In accordance with SAB 101, revenues
from the set-up fee are deferred and recognized ratably over the period that
the fees are earned. Revenues from the service fees are recognized ratably over
the periods in which the services are provided. Advance customer deposits
received are deferred and allocated ratably to revenue over the periods the
services are provided. The adoption of SAB 101 did not impact the Company's
existing revenue recognition policies.
Domain name registration revenues consist primarily of registration fees
charged to customers and registrars for domain name registration services.
Revenues from the sale or renewal of domain name registration services are
deferred and recognized ratably over the registration term, generally one to
two years.
Advertising Expense
Advertising costs are expensed as incurred. Advertising expense was
$90,478,000 in 2000, $3,037,000 in 1999 and $1,858,000 in 1998.
Income Taxes
VeriSign uses the asset and liability method to account for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is recorded for
deferred tax assets whose realization is not sufficiently likely.
Unearned Compensation
VeriSign accounts for its unearned compensation plans using the intrinsic
value method of Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees." VeriSign adopted FASB
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions Involving
Stock Compensation, an interpretation of APB 25" as of July 1, 2000. FIN 44
provides guidance on the application of APB 25 for stock compensation involving
employees. As prescribed by FIN 44, VeriSign allocated a portion of the
intrinsic value of unvested stock options assumed in purchase business
combinations completed after
68
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000, 1999 AND 1998
July 1, 2000 to unearned compensation. These amounts will be amortized to
expense over the remaining vesting periods of the respective options.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted average
number of outstanding shares of common stock. Diluted net income (loss) per
share is computed using the weighted average number of shares of common stock
outstanding plus the dilutive effect of stock options, if any, computed using
the treasury stock method and convertible securities using the if-converted
method.
The following table presents the calculation for the number of shares used
in the basic and diluted net income (loss) per share computations:
Year Ended December
31,
----------------------
2000 1999 1998
------- ------- ------
(In thousands)
Shares used to compute basic net income (loss) per
share:
Weighted average shares outstanding............... 159,169 100,531 83,492
Dilutive stock options............................ -- 14,079 --
------- ------- ------
Shares used to compute diluted net income (loss) per
share.............................................. 159,169 114,610 83,492
======= ======= ======
For 2000, VeriSign excluded all shares subject to outstanding stock options,
a total of 28,639,917 shares, from the calculation of diluted net loss per
share because these securities would have been anti-dilutive. For 1999,
VeriSign excluded from the calculation of diluted net income per share 481,320
shares related to stock options with an exercise price higher than $49.70, the
weighted average fair market value of the common stock for the year. For 1998,
VeriSign excluded all convertible preferred stock and outstanding stock options
from the calculation of diluted net loss per share because these securities
would have been anti-dilutive. The excluded shares totaled 16,516,368 shares
for 1998.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) includes gains and losses that are not
included in net income (loss) but instead are recorded directly in
stockholders' equity. Other comprehensive income (loss) includes unrealized
gains (losses) on investments and cumulative translation adjustments.
Concentration of Credit Risk
Financial instruments that potentially subject VeriSign to significant
concentrations of credit risk consist principally of cash, cash equivalents,
short and long-term investments and accounts receivable. VeriSign maintains its
cash, cash equivalents and short-term investments with high quality financial
institutions and, as part of its cash management process, performs periodic
evaluations of the relative credit standing of these financial institutions.
VeriSign also performs ongoing credit evaluations of its customers and,
generally, requires no collateral. VeriSign maintains an allowance for
potential credit losses on its accounts receivable. Amounts added to the
allowance for doubtful accounts through charges to bad debt expense totaled
$5,797,000 in 2000, $859,000 in 1999 and $590,000 in 1998. Uncollectible
amounts written off totaled $1,644,000 in 2000, $268,000 in 1999, and $359,000
in 1998.
69
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000, 1999 AND 1998
Impairment of Long-Lived Assets
VeriSign's long-lived assets consist primarily of goodwill and other
intangible assets, property and equipment and other long-term assets. VeriSign
reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Such events or circumstances indicate that the carrying amount
of an asset may not be recoverable. Such events or circumstances include, but
are not limited to, a significant decrease in the fair value of the underlying
business, a significant decrease in the benefits realized from the acquired
business, or a significant change in the operations of the acquired business.
Recoverability of long-lived assets is measured by comparison of the
carrying amount to future undiscounted net cash flows the assets are expected
to generate. If assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the long-
lived asset exceeds its fair market value. To date, results of operations and
cash flows from VeriSign's acquisitions have been consistent with original
expectations and no adjustments to the carrying value of long-lived assets have
been required, however, changes in the economy, the business in which the
Company operates and VeriSign's own relative performance could change the
assumptions used to evaluate the recovery of goodwill and other intangible
assets. VeriSign monitors the preceding factors to identify events or
circumstances which would cause the Company to test for impairment and revise
its assumptions on the estimated recovery of goodwill and intangible assets.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities". The new
standard establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Accounting for changes in the values of those derivatives depends on the
intended use of the derivatives and whether they qualify for hedge accounting.
SFAS 133, as amended by SFAS 137 and SFAS 138, is effective for fiscal years
beginning after June 15, 2000. Historically, the Company has not entered into
derivatives contracts either to hedge existing risks or for speculative
purposes. Adoption of the new standard will not have a material affect on the
Company's consolidated financial statements.
Note 2. Business Combinations
Purchases
THAWTE Consulting (Pty) Ltd. Acquisition
On February 1, 2000, VeriSign completed its acquisition of THAWTE Consulting
(Pty) Ltd., 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
70
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000, 1999 AND 1998
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. 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.
Network Solutions, Inc. Acquisition
On June 8, 2000, VeriSign completed its acquisition of Network Solutions,
Inc. 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 $67.3 million, which 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 banking fees, legal fees, filing fees, provision for
acceleration of stock option vesting and employee relocation expenses. For the
period from June 8, 2000 to December 31, 2000, approximately $43.1 million was
paid for filing fees, legal fees and consulting fees related to the
acquisition. An additional $9.3 million was recorded against the provision for
the write-off of duplicative information systems, prepaid director and officer
insurance premiums, employee relocation and severance payments. The balance of
the provision as of December 31, 2000 relates primarily to relocation expenses,
severance costs and consultant fees related to the integration of computer
systems and human resource plans.
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.
71
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000, 1999 AND 1998
Other Acquisitions
In 2000, VeriSign completed acquisitions of several other privately held
companies, each of which was individually not significant. VeriSign issued
approximately 661,000 shares of its common stock and approximately $33.3
million in cash in exchange for all of the outstanding shares of these
companies. VeriSign also assumed outstanding stock options for certain of these
acquisitions. Additionally, VeriSign escrowed shares of common stock which will
be released to the principal stockholders of certain of the acquired companies
over an employment term. As a result, unearned compensation of approximately
$30.5 million was recorded which will be amortized over the two year period of
required employment. Each of the acquisitions has been accounted for as a
purchase and, accordingly, the aggregate purchase price of approximately
$120.2 million has been allocated to the tangible and intangible assets
acquired and the liabilities assumed based on their respective fair values on
the acquisition dates. Goodwill and other intangible assets are being amortized
on a straight-line basis over two to four and a half years. The acquired
companies' results of operations have been included in the consolidated
financial statements from their respective dates of acquisition. The Company
recorded an additional provision for merger related costs of $4.2 million for
employee severance, relocation and write down of duplicative systems.
Purchase Price Allocations
The purchase consideration for the acquisitions was allocated to the assets
acquired and liabilities assumed based on fair values as follows:
Straight-Line
Network Amortization
THAWTE Signio Solutions Other Period
-------- -------- ----------- -------- -------------
(Dollars in thousands) (Years)
Net tangible assets..... $ 566 $ 2,888 $ 705,715 $ 13,317 --
ISP hosting
relationships.......... 11,389 -- -- -- 2.0
Customer relationships.. 2,815 15,402 -- -- 3.0
Technology in place..... 2,963 5,680 29,500 390 3.0-3.5
Non-compete agreement... 939 -- -- -- 3.0
Trade names............. 913 4,501 67,400 1,400 2.0-3.0
Workforce in place...... 342 1,353 16,900 800 3.0-4.0
Contracts with Internet
Corporation for
Assigned Names and
Numbers (ICANN) and
customer lists......... -- -- 800,700 10,230 3.4-4.5
In-process research and
development............ -- -- 54,000 -- --
Goodwill................ 632,087 854,635 18,295,026 87,155 3.0-4.0
Unearned compensation
attributable to
unvested stock options
assumed................ -- -- -- 7,421 --
Deferred income tax
liabilities
attributable to
identifiable intangible
assets................. -- (8,732) (334,432) (487) --
-------- -------- ----------- --------
Net assets acquired..... $652,014 $875,727 $19,634,809 $120,226
======== ======== =========== ========
Acquired In-Process Research and Development
The portion of the Network Solutions purchase price allocated to in-process
research and development, or IPR&D, was $54 million and was expensed during the
quarter ended June 30, 2000. Network Solution's
72
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000, 1999 AND 1998
IPR&D efforts focused on significant and substantial improvements and upgrades
to its shared registration system, or SRS. The SRS is the system that provides
shared registration interface to the accredited and licensed registrars into
the .com, .net, and .org top level domain, or TLD, 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 December 31,
2000, the development efforts related to upgrades and improvements in the SRS
and other systems are ongoing and expected to be completed by March 31, 2001.
The fair value assigned to IPR&D was estimated by discounting, to present
value, the cash flows attributable to the technology once it has reached
technological feasibility. A discount rate of 22% was used to estimate the
present value of cash flows, which is consistent with the risk of the project.
The value assigned to IPR&D was the amount attributable to the efforts of the
seller up to the time of acquisition. This amount was estimated through
application of the "stage 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.
Pro forma results of operations
The following summary, prepared on a pro forma basis, presents the results
of operations as if THAWTE, Signio and Network Solutions had been acquired as
of January 1, 1999. The pro forma results of operations include the impact of
certain adjustments, primarily amortization of goodwill and intangible assets
and excludes the one-time IPR&D charge.
Year Ended December 31,
------------------------
2000 1999
----------- -----------
(In thousands,
except per share data)
Revenues........................................... $ 661,995 $ 308,790
Net loss........................................... (5,232,753) (5,315,335)
Basic and diluted net loss per share............... (26.87) (28.12)
Pooling of Interests
In July 1998, VeriSign completed a merger with SecureIT, Inc. ("SecureIT").
SecureIT is a provider of Internet and enterprise security solutions comprising
a full range of products and services to assist clients with assessing,
designing and implementing security solutions. The merger was effected by
exchanging approximately 6,664,000 shares of VeriSign common stock for all of
the outstanding common stock of SecureIT. Each share of SecureIT was exchanged
for 0.164806 of one share of VeriSign common stock. In addition, outstanding
SecureIT employee stock options were converted at the same exchange ratio into
options to purchase approximately 760,000 shares of VeriSign common stock.
73
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000, 1999 AND 1998
The merger constituted a tax-free reorganization and has been accounted for
as a pooling-of-interests. Accordingly, all prior period financial statements
have been restated to include the combined results of operations, financial
position and cash flows of SecureIT as if it had always been a part of
VeriSign. There were no intercompany transactions between VeriSign and SecureIT
prior to the combination that required elimination and there were no material
adjustments required to conform SecureIT's accounting policies to those of
VeriSign. Direct costs and other related merger costs of approximately $3.6
million were incurred in connection with the acquisition (see Note 9).
Note 3. Cash, Cash Equivalents and Short and Long-Term Investments
All short-term investments and marketable long-term investments have been
classified as available-for-sale securities and consist of the following:
December 31, 2000
-------------------------------------------
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
(In thousands)
Classified as current assets:
Cash............................. $ 67,848 $ -- $ -- $ 67,848
Commercial paper................. 740,162 30 (503) 739,689
Corporate bonds and notes........ 8,004 31 -- 8,035
Money market funds............... 186,736 -- -- 186,736
Medium term corporate notes...... 10,882 17 -- 10,899
Other............................ 13,068 -- -- 13,068
---------- ------- -------- ----------
1,026,700 78 (503) 1,026,275
---------- ------- -------- ----------
Included in cash and cash
equivalents....................... $ 460,362
==========
Included in short-term
investments....................... $ 565,913
==========
Classified as non-current assets:
Equity securities................ 165,538 17,405 (24,795) 158,148
Corporate bonds and notes........ 24,728 29 (20) 24,737
Foreign debt securities.......... 9,941 54 -- 9,995
Medium term notes................ 8,232 64 -- 8,296
U.S. government and agency
securities...................... 5,899 -- (10) 5,889
Municipal bonds.................. 2,080 -- -- 2,080
---------- ------- -------- ----------
216,418 17,552 (24,825) 209,145
---------- ------- -------- ----------
Total cash and investments..... $1,243,118 $17,630 $(25,328) $1,235,420
========== ======= ======== ==========
74
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000, 1999 AND 1998
December 31, 1999
-----------------------------------------
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------- ---------- ---------- ----------
(In thousands)
Classified as current assets:
Cash............................... $ 22,645 $ -- $ -- $ 22,645
Commercial paper................... 57,243 20 -- 57,263
Corporate bonds and notes.......... 28,349 -- (345) 28,004
Money market funds................. 4,602 -- -- 4,602
Medium term corporate notes........ 23,276 1 (100) 23,177
Market auction securities.......... 5,000 -- -- 5,000
U.S. government and agency
securities........................ 15,876 -- (87) 15,789
-------- -------- ----- --------
156,991 21 (532) 156,480
-------- -------- ----- --------
Included in cash and cash
equivalents......................... $ 70,382
========
Included in short-term investments... $ 86,098
========
Classified as non-current assets:
Equity securities.................. 12,925 117,977 -- 130,902
U.S. government and agency
securities........................ 14,000 -- (151) 13,849
-------- -------- ----- --------
26,925 117,977 (151) 144,751
-------- -------- ----- --------
Total cash and investments....... $183,916 $117,998 $(683) $301,231
======== ======== ===== ========
Gross realized gains on investments were $35.0 million in 2000. Gross
realized gains and losses on investments in 1999 and 1998 were not material.
75
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000, 1999 AND 1998
Note 4. Balance Sheet Detail
December 31,
-------------------
2000 1999
----------- -------
(In thousands)
Property and equipment, net
Computer equipment and purchased software............... $ 121,437 $15,231
Office equipment, furniture and fixtures................ 4,803 2,438
Leasehold improvements.................................. 14,147 3,996
----------- -------
140,387 21,665
Less accumulated depreciation and amortization.......... 34,785 11,471
----------- -------
$ 105,602 $10,194
=========== =======
Goodwill and other intangible assets, net
ISP hosting relationships............................... $ 11,389 $ --
Customer relationships.................................. 18,217 --
Technology in place..................................... 38,533 --
Non-compete agreement................................... 939 --
Trade name.............................................. 74,214 --
Workforce in place...................................... 19,395 --
Contracts with ICANN and customer lists................. 810,930 --
Goodwill................................................ 19,868,903 --
----------- -------
20,842,520 --
Less accumulated amortization........................... 3,185,879 --
----------- -------
$17,656,641 $ --
=========== =======
Accounts payable and accrued liabilities
Accounts payable........................................ $ 39,330 $ 4,665
Employee compensation................................... 16,509 3,878
Professional fees....................................... 39,228 284
Advertising fees........................................ 32,681 --
Facilities related...................................... 12,709 --
Tax accrual............................................. 32,743 --
Other................................................... 20,752 2,075
----------- -------
$ 193,952 $10,902
=========== =======
76
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000, 1999 AND 1998
Note 5. Stockholders' Equity
Stock Splits
In March 1999, the Board of Directors (the "Board") declared a two-for-one
stock split for stockholders of record on May 14, 1999. In November 1999, the
Board declared an additional two-for-one stock split for stockholders of record
on November 22, 1999. All share and per share information has been restated to
reflect the effect of the stock splits.
Preferred Stock
VeriSign is authorized to issue up to 5,000,000 shares of preferred stock.
As of December 31, 2000, no shares of preferred stock had been issued.
Common Stock
On January 30, 1998, VeriSign completed its initial public offering ("IPO")
by issuing 13,800,000 shares of its common stock at an initial public offering
price of $3.50 per share. VeriSign received net proceeds from the offering,
after deducting underwriting discounts and commissions and offering expenses,
of approximately $43.7 million. Concurrently with the IPO, each outstanding
share of VeriSign's convertible preferred stock was automatically converted
into one share of common stock.
In January 1999, VeriSign completed a follow-on public offering by issuing
6,390,000 shares at an offering price of $20.13 per share. VeriSign received
net proceeds from the offering of approximately $121.4 million.
No dividends have been declared or paid on common stock since VeriSign's
inception. SecureIT paid Subchapter S distributions of $793,000 to its
stockholders for minimum tax obligations during the year ended December 31,
1998.
Notes Receivable From Stockholders
In November 1996, VeriSign loaned several officers an aggregate of $543,000,
due December 31, 2005, bearing interest at a rate per annum of 6.95%, payable
quarterly. In August 1997, VeriSign loaned an officer an aggregate of $116,000,
due December 31, 2006, bearing interest at a rate per annum of 6.87%, payable
quarterly. The loans are full recourse and are collateralized by pledges of the
shares of VeriSign common stock that were purchased. As of December 31, 1999,
all loans had been repaid in full.
In connection with its acquisition of Signio, VeriSign assumed notes
receivable from stockholders for the exercise of stock options. The notes bear
interest at 5.5% per annum and are secured by the underlying common stock.
Note 6. Stock Compensation Plans
Stock Option Plans
As of December 31, 2000, a total of 36,325,299 shares of common stock were
reserved for issuance upon the exercise of stock options and for the future
grant of stock options or awards under VeriSign's equity incentive plans.
77
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000, 1999 AND 1998
The 1995 Stock Option Plan and the 1997 Stock Option Plan (the "1995 and
1997 Plans") were terminated concurrent with VeriSign's IPO in 1998. Options to
purchase common stock granted under the 1995 and 1997 Plans remain outstanding
and subject to the vesting and exercise terms of the original grant. All shares
that remained available for future issuance under the 1995 and 1997 Plans at
the time of their termination were transferred to the 1998 Equity Incentive
Plan. No further options can be granted under the 1995 and 1997 Plans. Options
granted under the 1995 and 1997 Plans are subject to terms substantially
similar to those described below with respect to options granted under the 1998
Equity Incentive Plan.
The 1998 Equity Incentive Plan (the "1998 Plan") authorizes the award of
options, restricted stock awards and stock bonuses. As of December 31, 2000, no
restricted stock awards or stock bonus awards have been made under the 1998
Plan.
Options may be granted at an exercise price not less than 100% of the fair
market value of VeriSign's common stock on the date of grant for incentive
stock options and 85% of the fair market value for nonqualified stock options.
All options are granted at the discretion of the Board and have a term not
greater than 7 years from the date of grant. Options issued generally vest 25%
on the first anniversary date and ratably over the following 12 quarters. At
December 31, 2000, 7,272,882 shares remain available for future awards under
the 1998 Plan.
Members of the Board who are not employees of VeriSign, or of any parent,
subsidiary or affiliate of VeriSign, are eligible to participate in the 1998
Directors Plan (the "Directors Plan). The option grants under the Directors
Plan are automatic and nondiscretionary, and the exercise price of the options
is 100% of the fair market value of the common stock on the date of the grant.
Each eligible director who becomes a director on or after January 28, 1998 will
initially be granted an option to purchase 15,000 shares on the date he or she
first becomes a director (the "Initial Grant"). On each anniversary of a
director's Initial Grant or most recent grant if he or she was ineligible to
receive an Initial Grant, each eligible director will automatically be granted
an additional option to purchase 7,500 shares of common stock if the director
has served continuously as a director since the date of the Initial Grant or
most recent grant. The term of the options under the Directors Plan is ten
years and options vest as to 6.25% of the shares each quarter after the date of
the grant, provided the optionee remains a director of VeriSign. At December
31, 2000, 412,500 shares remain available for future grant under the Directors
Plan.
In connection with the acquisition of SecureIT, VeriSign assumed SecureIT's
1997 Stock Option Plan (the "SecureIT Plan"). The SecureIT Plan provided for
the grant of both fixed and performance-based stock options. Options granted
under the SecureIT Plan generally have a term of seven years and vest over a
four-year period, 25% on each anniversary of the grant date. No further options
can be granted under the SecureIT Plan.
In connection with its acquisitions in 2000, VeriSign assumed the acquired
companies' stock option plans. Options granted under these plans generally have
terms of seven to ten years and generally vest over a four-year period. No
further options can be granted under any of the assumed plans.
78
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000, 1999 AND 1998
A summary of stock option activity under the Plans follows:
Year Ended December 31,
--------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- ---------- -------- ---------- --------
Outstanding at beginning
of year................ 17,835,362 $ 16.77 16,516,368 $ 4.79 10,371,156 $ .75
Assumed in business
combinations........... 10,204,590 50.23 -- -- -- --
Granted................. 8,007,368 129.92 7,300,926 35.66 9,735,024 7.69
Exercised............... (5,657,256) 11.70 (4,198,177) 3.10 (2,962,548) .58
Canceled................ (1,750,147) 49.36 (1,783,755) 9.60 (627,264) 2.84
---------- ---------- ----------
Outstanding at end of
year................... 28,639,917 59.65 17,835,362 16.77 16,516,368 4.79
========== ========== ==========
Exercisable at end of
year................... 6,297,793 17.40 2,424,728 3.36 1,673,860 .82
========== ========== ==========
Weighted average fair
value of options
granted during the
year................... 97.01 21.86 4.01
The following table summarizes information about stock options outstanding
as of December 31, 2000:
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Exercise Shares Contractual Exercise Shares Exercise
Prices Outstanding Life Price Exercisable Price
----------------- ----------- ----------- --------- ----------- ---------
$ .03 -
$ 3.26......... 3,599,467 2.96 years $ 1.63 2,323,870 $ 1.52
$ 3.46 -
$ 12.78......... 5,799,469 4.42 years 8.74 1,965,867 9.29
$ 14.42 -
$ 42.79......... 7,531,191 4.70 years 32.91 1,547,212 32.96
$ 43.13 -
$ 97.80......... 4,115,921 6.17 years 76.14 368,640 66.79
$ 98.55 -
$ 149.97......... 3,954,852 5.16 years 126.59 64,271 113.10
$ 150.09 -
$ 173.50......... 2,907,969 6.47 years 153.85 14,238 157.81
$ 176.50 -
$ 198.75......... 659,488 6.47 years 190.35 13,695 189.86
$ 218.50 -
$ 253.00......... 71,560 6.15 years 239.19 -- --
---------- ---------
$ .03 -
$ 253.00......... 28,639,917 4.93 years 6,297,793
========== =========
1998 Employee Stock Purchase Plan
VeriSign has reserved 3,000,000 shares for issuance under the 1998 Employee
Stock Purchase Plan ("Purchase Plan"). Eligible employees may purchase common
stock through payroll deductions by electing to have between 2% and 15% of
their compensation withheld. Each participant is granted an option to purchase
common stock on the first day of each 24 month offering period and this option
is automatically exercised on the last day of each six month purchase period
during the offering period. The purchase price for the common stock under the
Purchase Plan is 85% of the lesser of the fair market value of the common
stock on the first day of the applicable offering period and the last day of
the applicable purchase period. Offering periods begin on February 1 and
August 1 of each year. Shares of common stock issued under the Purchase Plan
totaled
79
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000, 1999 AND 1998
550,724 in 2000, 547,896 in 1999 and 232,900 in 1998. As of December 31, 2000,
1,668,480 shares remain available for future issuance. The weighted-average
fair value of the stock purchase rights granted under the Purchase Plan was
$103.76 in 2000, $15.28 in 1999 and $7.18 in 1998.
Pro Forma Information
VeriSign applies the intrinsic value method in accounting for its equity-
based compensation plans. Had compensation cost for its equity-based
compensation plans been determined consistent with the fair value approach set
forth in SFAS No. 123, "Accounting for Stock-Based Compensation," VeriSign's
net income (loss) would have been as follows:
Year Ended December 31,
-------------------------------
2000 1999 1998
----------- -------- --------
(In thousands, except per
share data)
As reported:
Net income (loss)........................ $(3,115,474) $ 3,955 $(19,743)
Net income (loss) per share:
Basic.................................... $ (19.57) $ .04 $ (.24)
Diluted.................................. $ (19.57) $ .03 $ (.24)
Pro forma:
Net (loss) under SFAS No. 123............ $(3,246,422) $(24,667) $(24,117)
Net (loss) per share:
Basic.................................... $ (20.40) $ (.25) $ (.29)
Diluted.................................. $ (20.40) $ (.25) $ (.29)
The fair value of stock options and Purchase Plan options granted subsequent
to VeriSign's IPO on January 30, 1998 was estimated on the date of grant using
the Black-Scholes model. The fair value of stock options granted prior to the
IPO and for stock options granted by SecureIT prior to its acquisition was
estimated on the date of grant using the minimum value method. The following
table sets forth the weighted-average assumptions used to calculate the fair
value of the stock options and Purchase Plan options for each period presented.
Year Ended December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
Stock options:
Volatility............................ 115% 85% 70%*
Risk-free interest rate............... 6.06% 5.54% 4.95%
Expected life......................... 3.5 years 3.5 years 3.5 years
Dividend yield........................ zero zero zero
Purchase Plan options:
Volatility............................ 115% 85% 70%
Risk-free interest rate............... 6.20% 5.00% 5.35%
Expected life......................... 1.05 years 1.25 years 1.25 years
Dividend yield........................ zero zero zero
- --------
* Volatility was zero under the minimum value method for grants prior to
January 30, 1998 and for all grants made by SecureIT prior to its
acquisition by VeriSign.
80
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000, 1999 AND 1998
Note 7. Income Taxes
Total income tax expense for the years ended December 31, 2000 and 1999 was
allocated as follows:
Year ended
December 31,
-------------------
2000 1999
--------- --------
(In thousands)
Continuing operations:
Current............................................. $ -- $ --
Deferred............................................ $ -- $ --
--------- --------
Income tax expense.................................... $ -- $ --
========= ========
Charge (benefit) to comprehensive income attributable
to investment securities............................. (30,963) 29,670
Disqualifying dispositions of stock options credited
to stockholders' equity ............................. (67,448) (29,778)
--------- --------
$ (98,411) $ (108)
========= ========
The difference between income tax expense and the amount resulting from
applying the Federal statutory rate of 35% to income before income taxes for
2000 is attributable to the following:
(In thousands)
Income tax benefit at Federal Statutory rate................ $(1,090,416)
State taxes, net of Federal benefit......................... (1,732)
Foreign taxes............................................... 871
Goodwill amortization and in-process research and
development................................................ 1,009,765
Current year operating losses and temporary differences for
which no tax benefit is recognized......................... 59,852
Research and experimentation credit......................... (1,444)
Other....................................................... 23,104
-----------
Income taxes from continuing operations................... $ --
===========
In 1999 and 1998, VeriSign did not record any income tax expense because it
experienced significant operating losses.
81
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000, 1999 AND 1998
The tax effects of temporary differences that give rise to significant
portions of VeriSign's deferred tax assets and liabilities are as follows:
December 31,
------------------
2000 1999
--------- -------
(In thousands)
Deferred tax assets:
Net operating loss carryforwards....................... $ 282,678 $49,011
Tax credit carryforwards............................... 4,332 3,240
Property and equipment................................. 6,204 54
Deferred revenue, accruals and reserves................ 153,557 --
Unrealized loss........................................ 1,293 --
Other.................................................. 899 2,084
--------- -------
448,963 54,389
Valuation allowance...................................... (68,843) (7,736)
--------- -------
Deferred tax liabilities:
Non-deductible acquired intangibles.................... (380,120) --
Unrealized gain on Keynote............................. -- (46,653)
--------- -------
Net deferred tax assets................................ $ -- $ --
========= =======
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which temporary differences become deductible. Management does not believe it
is more likely than not that the deferred tax assets will be realized;
accordingly, a full valuation allowance has been established and no deferred
tax asset is shown in the accompanying consolidated balance sheets. The total
valuation allowance increased $61,107,000 in 2000 and decreased $18,439,000 in
1999.
As of December 31, 2000, VeriSign has available net operating loss
carryforwards for federal income tax purposes of approximately $340,061,000
related to stock compensation expense and approximately $394,820,000 related to
continuing operations. VeriSign has available net operating loss carryforwards
for state income tax purposes of approximately $190,665,000 related to stock
compensation expense and approximately $133,398,000 related to continuing
operations. The federal net operating loss carryforwards will expire, if not
utilized, in 2010 through 2020. The state net operating loss carryforwards will
expire, if not utilized, in 2004 through 2020.
As of December 31, 2000, VeriSign has available for carryover research and
experimentation tax credits for federal income tax purposes of approximately
$2,901,000 and for state income tax purposes of approximately $1,411,000. The
federal research and experimentation tax credits will expire, if not utilized,
in 2010 through 2020. State research and experimental tax credits carry forward
indefinitely until utilized.
82
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000, 1999 AND 1998
Note 8. Commitments and Contingencies
Leases
VeriSign leases its facilities under operating leases that extend through
2011. Future minimum lease payments under non-cancelable operating leases as of
December 31, 2000 are as follows:
(In thousands)
2001.......................................................... $ 49,009
2002.......................................................... 52,085
2003.......................................................... 54,388
2004.......................................................... 52,909
2005.......................................................... 50,672
Thereafter.................................................... 277,794
--------
Total minimum lease payments................................ $536,857
========
Net rental expense under operating leases was $15,198,000 in 2000,
$3,700,000 in 1999 and $1,936,000 in 1998. VeriSign has sub-leased offices to
various companies under non-cancelable operating leases. VeriSign received
payments of $1,222,000 in 2000 and $507,000 in 1999 and will receive payments
of $3,319,000 in 2001, $1,873,000 in 2002 and $294,000 in 2003.
Legal Proceedings
The Department of Justice ("DOJ") Antitrust Division issued a Civil
Investigative Demand ("CID"), seeking information and documents concerning the
then pending acquisition by VeriSign of THAWTE. VeriSign has complied with the
information requests of the CID, and has provided additional information to the
DOJ to alleviate their concerns about the potential competitive effects of the
transaction. While management believes that the transaction does not violate
the antitrust laws, it is possible that the DOJ may ultimately raise an
objection. Formal objection could lead to further proceedings or litigation
that could have an adverse material effect on VeriSign, and could include the
licensing or divestiture of assets acquired in the transaction.
VeriSign is engaged in other complaints, lawsuits and investigations arising
in the ordinary course of business. VeriSign believes that it has adequate
legal defenses and that the ultimate outcome of these actions will not have a
material effect on VeriSign's consolidated financial position and results of
operations.
Note 9. Special Charges
Merger-related expenses
In connection with the acquisition of SecureIT in July 1998 (see Note 2),
VeriSign recorded a special charge of $3.6 million for direct and other merger-
related costs pertaining to the merger transaction and certain stock-based
compensation charges. Merger transaction costs totaled $2.4 million and
consisted primarily of fees for investment bankers, attorneys and accountants,
filing fees and other related charges. The stock-based compensation charges of
$1.2 million related to certain performance stock options held by SecureIT
employees, the vesting of which either automatically accelerated upon change of
control or were accelerated by VeriSign's Board of Directors subsequent to the
merger.
83
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000, 1999 AND 1998
Note 10. Segment Information
Description of segments
Subsequent to its acquisition of Network Solutions in June 2000, VeriSign
organized its business into two reportable operating segments, the Mass Markets
Division and the Enterprise and Service Provider Division. The segments were
determined based primarily on how the chief operating decision maker (CODM)
views and evaluates VeriSign's operations. Other factors, including customer
base, homogeneity of products, technology and delivery channels, were also
considered in determining the reportable segments. VeriSign measures segment
performance based on gross margin.
The Mass Markets Division provides domain name registration, digital
certificate and payment services and other value-added services to small and
medium sized companies as well as to individual consumers. The Enterprise and
Service Provider Division provides similar products and services to larger
enterprises and service providers who want to establish and deliver secure
Internet-based services for their customers in both business-to-consumer and
business-to-business environments. In 2000, VeriSign's results prior to its
acquisition of Network Solutions are included in the Enterprise and Service
Provider Division.
In 1999 and 1998, VeriSign operated in a single reportable segment and
derived substantially all of its revenues from sales of Internet-based trust
services.
The accounting policies used to derive reportable segment results are
generally the same as those described in Note 1, "Description of Business and
Summary of Significant Accounting Policies." Internal revenue and gross margin
include transactions between segments that are intended to reflect an arm's
length transfer at the best price available for comparable external customers.
The following table reflects the results of VeriSign's reportable segments
under VeriSign's management system. The performance of each segment is measured
based on several metrics, including gross margin. These results are used, in
part, by management, in evaluating the performance of, and in allocating
resources to, each of the segments.
Mass Enterprise and
Markets Service Provider Total
Division Division Segments
-------- ---------------- --------
(In thousands)
Year ended December 31, 2000:
External revenues...................... $270,167 $204,599 $474,766
Internal revenues...................... -- 63,140 63,140
-------- -------- --------
Total revenues....................... $270,167 $267,739 $537,906
======== ======== ========
Gross margin............................. $123,772 $187,945 $311,717
======== ======== ========
84
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000, 1999 AND 1998
The following table presents revenue for groups of similar services:
Year Ended
December 31,
2000
------------
Web presence services......................................... $282,634
Enterprise services, net...................................... 138,303
Internet technology consulting services....................... 53,829
--------
Revenues as reported........................................ $474,766
========
Assets are not tracked by segment and the chief operating decision maker
does not evaluate segment performance based on asset utilization.
Reconciliation to VeriSign, as reported
Year Ended
December 31,
2000
--------------
(In thousands)
Revenues:
Total segments.............................................. $ 537,906
Elimination of internal revenues............................ (63,140)
-----------
Revenues, as reported....................................... $ 474,766
===========
Net loss:
Total segments' gross margin................................ $ 311,717
Operating expenses.......................................... (3,512,026)
Other income................................................ 86,169
Minority interest in net income of subsidiary............... (1,334)
-----------
Net loss, as reported....................................... $(3,115,474)
===========
Geographic information
Year Ended December 31,
------------------------
2000 1999 1998
-------- ------- -------
(In thousands)
Revenues:
United States..................................... $407,843 $61,997 $33,650
All other countries............................... 66,923 22,779 5,280
-------- ------- -------
Total........................................... $474,766 $84,776 $38,930
======== ======= =======
VeriSign operates in the United States, Europe, Japan and South Africa. In
general, revenues are attributed to the country in which the contract
originated. However, revenues from all digital certificates issued from the
Mountain View, California facility and domain names issued from the Herndon,
Virginia facility are attributed to the United States because it is
impracticable to determine the country of origin.
85
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000, 1999 AND 1998
Year Ended December 31,
----------------------------
2000 1999 1998
----------- -------- -------
(In thousands)
Long-lived assets:
United States................................. $17,539,817 $155,992 $ 8,655
All other countries........................... 468,973 2,332 1,952
----------- -------- -------
Total....................................... $18,008,790 $158,324 $10,607
=========== ======== =======
Long-lived assets consist primarily of goodwill and other intangible assets,
property and equipment and other long-term assets.
Major customers
No customer accounted for 10% or more of consolidated revenues in 2000, 1999
or 1998.
Note 11. Related Party Transactions
VeriSign has invested in several companies in which VeriSign has also sold
products and services. The revenue recorded from these investments individually
do not comprise more than 1% of our revenue during 2000.
In February 1999, VeriSign entered into a memorandum of understanding (the
"MOU") with Keynote Systems. As of December 31, 2000, VeriSign was a less than
5% shareholder of Keynote and Stratton Sclavos, president and chief executive
officer is a member of Keynote's board of directors. Under the MOU, VeriSign
received from Keynote a non-exclusive license to sell two versions of Keynote's
services as an integrated part of VeriSign's product offerings. Per the
agreement, VeriSign will pay a fee to Keynote for each of these introductory
services sold to a customer. In the event that Keynote converts the
introductory customer into a paying customer within a certain timeframe, then
Keynote will pay VeriSign a one-time fee for each customer. Under this MOU,
VeriSign received $223,000 in revenue and paid Keynote $242,000 in 2000 and
received $20,000 in revenue and paid Keynote $250,000 which was charged to cost
of revenues in 1999.
VeriSign entered into a development agreement in September 1997 with RSA
Security, formerly Security Dynamics Technologies, Inc. ("RSA Security"), the
parent company of RSA, and a former stockholder of VeriSign, to develop a
customized certificate authority product in order to enable RSA Security to
offer a product with encryption and digital certificate authority
functionality. In December 1998, VeriSign and RSA Security amended the
development agreement to grant RSA Security an exclusive license to incorporate
the developed technology into original equipment manufacturers' ("OEM")
products in order to create products incorporating the technology and to
sublicense the technology to licensees of the OEMs.
The development agreement provides that RSA Security pay VeriSign an
aggregate of $2.7 million as an initial license fee, of which $.9 million was
paid in October 1997, $1.4 million was paid during 1998 and $.4 million was
paid during 1999. At the time of the execution of the amendment in December
1998, RSA Security paid VeriSign $500,000. Once RSA Security has received net
revenues of $2.8 million from OEMs, it will pay VeriSign a royalty equal to the
greater of 18% of net revenues from the sale to OEMs or 18% of 60% of the
current list price for the product. RSA Security will not be obligated to pay
any royalties to VeriSign with respect to sales to value-added resellers.
86
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2000, 1999 AND 1998
In order for RSA Security to maintain its exclusivity rights, it must make
certain minimum aggregate annual payments to VeriSign, which are payable on a
quarterly basis. During 2000, RSA Security elected to not maintain its
exclusivity rights under this contract. In addition, VeriSign will be obligated
to pay RSA Security an amount equal to 8% of net revenue recognized by VeriSign
during a VeriSign OnSite customers' first year using VeriSign OnSite if the
customer had previously purchased products from RSA Security that incorporate
the developed technology.
Beginning in March 1998, RSA Security is required to pay VeriSign a monthly
product support fee for a three-year period and thereafter for successive
annual terms. For a yearly fee, RSA Security can purchase product maintenance
services. RSA Security paid both support and maintenance fees aggregating
$75,000 in 2000, $210,000 in 1999 and $105,000 in 1998.
Revenue from the development agreement accounted for less than 1% of
revenues in both 2000 and 1999 and 6% of revenues in 1998.
In July 1999, VeriSign entered into a non-exclusive reseller agreement with
RSA Security to grant RSA Security the right to resell certain VeriSign
products and services for a discounted fee. Revenue from the reseller agreement
accounted for 1% of revenues in 2000 and 1% of revenues in 1999.
Science Application International Corporation (SAIC) is an approximately 9%
shareholder in VeriSign. As of December 31, 2000, we incurred and paid $1.4
million for fees and services provided by SAIC. Of the total expense, $.7
million was subcontractor labor and expenses for the operations of foreign
offices, $.3 million was for corporate services provided by SAIC until all
systems were transitioned after our acquisition of Network Solutions. These
corporate services included accounting, data processing, payroll and related
taxes and employee benefit plans administration and processing. The remaining
$.4 million represents other services provided by SAIC.
Note 12. Subsequent Event (unaudited)
At December 31, 2000, we owned approximately 474,711 shares of Critical
Path. On February 2, 2001, Critical Path announced that its Board of Directors
formed a special committee of the Board to conduct an investigation into
Critical Path's revenue recognition practices. Critical Path stated that it had
discovered a number of transactions that called into question its financial
results. On February 15, 2001, Critical Path restated its financial results for
the fourth quarter of 2000 and made changes in its management. As a result of
these developments, we will evaluate our investment in Critical Path during the
first quarter of 2001 in order to determine if there is an other than temporary
impairment of the investment. If the decline in the fair value of the
investment is determined to be other than temporary, VeriSign would record a
write-off of approximately $21.8 million based on the market price of Critical
Path common stock on March 5, 2001.
On February 2, 2001, Leon Stambler, a citizen of the state of Florida, filed
a complaint against VeriSign for patent infringement in the United States
District Court for the District of Delaware. The other co-defendants in the
suit are RSA Security Inc., First Data Corporation, Openwave Systems Inc., and
Omnisky Corporation. The complaint alleges that VeriSign's Secure Site service
and that its Payflow products infringe two U.S. Patents. The complaint seeks
judgment declaring that the defendants have infringed the asserted claims of
the patents-in-suit, preliminary and permanent injunctions against the
defendants from infringing the asserted claims, an order requiring the
defendants to pay damages to compensate for the alleged infringement, and
treble damages for any willful infringement as well as attorney fees and costs.
While management cannot predict the outcome of this matter presently, it
believes that the claims against VeriSign are without merit and intends to
vigorously defend against these claims.
87
EXHIBITS
As required under Item 14--Exhibits, Financial Statement Schedules and
Reports on Form 8-K, the exhibits filed as part of this report are provided in
this separate section. The exhibits included in this section are as follows:
Exhibit
Number Exhibit Description
------- -------------------
10.37 Separation Letter Agreement between James P. Rutt and VeriSign, Inc.
dated February 23, 2001
21.01 Subsidiaries of the Registrant
23.01 Consent of KPMG LLP
88