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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, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 000-23593
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VERISIGN, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3221585
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
487 E. Middlefield Road, 94043
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, 2002 was approximately $5,582,440,000.
The number of shares outstanding of the registrant's common stock as of
February 28, 2002 was 236,009,529.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to stockholders
in connection with the 2002 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................................................................ 32
Item 3. Legal Proceedings......................................................... 33
Item 4. Submission of Matters to a Vote of Security Holders....................... 35
Item 4A. Executive Officers of the Registrant...................................... 36
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters...... 39
Item 6. Selected Financial Data................................................... 40
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 41
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................ 58
Item 8. Financial Statements and Supplementary Data............................... 60
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure.............................................................. 60
PART III
Item 10. Directors and Executive Officers of the Registrant........................ 61
Item 11. Executive Compensation.................................................... 61
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 61
Item 13. Certain Relationships and Related Transactions............................ 61
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K........... 62
Signatures......................................................................... 65
Financial Statements............................................................... 67
Exhibits........................................................................... 104
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PART I
ITEM 1. BUSINESS
Overview
VeriSign, Inc. is a leading provider of digital trust services that enable
Web site owners, enterprises, communications service providers, electronic
commerce, or e-commerce, service providers and individuals to engage in secure
digital commerce and communications. Our digital trust services include three
core offerings: managed security and network services, registry and
telecommunications services, and Web presence and trust services. We market our
products and services through our direct sales force, telesales operations,
member organizations in our global affiliate network, value added resellers,
service providers and our Web sites.
We are organized into two customer-focused lines of business: the Enterprise
and Service Provider Division and the Mass Markets Division. The Enterprise and
Service Provider Division delivers products and services to larger enterprises
and service providers that want to establish and deliver Internet-based and
telecommunications-based services to customers. The Mass Markets Division
delivers products and services to small and medium size enterprises, as well as
to consumers who wish to establish an online presence.
VeriSign was incorporated in Delaware on April 12, 1995. Our principal
executive offices are located at 487 E. Middlefield 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. VeriSign's primary Web site is www.verisign.com. The information
on our Web sites is not incorporated by reference into this annual report.
VeriSign is a registered trademark of VeriSign, Inc. Other names used in this
report may be trademarks of their respective owners.
Recent Acquisitions
During 2001, we acquired several companies that expanded and enhanced our
product and service offerings and expanded our marketing reach. In particular,
on December 12, 2001, we completed our acquisition of Illuminet Holdings, Inc.,
or Illuminet, a leading provider of specialized services to telecommunications
carriers. We issued a total of approximately 30.6 million shares of our common
stock for all of the outstanding capital stock of Illuminet. We also assumed
all of Illuminet's outstanding employee stock options.
In addition, on February 8, 2002 we completed our acquisition of H.O.
Systems, Inc., a leading provider of billing and customer services to wireless
carriers, for approximately $350 million in cash. We plan to combine H.O.
Systems' billing platform with the signaling, intelligent network and
clearinghouse services of Illuminet to enable us to offer wireless carriers a
comprehensive package of essential services.
Enterprise and Service Provider Division
The Enterprise and Service Provider Division provides products and services
to organizations who want to establish and deliver Internet-based and
telecommunications-based services for their customers. The services offered by
the Enterprise and Service Provider Division consist of the following types of
services: managed security and network services, registry and
telecommunications services.
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Managed Security and Network Services
Managed Security and Network Services include our traditional public key
infrastructure, or PKI, services for enterprises or members of our VeriSign
Affiliate program, enterprise consulting and management services, digital brand
management services and managed domain name services, or DNS.
VeriSign PKI Services. VeriSign PKI Services are sold under the VeriSign
OnSite and VeriSign Go Secure! brands, and can be tailored to meet the specific
needs of enterprises that wish to issue digital certificates to employees,
customers or trading partners.
. OnSite Services. OnSite is a managed service that allows an organization
to use 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, but not limited to: controlling access to
sensitive data and account information, enabling digitally-signed e-mail,
encryption of e-mail, or secure socket layer sessions. 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. Go Secure! Services are a set of managed application
services that enable enterprises to quickly build digital
certificate-based security into their off-the-shelf transaction and
communication applications. Go Secure! Services complement our OnSite
services and are designed to incorporate digital certificates into
existing applications such as e-mail, browser, directory and virtual
private network devices as well as other devices.
VeriSign Affiliate PKI Services. VeriSign Affiliate PKI Services are sold
to a wide variety of entities, which are unaffiliated with VeriSign, that
provide large-scale electronic commerce and communications services over wired
and wireless Internet Protocol, or 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 Affiliates can license either our Service Center or Processing
Center offerings. The Service Center and Processing Center offerings are based
on our software platform and enable a VeriSign Affiliate to offer one or more
types of digital certificate services.
. The 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
utilizing our secure data centers for back-end processing.
. The Processing Center provides a VeriSign Affiliate with all of the
capabilities of the Service Center plus the software 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 services to facilitate the
efficient and timely rollout of their digital certificate offerings. These
services may include Service Center or Processing Center installation and
integration services, facility and network design consulting, technical and
customer support documentation, training and sales and marketing support.
VeriSign Affiliates make up 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. The VeriSign
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Trust Network now consists of approximately 48 member organizations including
British Telecommunications plc in the United Kingdom, Soltrus in Canada,
Certplus in France, eSign in Australia, HiTrust in Taiwan, Eurotrust in Europe,
Firstream in Europe, Netsecure Holdings in Asia and Telia in Sweden.
VeriSign Affiliates typically enter into a five year technology licensing
and revenue sharing agreement with us whereby we receive up-front licensing
fees for the Service Center or Processing Center technology, as well as ongoing
royalties from each digital certificate or OnSite service sold by the VeriSign
Affiliate.
Enterprise Consulting and Management Services. VeriSign Consulting Services
include services related to public key infrastructure, network infrastructure
and information security services. To complement our Enterprise services, we
also provide consulting for integrating our PKI services with existing
applications and databases, consulting on policies and procedures related to
the management and deployment of digital certificates, and training classes on
the latest developments in security technology. In addition, we resell third
party hardware and software either related to the delivery of our consulting
services or as stand-alone products. Our services also include, among others,
managed DNS services and DNS hosting, which are delivered through our registry
operations infrastructure.
Enterprise Digital Brand Management Services. We offer a range of services
we refer to as Digital Brand Management Services to help information technology
professionals, brand marketers, attorneys and other enterprise customers
monitor, protect and build digital brand equity. Some of these services include
our domain name registration services for both global top level domains, such
as .com, and country code top level domains, such as .de or .tv, our domain
name recovery services and our digital brand surveillance services. Revenues
from our Digital Brand Management Services have not been significant to date.
Registry and Telecommunications Services
Registry Services. We are the exclusive registry of domain names within the
.com, .net and .org global top-level domains under agreements with the Internet
Corporation for Assigned Names and Numbers, or ICANN, and the Department of
Commerce, or DOC. As a registry, we maintain the master directory of all
second-level domain names in these top-level domains. We own and maintain the
shared registration system that allows all registrars 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.
Through our acquisitions of the .TV International Corporation and eNIC
Corporation in 2001, we also became the exclusive registry for domain names
within the .tv and .cc country code top-level domains, or ccTLDs. These
top-level domains are also supported by our global name server constellation
and shared registration system. In addition, we have made .nu and .bz domain
name registration services available through our outsourced hosting
environment, which enables domain name registrars and resellers to
simultaneously access the .nu and .bz registries.
Telecommunications Services. Through our Illuminet subsidiary, we provide
specialized services to telecommunications carriers. The majority of these
services are directly related to Illuminet's Signaling System 7, or SS7,
network, as either part of the connectivity, switching and transport function
of the SS7 network or as intelligent network services delivered over the SS7
network. SS7 is an industry-standard
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system of protocols and procedures that is used to control telephone
communications and provide routing information in association with vertical
calling features, such as calling card validation, advanced intelligent network
services, local number portability, wireless services, toll-free number
database access and caller identification. In addition, through Illuminet we
provide clearinghouse services, SS7 network reporting services, and we license
specially designed software for measuring SS7 network usage. Brief descriptions
of some of these services are set forth below:
Connectivity, Switching and Transport Services
. SS7 Connectivity, Switching and Transport. These are component parts of
our basic SS7 trunk signaling service. Trunk signaling reduces post-dial
delay, allowing call connection almost as soon as dialing is completed.
This enables telecommunications carriers to deploy a full range of
intelligent network services more quickly and cost effectively. By using
our trunk-signaling service, carriers simplify SS7 link provisioning, and
reach all local interexchange carriers, or IXC, and wireless carriers'
networks though our access to hundreds of carriers.
. Database Access Messaging. We provide the SS7 functions that enable
carriers to find and interact with network databases and conduct the
database queries that are essential for many advanced services, such as
call waiting, call forwarding, and three-way calling.
Intelligent Network Services
. Local Number Portability ("LNP"). In 1996, the Federal Communications
Commission, or FCC, mandated that incumbent local exchange carriers
implement wireline number portability in all major U.S. markets beginning
in 1999. Wireless carriers are required to provide routing information for
calls completed to ported numbers. LNP allows a telephone subscriber to
switch local service providers while keeping the same telephone number.
. Line Information Database ("LIDB") Access and Transport. LIDBs are
developed and maintained by telecommunications carriers to store
information about their subscribers necessary to provide enhanced services
such as validating telephone numbers and billing information. Through our
SS7 network we offer access to all LIDBs in the United States. The service
also includes validating calling cards, collect and third-party calls, as
well as fraud protection features.
. Calling Name ("CNAM") Delivery Access and Transport. We offer CNAM
database access, allowing carriers to query regional Bell operating
companies and major independent carriers and reduce "name not available"
messages that customers receive when a caller's phone number is not
identifiable when using a carrier's caller identification, or caller id,
service.
Wireless Services
. Seamless Roaming. We provide nationwide seamless roaming support using
the ANSI-41 signaling protocol. ANSI-41 allows carriers to provide support
for roamers visiting their service area, and for their customers when they
roam outside their service area. It enables number validation inside and
outside carriers' service areas by accessing our SS7 network.
. Prepaid Wireless Services. Our SmartPay prepaid wireless service is a
real-time account management platform, administered via a Web interface,
that makes prepaid wireless plans as flexible and convenient as
traditional postpaid plans. Debit card systems can include added costs for
inventory needs, loss, theft, PIN administration and retail commissions.
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Clearinghouse Services. Our Clearinghouse services include wireline billing
and collections, where we serve as a distribution and collection point for
billing information and payment collection for services provided by one carrier
to customers billed by another. Using our clearinghouse services, carriers can
bill and collect messages in a simple consolidated invoice that other providers
may otherwise bill separately to the local carrier's customers; bill and
collect operator-assisted and calling card calls made through WorldCom, Sprint
and other interexchange carriers; and bill and collect direct-dialed long
distance calls for selected interexchange carriers.
Mass Markets Division
The Mass Markets Division provides three general types of Web related
service offerings. The first is Web Presence Services, which provide digital
identity through domain name services and value added services, such as email,
Web site creation tools and other e-commerce enabling offerings. The second is
Web Trust Services, which includes Web site digital certificates for use by
businesses and professionals. The third is payment services, which provide
Internet merchants with the ability to securely and digitally authorize,
capture and settle a variety of payment types using our Internet payment
gateway.
Web Presence Services
Domain Name Registration Services. We register second-level domain names in
the .com, .net,.org, .biz and .info global top-level domains, as well as
selected country code top-level domains, such as .de and .tv, around the world,
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 or indirectly through our channel
partner wholesalers, Internet service providers, telecommunications companies
and others. We accept registrations and re-registrations in one-year or
multi-year increments for periods up to ten years.
Secondary Market Name Services. Our secondary market domain name service
offering, GreatDomains.com, a is marketplace where customers can transfer and
appraise domain names.
Other Value-Added Products and Services. We provide other digital identity
and Web presence value-added products and services through our Web site
storefront, such as VeriSign-hosted domain names, Web sites from VeriSign, Web
forwarding (which allows a customer to forward Internet traffic from one Web
site to another) and VeriSign mail.
Web Trust Services
Our Web Trust services include our Web server digital certificate services,
which enable merchants to implement and operate secure Web sites that utilize
the Secure Sockets Layer, or SSL, or Wireless Transport Layer Security, or
WTLS, protocols. These services provide merchants with the means to identify
themselves to consumers and to encrypt communications between consumers and
their Web site.
We currently offer the following 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 Web sites 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, which enables
U.S. and international enterprises to offer stronger, 128-bit encrypted,
SSL sessions between their Web sites
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and end-user browsers from Netscape and Microsoft. Secure Site Plus also
includes security monitoring, security assessment, site performance
monitoring and additional warranty protection.
. Commerce Site and Commerce Site Plus. Our Commerce Site and Commerce Site
Plus offerings combine the features and functionality of our Secure Site
offerings with our Payment Services offerings, providing existing sites
that want to offer e-commerce solutions with a comprehensive suite of
services to secure and process online payments.
. Thawte Branded Digital Certificates. We offer entry-level SSL security
services under the Thawte brand. These services generally offer lower
encryption and customer service features than our other VeriSign branded
products, but use the same underlying infrastructure, and are produced
using the same standards for authentication, as VeriSign branded
certificates.
Payment Services
Using our payment gateway, VeriSign Payment Services, online merchants are
able to process payment types, including credit, debit and purchase cards,
Internet checks, and automated clearing house transactions over the Internet.
Operations Infrastructure
Our operations infrastructure consists of secure data centers in Mountain
View, California; Dulles, Virginia; Lacey, Washington; Overland Park, Kansas;
and Kawasaki, Japan. Many of our VeriSign Affiliates also operate secure data
centers in their geographic areas. Most of these secure data centers operate on
a 24-hour a day, 7 days per week basis and support all aspects of our
enterprise services. Key features of our operations infrastructure include:
. Distributed Servers. We deploy a large number of high-speed servers to
support capacity and availability demands that in conjunction with our
proprietary software offers automatic failover, global and local 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 software modules that are designed to prevent most
known forms of electronic attacks. In addition, we employ firewalls and
intrusion detection software, and contract with security consultants who
perform periodic attacks and security risk assessments.
As part of our operations infrastructure for our domain name registry
services, we operate all thirteen global top-level domain name servers that
answer domain name lookups for the .com, .net, and .org zones. We also operate
two of the thirteen root zone servers, including the "A" root, which is the
authoritative root zone server of the Internet's domain name system, or DNS.
The domain name servers provide the associated name server and Internet
protocol, or IP, address for every .com, .net, or .org domain name on the
Internet and a large number of other top-level domain queries, resulting in an
average of over 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 controlled and monitored
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environment, incorporating security and system maintenance features. This
network of name servers is one of the cornerstones of the Internet's DNS
infrastructure.
To provide our telecommunications services, we operate an SS7 network
composed of specialized SS7 switches, computers and databases strategically
located across the United States. These elements interconnect our customers and
U.S. telecommunications carriers through leased lines. Our network currently
consists of 14 mated pairs of SS7 signal transfer points that are specialized
switches that manage SS7 signaling, and into which our customers connect. We
own seven pairs and lease capacity on seven pairs of SS7 signal transfer points
from regional partners. Our SS7 network control, located in Overland Park,
Kansas, is staffed 24 hours a day, seven days a week. As part of our operations
infrastructure for network services, we also have several SS7 network signal
transfer point, or STP, sites. These sites are maintained at 11 locations
throughout the United States.
Call Center and Help Desk. We provide customer support services through our
phone-based call centers, e-mail help desks and Web-based self-help systems.
Our California 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 services. Our Virginia call centers are staffed from 6 a.m. to 6 p.m.
to support our Mass Markets Division services and Global Registry Services. All
call centers also have Web-based support services which are available on a
24-hour a day, 7 days per week basis, utilizing customized automatic response
systems to provide self-help recommendations and a staff of trained customer
support agents.
Operations Support and Monitoring. We have an extensive monitoring
capability that enables us to track the status and performance of our critical
database systems at 60-second intervals, and our global resolution systems at
four-second intervals. Our distributed Network Operations Centers are staffed
24 hours a day, 7 days a week.
Disaster Recovery Plans. We have disaster recovery and business continuity
capabilities that are designed to deal with the loss of entire data centers and
other facilities. Our Global Registry Services business maintains dual mirrored
data centers that allow rapid failover with no data loss and no loss of
function or capacity. Our PKI and Payment Services businesses are similarly
protected by having service capabilities exist in both East and West Coast data
center facilities. All of our critical data services (including digital
certificates, domain name registration, and global resolution) use advanced
storage systems that provide data protection through techniques such as
mirroring and replication.
Marketing, Sales and Distribution
We market our services worldwide through multiple distribution channels,
including the Internet, direct sales, telesales, direct marketing through all
media, mass merchandisers, value-added resellers, systems integrators and our
VeriSign Affiliates. A significant portion of our Mass Markets Division
revenues to date has been generated through sales from our Web sites. We intend
to continue increasing our direct sales force in the Enterprise and Service
Division both in the United States and abroad, and to continue to expand our
other distribution channels in both divisions.
Our direct sales and marketing organization at December 31, 2001 consisted
of approximately 900 individuals, including managers, sales representatives,
marketing and technical and customer support personnel. We have field sales
offices 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.
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We continue to build an international network of VeriSign Affiliates who
provide our digital trust services under licensed co-branding relationships
using our proprietary technology and business practices.
We believe our customer base is diversified and is not concentrated in any
particular industry. In each of the past three fiscal years, no single customer
has accounted for 10 percent or more of our revenues.
Research and Development
As of December 31, 2001, we had approximately 350 employees dedicated to
research and development. Research and development expenses were $78.1 million
in 2001, $41.3 million in 2000 and $13.3 million in 1999. 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.
Our future success will depend in large part on the ability to continue to
maintain and enhance our current technologies and services. In the past, we
have developed our 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 Security Inc., or RSA. Although we
will continue to work closely with developers and major customers in our
development efforts, we expect that most of the future enhancements to existing
services and new digital trust services will be developed internally.
The markets for digital trust services and telecommunications services are
dynamic markets characterized by rapid technological developments, frequent new
product introductions and evolving industry standards. The constantly changing
nature of these markets and their rapid evolution will require us to
continually improve the performance, features and reliability of our digital
trust services and telecommunications services, particularly in response to
competitive offerings and that we introduce both new and enhanced services as
quickly as possible and prior to our competitors.
Competition
Competition in Digital Trust Services. Our digital 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.
Principal competitors generally fall within one of three categories: (1)
companies such as Baltimore Technologies 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 Baltimore
Technologies, which acquired GTE CyberTrust. 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
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the issuance and management of digital certificates, and we believe that other
companies could introduce similar products.
In addition, browser companies that embed our interface technologies or
otherwise feature them as a provider of digital certificate products and
services in their Web browsers or on their Web sites 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 pressure. We can not assure that competing technologies developed
by others or the emergence of new industry standards will not adversely affect
our competitive position or render our digital 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 in 1995, RSA contributed
certain technology to us and entered into a non-competition agreement under
which RSA agreed that it would not compete with our certificate authority
business for a period of five years. This non-competition agreement expired in
April 2000. RSA has recently entered into the digital certificate market, and
our business could be materially harmed by their potential competition.
Competition in Digital Brand Management Services. We face competition from
companies providing some of our Digital Brand Management Services. In the
registration and domain name asset management area of our business, our
competition comes from Register.com among other companies. In the monitoring
service, competition comes from various smaller companies providing similar
services.
Competition in Web Presence Services. The Web Presence Service market is
extremely competitive and subject to significant pricing pressure. We currently
face competition among registrars within the global top-level domains, or
gTLDs, like .com, and in the future will face competition among registrars
within all new top-level domains. As of February 28, 2002, there were over 145
ICANN-accredited registrars, of which approximately 100 are active competitors,
including us, BulkRegister.com, Deutsche Telekom, France Telecom/Transpac,
Go-Daddy Software, Melbourne IT, Register.com and Tucows.com, Inc. that
register second-level domain names in .com, .net, .org and the other global top
level domains, or gTLDs. We also face competition from third-level domain name
providers such as Internet access providers and registrars of country code
TLDs. We face substantial competition from other providers of value-added Web
presence services such as e-mail providers, Web site designers, Internet
service providers and others.
Competition in Registry Services. In November 2000, ICANN announced
selections for several new gTLDs that, once launched, will directly compete
with the .com, .net and .org TLDs, as well as the ccTLDs offered by us. Two of
the new gTLDs, .biz and .info, were launched in 2001, while other gTLDs are
scheduled to launch in 2002, including .name, .pro, .aero, .museum and .coop.
These gTLDs are or will be available for registration through ICANN accredited
registrars, in addition to our own registrar. In addition, we currently face
competition from the over 240 country code top-level domain registry operators
who compete directly for the business of entities and individuals that are
seeking to establish a Web presence.
We also face competition from registry service providers that offer
outsourced DNS and registration services to organizations that require a
reliable and scalable infrastructure. Among the competitors are NeuLevel,
Affilias, Register.com and Tucows.com.
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Our primary competitors for managed DNS services fall within two
service/product categories: DNS hosting service providers and DNS software and
appliance vendors. DNS hosting competitors include UltraDNS, Nominum, and
EasyDNS. In addition, the majority of the domain name registrars, ISPs, and Web
hosting companies offer basic DNS hosting as a part of their services. DNS
software or appliance competitors include major network and telecommunication
product vendors including Lucent, Cisco and Nortel, which focus on IP address
management services.
Competition in Telecommunications Services. The market for
telecommunications services is extremely competitive and subject to significant
pricing pressure. Competition in this area arises from two primary sources.
Large incumbent carriers provide competing services in their regions as a
result of regulatory requirements to promote competition. In addition, we face
direct competition on a nationwide basis from unregulated carriers, including
Telecommunications Services, Inc., or TSI, and Southern New England Telephone,
a unit of SBC Communications. Our prepaid wireless services also compete with
services offered by Boston Communications Group, Priority Call,
InterVoice-Brite and TSI.
Competition in Enterprise Consulting and Management Services. Consulting
companies or professional services groups of other companies with Internet
expertise are current or potential competitors to our enterprise consulting
services. These companies include large 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 IP 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 the
ability to distribute our products successfully and the utilization of our
services would be substantially diminished. New technologies and the expansion
of existing technologies may increase the competitive pressure.
Industry Regulation
Domain Name Registration. The cooperative agreement, which our wholly-owned
subsidiary Network Solutions, Inc. 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, or TLDs, .com, .net,
.org, .edu and .gov. 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 November 10, 1999, we entered into a series of wide-ranging agreements.
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 TLDs for at
least four years from that date. This agreement was subsequently replaced
with three new registry agreements on May 25, 2001;
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. 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 Memorandum of Understanding between the U.S.
Government and ICANN.
The registry agreement with ICANN executed on November 10, 1999 was replaced
by three new agreements on May 25, 2001, one for .com, one for .net and one for
.org. The term of the .com registry agreement extends until November 10, 2007
with a 4-year renewal option, the terms of which are outlined in the agreement.
The term of the .net registry agreement extends at least until November 10,
2003 and possibly until June 30, 2005 depending on criteria set forth in the
agreement, at which time the .net registry services will be put out for
competitive bid by ICANN, a process in which we will be allowed to participate.
The term of the .org registry agreement extends until December 31, 2002, at
which time we are responsible for transitioning the services to a new registry
operator selected by ICANN.
The description of these agreements are qualified in their entirety by the
text of the complete agreements that are filed as exhibits to the periodic
reports indicated in the index to the exhibits contained in Part IV of this
report.
PKI Services. 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 server digital
certificate service, and none of our other digital trust 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. It is
possible that the terrorist acts of September 11, 2001 will increase the
scrutiny of, and further government restrictions on, exportation of software
products utilizing encryption technology. If we do not obtain required
approvals, we may not be able to sell some of our digital trust 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 we do
not comply with these state laws and regulations, we will lose the statutory
benefits and protections that would be otherwise afforded to us. Moreover, if
our 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.
Telecommunications Services. One service provided by Illuminet's National
Telemanagement Corporation subsidiary is currently subject to Federal
Communications Commission regulation. This service allows wireless users who
are "roaming" in areas where their home carrier has not made arrangements for
automatic roaming service to complete calls to domestic and international
destinations. National Telemanagement Corporation has a license from the FCC to
provide this service. Further, Illuminet's telecommunications customers are
subject to FCC regulation, which indirectly affects Illuminet's business. We
cannot predict when, or upon what terms and conditions, further regulation or
deregulation might occur or the effect of regulation or deregulation on our
business. Several services that we offer may be indirectly affected by
regulations imposed upon potential users of those services, which may increase
our costs of operations. In addition, future services we may provide could be
subject to direct regulation.
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Intellectual Property
We rely primarily on a combination of copyrights, trademarks, service marks,
patents, restrictions on disclosure and other methods to protect our
intellectual property. 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
documentation and other proprietary information.
We have been issued approximately ten patents and have filed more than sixty
applications for patents with respect to certain of our technology. However,
the U.S. and foreign patent offices may not award any patents with respect to
these applications.
We have obtained U.S. and foreign trademark registrations for various
VeriSign marks. We have also filed numerous applications to register VeriSign
trademarks and claims, and have common law rights in many other proprietary
names.
With regard to our digital 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 digital 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 services 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 them, or such other services that, in RSA's
reasonable discretion, are reasonably necessary for the implementation of a
digital certificate business. 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.
With regard to our domain name registration services, our principal
intellectual property consists of, and our success is dependent upon,
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
registrars, submit .com, .net and .org second-level domain name registrations.
Some of the software and protocols used in our registration services are in the
public domain or are otherwise available to our competitors. We have compiled a
database of information relating to customers in our registration business.
While some of this data 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.
Employees
As of December 31, 2001, we had approximately 3,270 full-time employees. Of
the total, approximately 1,350 were employed in operations, approximately 900
in sales and marketing, approximately 350 in research and development and
approximately 650 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
14
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 is intense, particularly in software development
personnel.
Segment Information
Segment information is set forth in Note 12 of the Notes to Consolidated
Financial Statements referred to in Item 8 below and is incorporated herein by
reference.
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RISK FACTORS
Our business faces significant risks. The risks described below may not be
the only risks we face. Additional risks that we do not yet know of or that we
currently think are immaterial may also impair our business operations. If any
of the events or circumstances described in the following risks actually occur,
our business, financial condition or results of operations could suffer, and
the trading price of our common stock could decline.
Our limited operating history under our current business structure may result
in significant fluctuations of our financial results.
We were incorporated in April 1995, and began introducing our digital trust
services in June 1995. In addition, we completed several acquisitions in 2000
and 2001, including our acquisitions of Network Solutions and Illuminet, both
of which companies operated in different businesses from our then current
business. Therefore, we have only a limited operating history on which to base
an evaluation of our consolidated business and prospects. 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 timing and execution of individual customer contracts, particularly
large contracts;
. the extent to which digital certificates and domain names are used for
electronic commerce or communications;
. the continued growth in the number of Web sites;
. the growth in demand for our services;
. the continued evolution of electronic commerce as a viable means of
conducting business;
. 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;
. the significant lead times before a product or service begins generating
revenues;
. the varying rates at which telecommunications companies, telephony
resellers and Internet service providers use our services;
. the loss of customers through industry consolidation, or customer
decisions to deploy in-house technology; 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 digital trust services to new and existing
customers;
. attract, integrate, train, retain and motivate qualified personnel;
. respond to competitive developments;
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. successfully introduce new digital trust services; and
. successfully introduce enhancements to our digital trust services to
address new technologies and standards and changing market conditions.
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 to obtain
personally identifiable information about users or to disclose or sell
data without notice to or the consent of such users;
. other security concerns such as attacks on popular Web sites by "hackers;"
. inconsistent quality of service;
. lack of availability of cost-effective, high-speed systems and services;
. 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.
We have sold our products to companies as part of broader business
relationships and revenues from these contracts may not be indicative of future
revenues.
We have purchased products and services from companies and participated in
financings of companies with whom we have entered into separate contractual
arrangements for the distribution and sale of our products and services. We
derived approximately 3.8% of our total revenues in 2001 from reciprocal
arrangements. Typically in these relationships, under separate agreements, we
sell our products and services to a company and that company sells to us their
products and services or we, under a separate agreement, participate with other
investors in a private equity round financing of the company. We derived no
revenues from customers from reciprocal arrangements in 2000 and 1999. We also
derived approximately 6.5% in 2001, 2.8% in 2000 and 1.1% in 1999 of our total
revenues from customers with
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whom we have participated in a private equity round of financing, including
several of the VeriSign Affiliates, as well as various technology companies in
a variety of related market areas. We may not be able to sustain the revenue
growth we have experienced in recent periods if we do not continue to
participate in business relationships of this nature. In addition, past revenue
growth may not be indicative of future operating results.
We may not be able to sustain the revenue growth we have experienced in the
past from our Web presence services, which depends in part upon our ability to
renew domain name registrations.
In 2000, the demand for new domain name registrations in our Web presence
business increased substantially as a result of our promotional programs, in
which we accepted domain name registrations at significant discounts, and from
registrations by entities who registered domain names with the hopes of
reselling them. Many of those domain names have not been renewed as of their
two-year anniversary date. Further, many of the entrepreneurial and start-up
businesses, begun in 2000, have declined. The future success of our Web
presence services business will depend, among other things, upon our customers'
renewal of their domain name registrations and upon our ability to obtain new
domain name registrations and to successfully market our value-added product
and services to our domain mane registrants. Registrants may choose to renew
their domain names with other registrars or they may choose not to renew and
pay for renewal of their domain names. Since we deactivate and delete domain
name registrations that are not paid for, our inability to obtain domain name
registration renewals from our customers could have an adverse effect on our
revenue growth and our business.
Our failure to achieve or sustain market acceptance of our signaling and
intelligent network services at desired pricing levels could impact our ability
to maintain profitability or positive cash flow.
The telecommunications industry is characterized by significant price
competition. Competition and industry consolidation in our telecommunications
services could result in significant pricing pressure and an erosion in our
market share. Pricing pressure from competition could cause large reductions in
the selling price of our services. For example, our competitors may provide
customers with reduced communications costs for Internet access or private
network services, reducing the overall cost of services and significantly
increasing pricing pressures on us. We may not be able to offset the effects of
any price reductions by increasing the number of our customers, generating
higher revenues from enhanced services or reducing our costs. We believe that
the business of providing network connectivity and related network services
will likely see increased consolidation in the future. Consolidation could
decrease selling prices and increase competition in these industries, which
could erode our market share, revenues and operating margins.
Issues arising from implementing agreements with ICANN and the Department of
Commerce could harm our domain name registration business.
The Department of Commerce, or DOC, has adopted a plan for a phased
transition of the DOC's responsibilities for the domain name system to the
Internet Corporation for Assigned Names and Numbers, or 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 DOC 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;
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. if our agreements to be the registry for the .com, .org or .net top-level
domains, or a registrar for existing and new top-level domains are
terminated, we may not be able to sustain the revenue growth we
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 DOC's or ICANN's interpretation of provisions of our agreements with
either of them could differ from ours;
. the DOC could revoke its recognition of ICANN, as a result of which the
DOC 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 some of 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 could be brought, including
challenges to the agreements governing our relationship with the DOC or
ICANN, or to the legal authority underlying the roles and actions of the
DOC, ICANN or us;
. 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;
. ICANN could fail to maintain its role, potentially resulting in
instability in domain name system administration; and
. some foreign governments and governmental authorities have in the past
disagreed with, and may in the future disagree with, the actions, policies
or programs of ICANN, the U.S. Government and us relating to the domain
name system. These foreign governments or governmental authorities may
take actions or adopt policies or programs that are harmful to our
business.
Our quarterly operating results may fluctuate and our future revenues and
profitability are uncertain.
Our quarterly operating results have varied and may fluctuate significantly
in the future as a result of a variety of factors, many of which are outside
our control. These factors include the following:
. the long sales and implementation cycles for, and potentially large order
sizes of, some of our digital trust services and the timing and execution
of individual customer contracts;
. volume of domain name registrations and customer renewal rates through our
Web presence services business and our Global Registry Service business;
19
. competition in the domain name registration services business from
competing registrars and registries;
. the mix of all our offered services sold during a quarter;
. our success in marketing and market acceptance of our enterprise services,
network services, Web presence services and Web trust services by our
existing customers and by new customers;
. continued development of our direct and indirect distribution channels,
both in the U.S. and abroad;
. a decrease in the level of spending for information technology related
products and services by enterprise customers;
. our success in assimilating the operations and personnel of any acquired
businesses;
. the seasonal fluctuations in consumer use of telecommunications services;
. the impact of price changes in our enterprise services, network services,
Web presence services, Web trust services or our competitors' products and
services; and
. general economic and market conditions as well as economic and market
conditions specific to IP network, telecommunications and Internet
industries.
We expect an increase in our operating expenses. 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 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.
In addition, the terrorist acts of September 11, 2001 have created an
uncertain economic environment and we cannot predict the impact of these
events, any subsequent terrorist acts or of any related military action, on our
customers or business. We believe that, in light of these events, some
businesses may curtail spending on information technology, which could also
affect our quarterly results in the future.
Our industry is highly competitive and, if we do not compete effectively, we
may suffer price reductions, reduced gross margins and loss of market share.
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 digital trust 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 digital 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 digital trust services to achieve or maintain market
acceptance, any of which could harm our business. Several of
20
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.
We face competition from large, well-funded regional providers of SS7
network services and related products, such as regional Bell operating
companies, TSI and Southern New England Telephone, a unit of SBC Communication.
The prepaid wireless account management and unregistered user services of
National Telemanagement Corporation, a subsidiary of ours, faces competition
from Boston Communications Group, Priority Call, InterVoice-Brite and TSI. We
are also aware of major Internet service providers, software developers and
smaller entrepreneurial companies that are focusing significant resources on
developing and marketing products and services that will compete directly with
ours.
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 certificate authority
business for a period of five years. This non-competition agreement expired in
April 2000. RSA has recently entered the digital certificate market and our
business could be materially harmed.
Seven new global top-level domain registries, .aero, .biz, .coop, .info,
.museum, .name and .pro, have begun or are expected to begin accepting domain
name registrations in the near future. Since we will not serve as a registry
for these new top-level domains, we will not receive the annual registry fee
for domain name registrations under these top-level domains. The commencement
of registrations in these new top-level domains could have the effect of
reduced demand for .com and .net domain name registrations. If the new
top-level domains reduce the demand for domain name registrations in .com and
.net, our business could be materially harmed.
The agreements among ICANN, the DOC, 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 from our competitors. Some registrars and resellers in the .com,
.net and .org top-level domains are already charging lower prices for
registration services in those domains. In addition, other entities are
bundling, and may in the future bundle, domain name registrations with other
products or services at reduced rates or for free.
We may face difficulties assimilating and may incur costs associated with our
acquisition of Illuminet Holdings, Inc. and any other future acquisitions.
We made several acquisitions in 2000 and 2001. We recently acquired
Illuminet Holdings, Inc., which recently completed several acquisitions of its
own, and H.O. Systems, Inc. We could experience difficulty in integrating the
personnel, products, technologies or operations of these companies.
Assimilating acquired businesses involves a number of other risks, including,
but not limited to:
. the potential disruption of our ongoing business;
. the potential impairment of relationships with our employees, customers
and strategic partners;
. unanticipated costs or the incurrence of unknown liabilities;
. the need to manage more geographically-dispersed operations, such as our
offices in Virginia, North Carolina, Washington, Kansas, South Carolina,
South Africa and Europe;
. greater than expected costs and the diversion of management's resources
from other business concerns involved in identifying, completing and
integrating acquisitions;
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. the inability to retain the employees of the acquired businesses;
. adverse effects on the existing customer relationships of acquired
companies;
. the difficulty of assimilating the operations and personnel of the
acquired businesses;
. the potential incompatibility of business cultures;
. any perceived adverse changes in business focus;
. entering into markets and acquiring technologies in areas in which we have
little experience;
. our inability to incorporate acquired technologies successfully into our
operations infrastructure;
. the need to incur debt, which may reduce our cash available for operations
and other uses, or issue equity securities, which may dilute the ownership
interests of our existing stockholders; 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.
Additionally, there is risk that we may incur additional expenses associated
with a write-off of a portion of goodwill and other intangible assets, as was
the case when we recorded a non-cash charge of $9.9 billion in the second
quarter of 2001 related to write downs of goodwill due to changes in market
conditions for acquisitions made with our common stock. Under generally
accepted accounting principles, we are required to evaluate goodwill for
impairment on an annual basis and to evaluate other intangible assets as events
or circumstances indicate that such assets may be impaired. These evaluations
could result in further write downs of goodwill or other intangible assets.
Our telecommunications services business depends on the acceptance of our SS7
network and the telecommunications market's continuing use of SS7 technology.
Our future growth depends, in part, on the commercial success and
reliability of our SS7 network, which we recently acquired through our merger
with Illuminet Holdings, Inc. Our SS7 network is a vital component of our
intelligent network services, which had been an increasing source of revenues
for Illuminet. Our network services business will suffer if our target
customers do not use our SS7 network. Our future financial performance will
also depend on the successful development, introduction and customer acceptance
of new and enhanced SS7-based services. We are not certain that our target
customers will choose our particular SS7 network solution or continue to use
our SS7 network. In the future, we may not be successful in marketing our SS7
network or any new or enhanced services.
Our industry markets are evolving, and if these markets fail to develop or if
our products are not widely accepted in these markets, our business could
suffer.
We target our digital trust services at the market for trusted and secure
electronic commerce and communications over IP networks. This is a rapidly
evolving market that may not continue to grow.
Accordingly, the demand for our digital trust services is very uncertain.
Even if the market for electronic commerce and communications over IP networks
grows, our digital trust services may not be widely accepted. The factors that
may affect the level of market acceptance of digital certificates and,
consequently, our digital trust services include the following:
. market acceptance of products and services based upon authentication
technologies other than those we use;
22
. 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 digital trust
services may fail to address the market's requirements adequately. If digital
certificates do not sustain or increase their acceptance, or if our digital
trust services in particular do not achieve or sustain market acceptance, our
business would be materially harmed.
The telecommunications network services industry is also characterized by
rapid technological change and frequent new product and service announcements.
Significant technological changes could make our technology obsolete. We must
adapt to our rapidly changing market by continually improving the
responsiveness, reliability and features of our network and by developing new
network features, services and applications to meet changing customer needs. We
cannot assure that we will be able to adapt to these challenges or respond
successfully or in a cost-effective way to adequately meet them. Our failure to
do so would adversely affect our ability to compete and retain customers or
market share. We sell our SS7 network services primarily to traditional
telecommunications companies that rely on traditional voice networks. Many
emerging companies are providing convergent Internet protocol-based network
services. Our future revenues and profits, if any, could depend upon our
ability to provide products and services to these Internet protocol-based
telephony providers.
If we encounter system interruptions or security breaches, we could be exposed
to liability and our reputation and business could suffer.
We depend on the uninterrupted operation of our various domain name
registration systems, secure data centers and other computer and communication
networks. Our systems and operations are vulnerable to damage or interruption
from:
. power loss, transmission cable cuts and other telecommunications failures;
. damage or interruption caused by fire, earthquake, and other natural
disasters;
. computer viruses or software defects; and
. physical or electronic break-ins, sabotage, intentional acts of vandalism,
terrorist attacks and 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, Dulles and Herndon, Virginia,
Lacey, Washington and Overland Park, Kansas. Though we have back-up power
resources, our California locations are susceptible to electric power shortages
similar to those experienced during 2001. All of our domain name registration
services systems, including those used in our domain name registry and
registrar business are located at our Dulles and 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
23
registration system. These connections depend upon the 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, which could harm our business.
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
the 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 the 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 a large
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 registry 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 depends on 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 registry services
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-in or other security breach or compromise 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 digital trust
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 recent energy crisis could disrupt our operations and increase our
expenses.
One of our secure data centers and one of our customer support call centers
are located in Mountain View, California. In the summer of 2001, California
experienced an energy crisis and could again face 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 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 delay the development
of our products. Future interruptions could damage our reputation, harm our
ability to retain existing customers and to obtain new
24
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.
Some of our investments in other companies have resulted in losses and may
result in losses in the future.
We have 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. Further, if these companies
are not successful, we could incur charges related to write-downs or write-offs
of these types of assets. Due to the recent volatility in the stock market in
general, and the market prices of securities of technology companies in
particular, during 2001 we determined that the decline in value of some of our
public and private equity security investments was other than temporary and
recognized a loss of $89.1 million related to the decline in value of these
investments. Due to the inherent risk associated with some of our investments,
and in light of current stock market conditions, we may incur future losses on
the sales, write-downs or write-offs of our investments.
The inability of our customers to successfully implement our signaling and
network services with their existing systems could adversely affect our
business.
Significant technical challenges exist in our signaling and network services
business because many of our customers:
. purchase and implement SS7 network services in phases;
. deploy SS7 connectivity across a variety of telecommunication switches and
routes; and
. integrate our SS7 network with a number of legacy systems, third-party
software applications and engineering tools.
Customer implementation currently requires participation by our order
management and our engineering and operations groups, each of which has limited
resources. Some customers may also require us to develop costly customized
features or capabilities, which increase our costs and consume a
disproportionate share of our limited customer service and support resources.
Also, we typically charge one-time flat rate fees for initially connecting a
customer to our SS7 network and a monthly recurring flat rate fee after the
connection is established. If new or existing customers have difficulty
deploying our products or require significant amounts of our engineering
service support, we may experience reduced operating margins. Our customers'
ability to deploy our network services to their own customers and integrate
them successfully within their systems depends on our customers' capabilities
and the complexity involved. Difficulty in deploying those services could
reduce our operating margins due to increased customer support and could cause
potential delays in recognizing revenues until the services are implemented.
25
Our inability to introduce and implement technological changes in our industry
could harm our business.
The emerging nature of the Internet, digital certificate business, the
domain name registration business and payment services business, and their
rapid evolution, require us continually to improve the performance, features
and reliability of our digital trust services, particularly in response to
competitive offerings. We must also introduce any new digital trust services,
as quickly as possible. The success of new digital trust 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 digital trust services that respond to competitive and
technological developments and changing customer needs. This could harm our
business.
Capacity limits on our technology and network hardware and software may be
difficult to project and we may not be able to expand and upgrade our systems
to meet increased use.
As traffic from our telecommunication customers through our network
increases, we will need to expand and upgrade our technology and network
hardware and software. We may not be able to accurately project the rate of
increase in usage on our network. In addition, we may not be able to expand and
upgrade, in a timely manner, our systems and network hardware and software
capabilities to accommodate increased traffic on our network. If we do not
appropriately expand and upgrade our systems and network hardware and software,
we may lose customers and revenues.
We have experienced significant growth in our business and our failure to
manage this growth or any future growth could harm our business.
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 3,200 employees at December 31, 2001. 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 to manage our business effectively.
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. 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 VeriSign at any time. In addition, we do not maintain key
person life insurance for any of our officers or key employees. 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.
26
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 global registry services business could be
harmed if these volunteer operators fail to maintain these servers properly or
abandon these servers, which would place additional capacity demands on the two
root zone servers we operate.
Further, our global 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 our registry agreement with
ICANN, it is required to ensure that the authoritative root will point to the
top-level domain zone servers designated by us. If ICANN does not do this, our
business could be harmed.
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.
Our signaling and network services reliance on third party communications
infrastructure, hardware and software exposes us to a variety of risks we
cannot control.
Our signaling and network services success will depend on our network
infrastructure, including the capacity leased from telecommunications
suppliers. In particular, we rely on AT&T, WorldCom, Sprint and other
telecommunications providers for leased long-haul and local loop transmission
capacity. These companies provide the dedicated links that connect our network
components to each other and to our customers. Our business also depends upon
the capacity, reliability and security of the infrastructure owned by third
parties that is used to connect telephone calls. Specifically, we currently
lease capacity from regional partners on seven of the fourteen mated pairs of
SS7 signal transfer points that comprise our network. We have no control over
the operation, quality or maintenance of a significant portion of that
infrastructure or whether or not those third parties will upgrade or improve
their equipment. We depend on these companies to maintain the operational
integrity of our connections. If one or more of these companies is unable or
unwilling to supply or expand its levels of service to us in the future, our
operations could be severely interrupted. In addition, rapid changes in the
telecommunications industry have led to the merging of many companies. These
mergers may cause the availability, pricing and quality of the services we use
to vary and could cause the length of time it takes to deliver the services
that we use to increase significantly. We rely on links, equipment and software
provided to us from our vendors, the most important of which are gateway
equipment and software from Tekelec and Agilent Technologies, Inc. We cannot
assure you that we will be able to continue to purchase equipment from these
vendors on acceptable terms, if at all. If we are unable to maintain current
purchasing terms or ensure product availability with these vendors, we may lose
customers and experience an increase in costs in seeking alternative suppliers
of products and services.
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
27
marketing efforts. We may need to enter into additional relationships to
execute our business plan. We may not be able to enter into additional, or
maintain our existing, strategic relationships on commercially reasonable
terms. If we fail to enter into additional relationships, we would have to
devote substantially more resources to the distribution, sale and marketing of
our enterprise services, telecommunications services and Web presence 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 enterprise 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
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 enterprise services have lengthy sales and implementation cycles.
We market many of our enterprise 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 enterprise 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.
Undetected or unknown defects in our services could harm our business and
future operating results.
Services as complex as those we offer or develop frequently contain
undetected defects or errors. Despite testing, defects or errors may occur in
our existing or new services, which could result in loss of or delay in
revenues, loss of market share, failure to achieve market acceptance, diversion
of development resources, injury to our reputation, tort or warranty claims,
increased insurance costs or increased service and warranty costs, any of which
could harm our business. Furthermore, we often provide implementation,
customization, consulting and other technical services in connection with the
implementation and ongoing maintenance of our services, which typically
involves working with sophisticated software, computing and communications
systems. Our failure or inability to meet customer expectations in a timely
manner could also result in loss of or delay in revenues, loss of market share,
failure to achieve market acceptance, injury to our reputation and increased
costs.
28
Our enterprise and affiliate PKI services and Web trust services rely on public
key cryptography technology that may compromise our system's security.
Our enterprise and affiliate PKI 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 PKI 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.
The expansion of our international operations subjects our business to
additional economic risks that could have an adverse impact on our revenues and
business.
Revenues from international subsidiaries and affiliates accounted for
approximately 13% of our revenues in 2001, 14% in 2000 and 27% in 1999. We
intend to expand our international operations and international sales and
marketing activities. For example, in addition to our past acquisitions of
THAWTE with operations in South Africa, Network Solutions with operations in
Asia and Europe, we have continued to focus on expanding our operations and
marketing activities throughout Asia, Europe and Latin America. Expansion into
these markets has required and will continue to require significant management
attention and resources. We may also need to tailor our digital trust 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 in which we operate;
. 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;
29
. currency fluctuations, as all of our international revenues from VeriSign
Japan, K.K. our wholly owned subsidiaries in South Africa and Europe are
not denominated in U.S. dollars;
. 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;
. additional vulnerability from terrorist groups targeting American
interests abroad;
. seasonal reductions in business activity; and
. potentially adverse tax consequences.
We have licensed to VeriSign Affiliates our Processing Center platform,
which is designed to replicate our own secure data centers and allows the
affiliate to offer back-end processing of enterprise PKI services. The VeriSign
Processing Center platform provides a VeriSign Affiliate with the knowledge and
technology to offer enterprise PKI 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 VeriSign
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 a VeriSign Affiliate to maintain the privacy or security 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.
In July 2001, we enhanced our managed public key infrastructure services
processes in order to satisfy the European Union's directive on digital
signatures, which we hope will stimulate the acceptance of digital signatures
in Europe. We cannot guarantee that our enhancements will be accepted by, or
introduced and marketed successfully in, the European markets. In addition, we
cannot predict whether the European Union Commission will amend or alter the
directive or introduce new legislation, nor can we predict the impact such a
change in legislation could have on our international business and operations.
We rely on our intellectual property, and any failure by us to protect, or any
misappropriation of, our intellectual property could harm our business.
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 forms of
our intellectual property without authorization. Furthermore, the laws of
foreign countries may not protect our proprietary rights in those countries to
the same extent U.S. law protects these rights in the United States. 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.
30
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.
Our services employ technology that may infringe the proprietary rights of
others, and we may be liable for significant damages as a result.
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 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 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. For example, we have had two
complaints filed against us in February 2001 and February 2002 alleging patent
infringement. (See Item 3, "Legal Proceedings.")
We have anti-takeover protections that may delay or prevent a change in control
that could benefit our stockholders.
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 take action only 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 be called only by the chairman of
the board, the president or the board, not by our stockholders.
31
ITEM 2. PROPERTIES
VeriSign's principal administrative, sales, marketing, research and
development and operations facilities are located in Mountain View, California,
Herndon, Virginia and Lacey, Washington. In October 2001, we purchased the land
and buildings related to our headquarters complex in Mountain View, California
for a purchase price of approximately $285 million. This complex includes five
buildings with a combined area of approximately 395,000 square feet. We also
own our Illuminet headquarters facility in Lacey, Washington. The remainder of
our significant facilities are leased under agreements that expire at various
dates through 2011.
VeriSign also leases other 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; Geneva, Switzerland; and Malmo, Sweden. 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--If we encounter system interruptions or security breaches, we could be
exposed to liability and our reputation and business could suffer."
Approximate
Square
Major Locations Footage Use
--------------- ----------- ---
United States:
455-685 East Middlefield Road............... 395,000 Engineering, Sales and Marketing,
Mountain View, CA (owned) Customer Service, Finance and
Administration, Production Services
21355 Ridgetop Circle....................... 160,000 VeriSign Global Registry Services
Dulles, VA
625 Herndon Parkway......................... 61,000 Sales and Marketing, Engineering
Herndon, VA
365 Herndon Parkway......................... 41,000 Engineering, Sales and Marketing
Herndon, VA
4501 Intelco Loop S.E....................... 67,000 Iluminet, Inc. headquarters
Lacey, Washington (owned)
7400 West 129th Street...................... 28,000 SS7 Network control
Overland Park, Kansas
Europe:
Sunderland Solar Building................... 38,750 VeriSign DomainNames.com
Phase VI, Sunderland
United Kingdom
Japan:
Nittobo Buildings........................... 19,400 Japan Headquarters
13F, 8-1 Yaesu, 2-chome
Chuo-ku, Tokyo, 104-0028
Japan
We believe that our current facilities are sufficient for our needs for the
foreseeable future.
32
ITEM 3. LEGAL PROCEEDINGS
As of February 11, 2002, through our Network Solutions subsidiary, we were a
defendant in nine 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 that affects their contractual rights to the domain names in
question. Although 87 of these kinds of situations have resulted in suits
actually naming Network Solutions as a defendant, as of February 11, 2002, no
adverse judgment has been rendered and no award of damages has ever been made.
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 named in the complaint were 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. On September 24, 2001, Mr.
Stambler amended his complaint, adding Certicom Corporation as a defendant and
asserting that our Payflow products also infringe claims 25 and 27 of Mr.
Stambler's U.S. Patent No. 5,936,541. Subsequently, the parties to the
litigation engaged in extensive discovery.
On December 21, 2001, Mr. Stambler supplemented his discovery responses,
significantly expanding his allegations. Through these supplemental responses,
Mr. Stambler contends that we infringe claims 12 and 34 of the '302 patent,
claims 1, 16, 28 and 35 of the '148 patent, and claims 25 and 27 of the '541
patent. Additionally, Mr. Stambler significantly expanded the list of accused
products to include the following products, services and protocols:
Authentication Service Bureau, B2B Payment Services, Certificate Validation,
Cybercash Products and Services, Enterprise Service Center, GO Secure!,
Healthcare Personal Trust Agent, Payment Net, SoftTerminal, Onsite, CommerSite,
Processing Center, Secure Site, 128-bit SSL Global Server, 40 bit SSL Secure
Server, Authentic Document ID, Digital Ids for Securing Email, Code Signing
Digital Ids, WebTrust, WAP related products, Electronic Data Interchange and
Financial Server Ids. Mr. Stambler also contends that our use of products in
connection with certain third party technology infringes his patents, including
Intershop Cartridges and QualysGuard SSL. While we cannot predict the outcome
of this matter presently, we believe that the claims against us are without
merit and we intend to vigorously defend ourselves against these claims.
On September 7, 2001, NetMoneyIN, an Arizona corporation, filed a complaint
alleging patent infringement against us in the United States District Court for
the District of Arizona. NetMoneyIN named thirty-two other defendants,
including Mellon Financial Corporation, Bankcard Center Inc., FMT Corp.,
American Express Financial Advisors, Inc., Bank One Corp., Citibank, N.A. and
Wells Fargo & Co. The complaint alleges that our "activities related to credit
card approval for purchases made on the Internet at
33
an Internet Web site operated by a merchant" infringe claim 13 of NetMoneyIN's
U.S. Patent No. 5,822,737 and claim 1 of NetMoneyIN's U.S. Patent No.
5,963,917. The complaint requests the Court to enter judgment in favor of
NetMoneyIN, a permanent injunction against the defendants from infringing the
asserted claims, an order requiring the defendants to provide an accounting for
NetMoneyIN's damages, to pay NetMoneyIN such damages and three times that
amount, and an order awarding NetMoneyIN attorney fees and costs. NetMoneyIN
did not properly serve the complaint on VeriSign. However, NetMoneyIN filed an
amended complaint adding International Business Machines Corporation as a
defendant and served it on VeriSign in February 2002. While we cannot predict
the outcome of this matter presently, we 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 stockholder
derivative complaint on behalf of himself and others similarly situated against
Charles Stuckey, Jr., James Bidzos, Richard L. Earnest, Dr. Taher Elgamal,
James K. Sims, Joseph B. Lassiter III, Robert P. Badavas, and against us as a
nominal defendant. The case was 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 stockholder complaint was filed against us and the
aforementioned directors of RSA Security, Inc. by plaintiff James V. Biglan.
That case was 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. We filed a Motion to Dismiss on November 20, 2000. On
November 19, 2001, the parties submitted a stipulated settlement Agreement to
the Court for approval. VeriSign has no financial obligations under the
Agreement. On January 17, 2002, the Court approved the settlement Agreement.
The order is final as of February 16, 2002.
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 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
34
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.
While we cannot predict the outcome of this matter presently, we believe that
the claims against us are without merit and we intend to vigorously defend
ourselves against these claims.
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. On March 11, 2002, we were notified by the Department of Justice that the
matter has been closed and no further action will be taken.
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.
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, 2001.
35
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of VeriSign as of February 28, 2002.
Name Age Position
- ---- --- --------
Stratton D. Sclavos.......... 40 President, Chief Executive Officer and Chairman of the Board
of Directors
Dana L. Evan................. 42 Executive Vice President, Finance and Administration and
Chief Financial Officer
Quentin P. Gallivan.......... 44 Executive Vice President, Worldwide Sales and Services
Robert J. Korzeniewski....... 44 Executive Vice President, Corporate and Business
Development
F. Terry Kremian............. 54 Executive Vice President, Illuminet
Russell S. Lewis............. 47 Executive Vice President and General Manager, VeriSign
Global Registry Services
W.G. Champ Mitchell.......... 55 Executive Vice President and Group General Manager, Mass
Markets Division
Anil H.P. Pereira............ 38 Executive Vice President and Group General Manager,
Enterprise and Service Provider Division
William P. Fasig............. 38 Senior Vice President, Corporate Marketing Services
James M. Ulam................ 45 Senior 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. In December
2001, he was named Chairman of the Board of Directors. 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., Intuit, Inc. and Marimba, Inc. Mr. Sclavos holds a
B.S. degree in Electrical and Computer Engineering from the University of
California at Davis.
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. 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.
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
36
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.
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 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.
F. Terry Kremian has served as Executive Vice President of VeriSign since
December 2001. He was Executive Vice President and Chief Operating Officer of
Illuminet Holdings, Inc. from September 1998 until December 2001 when Illuminet
was acquired by VeriSign. Prior to that, Mr. Kremian was Vice
President--Marketing and Sales from November 1997. Mr. Kremian is also the
President of Illuminet, Inc. since March 1, 2001. He joined Illuminet from MCI
where he was employed since 1982, most recently as director of Carrier Sales,
National Accounts. Mr. Kremian holds a B.A. degree from the U.S. Naval Academy
and a J.D. degree from the University of Maryland School of Law.
Russell S. Lewis has served as Executive Vice President and General Manager,
VeriSign Global Registry Services since February 2002. From March 2000 to
February 2002, he served as Senior Vice President, Corporate Development of
VeriSign. Since August 1999, he has served as President of Lewis Capital Group,
LLC, an investment firm providing general business and merger and acquisition
consulting services to growth-oriented firms. From 1994 to August 1999, he was
President and Chief Executive Officer of TransCore, a supplier of electronic
toll collections systems and advanced traffic management systems. Mr. Lewis is
a director of Castle Energy Corporation, a company engaged in oil and gas
exploration and production. Mr. Lewis holds an M.B.A. degree with a
concentration in finance and marketing from Harvard School of Business and a
B.A. degree in Economics from Haverford College.
W. G. Champ Mitchell has served as Executive Vice President and Group
General Manager, Mass Markets Division since July 2001. From 1999 until March
2000, he served as Chairman of the Board and CEO of Convergence Equipment
Company, a telephone equipment manufacturer, and President of Global
Communication Technologies Inc., an Internet-based telecommunication carrier.
From 1997 until early 1999, he served as Special Counselor to the Board of
Directors and Chairman of True North Communications, a holding company for
advertising agencies and other marketing companies. Mr. Mitchell holds a B.A.
degree in English and a J.D. degree from the University of North Carolina.
Anil H.P. Pereira has served as Executive Vice President and General
Manager, Enterprise and Service Provider Division since January 2002. From
October 2000 to January 2002, he served as Senior Vice President and Group
General Manager of the Enterprise and Service Provider Division; from August
2000 to October 2000 he served as Senior Vice President of the Internet
Services Group and Worldwide Corporate Marketing; from February 1999 to August
2000, he served as Vice President of the Internet Services Group and Worldwide
Corporate Marketing; and from March 1997 to February 1999, he served 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. He holds a B. Mgt. Degree from
the University of Lethbridge in Alberta and a MBA degree from the Wharton
School of the University of Pennsylvania.
37
William P. Fasig has served as Senior Vice President, Corporate Marketing
Services since April 2001. From July 2000 to October 2000 he served as Vice
President, Corporate Communications of Compaq Computer Corporation, a leading
global provider of information technology products, services and solutions for
enterprise customers. From November 1996 to July 2000 he was with Young &
Rubicam, Inc., a diversivied global marketing and communications organization,
in several general management roles most recently as Chairman and Managing
Director, Burston-Marsteller Technology Practice, a division of Young &
Rubicam. Mr. Fasig holds an M.A. degree in Government/National Securities
Studies from Georgetown University and a B.A. degree in Political Science from
Wheaton College.
James M. Ulam has served as Senior Vice President, General Counsel since
October 2001 and 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. degree from the
Mississippi College School of Law.
38
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.
Price Range
---------------
High Low
------- -------
Year ended December 31, 2002:
First Quarter (through February 28, 2002)............... $ 38.06 $ 22.71
Year ended December 31, 2001:
First Quarter........................................... $ 91.94 $ 32.00
Second Quarter.......................................... 67.66 28.00
Third Quarter........................................... 60.50 34.16
Fourth Quarter.......................................... 53.34 36.73
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
On February 28, 2002, there were 993 holders of record of our common stock
although we believe there are in excess of 160,000 beneficial owners. On
February 28, 2002, the reported last sale price of our common stock was $23.73
per share.
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;
. announcements of technological innovations, acquisitions or investments,
developments in Internet governance or corporate actions such as stock
splits; and
. industry conditions and trends.
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 we 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.
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.
39
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data are derived from our
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. We made several acquisitions in 2001 and 2000, each of which was
accounted for as a purchase. Accordingly, the results of the acquired
companies' operations are included in our consolidated financial statements
from their respective dates of acquisition.
Year Ended December 31,
-------------------------------------------------------
2001 2000 1999 1998 1997
------------ ----------- -------- -------- --------
(In thousands, except per share data)
Consolidated Statement of Operations
Data:
Revenues............................... $ 983,564 $ 474,766 $ 84,776 $ 38,930 $ 13,356
Total costs and expenses............... 14,394,390 3,675,075 88,086 62,075 34,657
Operating loss......................... (13,410,826) (3,200,309) (3,310) (23,145) (21,301)
Minority interest in net (income) loss
of subsidiary........................ (579) (1,334) 836 1,282 1,538
Net income (loss)...................... (13,355,952) (3,115,474) 3,955 (19,743) (18,589)
Basic net income (loss) per share...... (65.64) (19.57) .04 (.24) (.65)
Diluted net income (loss) per share.... (65.64) (19.57) .03 (.24) (.65)
December 31,
-------------------------------------------------------
2001 2000 1999 1998 1997
------------ ----------- -------- -------- --------
(In thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments.......................... $ 726,697 $ 1,026,275 $156,480 $ 41,745 $ 12,893
Working capital........................ 256,714 520,953 140,163 31,085 6,160
Long-term investments.................. 201,781 209,145 144,751 436 --
Total assets........................... 7,537,508 19,195,222 341,166 64,295 26,904
Long-term debt*........................ 800 -- -- -- --
Stockholders' equity................... 6,506,074 18,470,608 298,359 40,728 13,541
- --------
* Included in other long-term liabilities in the accompanying consolidated
balance sheets.
40
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
2002. 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.
Overview
VeriSign is a leading provider of digital trust services that enable Web
site owners, enterprises, communications service providers, electronic commerce
service providers and individuals to engage in secure digital commerce and
communications. Our digital trust services include three core offerings:
managed security and network services, registry and telecommunications
services, and Web presence and trust services.
Our core Web Trust service offerings were established as the cornerstone of
the business in 1995 with the introduction of Web site digital certificates.
Through our secure online infrastructure we sell our Web site digital
certificates to online businesses, large enterprises, government agencies and
other organizations. We also sell enterprise PKI services that allow
organizations 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 digital trust services worldwide through multiple distribution
channels, including Internet Web sites, our direct sales force, telesales
operations, value added resellers, service providers and member organizations
in our global affiliate network. A portion of our digital trust services
revenues to date have been generated through sales from our Web site, 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 have
established strategic relationships to enable widespread utilization of our
digital trust services and to assure interoperability with a wide variety of
applications and network equipment.
We are organized into two customer-focused lines of business: the Enterprise
and Service Provider Division and the Mass Markets Division. The Enterprise and
Service Provider Division delivers products and services to organizations that
want to establish and deliver Internet-based and telecommunications-based
services to customers in the business-to-consumer and business-to-business
environments. The Mass Markets Division delivers products and services to small
and medium size enterprises, as well as to consumers who wish to establish an
online presence.
41
Acquisitions
In February 2002, we completed our acquisition of H.O. Systems, Inc., a
provider of billing and customer care solutions to wireless carriers. We paid
approximately $350 million in cash for all of the outstanding stock of H.O.
Systems. The total purchase price will be allocated to the tangible and
intangible assets acquired and the liabilities assumed based on their
respective fair values on the acquisition date. H.O. System's results of
operations will be included in the consolidated financial statements from its
date of acquisition.
In December 2001, we completed our acquisition of Illuminet Holdings, Inc.,
a provider of intelligent network and signaling services to telecommunications
carriers. We issued approximately 30.6 million shares of our common stock for
all of the outstanding shares of Illuminet and we also assumed all of
Illuminet's outstanding stock options. The acquisition has been accounted for
as a purchase and, accordingly, the total purchase price of approximately $1.4
billion has been preliminarily allocated to the tangible and intangible assets
acquired and the liabilities assumed based on their respective fair values on
the acquisition date. Illuminet's results of operations have been included in
the consolidated financial statements from its date of acquisition. As a result
of our acquisition of Illuminet, we recorded goodwill of approximately $1.0
billion and other intangible assets of approximately $281 million. The other
intangible assets will be amortized over a four year period. In accordance with
the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," goodwill related to this acquisition
will not be amortized but will be tested for impairment at least annually.
In addition, during 2001, we completed acquisitions of eleven privately held
companies or acquired certain assets of privately held companies, which were
not significant, either individually or in the aggregate. We issued
approximately 939,000 shares of our common stock and paid approximately
$151 million in cash in exchange for all of the outstanding shares of these
companies. We also assumed certain of the companies' outstanding stock options.
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 of
approximately $252 million and unearned compensation of approximately $19
million. The unearned compensation will be amortized over the remaining vesting
period for stock options assumed. In accordance with the provisions SFAS No.
142, goodwill related to acquisitions that were completed after June 30, 2001
will not be amortized but will be tested for impairment at least annually.
Goodwill related to acquisitions that were completed prior to July 1, 2001 will
be amortized based on a three-year life until December 31, 2001 at which time
amortization will cease and the remaining goodwill balance will be subject to
testing for impairment at least annually.
During 2000, we completed our acquisitions of THAWTE Consulting (Pty) Ltd
and Signio, Inc. in February and our acquisition of Network Solutions, Inc. in
June. In addition, we completed acquisitions of several other privately held
companies, which were not significant, either individually or in the aggregate.
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.
Critical accounting policies
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires
management
42
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent
assets and liabilities. On an ongoing basis, management evaluates its
estimates, including those related to revenue recognition, doubtful accounts,
investments and long-lived assets. Management bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily available from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in preparing our consolidated
financial statements.
Revenue recognition
We derive revenues from three primary categories: Web presence and trust
services, which include domain name registration services, Web trust services
and payment services; managed security and network services, which include
enterprise and affiliate PKI services and enterprise consulting services; and
registry and telecommunications services, which include registry services,
connectivity, intelligent networks, wireless and clearinghouse services. The
revenue recognition policy for each of these areas is as follows:
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 and up to ten years.
Domain name registration renewal fees are estimated and recorded based on
recent renewal and collection rates. Customers are notified of the expiration
of their registration in advance, and we record the receivables for estimated
renewal fees in the month preceding the anniversary date of their registration
when we have a right to bill under the terms of domain name registration
agreements. The variance between the actual collections and the rate used to
estimate the renewal fees is reflected in the setting of prospective renewal
rates. Fees for renewals and advance extensions to the existing term are
deferred until the new incremental period commences. These fees are then
recognized ratably over the new registration term, ranging from one to ten
years.
Revenues from the licensing of digital certificate technology and business
process technology are derived from arrangements involving multiple elements
including post-contract customer support, training and other services. These
licenses, which do not provide for right of return, are primarily perpetual
licenses for which revenues are recognized up front once all criteria for
revenue recognition have been met.
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 to 36 months.
Maintenance is bundled with OnSite licenses over the license term.
We recognize revenues from issuances of digital certificates and business
process licensing to VeriSign Affiliates in accordance with SOP 97-2, "Software
Revenue Recognition," as amended by SOP 98-9, and generally recognize revenues
when all of the following criteria are met as set forth in paragraph 8 of SOP
97-2: (1) persuasive evidence of an arrangement exists, (2) delivery has
occurred,
43
(3) the fee is fixed or determinable and (4) collectibility is probable. We
define each of these four criteria as follows:
Persuasive evidence of an arrangement exists. It is our customary practice
to have a written contract, which is signed by both the customer and us, or a
purchase order from those customers who have previously negotiated a standard
license arrangement with us.
Delivery has occurred. Our software may be either physically or
electronically delivered to the customer. Electronic delivery is deemed to have
occurred upon download by the customer from an FTP server. If an arrangement
includes undelivered products or services that are essential to the
functionality of the delivered product, delivery is not considered to have
occurred until these products or services are delivered.
The fee is fixed or determinable. It is our policy to not provide customers
the right to a refund of any portion of its license fees paid. We may agree to
extended payment terms with a foreign customer based on local customs.
Generally, at least 80% of the arrangement fees are due within one year or
less. Arrangements with payment terms extending beyond these customary payment
terms are considered not to be fixed or determinable, and revenues from such
arrangements are recognized as payments become due and payable.
Collectibility is probable. Collectibility is assessed on a
customer-by-customer basis. We typically sell to customers for whom there is a
history of successful collection. New customers are subjected to a credit
review process that evaluates the customers' financial position and ultimately
their ability to pay. If we determine from the outset of an arrangement that
collectibility is not probable based upon our credit review process, revenues
are recognized as cash is collected.
We allocate revenues on software arrangements involving multiple elements to
each element based on the relative fair values of each element. Our
determination of fair value of each element in multiple element arrangements is
based on vendor-specific objective evidence, or VSOE. We limit our assessment
of VSOE for each element to the price charged when the same element is sold
separately. We have analyzed all of the elements included in our
multiple-element arrangements and determined that we have sufficient VSOE to
allocate revenues to maintenance and support service, professional services and
training components of our perpetual license arrangements. We sell our
professional services and training separately, and have established VSOE on
this basis. VSOE for maintenance and support is determined based upon the
customer's annual renewal rates for these elements. Accordingly, assuming all
other revenue recognition criteria are met, revenues from perpetual licenses
are recognized upon delivery using the residual method in accordance with SOP
98-9. We recognize revenues from licenses in which maintenance is bundled with
the software license, such as for digital certificates, digital certificate
provisioning and OnSite managed services ratably over the license term of one
to three years.
Our consulting services generally are not essential to the functionality of
the software. Our software products are fully functional upon delivery and
implementation and do not require any significant modification or alteration.
Customers purchase these consulting services to facilitate the adoption of our
technology and dedicate personnel to participate in the services being
performed, but they may also decide to use their own resources or appoint other
consulting service organizations to provide these services. Software products
are billed separately and independently from consulting services, which are
generally billed on a time-and-materials or milestone-achieved basis. We
generally recognize revenues from consulting services as the services are
performed.
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
44
arrangements. Revenues from third-party product sales are recognized when title
to the products sold passes to the customer. Our shipping terms generally
dictate that the passage of title occurs upon shipment of the products to the
customer.
Revenues from payment services primarily consist of a set-up fee and a
monthly service fee for the transaction processing services. In accordance with
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.
Revenues from telecommunications services are comprised of network
connectivity revenues and intelligent network services revenues. Network
connectivity revenues are derived from establishing and maintaining connection
to our SS7 network and trunk signaling services. Revenues from network
connectivity consist primarily of monthly recurring fees, and trunk signaling
service revenues are charged monthly based on the number of switches to which a
customer signals. The initial connection fee and related costs are deferred and
recognized over the term of the arrangement. Intelligent network services,
which include calling card validation, local number portability, wireless
services, toll-free database access and caller identification are derived
primarily from database administration and database query services and are
charged on a per-use or per-query basis. Prepaid wireless account management
services and unregistered wireless roaming services are based on the revenue we
retain and recognized in the period in which we process such calls on a
per-minute or per-call basis.
Clearinghouse services revenues are derived primarily from serving as a
distribution and collection point for billing information and payment
collection for services provided by one carrier to customers billed by another.
Clearinghouse revenues are earned based on the number of messages processed.
On occasion, we have purchased goods or services for our operations from
organizations such as IBM, Oracle, Phoenix Technologies and Infospace at or
about the same time that we licensed our software to these organizations. These
transactions are recorded at terms we consider to be fair value. For these
reciprocal arrangements, we consider Accounting Principles Board ("ABP")
Opinion No. 29, "Accounting for Nonmonetary Transactions," and Emerging Issues
Task Force ("EITF") Issue No. 01-02, "Interpretation of APB Opinion No. 29," to
determine whether the arrangement is a monetary or nonmonetary transaction.
Transactions involving the exchange of boot representing 25% or greater of the
fair value of the reciprocal arrangement are considered monetary transactions
within the context of APB Opinion No. 29 and EITF Issue No. 01-02. Monetary
transactions and nonmonetary transactions that represent the culmination of an
earnings process are recorded at the fair value of the products delivered or
products or services received, whichever is more readily determinable,
providing the fair values are determinable within reasonable limits. In
determining the fair values, we consider the recent history of cash sales of
the same products or services in similar sized transactions. Revenues from such
transactions may be recognized over a period of time as the products or
services are received. For nonmonetary reciprocal arrangements that do not
represent the culmination of the earnings process, the exchange is recorded
based on the carrying value of the products delivered, which is generally zero.
In 2001, we recognized revenues under reciprocal arrangements of
approximately $37.5 million, of which $27.0 million involved nonmonetary
transactions, as defined above. We did not recognize any revenues under
reciprocal arrangements as defined above in 2000 and 1999.
45
Allowance for doubtful accounts
We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. We regularly
review the adequacy of our accounts receivable allowance after considering the
size of the accounts receivable balance, each customer's expected ability to
pay and our collection history with each customer. We review significant
invoices that are past due to determine if an allowance is appropriate based on
the risk category using the factors described above. In addition, we maintain a
general reserve for all invoices by applying a percentage based on the age
category. We also monitor our accounts receivable for any build up of
concentration to any one customer, industry or geographic region. To date our
receivables have not had any particular concentrations that, if not collected,
would have a significant impact on our operating income. We require all
acquired companies to adopt our credit policies. The allowance for doubtful
accounts represents our best estimate, but changes in circumstances relating to
accounts receivable may result in a requirement for additional allowances in
the future.
Investments
We invest in debt and equity securities of technology companies for business
and strategic purposes. Some of these companies are publicly traded and have
highly volatile share prices. However, 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. Further, if these companies are not
successful, we could incur charges related to write-downs or write-offs of
these types of assets.
We review our marketable equity holdings in publicly-traded companies on a
regular basis to determine if any security has experienced an
other-than-temporary decline in fair value. We consider the investee company's
cash position, earnings and revenue outlook, stock price performance over the
past six months, liquidity and management ownership, among other factors, in
our review. If we determine that an other-than-temporary decline exists in a
marketable equity security, we write down the investment to its market value
and record the related write-down as an investment loss in our consolidated
statements of operations. For non-public companies, we regularly review the
assumptions underlying the operating performance and cash flow forecasts based
on information requested from these privately held companies. Generally, this
information may be more limited, may not be as timely and may be less accurate
than information available from publicly traded companies. Assessing each
investment's carrying value requires significant judgment by management. If we
determine that an other-than-temporary decline exists in a non-public equity
security, we write down the investment to its fair value and record the related
write-down as an investment loss in our consolidated statements of operations.
Generally, if cash balances are insufficient to sustain the company's
operations for a six-month period, we consider the decline in fair value to be
other than temporary. During 2001, we determined that the decline in value of
certain of our public and non-public equity investments was other than
temporary and recorded a write-down of these investments totaling $89.1 million.
Long-lived assets
Our long-lived assets consist primarily of goodwill and other intangible
assets and property and equipment. We review long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
of such an asset may not be recoverable. Such events or circumstances
46
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, difficulty and delays in integrating the 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 estimated future undiscounted net cash flows the assets are
expected to generate. Those cash flows include an estimated terminal value
based on a hypothetical sale of an acquisition at the end of its goodwill
amortization period. Estimating these cash flows and terminal values requires
management to make judgments about the growth in demand for our services,
sustainability of gross margins, our ability to integrate acquired companies
and achieve economies of scale, and valuation multiples required by investors
or buyers. Changes in these estimates could require us to further write down
the carrying amount of our long-lived assets. 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 value.
Effective January 1, 2002, we will assess impairment of goodwill in
accordance with the provisions of SFAS No. 142. The provisions of SFAS No. 142
require that a two-step test be performed. First, the fair value of each of our
reporting units will be compared to its carrying value. If the fair value
exceeds the carrying value, goodwill is not impaired and no further testing is
performed. If the carrying value exceeds the fair value, then the implied fair
value of the reporting unit's goodwill must be determined and compared to the
carrying value of the goodwill. If the carrying value of a reporting unit's
goodwill exceeds its implied fair value, then an impairment loss equal to the
difference will be recorded.
Results of Operations
We have experienced substantial net losses in the past substantially due to
the charges we incurred for the amortization and write down of acquired
goodwill and other intangible assets related to our acquisitions. As of
December 31, 2001, we had an accumulated deficit of approximately $16.5
billion, primarily due to the amortization and write-down of goodwill and other
intangible assets of approximately $16.8 billion related to our acquisitions.
In accordance with the provisions of SFAS No. 142, goodwill will no longer be
amortized to earnings commencing January 1, 2002. Instead goodwill will be
reviewed for impairment as of January 1, 2002 and annually thereafter, or more
often if circumstances indicate that an impairment may have occurred.
Amortization of other intangible assets is expected to be approximately $84
million per quarter in 2002, including the impact of all acquisitions through
December 31, 2001, excluding the impact of H.O. Systems and assuming no other
acquisitions or impairment charges.
We accounted for all of our acquisitions in 2000 and 2001 as purchase
business combinations. Accordingly, the acquired companies' revenues, costs and
expenses have been included in our results of operations beginning with their
dates of acquisition. As a result of our acquisitions of THAWTE and Signio in
February 2000, Network Solutions in June 2000 and Illuminet in December 2001,
comparisons of revenues, costs and expenses for the year ended December 31,
2001 to the years ended December 31, 2000 and 1999 may not be relevant, as the
businesses of the combined company were not equivalent.
47
Revenues
A comparison of revenues for the years ended December 31, 2001, 2000 and
1999 is presented below.
2001 Change 2000 Change 1999
-------- ------ -------- ------ -------
(Dollars in thousands)
Web presence and trust services.............. $555,061 96% $282,634 *
-------- --------
Subtotal--Mass Market Division............. 555,061 282,634
-------- --------
Managed security and network services........ 298,000 101% 147,984 *
Registry and telecommunications services..... 130,503 196% 44,148 *
-------- --------
Subtotal--Enterprise and Service Provider
Division.................................. 428,503 192,132
-------- --------
Total revenues............................... $983,564 107% $474,766 460% $84,776
======== ======== =======
- --------
* In 1999, we derived all of our revenues from our Enterprise Services under
one reportable segment.
Revenues increased significantly in 2001 from 2000 for both our Enterprise
and Service Provider Division and our Mass Markets Division. The increases were
primarily due to the acquisition of Network Solutions in June 2000. Sales of
authentication services, particularly Web site digital certificates and
enterprise and affiliate PKI services, also increased. In addition, we expanded
the VeriSign Trust Network of worldwide affiliates and saw increased demand for
our training and consulting services.
The increase in revenues in 2000 from 1999 is primarily due to the
acquisitions of THAWTE, Signio and Network Solutions. In addition, we increased
sales of our authentication services, particularly our Web site digital
certificates and enterprise and affiliate PKI services, expanded our
international affiliate network and delivered more training and consulting
services.
In 2001, we derived 3.8% of our total revenues from reciprocal arrangements.
We derived no revenues from customers from reciprocal arrangements in 2000 and
1999. Typically in these relationships, under separate agreements, we sell our
products and services to a company and that company sells to us their products
and services. We enter into these arrangements for strategic business purposes
and the goods and services we receive in exchange are those we would have
purchased in non-reciprocal arrangements. These arrangements are independent
relationships and are not terminable unless the terms of the agreements are
violated.
We derived 6.5% in 2001, 2.8% in 2000 and 1.1% in 1999 of our total revenues
from customers with whom we have participated in a private equity round of
financing, including several of the VeriSign Affiliates as well as various
technology companies in a variety of related market areas. Typically in these
relationships, under separate agreements, we sell our products and services to
a company and, under a separate agreement, participate with other investors in
a private equity round financing of the company. We typically make our
investments with others where our investment is less than 50% of the total
financing round. Our policy is not to recognize revenue in excess of other
investors' financing of the company. These arrangements are independent
relationships and are not terminable unless the terms of the agreements are
violated.
Enterprise and Service Provider Division
Enterprise and Service Provider Division revenues from external customers
were $428.5 million in 2001, $192.1 million in 2000 and $84.8 million in 1999.
48
In 2001, revenues from the managed security and network services product
line increased approximately $150 million, to $298 million in 2001 from $148
million in 2000. The revenue increase was primarily due to increases in OnSite
services sold, software licenses sold to the 13 new affiliate service
providers, an increase in royalties earned from existing affiliates, and an
overall increase in the volume of consulting services that included the resale
of third party products. Third party software and hardware sales are generally
made at lower margins than our other enterprise and mass market sales.
In 2001, revenues from registry and telecommunications services increased
approximately $86 million, to $131 million in 2001 from $44 million in 2000.
This increase was primarily driven by the inclusion of a full year of Registry
services revenue compared to approximately seven months in 2000, as a result of
the acquisition of Network Solutions in June 2000. Revenues related to
outsourced managed registry services also increased. The VeriSign Global
Registry Services group managed approximately 28.8 million domain names at
December 31, 2001 in the active zone file for all domain names ending in .com,
.net and .org. The Global Registry Services group also processed the renewal,
extension or transfer of 8.9 million domain names during 2001, bringing the
total number of paid domain name transactions during 2001 to 22.0 million.
Mass Market Division
Mass Market Division revenues from external customers were $555.1 million in
2001, $282.6 million in 2000 and zero in 1999.
In 2001, the increase in revenues in the Mass Market Division was primarily
due to the inclusion of a full year of revenues from Web Presence Services
compared to approximately seven months in 2000 as a result of the acquisition
of Network Solutions in June 2000.
During 2001, we added approximately 4.1 million new domain names and renewed
or extended an additional 4.9 million domain names bringing the total active
domain names under management by the Registrar to approximately 13.6 million at
December 31, 2001, which does not include approximately 1.7 million domain
names past their anniversary dates that have been deactivated from the zone
files but not yet deleted from the Web presence services WHOIS database. In
2000, the demand for new domain name registrations in our Web presence business
increased substantially as a result of our promotional programs and from
registrations by entities who registered domain names with the hopes of
reselling them. Many of those promotional and speculator domain names have not
been renewed and have already been deactivated from the active zone file
maintained by the VeriSign Global Registry. In addition, due to the competitive
market in domain names, we have experienced moderate price declines in sales
prices for domain names. We expect that this situation will continue.
Our Mass Markets Division and our Enterprise and Service Provider Division
issued approximately 366,000 new and renewed Web site digital certificates in
2001 compared to 274,000 in 2000 and 112,000 in 1999. The total installed base
was over 366,000 certificates at December 31, 2001. In particular, the Mass
Markets Division Web site certificate base increased by 50,000 installed
certificates in 2001 to a total of 260,000 certificates at December 31, 2001.
The increase in sales of Web site digital certificates in 2001 contributed
approximately $25 million to the increase in revenues. In addition, due to
increased competition in the Web trust services market, we have experienced
moderate pricing pressure for our services. We expect that this pricing
pressure will continue.
49
International revenues
Revenues from international subsidiaries and VeriSign Affiliates accounted
for 13% of total revenues in 2001, 14% in 2000 and 27% in 1999. The percentage
decrease in revenues from international subsidiaries and VeriSign Affiliates in
2001 compared to 2000 and 1999 was primarily related to the acquisition in June
2000 of Network Solutions, whose revenues are primarily attributable to U.S.
sources. This was partially offset by additional revenues from international
subsidiaries and VeriSign Affiliates in 2001 related to an increase in the
number of VeriSign Affiliates in the VeriSign Trust Network combined with other
activities to expand our presence in foreign markets.
In 1998, we began our international affiliate program under which we signed
agreements with local telecommunications companies, financial institutions and
others to promote, sell and distribute our PKI services in international
markets around the world. These VeriSign Affiliates typically require
significant capital development, the cost of which is borne by the affiliate.
Our strategy from time to time also includes investing in certain affiliates in
strategic markets that represent advantageous economic opportunities for a
minority interest of less than 20%. As a result, we have invested in several
international affiliates in 2001 and prior years. Revenues from VeriSign
Affiliates in which we have invested accounted for 4.5% of total revenues in
2001, 1.5% in 2000 and 1.1% in 1999.
Costs and Expenses
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, errors and omission insurance and the cost of software and hardware
resold to customers.
A comparison of cost of revenues for the years ended December 31, 2001, 2000
and 1999 is presented below.
2001 Change 2000 Change 1999
-------- ------ -------- ------ -------
(Dollars in thousands)
Cost of revenues................................. $343,721 111% $163,049 411% $31,898
Percentage of revenues........................... 35% 34% 38%
Growth of revenues was the primary factor in the increase of cost of
revenues in 2001 from 2000 and in 2000 from 1999. We hired more employees to
support the growth of demand for our products and services and to support the
growth of our consulting and training services. We incurred increased expenses
for access to third-party databases to verify digital certificate applicants'
identities, increased customer service costs related to our larger customer
base and increased expenses related to the cost of hardware and software
products resold to customers as part of our consulting business. 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. Our acquisitions of
THAWTE, Signio and Network Solutions have resulted in an increase in our cost
of revenues since their acquisitions in 2000. Our recent acquisitions of
Illuminet in December 2001 and H.O. Systems in February 2002 will further
increase the dollar amount of our cost of revenues. Future
50
acquisitions, further expansion into international markets and introduction of
new products will result in additional increases in cost of revenues, due to
the hiring of additional personnel and related expenses and other factors.
Cost of revenues as a percentage of revenues increased slightly in 2001 from
2000, primarily due to the cost structure of the Network Solutions product mix
and the increase in the volume of third party hardware and software sales,
which was partially offset by economies of scale associated with the growth in
recurring revenues from existing customers. The decrease in 2000 from 1999 was
primarily a result of the continued realization of economies of scale from our
technology infrastructure and the efficiency gains in the certificate
enrollment and issuance process.
Certain of our services, such as consulting and training, require greater
initial personnel involvement and therefore have higher costs than other types
of services. In addition, revenues derived from our authentication services,
domain name registration services, registry services, payment services and our
telecommunications services as a result of our recent acquisition of Illuminet
each have different cost structures. As a result, we anticipate that cost of
revenues as a percentage of revenues will increase in the near term.
Sales and marketing
Sales and marketing expenses consist primarily of costs related to sales and
marketing, and policy activities. These expenses include salaries, sales
commissions and other personnel-related expenses, travel and related expenses,
trade shows, costs of lead generation, 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, 2001, 2000 and 1999 is presented below.
2001 Change 2000 Change 1999
-------- ------ -------- ------ -------
(Dollars in thousands)
Sales and marketing.................... $259,585 55% $167,148 390% $34,145
Percentage of revenues................. 26% 35% 40%
The Network Solutions acquisition was the primary reason for the increase in
sales and marketing expenses in 2001 from 2000 as well as in 2000 as compared
to 1999. The Mass Markets Division incurs 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 both periods was driven by lead and demand generation
activities in our enterprise and affiliate PKI businesses, expansion of our
sales force and an increase in international sales expenses. The increase in
2000 from 1999 also reflects the effect of sales and marketing expenses from
THAWTE and Signio.
While the absolute dollar spending increased for sales and marketing
expenses, we continue to realize a decline in 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 retention costs and the increase in the productivity of our direct and
inside sales forces. However, we cannot forecast that these sales and marketing
expenses will continue to decline as a percentage of revenues.
51
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, 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, 2001, 2000 and 1999 is presented below.
2001 Change 2000 Change 1999
------- ------ ------- ------ -------
(Dollars in thousands)
Research and development $78,134 89% $41,256 210% $13,303
Percentage of revenues.. 8% 9% 16%
Research and development expenses increased in absolute dollars in 2001 from
2000 and in 2000 from 1999 primarily due to the acquisition of Network
Solutions in June 2000. The increases in both periods relate to the development
and enhancement of new registry products related to multilingual domain names
and managed domain name system services. In addition, we continued to invest in
the design, testing and deployment of, and technical support for our expanded
digital trust service offerings and technology. We also expanded our
engineering staff and incurred related costs required to support our continued
emphasis on developing new products and services as well as enhancing existing
products and services. Some of the new products and services developed during
2001 include our Entitlement Management Services, Authentication Service Bureau
and Digital Trust Services platform.
The decrease in research and development expenses as a percentage of
revenues in 2001 from 2000 and in 2000 from 1999 is largely due to the fact
that revenues increased faster than research and development expenses in these
periods. We expect research and development expenses as a percentage of
revenues to decline in future periods.
We believe that timely development of new and enhanced enterprise services,
payment services, Web presence services and other technologies 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, management information systems, support services, professional
services fees and bad debt expense.
52
A comparison of general and administrative expenses for the years ended
December 31, 2001, 2000 and 1999 is presented below.
2001 Change 2000 Change 1999
-------- ------ ------- ------ ------
(Dollars in thousands)
General and administrative $143,297 136% $60,672 594% $8,740
Percentage of revenues.... 15% 13% 10%
The increase in general and administrative expenses in 2001 from 2000 and in
2000 over 1999 was primarily related to the acquisition of Network Solutions in
June 2000. Expenses also increased in 2001 from 2000, as well as in 2000 from
1999, 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. In addition, our bad
debt expense increased to $26.9 million in 2001 from $5.8 million in 2000 and
$.9 million in 1999, primarily as a result of increased revenues and
deterioration in the overall economy in 2001.
The increase in general and administrative expenses as a percentage of
revenues in 2001 from 2000 and in 2000 from 1999 is primarily due to
incremental expenses related to integrating our acquisitions and different cost
structures of those acquisitions.
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 a shared
registration interface to the ICANN 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 was 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 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. The development
efforts related to upgrades and improvements in the SRS and other systems were
completed in the first quarter of 2001.
The fair value assigned to IPR&D was estimated by discounting, to present
value, the cash flows attributable to the technology once it 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,
53
excluding costs of completion, by the percentage of completion of the purchased
research and development project at the time of acquisition.
Amortization and write-down of goodwill and other intangible assets
During 2000, we completed several acquisitions including THAWTE, Signio and
Network Solutions. These acquisitions resulted in the recording of goodwill and
other intangible assets in the amount of $21.3 billion. Our policy is to assess
the recoverability of goodwill using estimated undiscounted cash flows. Those
cash flows include an estimated terminal value based on a hypothetical sale of
an acquisition at the end of its goodwill amortization period. Though the
acquisitions have been predominantly performing at or above expectations,
market conditions and attendant multiples used to estimate terminal values have
continued to remain depressed. At June 30, 2000, the NASDAQ market index was at
3,966 points and had decreased 1,805 points, or 46%, to 2,161 points at June
30, 2001. This decline affected the analysis used to assess the recoverability
of goodwill. For goodwill associated with THAWTE and Network Solutions, fair
value was determined based on future operating cash flows over the remaining
amortization period of the goodwill. The terminal values were estimated based
on the relationship of the value of the VeriSign stock issued at the
acquisition date to the value of VeriSign's stock over the three-month period
preceding the valuation. For Signio and the other acquisitions, fair value was
determined through the use of recent indicators of fair value such as
comparable sales and multiples derived from recent acquisition activities. As a
result, management recorded an impairment charge in the quarter ended June 30,
2001, in the amount of $9.9 billion. Since the most significant acquisitions
were completed by issuing shares of our common stock, the impairment should be
considered a non-cash charge.
The amortization and write-down of goodwill and other intangible assets was
approximately $13.6 billion in 2001 compared to $3.2 billion in 2000. In
addition to the $9.9 billion write-down discussed above, the increase was
primarily related to our purchase acquisitions during 2000, which accounted for
approximately $21.3 billion of additional goodwill and other intangible assets.
In accordance with the provisions of SFAS No. 142, goodwill will no longer be
amortized to earnings commencing January 1, 2002. Instead goodwill will be
reviewed for impairment annually, or more often if circumstances indicate that
an impairment may have occurred. Amortization of other intangible assets is
expected to be approximately $84 million per quarter thereafter, including the
impact of all acquisitions through December 31, 2001, but excluding the impact
of H.O. Systems and assuming no other acquisitions or impairment charges.
Other income (expense), net
Other income (expense), net, consists primarily of interest earned on our
cash, cash equivalents and short-term and long-term investments, gains and
losses on the sale or write-down of equity investments, and the net effect of
foreign currency transaction gains and losses.
A comparison of other income for the years ended December 31, 2001, 2000 and
1999 is presented below.
2001 Change 2000 Change 1999
-------- ------ ------- ------ ------
(Dollars in thousands)
-----------------------------------------
Other income (expense)................. $(22,469) (126)% $86,169 1240% $6,429
Percentage of revenues................. (2)% 18% 8%
54
Other (expense), net, in 2001 was primarily comprised of the write-down of
investments totaling $89.1 million on certain public and non-public equity
security investments, partially offset by $66.7 million of interest and other
income. Other income, net, in 2000 consisted primarily of a realized gain of
$32.6 million from the sale of shares of Keynote Systems, Inc., and interest
and other income of $53.6 million. In 2001, we determined that the decline in
value of certain of our public and non-public equity securities investments was
other than temporary and we recorded a write-down of these investments totaling
$89.1 million. We had previously valued certain of these investments at the
then-fair-market value as part of the Network Solutions acquisition. We may
from time to time recognize losses or gains from the sales, write-downs or
write-offs of our equity investments. Our cash and investments base increased
significantly through the acquisition of Network Solutions in June 2000;
however, our invested balances produced lower returns due to lower market
interest rates in 2001 as compared to 2000.
The increase in 2000 from 1999 is primarily due to increased earnings on
funds invested. Investments increased in part due to our net proceeds of $121.4
million generated from the follow-on public offering of our common stock in
January 1999 and the investment of cash generated from operations. Our
investment base was also significantly increased through the acquisition of
Network Solutions, which added over $925 million of cash and investments. In
2000, we also realized a $32.6 million gain from the sale of shares of Keynote
Systems, Inc.
Income tax benefit
In 2001, we recorded a $77.9 million tax benefit. The benefit is due to the
realization of current net operating losses and certain current deferred tax
assets. We have not provided a benefit for the long-term deferred tax assets
due to the uncertainty of their being realized. As of December 31, 2001, we had
federal net operating loss carryforwards of approximately $492.4 million
related to stock compensation deductions. We also had state net operating loss
carryforwards of approximately $313.8 million related to stock compensation
deductions. We had no net operating loss carryforwards for federal or state
income tax purposes from operations. If we are not able to use them, the
federal net operating loss carryforwards will expire in 2010 through 2021 and
the state net operating loss carryforwards will expire in 2004 through 2021. In
addition, we had available for carryover research and experimentation tax
credits for federal income tax purposes of approximately $8.9 million and for
state income tax purposes of approximately $5.2 million. The federal research
and experimentation tax credits will expire, if not utilized, in 2010 through
2021. State research and experimental tax credits carry forward indefinitely
until utilized. 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.
Our accounting for deferred taxes under SFAS 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 valuation
allowance was required to be applied to certain deferred tax assets, we
considered such factors as our history of operating losses, our expected
current year taxable income (exclusive of stock compensation deductions), our
uncertainty as to the projected long-term operating results, 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 noncurrent deferred tax assets
indicated that such plans were not considered sufficient to overcome the
available negative evidence. The possible future reversal of the valuation
allowance will result in future income statement benefit to the extent the
valuation allowance was applied to deferred tax assets generated through
ongoing operations. To the extent the valuation allowance relates to deferred
tax assets generated through
55
stock compensation deductions, the possible future reversal of such valuation
allowance will result in a credit to additional paid in capital and will not
result in future income statement benefit. See Note 10 of Notes to Consolidated
Financial Statements.
Minority Interest in Net (Income) Loss of Subsidiary
Minority interest in the net (income) loss of VeriSign Japan K.K. was $(.6)
million in 2001, $(1.3) million in 2000 and $.8 million in 1999. The
year-to-year changes are primarily due to VeriSign Japan's increased revenues
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.
We Disclose Pro Forma Financial Information
We prepare and release quarterly unaudited financial statements prepared in
accordance with generally accepted accounting principles ("GAAP"). We also
disclose and discuss certain pro forma financial information in the related
earnings release and investor conference call. Our pro forma financial
information does not include the amortization and write-down of goodwill and
intangible assets related to acquisitions, stock-based compensation charges
related to acquisitions, write-down of investments and benefit for income
taxes. We believe the disclosure of the pro forma financial information helps
investors more meaningfully evaluate the results of our ongoing operations.
However, we urge investors to carefully review the GAAP financial information
included as part of our Quarterly Reports on Form 10-Q, our Annual Reports on
Form 10-K, and our quarterly earnings releases and compare that GAAP financial
information with the pro forma financial results disclosed in our quarterly
earnings releases and investor calls.
Liquidity and Capital Resources
2001 2000 Change
---------- ----------- ------
(Dollars in thousands)
Cash, cash equivalents and short-term
investments.......................... $ 726,697 $ 1,026,275 (29)%
Working capital........................ $ 256,714 $ 520,953 (51)%
Stockholders' equity................... $6,506,074 $18,470,608 (65)%
At December 31, 2001, our principal source of liquidity was $726.7 million
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 $201.8 million of long-term investments,
consisting primarily of debt and equity securities of non-public companies,
which have no ready market.
Net cash provided by operating activities was $227.5 million in 2001, $192.0
million in 2000 and $14.7 million in 1999. The increase was primarily due to an
overall increase in net income after adjustments for non-cash items such as
amortization and the write-down of goodwill and other intangible assets,
depreciation of property and equipment and the write-down of certain
investments, as well as higher levels of deferred revenue. The increase in cash
provided by operating activities was partially offset by increases in deferred
income taxes and accounts receivable.
Net cash used in investing activities was $389.1 million in 2001, primarily
as a result of $1.3 billion used for purchases of investments, which were
offset by proceeds of $1.4 billion from sales and maturities of investments,
$380.3 million used for purchases of property and equipment, including
approximately $285 million used for the purchase of the land and buildings for
our corporate headquarters in California, and $52.6 million paid, net of cash
acquired, for business combinations. Net cash provided by investing activities
was $124.0 million in 2000, primarily as a result of the cash acquired in our
acquisitions, partially
56
offset by increased purchases of short and long-term investments, and costs
relating to our acquisitions. In 1999, net cash used in investing activities of
$103.2 million was primarily related to net purchases of investments. Capital
expenditures for property and equipment totaled $380.3 million in 2001, $58.8
million in 2000 and $6.0 million in 1999. Our planned capital expenditures for
2002 are approximately $140 million to $150 million, primarily for computer and
communications equipment and leasehold improvements. As of December 31, 2001,
we also had commitments under noncancelable operating leases for our facilities
for various terms through 2011. See Note 11 of Notes to Consolidated Financial
Statements.
Net cash provided by financing activities was $10.8 million in 2001, $73.5
million in 2000 and $136.2 million in 1999. In 2001 and 2000, cash was provided
primarily from common stock issuances as a result of stock option exercises. In
2001, these proceeds were partially offset by the use of approximately $70
million to repurchase shares of our common stock. In 1999, we received net cash
proceeds of $121.4 million from the public offering of our stock.
In April 2001, the Board authorized the use of up to $350 million to
repurchase shares of our common stock on the open market, or in negotiated or
block trades. During 2001, we repurchased approximately 1,650,000 shares at a
cost of approximately $70 million. At December 31, 2001, approximately
$280 million remained available for future purchases under this program.
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. An increase
in the number of significant acquisitions or investments to be funded with cash
may require us to raise additional funds through public or private financing,
strategic relationships or other arrangements. This additional funding, if
needed, might not be available on terms attractive to us, or at all. Failure to
raise capital when needed could materially harm our business. If we raise
additional funds through the issuance of equity securities, the percentage of
our stock owned by our then-current stockholders will be reduced. Furthermore,
these equity securities might have rights, preferences or privileges senior to
those of our common stock.
Our Illuminet subsidiary entered into an agreement with Bank of America
effective June 1, 2000 to provide a line of credit and a capital expenditure
loan facility. The line of credit is a $10.0 million unsecured loan that
expires June 1, 2002, with a one-year extension available. The capital
expenditure loan facility is a $15 million unsecured loan with a five-year
term. No amounts were outstanding under the line of credit and $800,000 was
outstanding under the capital expenditure facility at December 31, 2001.
Amounts drawn under these agreements must be made by Illuminet. We currently
have no plans to make any borrowings under this agreement.
In October 2001, we filed a shelf registration statement with the Securities
and Exchange Commission to offer an indeterminate number of shares of common
stock that may be issued at various times and at indeterminate prices, with a
total public offering price not to exceed $750 million. To date, no shares have
been issued under this registration statement.
In December 2001, we signed a master contract with IBM under which we
committed to purchase $30 million of IBM technology over the next three years.
In February 2002, we completed our acquisition of H.O. Systems, Inc., a
provider of billing and customer care solutions to wireless carriers. We used
approximately $350 million in cash for this acquisition.
57
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets."
SFAS No. 141 requires that all business combinations be accounted for under
the purchase method for business combinations initiated after June 30, 2001.
Use of the pooling-of-interests method is no longer permitted. We adopted the
provisions of SFAS No. 141 commencing July 1, 2001. We have accounted for all
of our business combinations in 2001 and 2000 as purchases and the adoption of
SFAS No. 141 is not expected to have a significant impact on our financial
position or results of operations.
SFAS No. 142 requires that goodwill resulting from a business combination
will no longer be amortized to earnings, but instead be reviewed for
impairment. We are required to adopt SFAS No. 142 as of January 1, 2002. For
goodwill resulting from business combinations prior to July 1, 2001,
amortization of goodwill continued through December 31, 2001, but ceased
commencing January 1, 2002. For business combinations occurring on or after
July 1, 2001, the associated goodwill will not be amortized. Upon adoption of
SFAS No. 142, we are required to perform a transitional impairment test for all
recorded goodwill within six months and, if necessary, determine the amount of
an impairment loss by December 31, 2002. The adoption of SFAS No. 142 will
reduce the amount of amortization of goodwill and intangible assets from
approximately $460 million per quarter to approximately $84 million per
quarter, including the effect of all acquisitions through December 31, 2001,
but excluding the impact of H.O. Systems and assuming no other acquisitions or
impairment charges. In addition, approximately $10.9 million of intangible
assets previously allocated to workforce in place will be subsumed into
goodwill as of January 1, 2002. We are currently evaluating the effect, if any,
of the required impairment testing on our recorded goodwill, which had a net
book value of $4.9 billion at December 31, 2001.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" and in October issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 143 requires that the
fair value of an asset retirement obligation be recorded as a liability in the
period in which the obligation is incurred. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets
and supercedes SFAS No. 121 and the accounting and reporting provisions of APB
Opinion No. 30 as it related to the disposal of a segment of a business.
SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 and
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001.
We have adopted SFAS No. 144 effective January 1, 2002 and SFAS No. 143 will be
adopted effective January 1, 2003. The effect of adopting these Statements is
not expected to have a material effect on ours consolidated financial position
or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate sensitivity
The primary objective of our 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, 2001, 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
58
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, 2001, 43% of our
short-term investments mature in less than one year.
We do not hold any derivative financial instruments.
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, 2001. This table does not
include money market funds because those funds are not subject to market risk.
Maturing in
---------------------------
Six
Six Months
Months or to One More than Estimated
Less Year One Year Total Fair Value
--------- ------- --------- -------- ----------
(Dollars in thousands)
Included in cash and cash equivalents.. $ 97,830 $ -- $ -- $ 97,830 $ 97,840
Weighted-average interest rate......... 2.65% -- --
Included in short-term investments..... $132,090 $38,887 $222,563 $393,540 $396,840
Weighted-average interest rate......... 3.21% 3.55% 4.99%
Exchange rate sensitivity
We consider our exposure to foreign currency exchange rate fluctuations to
be minimal. All revenues derived from operations other than VeriSign Japan
K.K., THAWTE (South Africa), Registrars.com (Canada), euro909 (Europe) and
Domainnames.com (U.K.) 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 as
well as our wholly owned subsidiaries and sales offices in South Africa,
Europe, Sweden, Canada and the United Kingdom are denominated in local
currencies. In these 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. Because of our minimal
exposure to foreign currencies, we have not engaged in any hedging activities,
although if future events or changes in circumstances indicate that hedging
activities would be beneficial, we may consider such activities.
Equity price risk
We own shares of common stock of several public companies. We value these
investments using the closing market value for the last day of each month.
These investments are subject to market price volatility. We reflect these
investments on 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. We have also invested
in equity instruments of several privately held companies, many of which can
still be considered in the startup or development stages, and therefore, carry
a high level of risk. In 2001, we determined the decline in value of certain
public and non-public equity investments was other than temporary and we
recognized a $89.1 million impairment loss. Due to the inherent risk associated
with some of our investments, and in light of current stock market conditions,
we may incur future losses on the sales, write-downs or write-offs of our
investments. We do not currently hedge against equity price changes.
59
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, 2001.
2001
-----------------------------------------------------------------
Year Ended
March 31 June 30 September 30 December 31 December 31
----------- ------------ ------------ ----------- ------------
(In thousands, except per share data)
Revenues.......................... $ 213,413 $ 231,197 $ 255,155 $ 283,799 $ 983,564
Total costs and expenses.......... 1,564,613 11,470,182 667,944 691,651 14,394,390
Operating loss.................... (1,351,200) (11,238,985) (412,789) (407,852) (13,410,826)
Minority interest in net (income)
loss of subsidiary.............. (210) (309) (405) 345 (579)
Net loss.......................... (1,377,377) (11,190,730) (386,735) (401,110) (13,355,952)
Basic and diluted net loss per
share........................... (6.90) (55.49) (1.91) (1.91) (65.64)
2000
-----------------------------------------------------------------
Year Ended
March 31 June 30 September 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 1,531,043 3,675,075
Operating loss.................... (61,149) (459,685) (1,345,787) (1,333,688) (3,200,309)
Minority interest in net (income)
loss of subsidiary.............. 147 (57) (130) (1,294) (1,334)
Net loss.......................... (26,155) (452,938) (1,324,185) (1,312,196) (3,115,474)
Basic and diluted net loss per
share........................... (.24) (3.37) (6.78) (6.64) (19.57)
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
Not applicable.
60
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 2002 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 the 2002 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 2002 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 2002 Annual Meeting of
Stockholders. This information is incorporated herein by reference.
61
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, 2001 and 2000
. Consolidated Statements of Operations
Years Ended December 31, 2001, 2000 and 1999
. Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2001, 2000 and 1999
. Consolidated Statements of Comprehensive Income (Loss)
Years Ended December 31, 2001, 2000 and 1999
. Consolidated Statements of Cash Flows
Years Ended December 31, 2001, 2000 and 1999
. 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
December 17, 1999 by and among the Registrant,
Signio, Inc. and BEHAD Acquisition Corp. 8-K 3/7/00 2.1
2.02 Exchange Agreement dated as of December 19, 1999 by
and between the Registrant and Mark Shuttleworth 8-K 2/16/00 2.1
2.03 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
2.04 Agreement and Plan of Merger by and among the
Registrant, Illinois Acquisition Coropration and
Illuminet Holding, Inc. S-4 10/10/01 2.01
3.01 Third Amended and Restated Certificate of
Incorporation of the Registrant S-1 1/29/98 3.02
62
Incorporated by Reference
Exhibit ------------------------- Filed
Number Exhibit Description Form Date Number Herewith
- ------ ------------------- ---- ------- ------ --------
3.02 Amended and Restated Bylaws of the Registrant S-1 1/29/98 3.04
3.03 Amendment to Third Amended and Restated Certificate
of Incorporation of the Registrant S-8 7/15/99 4.03
4.01 Registration Rights Agreement dated as of
December 19, 1999 by and between the Registrant
and Mark Shuttleworth 10-K 3/22/00 4.06
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
10.04 Form of Indemnification Agreement entered into by the
Registrant with each of its directors and executive
officers S-1 1/29/98 10.05
10.05 Registrant's 1995 Stock Option Plan and related
documents S-1 1/29/98 10.06
10.06 Registrant's 1997 Stock Option Plan S-1 1/29/98 10.07
10.07 Registrant's 1998 Directors' Stock Option Plan and
related documents S-1 1/29/98 10.08
10.08 Registrant's 1998 Equity Incentive Plan and related
documents S-1 1/29/98 10.09
10.09 Registrant's 1998 Employee Stock Purchase Plan and
related documents S-1 1/29/98 10.10
10.10 Registrant's Executive Loan Program of 1996 S-1 1/29/98 10.11
10.11 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
10.12 Assignment Agreement, dated April 19, 1995 between
the Registrant and RSA Data Security, Inc. S-1 1/29/98 10.15
10.13 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
10.14 Non-Compete and Non-Solicitation Agreement, dated
April 18, 1995, between the Registrant and RSA
Security, Inc. S-1 1/29/98 10.17
10.15* 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
10.16* Master Development and License Agreement, dated
September 30, 1997, between the Registrant and
Security Dynamics Technologies, Inc. S-1 1/29/98 10.19
63
Incorporated by Reference
Exhibit ------------------------- Filed
Number Exhibit Description Form Date Number Herewith
- ------ ------------------- ---- -------- ------ --------
10.17 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
10.18 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
10.19 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
10.20 Separation Letter Agreement between James P. Rutt and
VeriSign, Inc. dated February 23, 2001 10-K 3/28/01 10.37
10.21 Deed of lease between TST Waterview I, L.L.C. and
VeriSign, Inc., dated July 19, 2001 10-Q 11/14/01 10.01
10.22 Agreement to purchase building between VeriSign, Inc.
and Sobrato Development Co. #792, dated October 1,
2001 10-Q 11/14/01 10.02
10.23 Agreement to purchase buildings between VeriSign,
Inc. and Ellis-Middlefield Business Park, dated
October 1, 2001 10-Q 11/14/01 10.03
10.24 .com Registry Agreement between VeriSign and
ICANN 8-K 6/01/01 99.03
10.25 .net Registry Agreement between VeriSign and ICANN 8-K 6/01/01 99.04
10.26 .org Registry Agreement between VeriSign and ICANN 8-K 6/01/01 99.05
10.27 Amendment No. 24 to Cooperative Agreement
#NCR 92-18742 between the DOC and Network
Solutions, Inc. 8-K 6/01/01 99.06
10.28 Registrant's 2001 Incentive Stock Plan S-8 9/21/01 4.05
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
The following reports were filed on Form 8-K or Form 8-K/A during the
quarter ended December 31, 2001:
. Current Report on Form 8-K dated December 12, 2001 and filed
December 27, 2001 pursuant to Item 2 (Acquisition or disposition of
assets), regarding the acquisition of Illuminet Holdings, Inc.
64
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 19th day of March 2002.
VERISIGN, INC.
By: /s/ STRATTON D. SCLAVOS
__________________________________
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 19th day of March 2002.
Signature Title
--------- -----
/s/ STRATTON D. SCLAVOS President, Chief Executive Officer and
- -------------------------------------- Chairman of the Board
Stratton D. Sclavos
/s/ DANA L. EVAN Executive Vice President of Finance and
- -------------------------------------- Administration and Chief Financial
Dana L. Evan Officer (Principal finance and
accounting officer)
/s/ D. JAMES BIDZOS Vice 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
65
Signature Title
--------- -----
/s/ SCOTT G. KRIENS Director
- --------------------------------------
Scott G. Kriens
/s/ ROGER H. MOORE Director
- --------------------------------------
Roger H. Moore
/s/ GREGORY L. REYES Director
- --------------------------------------
Gregory L. Reyes
/s/ TIMOTHY TOMLINSON Director
- --------------------------------------
Timothy Tomlinson
66
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............................................... 68
. Independent Auditors' Report...................................... 69
. Consolidated Balance Sheets As of December 31, 2001 and 2000...... 70
. Consolidated Statements of Operations For the Years Ended December
31, 2001, 2000 and 1999........................................... 71
. Consolidated Statements of Stockholders' Equity For the Years
Ended December 31, 2001, 2000 and 1999............................ 72
. Consolidated Statements of Comprehensive Income (Loss) For the
Years Ended December 31, 2001, 2000 and 1999...................... 74
. Consolidated Statements of Cash Flows For the Years Ended December
31, 2001, 2000 and 1999........................................... 75
. Notes to Consolidated Financial Statements........................ 76
67
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 a 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
procedures and tests of accounting records 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 the independent auditors.
VERISIGN, INC.
By /s/ STRATTON D. SCLAVOS
__________________________________
Stratton D. Sclavos
President and Chief Executive
Officer
By /s/ DANA L. EVAN
__________________________________
Dana L. Evan
Executive Vice President of
Finance and Administration and
Chief Financial Officer
Mountain View, California
January 22, 2002
68
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
VeriSign, Inc.:
We have audited the accompanying consolidated balance sheets of VeriSign,
Inc. and subsidiaries (the Company) as of December 31, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
July 1, 2001, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 141, "Business Combinations," and certain
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," as required
for goodwill and intangible assets resulting from business combinations
consummated after June 30, 2001.
/s/ KPMG LLP
Mountain View, California
January 22, 2002
69
VERISIGN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
-------------------------
2001 2000
------------ -----------
ASSETS
------
Current assets:
Cash and cash equivalents................................ $ 306,054 $ 460,362
Short-term investments................................... 420,643 565,913
Accounts receivable, net of allowance for doubtful
accounts of $24,290 in 2001 and $5,261 in 2000......... 314,923 128,011
Prepaid expenses and other current assets................ 48,939 32,146
------------ -----------
Total current assets.................................. 1,090,559 1,186,432
Property and equipment, net................................. 532,546 105,602
Goodwill and other intangible assets, net................... 5,691,169 17,656,641
Long-term investments....................................... 201,781 209,145
Other assets, net........................................... 21,453 37,402
------------ -----------
$ 7,537,508 $19,195,222
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued liabilities................. $ 313,447 $ 193,952
Accrued merger costs..................................... 49,069 18,814
Deferred revenue......................................... 471,329 452,713
------------ -----------
Total current liabilities............................. 833,845 665,479
------------ -----------
Long-term deferred revenue.................................. 150,727 55,575
Deferred taxes.............................................. 26,553 --
Other long-term liabilities................................. 20,309 3,560
------------ -----------
Total long-term liabilities........................... 197,589 59,135
------------ -----------
Commetments 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:
234,358,114, excluding 1,690,000 shares held in
treasury, at December 31, 2001; 198,639,497, excluding
40,000 shares held in treasury, at December 31, 2000... 234 199
Additional paid-in capital.................................. 23,051,546 21,670,647
Notes receivable from stockholders.......................... (252) (245)
Unearned compensation....................................... (27,042) (36,365)
Accumulated deficit......................................... (16,518,878) (3,162,926)
Accumulated other comprehensive income (loss)............... 466 (702)
------------ -----------
Total stockholders' equity............................ 6,506,074 18,470,608
------------ -----------
$ 7,537,508 $19,195,222
============ ===========
See accompanying notes to consolidated financial statements.
70
VERISIGN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
-----------------------------------
2001 2000 1999
------------ ----------- --------
Revenues.......................................... $ 983,564 $ 474,766 $ 84,776
------------ ----------- --------
Costs and expenses:
Cost of revenues............................... 343,721 163,049 31,898
Sales and marketing............................ 259,585 167,148 34,145
Research and development....................... 78,134 41,256 13,303
General and administrative..................... 143,297 60,672 8,740
Write-off of acquired in-process research and
development.................................. -- 54,000 --
Amortization and write-down of goodwill and
other intangible assets...................... 13,569,653 3,188,950 --
------------ ----------- --------
Total costs and expenses................... 14,394,390 3,675,075 88,086
------------ ----------- --------
Operating loss.................................... (13,410,826) (3,200,309) (3,310)
Other income:
Interest and investment income (loss).......... (20,681) 87,647 7,365
Other expense, net............................. (1,788) (1,478) (936)
------------ ----------- --------
Total other income (expense)............... (22,469) 86,169 6,429
------------ ----------- --------
Income (loss) before income taxes and minority
interest........................................ (13,433,295) (3,114,140) 3,119
Income tax benefit................................ 77,922 -- --
------------ ----------- --------
Income (loss) before minority interest............ (13,355,373) (3,114,140) 3,119
Minority interest in net (income) loss of
subsidiary...................................... (579) (1,334) 836
------------ ----------- --------
Net income (loss)................................. $(13,355,952) $(3,115,474) $ 3,955
============ =========== ========
Net income (loss) per share:
Basic.......................................... $ (65.64) $ (19.57) $ .04
============ =========== ========
Diluted........................................ $ (65.64) $ (19.57) $ .03
============ =========== ========
Shares used in per share computation:
Basic.......................................... 203,478 159,169 100,531
============ =========== ========
Diluted........................................ 203,478 159,169 114,610
============ =========== ========
See accompanying notes to consolidated financial statements.
71
VERISIGN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Year Ended December 31,
--------------------------------
2001 2000 1999
----------- ---------- --------
Common stock:
Balance, beginning of year:
198,639,497 shares at January 1, 2001
103,482,841 shares at January 1, 2000
92,346,768 shares at January 1, 1999..................... $ 199 $ 103 $ 92
Issuance of common stock through public offerings:
6,390,000 shares in 1999................................. -- -- 6
Issuance of common stock for business combinations:
31,513,530 shares in 2001
88,948,676 shares in 2000................................ 31 89 --
Issuance of common stock under employee stock purchase
plan:
201,953 shares in 2001
550,724 shares in 2000
547,896 shares in 1999................................... -- 1 1
Exercise of common stock options:
5,653,134 shares in 2001
5,657,256 shares in 2000
4,198,177 shares in 1999................................. 6 6 4
Repurchase of common stock:
(1,650,000) shares in 2001............................... (2) -- --
----------- ---------- --------
Balance, end of year:
234,358,114 shares at December 31, 2001
198,639,497 shares at December 31, 2000
103,482,841 shares at December 31, 1999.................. 234 199 103
----------- ---------- --------
(Continued)
See accompanying notes to consolidated financial statements.
72
VERISIGN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued)
(In thousands, except share data)
Year Ended December 31,
-----------------------------------
2001 2000 1999
------------ ----------- --------
Additional paid-in capital:
Balance, beginning of year...................... $ 21,670,647 $ 258,239 $ 92,728
Issuance of common stock through public
offerings, net of offering expenses of $7,239. -- -- 121,354
Issuance of common stock and common stock
options for business combinations............. 1,370,208 21,273,280 --
Issuance of common stock under employee stock
purchase plan................................. 9,767 4,696 1,989
Income tax benefit from exercise of employee
stock options................................. -- 67,448 29,778
Exercise of common stock options................ 70,436 66,984 12,390
Repurchase of common stock...................... (69,512) -- --
------------ ----------- --------
Balance, end of year............................ 23,051,546 21,670,647 258,239
------------ ----------- --------
Notes receivable from stockholders:
Balance, beginning of year...................... (245) -- (409)
Loans acquired through business combinations.... -- (766) --
Interest accrued................................ (7) -- --
Payments on notes receivable.................... -- 521 409
------------ ----------- --------
Balance, end of year............................ (252) (245) --
------------ ----------- --------
Unearned compensation:
Balance, beginning of year...................... (36,365) (172) (276)
Unearned compensation resulting from business
combinations.................................. (24,296) (37,915) --
Reversal of unearned compensation upon
forfeiture of awards.......................... 25,816 -- --
Amortization of unearned compensation........... 7,803 1,722 104
------------ ----------- --------
Balance, end of year............................ (27,042) (36,365) (172)
------------ ----------- --------
Accumulated deficit:
Balance, beginning of year...................... (3,162,926) (47,452) (51,407)
Net income (loss)............................... (13,355,952) (3,115,474) 3,955
------------ ----------- --------
Balance, end of year............................ (16,518,878) (3,162,926) (47,452)
------------ ----------- --------
Accumulated other comprehensive income:
Balance, beginning of year...................... (702) 87,641 --
Translation adjustments......................... (3,597) 525 --
Change in unrealized gain on investments, net
of tax........................................ 4,765 (88,868) 87,641
------------ ----------- --------
Balance, end of year............................... 466 (702) 87,641
------------ ----------- --------
Total stockholders' equity......................... $ 6,506,074 $18,470,608 $298,359
============ =========== ========
See accompanying notes to consolidated financial statements.
73
VERISIGN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Year Ended December 31,
----------------------------------
2001 2000 1999
------------ ----------- -------
Net income (loss)................................. $(13,355,952) $(3,115,474) $ 3,955
Other comprehensive income:
Translation adjustments........................ (3,597) 525 --
Change in unrealized gain on investments, net
of tax....................................... 4,765 (88,868) 87,641
------------ ----------- -------
Comprehensive income (loss)....................... $(13,354,784) $(3,203,817) $91,596
============ =========== =======
See accompanying notes to consolidated financial statements.
74
VERISIGN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
------------------------------------
2001 2000 1999
------------ ----------- ---------
Cash flows from operating activities:
Net income (loss).................................. $(13,355,952) $(3,115,474) $ 3,955
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization of property and
equipment....................................... 58,862 27,855 5,404
Amortization and write-down of goodwill and
other intangible assets......................... 13,569,653 3,188,950 --
Write-off of acquired in-process research and
development..................................... -- 54,000 --
Provision for doubtful accounts.................. 26,910 5,797 859
Reciprocal transactions for purchases of
property and equipment.......................... (5,500) -- --
Net loss (gain) on sale and write-down of
marketable securities........................... 87,022 (34,996) --
Minority interest in net income (loss) of
subsidiary...................................... 579 1,334 (836)
Deferred income taxes............................ (77,922) -- --
Amortization of unearned compensation............ 7,803 1,722 104
Loss on disposal of property and equipment....... 6,180 520 381
Changes in operating assets and liabilities:
Accounts receivable............................. (142,824) (87,965) (13,817)
Prepaid expenses and other current assets....... (4,674) 29,359 (1,461)
Accounts payable and accrued liabilities........ 10,890 71,803 1,395
Deferred revenue................................ 46,511 49,092 18,681
------------ ----------- ---------
Net cash provided by operating activities...... 227,538 191,997 14,665
------------ ----------- ---------
Cash flows from investing activities:
Purchases of investments........................... (1,284,047) (1,205,170) (159,134)
Proceeds from maturities and sales of investments.. 1,383,029 640,803 65,099
Purchases of property and equipment................ (380,269) (58,778) (6,019)
Net cash (paid) acquired in purchase transactions.. (52,640) 835,758 --
Transaction costs.................................. (24,127) (62,594) --
Other assets....................................... (31,032) (26,015) (3,168)
------------ ----------- ---------
Net cash provided by (used in) investing
activities................................... (389,086) 124,004 (103,222)
------------ ----------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock......... 80,209 71,687 135,744
Repurchase of common stock......................... (69,514) -- --
Collections on notes receivable from stockholders.. -- 521 409
Investment in VeriSign Japan KK.................... 142 1,246 --
------------ ----------- ---------
Net cash provided by financing activities...... 10,837 73,454 136,153
------------ ----------- ---------
Effect of exchange rate changes..................... (3,597) 525 --
------------ ----------- ---------
Net (decrease) increase in cash and cash
equivalents........................................ (154,308) 389,980 47,596
Cash and cash equivalents at beginning of year...... 460,362 70,382 22,786
------------ ----------- ---------
Cash and cash equivalents at end of year............ $ 306,054 $ 460,362 $ 70,382
============ =========== =========
Supplemental cash flow disclosures:
Noncash investing and financing activities:
Issuance of common stock for business
combinations.................................... $ 1,370,239 $21,273,369 $ --
============ =========== =========
Income tax benefit from exercise of stock
options......................................... $ -- $ 67,448 $ 29,778
============ =========== =========
Unrealized gain (loss) on investments, net of
tax............................................. $ 4,765 $ (88,868) $ 87,641
============ =========== =========
Cash paid for income taxes....................... $ 4,169 $ 1,267 $ 698
============ =========== =========
See accompanying notes to consolidated financial statements.
75
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
Note 1. Description of Business and Summary of Significant Accounting Policies
Business
VeriSign, Inc., a Delaware corporation, is a leading provider of digital
trust services that enable Web site owners, enterprises, communications service
providers, electronic commerce service providers and individuals to engage in
secure digital commerce and communications. VeriSign's digital trust services
include three core offerings: managed security and network services, registry
and telecommunications services, and Web presence and trust services. These
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 and 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, 2001, VeriSign owned approximately 67.7% 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.
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.
Cash, Cash Equivalents and 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 and various deposit
accounts.
VeriSign's investments in marketable securities are classified as
"available-for-sale" and are carried at fair value based on quoted market
prices. These investments consist primarily of U.S. government and agency
securities, corporate bonds and notes, municipal bonds, asset-backed securities
and medium-term notes. VeriSign has the intent to maintain a liquid portfolio
and has the ability to redeem its investments at their carrying amounts.
Therefore, all marketable investments at December 31, 2001 have been classified
as short-term investments. Previously, investments with original maturities
greater than twelve months at the time of purchase were classified as long-term
investments because VeriSign's intent was to hold these investments for more
than one year. VeriSign's investments in debt and equity securities of
non-public
76
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
companies are classified as long-term investments. Realized gains and losses
upon sale or maturity of investments are determined using the specific
identification method.
VeriSign invests in debt and equity securities of technology companies for
business and strategic purposes. Investments in public companies are classified
as "available-for-sale" and are carried at fair value based on quoted market
prices. VeriSign reviews its marketable equity holdings in publicly-traded
companies on a regular basis to determine if any security has experienced an
other-than-temporary decline in fair value. VeriSign considers the investee
company's cash position, earnings and revenue outlook, stock price performance
over the past six months, liquidity and management ownership, among other
factors, in its review. If it is determined that an other-than-temporary
decline exists in a marketable equity security, VeriSign writes down the
investment to its market value and records the related write-down as an
investment loss in its consolidated statements of operations. 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 based on information
requested from these privately held companies. Generally, this information may
be more limited, may not be as timely and may be less accurate than information
available from publicly traded companies. Assessing each investment's carrying
value requires significant judgment by management. If it is determined that an
other-than-temporary decline exists in a non-public equity security, VeriSign
writes down the investment to its fair value and records the related write-down
as an investment loss in its consolidated statements of operations. Generally,
if cash balances are insufficient to sustain the investee's operations for a
six-month period, we consider the decline in fair value to be other than
temporary. During 2001, VeriSign determined that the decline in value of
certain of its public and non-public equity investments was other than
temporary and recorded a write-down of these investments totaling $89.1 million.
From time to time, VeriSign may recognize revenues from companies in which
it also has made an investment. In addition to its normal revenue recognition
policies, VeriSign also considers the amount of other third-party investments
in the company, its earnings and revenue outlook, and its operational
performance in determining the propriety and amount of revenues to recognize.
If the investment is made in the same quarter that revenues are recognized,
VeriSign looks to the investments of other third parties made at that time to
establish the fair value of VeriSign's investment in the company as well as to
support the amount of revenues recognized. VeriSign typically makes its
investments with others where its investment is less than 50% of the total
financing round. VeriSign's policy is not to recognize revenue in excess of
other investors' financing of the company.
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, 40 years for buildings and three to five years for
computer equipment, purchased software, office equipment, and furniture and
fixtures. Leasehold improvements are amortized using the straight-line method
over the lesser of the estimated useful lives of the assets or remaining lease
terms.
77
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
Capitalized Software
Costs incurred in connection with the development of software products are
accounted for in accordance with Statement of Financial Accounting Standards
("SFAS") 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, VeriSign's software has been
available for general release concurrent with the establishment of
technological feasibility, and accordingly no such costs have been capitalized.
Software included in property and equipment includes amounts paid for
purchased software and implementation services for software used internally
that has been capitalized in accordance with the American Institute of
Certified Public Accountants Statement of Position ("SOP") No. 98-1. In 2001,
VeriSign capitalized $8.0 million of implementation and consulting services
from third parties for software that is used internally. No costs related to
internally developed software have been capitalized.
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.
Revenue Recognition
VeriSign derives revenues from three primary categories: Web presence and
trust services, which include domain name registration services, Web trust
services and payment services; managed security and network services, which
include enterprise and affiliate PKI services and enterprise consulting
services; and registry and telecommunications services, which include registry
services, connectivity, intelligent network, wireless and clearinghouse
services. The revenue recognition policy for each of these areas is as follows:
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 and up to 10 years.
Domain name registration renewal fees are estimated and recorded based on
recent renewal and collection rates. Customers are notified of the expiration
of their registration in advance, and VeriSign
78
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
records the receivables for estimated renewal fees in the month preceding the
anniversary date of their registration when it has a right to bill under the
terms of domain name registration agreements. The variance between the actual
collections and the rate used to estimate the renewal fees is reflected in the
setting of prospective renewal rates. Fees for renewals and advance extensions
to the existing term are deferred until the new incremental period commences.
These fees are then recognized ratably over the new registration term, ranging
from one to ten years.
Revenues from the licensing of digital certificate technology and business
process technology are derived from arrangements involving multiple elements
including post-contract customer support, training and other services. These
licenses, which do not provide for right of return, are primarily perpetual
licenses for which revenues are recognized up front once all criteria for
revenue recognition have been met.
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 to 36 months.
Maintenance is bundled with OnSite licenses over the license term.
VeriSign recognizes revenues from issuances of digital certificates and
business process licensing to VeriSign affiliates in accordance with SOP 97-2,
"Software Revenue Recognition," as amended by SOP 98-9, and generally
recognizes revenues when all of the following criteria are met as set forth in
paragraph 8 of SOP 97-2: (1) persuasive evidence of an arrangement exists, (2)
delivery has occurred, (3) the fee is fixed or determinable and (4)
collectibility is probable. VeriSign defines each of these four criteria as
follows:
Persuasive evidence of an arrangement exists. It is VeriSign's customary
practice to have a written contract, which is signed by both the customer and
VeriSign, or a purchase order from those customers who have previously
negotiated a standard license arrangement with VeriSign.
Delivery has occurred. VeriSign's software may be either physically or
electronically delivered to the customer. Electronic delivery is deemed to have
occurred upon download by the customer from an FTP server. If an arrangement
includes undelivered products or services that are essential to the
functionality of the delivered product, delivery is not considered to have
occurred until these products or services are delivered.
The fee is fixed or determinable. VeriSign's policy is to not provide
customers the right to a refund of any portion of their license fees paid.
VeriSign may agree to extended payment terms with a foreign customer based on
local customs. Generally, at least 80% of the arrangement fees are due within
one year or less. Arrangements with payment terms extending beyond these
customary payment terms are considered not to be fixed or determinable, and
revenues from such arrangements are recognized as payments become due and
payable.
Collectibility is probable. Collectibility is assessed on a
customer-by-customer basis. VeriSign typically sells to customers for whom
there is a history of successful collection. New customers are subjected to a
credit review process that evaluates the customers' financial position and
ultimately their ability to pay. If it is determined from the outset of an
arrangement that collectibility is not probable based upon VeriSign's credit
review process, revenues are recognized as cash is collected.
79
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
VeriSign allocates revenues on software arrangements involving multiple
elements to each element based on the relative fair values of each element.
VeriSign's determination of fair value of each element in multiple element
arrangements is based on vendor-specific objective evidence ("VSOE"). VeriSign
limits its assessment of VSOE for each element to the price charged when the
same element is sold separately. VeriSign has analyzed all of the elements
included in its multiple-element arrangements and determined that it has
sufficient VSOE to allocate revenues to maintenance and support service,
professional services and training components of its perpetual license
arrangements. VeriSign sells its professional services and training separately,
and has established VSOE on this basis. VSOE for maintenance and support is
determined based upon the customer's annual renewal rates for these elements.
Accordingly, assuming all other revenue recognition criteria are met, revenues
from perpetual licenses are recognized upon delivery using the residual method
in accordance with SOP 98-9. VeriSign recognizes revenues from licenses in
which maintenance is bundled with the software license, such as for digital
certificates, digital certificate provisioning and OnSite managed services
ratably over the license term of one to three years.
VeriSign's consulting services generally are not essential to the
functionality of the software. VeriSign's software products are fully
functional upon delivery and implementation and do not require any significant
modification or alteration. Customers purchase these consulting services to
facilitate the adoption of VeriSign's technology and dedicate personnel to
participate in the services being performed, but they may also decide to use
their own resources or appoint other consulting service organizations to
provide these services. Software products are billed separately and
independently from consulting services, which are generally billed on a
time-and-materials or milestone-achieved basis. VeriSign generally recognizes
revenues from consulting services as the services are performed.
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
third-party product sales are recognized when title to the products sold passes
to the customer. VeriSign's shipping terms generally dictate that the passage
of title occurs upon shipment of the products to the customer.
Revenues from payment services primarily consist of a set-up fee and a
monthly service fee for the transaction processing services. In accordance with
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.
Revenues from network services are comprised of network connectivity
revenues and intelligent network services revenues. Network connectivity
revenues are derived from establishing and maintaining connection to VeriSign's
SS7 network and trunk signaling services. Revenues from network connectivity
consist primarily of monthly recurring fees, and trunk signaling service
revenues are charged monthly based on the number of switches to which a
customer signals. The initial connection fee and related costs are deferred and
recognized over the term of the arrangement. Intelligent network services,
which include calling card validation, local number portability, wireless
services, toll-free database access and caller
80
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
identification are derived primarily from database administration and database
query services and are charged on a per-use or per-query basis. Prepaid
wireless account management services and unregistered wireless roaming services
are based on the revenue retained by VeriSign and recognized in the period in
which such calls are processed by VeriSign on a per-minute or per-call basis.
Clearinghouse services revenues are derived primarily from serving as a
distribution and collection point for billing information and payment
collection for services provided by one carrier to customers billed by another.
Clearinghouse revenues are earned based on the number of messages processed.
On occasion, VeriSign has purchased goods or services for its operations
from organizations such as IBM, Oracle, Phoenix Technologies and Infospace at
or about the same time that it licensed its software to these organizations.
These transactions are recorded at terms VeriSign considers to be fair value.
For these reciprocal arrangements, VeriSign considers Accounting Principles
Board ("ABP") Opinion No. 29, "Accounting for Nonmonetary Transactions," and
Emerging Issues Task Force ("EITF") Issue No. 01-02, "Interpretation of APB
Opinion No. 29," to determine whether the arrangement is a monetary or
nonmonetary transaction. Transactions involving the exchange of boot
representing 25% or greater of the fair value of the reciprocal arrangement are
considered monetary transactions within the context of APB Opinion No. 29 and
EITF Issue No. 01-02. Monetary transactions and nonmonetary transactions that
represent the culmination of an earnings process are recorded at the fair value
of the products delivered or products or services received, whichever is more
readily determinable, providing the fair values are determinable within
reasonable limits. In determining the fair values, VeriSign considers the
recent history of cash sales of the same products or services in similar sized
transactions. Revenues from such transactions may be recognized over a period
of time as the products or services are received. For nonmonetary reciprocal
arrangements that do not represent the culmination of the earnings process, the
exchange is recorded based on the carrying value of the products delivered,
which is generally zero.
Revenues recognized under reciprocal arrangements were approximately $37.5
million in 2001, of which $27.0 million involved nonmonetary transactions, as
defined above. VeriSign did not recognize any revenues under reciprocal
arrangements in 2000 and 1999.
Advertising Expense
Advertising costs are expensed as incurred and are included in sales and
marketing expense in the accompanying consolidated statements of operations.
Advertising expense was $102,429,000 in 2001, $90,478,000 in 2000 and
$3,037,000 in 1999.
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
81
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
enactment date. VeriSign records a valuation allowance to reduce deferred tax
assets to an amount whose realization is more likely than not.
Stock Compensation Plans and Unearned Compensation
VeriSign accounts for its stock compensation plans using the intrinsic value
method of APB Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." In accordance with FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB 25," VeriSign allocates to unearned compensation a
portion of the intrinsic value of unvested stock options, if any, assumed in
purchase business combinations completed after July 1, 2000, the date of
adoption of FIN 44. These amounts are amortized to expense using the
straight-line method over the remaining vesting periods of the respective
options.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) includes unrealized gains and losses on
marketable securities classified as available-for-sale and foreign currency
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 investments in marketable securities 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. In addition, the portfolio of investments in marketable
securities conforms to VeriSign's policy regarding concentration of
investments, maximum maturity and quality of investment. Concentration of
credit risk with respect to accounts receivable is limited by the diversity of
the customer base and geographic dispersion. 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 $26,910,000 in 2001, $5,797,000 in 2000 and
$859,000 in 1999. Uncollectible amounts written off totaled $7,881,000 in 2001,
$1,644,000 in 2000 and $268,000 in 1999.
Impairment of Long-Lived Assets
VeriSign's long-lived assets consist primarily of goodwill and other
intangible assets and property and equipment. VeriSign reviews long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of such 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, difficulties or delays in integrating the
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 estimated future undiscounted net cash flows the assets are
expected to generate. Those cash flows include an
82
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
estimated terminal value based on a hypothetical sale of an acquisition at the
end of its goodwill amortization period. 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 value.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets."
SFAS No. 141 requires that all business combinations be accounted for under
the purchase method for business combinations initiated after June 30, 2001.
Use of the pooling-of-interests method is no longer permitted. VeriSign adopted
the provisions of SFAS No. 141 commencing July 1, 2001. VeriSign has accounted
for all of its business combinations in 2001 and 2000 as purchases and the
adoption of SFAS No. 141 is not expected to have a significant impact on its
financial position or results of operations.
SFAS No. 142 requires that goodwill resulting from a business combination
will no longer be amortized to earnings, but instead be reviewed for
impairment. VeriSign is required to adopt SFAS No. 142 as of January 1, 2002.
For goodwill resulting from business combinations prior to July 1, 2001,
amortization of goodwill continued through December 31, 2001, but ceased
commencing January 1, 2002. For business combinations occurring on or after
July 1, 2001, the associated goodwill will not be amortized. Upon adoption of
SFAS No. 142, VeriSign is required to perform a transitional impairment test
for all recorded goodwill within six months and, if necessary, determine the
amount of an impairment loss by December 31, 2002. The adoption of SFAS No. 142
will reduce the amount of amortization of goodwill and intangible assets from
approximately $460 million per quarter to approximately $84 million per
quarter, including the impact of all acquisitions through December 31, 2001,
excluding the impact of H.O. Systems and assuming no other acquisitions or
impairment charges. In addition, approximately $10.9 million of intangible
assets previously allocated to workforce in place will be subsumed into
goodwill as of January 1, 2002. Management is currently evaluating the effect,
if any, of the required impairment testing on VeriSign's recorded goodwill,
which had a net book value of $4.9 billion at December 31, 2001.
In August 2001 the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" and in October issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 143 requires that the
fair value of an asset retirement obligation be recorded as a liability in the
period in which the obligation is incurred. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets
and supercedes SFAS No. 121 and the accounting and reporting provisions of APB
Opinion No. 30 as it relates to the disposal of a segment of a business.
SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 and
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001.
VeriSign has adopted SFAS No. 144 effective January 1, 2002 and SFAS No. 143
will be adopted effective January 1, 2003. The effect of adopting these
Statements is not expected to have a material effect on VeriSign's consolidated
financial position or results of operations.
83
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
Note 2. Business Combinations
Acquisitions in 2001
Illuminet Holdings, Inc.
On December 12, 2001, VeriSign completed its acquisition of Illuminet
Holdings, Inc. ("Illuminet"), a publicly traded company that provides
intelligent network and signaling services to telecommunications carriers. We
issued approximately 30.6 million shares of our common stock for all of the
outstanding stock of Illuminet and we also assumed all of Illuminet's
outstanding stock options, all of which were vested. The acquisition has been
accounted for as a purchase and, accordingly, the total purchase price of
approximately $1.4 billion has been preliminarily allocated to the tangible and
intangible assets acquired and the liabilities assumed based on their
respective fair values on the acquisition date. Illuminet's results of
operations have been included in the consolidated financial statements from its
date of acquisition. As part of the purchase price, VeriSign recorded a
provision for merger-related costs of $36.9 million. As a result of the
acquisition of Illuminet, VeriSign recorded goodwill of approximately $1.0
billion and other intangible assets of approximately $281 million. The
intangible assets will be amortized over a four year period. In accordance with
the transitional provisions of SFAS No. 142, goodwill related to this
acquisition will not be amortized. Pro forma results of operations reflecting
the acquisition of Iluminet have not been presented because Iluminet's results
of operations are not material to VeriSign's results of operations.
Other Acquisitions
During 2001, VeriSign completed acquisitions of eleven privately held
companies or acquired certain assets of privately held companies, which were
not significant, either individually or in the aggregate. VeriSign issued
approximately 939,000 shares of common stock and paid approximately $151
million in cash in exchange for all of the outstanding stock of these
companies. VeriSign also assumed certain of the companies' outstanding vested
and unvested stock options. Each of these transactions has been accounted for
as a purchase and, accordingly, the results of the acquired companies'
operations are included in the consolidated financial statements from their
respective dates of acquisition. As part of the purchase price, VeriSign
recorded a provision for merger-related costs of $17.5 million in connection
with these transactions. As a result of these acquisitions, VeriSign recorded
goodwill of approximately $252 million and unearned compensation of
approximately $19 million. The unearned compensation will be amortized over the
remaining vesting period for stock options assumed. In accordance with the
transitional provisions of SFAS No. 142, goodwill related to acquisitions that
were completed after June 30, 2001 will not be amortized and goodwill related
to acquisitions that were completed prior to July 1, 2001 will be amortized
based on a three-year life until December 31, 2001 at which time amortization
will cease. Pro forma results of operations reflecting these acquisitions have
not been presented because the results of operations of the acquired companies,
either individually or collectively, are not material to VeriSign's results of
operations.
84
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
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
Amortization
Illuminet Other Period
---------- -------- -------------
(Dollars in thousands) (Years)
Net tangible assets (liabilities)................ $ 187,024 $(18,343) --
Customer relationships........................... 242,380 -- 4.0
Contracts........................................ 25,690 -- 4.0
Technology in place.............................. 11,020 -- 4.0
Trade name....................................... 1,650 -- 4.0
Goodwill......................................... 1,026,735 252,121 *
Unearned compensation attributable to unvested
stock options assumed.......................... -- 18,905 --
Deferred income tax liabilities attributable to
identifiable intangible assets................. (112,296) (14,597) --
---------- --------
Net assets acquired.............................. $1,382,203 $238,086
========== ========
- --------
* Goodwill related to acquisitions that were completed prior to July 1, 2001
will be amortized based on a three-year life until December 31, 2001 at which
time amortization will cease. Goodwill related to acquisitions that were
completed after June 30, 2001 is not subject to amortization.
Acquisitions in 2000
THAWTE Consulting (Pty) Ltd.
On February 1, 2000, VeriSign completed its acquisition of THAWTE Consulting
(Pty) Ltd. ("THAWTE"), a privately held South African company, that provides
digital certificates to Web site owners and software developers. VeriSign
issued approximately 4.4 million shares of its common stock in exchange for all
of the outstanding stock of THAWTE. The acquisition was accounted for as a
purchase and, accordingly, the total purchase price of approximately $652
million was allocated to the tangible and intangible assets acquired and the
liabilities assumed based on their respective fair values on the acquisition
date. THAWTE's results of operations have been included in the consolidated
financial statements from its date of acquisition. Goodwill and other
intangible assets are being amortized on a straight-line basis over two to
three years. Effective December 31, 2001, amortization of goodwill will cease.
Signio, Inc.
On February 29, 2000, VeriSign completed its acquisition of Signio, Inc.
("Signio"), a privately held company that provides payment services that
connect online merchants, business-to-business exchanges, payment processors
and financial institutions on the Internet. VeriSign issued approximately 5.6
million
85
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
shares of its common stock in exchange for all the outstanding stock of Signio
and also assumed all of Signio's outstanding stock options. The acquisition was
accounted for as a purchase and, accordingly, the total purchase price of
approximately $876 million was allocated to the tangible and intangible assets
acquired and the liabilities assumed based on their respective fair values on
the acquisition date. Signio's results of operations have been included in the
consolidated financial statements from its date of acquisition. Goodwill and
other intangible assets are being amortized on a straight-line basis over three
years. Effective December 31, 2001, amortization of goodwill will cease.
Network Solutions, Inc.
On June 8, 2000, VeriSign completed its acquisition of Network Solutions,
Inc. ("Network Solutions"), a publicly traded company that provides Internet
domain name registration and global registry services. The total consideration
of approximately $19.6 billion was based on the fair value of VeriSign's common
stock issued, stock options assumed and merger related costs. At the closing,
VeriSign issued approximately 78.3 million shares of its common stock valued at
approximately $18.0 billion, based on an exchange ratio of 1.075 shares of
VeriSign's common stock for each outstanding share of Network Solutions' common
stock. VeriSign assumed outstanding options to purchase Network Solutions'
common stock, which were converted into options to acquire approximately 9.1
million shares of VeriSign's common stock, with a fair value of approximately
$1.6 billion, based on the same exchange ratio, subject to terms and
conditions, including exercisability and vesting schedules, of the original
options.
As part of the purchase price, VeriSign recorded a provision for
merger-related costs of $67.3 million, related to the integration of Network
Solutions and VeriSign. The provision was 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, as well
as provisions for the write-off of duplicative information systems and prepaid
director and officer insurance premiums. Approximately $52.4 million of the
provision was utilized in the period from June 8, 2000 to December 31, 2000.
The remainder of the provision was utilized in 2001.
This transaction was accounted for as a purchase. Network Solutions' results
of operations have been included in the consolidated financial statements from
its date of acquisition. The purchase consideration of $19.6 billion has been
allocated to the estimated fair value of the assets acquired and liabilities
assumed, including in-process research and development ("IPR&D"), 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. Effective December 31, 2001, amortization
of goodwill will cease.
The portion of the Network Solutions purchase price allocated to IPR&D was
$54 million, which was expensed during the quarter ended June 30, 2000. Network
Solution's IPR&D efforts focused on significant and substantial improvements
and upgrades to its shared registration system ("SRS"). The SRS is the system
that provides a shared registration interface to the ICANN 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
86
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
high demand on the SRS, it was 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 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. The development
efforts related to upgrades and improvements in the SRS were completed during
the first quarter of 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 was 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.
Other Acquisitions
In 2000, VeriSign completed acquisitions of several other privately held
companies, which were not significant either individually or in the aggregate.
VeriSign issued approximately 661,000 shares of its common stock and
approximately $33.3 million in cash in exchange for all of the outstanding
stock of these companies. VeriSign also assumed outstanding stock options for
certain of these acquisitions. In addition, VeriSign escrowed shares of common
stock that 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 is being amortized over the
two year period of required employment. VeriSign also recorded a provision for
merger related costs of $4.2 million for employee severance, relocation and
write down of duplicative systems. 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. The acquired companies' results of operations
have been included in the consolidated financial statements from their
respective dates of acquisition. Goodwill and other intangible assets are being
amortized on a straight-line basis over two to four and a half years. Effective
December 31, 2001, amortization of goodwill will cease.
87
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
Note 3. Cash, Cash Equivalents and Short and Long-Term Investments
VeriSign's cash, cash equivalents and short and long-term investments
consist of the following:
December 31, 2001
-----------------------------------------
Carrying Unrealized Unrealized Estimated
Value Gains Losses Fair Value
-------- ---------- ---------- ----------
(In thousands)
Classified as current assets:
Cash........................................ $178,556 $ -- $ -- $178,556
Commercial paper............................ 163,243 51 (4) 163,290
Corporate bonds and notes................... 94,887 1,266 (11) 96,142
Money market funds.......................... 30,070 -- -- 30,070
U.S. government and agency securities....... 139,015 1,708 (45) 140,678
Municipal bonds............................. 38,662 96 (20) 38,738
Asset-backed securities..................... 21,631 81 (9) 21,703
Medium term notes........................... 17,092 207 -- 17,299
Foreign debt securities..................... 4,189 -- (9) 4,180
Equity securities........................... 20,759 7,517 (4,885) 23,391
Other....................................... 12,650 -- -- 12,650
-------- ------- ------- --------
720,754 10,926 (4,983) 726,697
-------- ------- ------- --------
Included in cash and cash equivalents.......... $306,054
--------
Included in short-term investments............. $420,643
========
Long-term investments:
Debt and equity securities of
non-public companies...................... 186,689 -- -- 186,689
Other....................................... 15,092 -- -- 15,092
-------- ------- ------- --------
Total long-term investments............. 201,781 -- -- 201,781
-------- ------- ------- --------
Total cash, cash equivalents
and short and long-term
investments........................ $922,535 $10,926 $(4,983) $928,478
======== ======= ======= ========
88
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
December 31, 2000
-------------------------------------------
Carrying Unrealized Unrealized Estimated
Value 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
==========
Marketable long-term investments:
Equity securities........................... 47,848 17,405 (24,795) 40,458
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
---------- ------- -------- ----------
Total marketable long-term
investments........................... 98,728 17,552 (24,825) 91,455
Debt and equity securities of
non-public companies......................... 117,690 -- -- 117,690
---------- ------- -------- ----------
Total long-term investments............. 216,418 17,552 (24,825) 209,145
---------- ------- -------- ----------
Total cash, cash equivalents
and short and long-term
investments........................ $1,243,118 $17,630 $(25,328) $1,235,420
========== ======= ======== ==========
Gross realized losses on investments were $89.1 million in 2001, consisting
of the write-down of certain public and non-public equity investments. Gross
realized gains on investments were $2.1 million in 2001 and $35.0 million in
2000. Gross realized gains and losses on investments in 1999 were not material.
89
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
Note 4. Long-Lived Assets
Property and equipment, net
December 31,
-----------------
2001 2000
-------- --------
(In thousands)
Land....................................................... $222,516 $ --
Buildings.................................................. 63,493 --
Computer equipment and purchased software.................. 286,896 121,437
Office equipment, furniture and fixtures................... 15,311 4,803
Leasehold improvements..................................... 37,565 14,147
-------- --------
625,781 140,387
Less accumulated depreciation and amortization............. 93,235 34,785
-------- --------
$532,546 $105,602
======== ========
In October 2001, VeriSign purchased the land and buildings related to its
headquarters complex in Mountain View, California for a total of $285 million
in cash. This complex includes five buildings with a combined area of
approximately 395,000 square feet.
Goodwill and other intangible assets, net
December 31,
-----------------------
2001 2000
----------- -----------
(In thousands)
ISP hosting relationships.................................. $ 11,388 $ 11,389
Customer relationships..................................... 260,597 18,217
Technology in place........................................ 49,163 38,533
Non-compete agreement...................................... 1,019 939
Trade name................................................. 74,464 74,214
Workforce in place......................................... 18,595 19,395
Contracts with ICANN and customer lists.................... 826,390 810,930
Goodwill................................................... 21,187,391 19,868,903
----------- -----------
22,429,007 20,842,520
Less accumulated amortization and write-down............... 16,737,838 3,185,879
----------- -----------
$ 5,691,169 $17,656,641
=========== ===========
During 2000, VeriSign completed several acquisitions, including the
acquisitions of THAWTE, Signio and Network Solutions. These acquisitions
resulted in the recording of goodwill and other intangible assets of
approximately $21.3 billion. Though the acquisitions have predominantly been
performing at or above expectations, market conditions and attendant multiples
used to estimate terminal values have continued to remain depressed. At June
30, 2000, the NASDAQ market index was at 3,966 points and had decreased 1,805
points, or 46%, to 2,161 points at June 30, 2001. This decline
90
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
affected the analysis used to assess the recoverability of goodwill. For
goodwill associated with THAWTE and Network Solutions, fair value was
determined based on future operating cash flows over the remaining amortization
period of the goodwill. The terminal values were estimated based on the
relationship of the value of the VeriSign stock issued at the acquisition date
to the value of VeriSign's stock over the three-month period preceding the
valuation. For Signio and the other acquisitions, fair value was determined
through the use of recent indicators of fair value such as comparable sales and
multiples derived from recent acquisition activities. As a result, management
recorded an impairment charge in the second quarter of 2001 totaling $9.9
billion. Since the most significant acquisitions were completed by issuing
shares of VeriSign's common stock, the impairment should be considered a
non-cash charge.
The impairment of goodwill and other intangible assets in the second quarter
of 2001 resulted in a write-off of the net book value as follows:
Network
THAWTE Signio Solutions Other Total
-------- -------- ---------- ------- ----------
(In thousands)
Goodwill..................... $100,451 $447,442 $9,228,263 $63,064 $9,839,220
Trade names.................. -- 2,501 49,535 -- 52,036
-------- -------- ---------- ------- ----------
$100,451 $449,943 $9,277,798 $63,064 $9,891,256
======== ======== ========== ======= ==========
Note 5. Accounts payable and accrued liabilities
Accounts payable and accrued liabilities consist of the following:
December 31,
-----------------
2001 2001
-------- --------
(In thousands)
Accounts payable........................................... $111,562 $ 39,330
Employee compensation...................................... 45,107 16,509
Professional fees.......................................... 33,272 39,228
Due to customers........................................... 17,333 --
Other...................................................... 106,173 98,885
-------- --------
$313,447 $193,952
======== ========
Note 6. Long-Term Debt
Illuminet, a wholly-owned subsidiary of VeriSign, entered into an agreement
with Bank of America effective June 1, 2000 to provide a line of credit and a
capital expenditure loan facility. The line of credit is a $10.0 million
unsecured loan that expires June 1, 2002, with a one-year extension available.
The capital expenditure loan facility is a $15 million unsecured loan with a
five-year term. The loans bear interest at the lesser of the bank's prime
lending rate or LIBOR plus 1.35% to 1.75%, depending on Illuminet's trailing
twelve-month earnings adjusted cash flow as defined by the agreement. The
interest rate was 4.75% at December 31, 2001. The loan agreements contain
certain covenants, the most restrictive of which
91
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
requires Illuminet to maintain certain financial ratios. Illuminet is in
compliance with all debt-related covenants. No amounts were outstanding under
the line of credit and $800,000 was outstanding under the capital expenditure
facility at December 31, 2001 and is included in other long-term liabilities in
the accompanying consolidated balance sheet.
Maturities of the long-term debt for the years ended December 31 are
scheduled as follows:
(In thousands)
--------------
2002....................................................... $ 80
2003....................................................... 160
2004....................................................... 320
2005....................................................... 240
----
$800
====
Note 7. Stockholders' Equity
Preferred Stock
VeriSign is authorized to issue up to 5,000,000 shares of preferred stock.
As of December 31, 2001, no shares of preferred stock had been issued.
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.
In April 2001, the Board authorized the use of up to $350 million to
repurchase shares of VeriSign's common stock on the open market, or in
negotiated or block trades. During 2001, VeriSign repurchased 1,650,000 shares
at a cost of approximately $70 million. At December 31, 2001, approximately
$280 million remained available for future purchases.
No dividends have been declared or paid on common stock since VeriSign's
inception.
Notes Receivable From Stockholders
In 2000, 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.
92
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
Note 8. Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss)
(numerator) by the weighted average number of shares of common stock
outstanding (denominator) during the period. Diluted net income (loss) per
share gives effect to stock options considered to be potential common shares,
if dilutive, computed using the treasury stock 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,
-----------------------
2001 2000 1999
------- ------- -------
(In thousands)
Shares used to compute basic net income (loss)
per share:
Weighted average shares outstanding............. 203,478 159,169 100,531
Potential common shares--dilutive stock options. -- -- 14,079
------- ------- -------
Shares used to compute diluted net income (loss)
per share........................................ 203,478 159,169 114,610
======= ======= =======
In 2001 and 2000, VeriSign excluded potential common shares subject to
outstanding stock options from the calculation of diluted net loss per share
because their effect would have been anti-dilutive. The excluded shares totaled
37,340,507 for 2001 and 28,639,917 for 2000. In 1999, VeriSign excluded from
the calculation of diluted net income per share 481,320 shares related to stock
options with an exercise price greater than $49.70, the weighted average fair
market value of the common stock for the year, because their effect would have
been antidilutive.
Note 9. Stock Compensation Plans
Stock Option Plans
As of December 31, 2001, a total of 47,712,001 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.
The 1995 Stock Option Plan and the 1997 Stock Option Plan (the "1995 and
1997 Plans") were terminated concurrent with VeriSign's initial public offering
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, 2001, no
restricted stock awards or stock bonus awards
93
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
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, 2001, 7,820,417 shares remain available
for future awards under the 1998 Plan.
The Board adopted the 2001 Stock Incentive Plan (the "2001 Plan") in January
2001. The 2001 Plan, which did not require approval by the stockholders,
authorizes the award of non-qualified stock options and restricted stock awards
to eligible employees, officers who are not subject to Section 16 reporting
requirements, contractors and consultants. As of December 31, 2001, no
restricted stock awards have been made under the 2001 Plan. Options may be
granted at an exercise price not less than the par value of VeriSign's common
stock on the date of grant. All options are granted at the discretion of the
Board and have a term not greater than 10 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, 2001, 2,276,077 shares remain available
for future awards under the 2001 Plan. On January 1 of each year beginning in
2002, the number of shares available for grant under the 2001 Plan will
automatically be increased by an amount equal to 2% of the outstanding common
shares on the immediately preceding December 31.
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 25,000 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 12,500 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, 2001, 275,000 shares remain available for future grant under the Directors
Plan.
In connection with its acquisitions in 2001 and 2000, VeriSign assumed some
of 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.
94
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
A summary of stock option activity under the Plans follows:
Year Ended December 31,
-----------------------------------------------------------------
2001 2000 1999
--------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- ---------- --------- ---------- ---------
Outstanding at beginning of
year....................... 28,639,917 $59.65 17,835,362 $ 16.77 16,516,368 $ 4.79
Assumed in business
combinations............... 3,550,832 15.16 10,204,590 50.23 -- --
Granted...................... 15,789,042 39.12 8,007,368 129.92 7,300,926 35.66
Exercised.................... (5,653,134) 12.75 (5,657,256) 11.70 (4,198,177) 3.10
Canceled..................... (4,986,150) 73.05 (1,750,147) 49.36 (1,783,755) 9.60
---------- ---------- ----------
Outstanding at end of year... 37,340,507 52.50 28,639,917 59.65 17,835,362 16.77
========== ========== ==========
Exercisable at end of year... 12,074,142 44.53 6,297,793 17.40 2,424,728 3.36
========== ========== ==========
Weighted average fair value
of options granted during
the year................... 26.42 97.01 21.86
The following table summarizes information about stock options outstanding
as of December 31, 2001:
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Shares Contractual Exercise Shares Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
- ------------------------ ----------- ----------- --------- ----------- ---------
$ .03 - $ 2.80..................... 2,249,705 3.96 years $ 1.65 2,176,399 $ 1.65
$ 3.03 - $ 9.81..................... 3,361,287 4.25 years 7.21 2,239,869 7.09
$ 10.03 - $ 18.25..................... 1,630,787 3.72 years 12.90 1,153,984 12.81
$ 20.44 - $ 29.90..................... 2,311,950 6.46 years 27.16 1,289,828 27.13
$ 30.44 - $ 39.80..................... 12,861,087 5.72 years 34.84 1,190,825 36.29
$ 40.00 - $ 49.94..................... 3,374,867 5.58 years 43.65 769,284 43.16
$ 50.11 - $ 99.51..................... 5,496,933 5.83 years 68.75 1,196,069 78.12
$ 100.73 - $149.97..................... 3,046,664 4.17 years 126.95 1,078,508 128.45
$ 150.09 - $199.88..................... 2,942,167 5.46 years 160.77 950,910 161.16
$ 218.50 - $253.00..................... 65,060 5.15 years 237.81 28,466 237.81
---------- ----------
37,340,507 5.30 years 52.50 12,074,142 44.53
========== ==========
95
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
1998 Employee Stock Purchase Plan
VeriSign has reserved 5,486,785 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
201,953 in 2001, 550,724 in 2000 and 547,896 in 1999. As of December 31, 2001,
3,956,629 shares remain available for future issuance. On January 1 of each
year, the number of shares available for grant under the Purchase Plan will
automatically be increased by an amount equal to 1% of the outstanding common
shares on the immediately preceding December 31. The weighted-average fair
value of the stock purchase rights granted under the Purchase Plan was $27.74
in 2001, $103.76 in 2000 and $15.28 in 1999.
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,
------------------------------------
2001 2000 1999
------------ ----------- --------
(In thousands, except per share data)
As reported:
Net income (loss).............................. $(13,355,952) $(3,115,474) $ 3,955
Net income (loss) per share:
Basic...................................... $ (65.64) $ (19.57) $ .04
Diluted.................................... $ (65.64) $ (19.57) $ .03
Pro forma:
Net (loss) under SFAS No. 123.................. $(13,619,611) $(3,246,422) $(24,667)
Net (loss) per share:
Basic...................................... $ (66.93) $ (20.40) $ (.25)
Diluted.................................... $ (66.93) $ (20.40) $ (.25)
96
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
The fair value of stock options and Purchase Plan options was estimated on
the date of grant using the Black-Scholes model. 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,
----------------------------------
2001 2000 1999
---------- ---------- ----------
Stock options:
Volatility.................................... 100% 115% 85%
Risk-free interest rate....................... 4.25% 6.06% 5.54%
Expected life................................. 3.5 years 3.5 years 3.5 years
Dividend yield................................ zero zero zero
Purchase Plan options:
Volatility.................................... 100% 115% 85%
Risk-free interest rate....................... 4.07% 6.20% 5.00%
Expected life................................. 1.25 years 1.05 years 1.25 years
Dividend yield................................ zero zero zero
Note 10. Income Taxes
Total income tax expense was allocated as follows:
Year Ended December 31,
-----------------------------
2001 2000 1999
--------- -------- --------
(In thousands)
Continuing operations:
Current:
Federal.................................... $ 106,135 $ -- $ --
State...................................... 20,308 -- --
Foreign.................................... 3,137 -- --
--------- -------- --------
129,580 -- --
--------- -------- --------
Deferred:
Federal.................................... (165,429) -- --
State...................................... (42,073) -- --
Foreign.................................... -- -- --
--------- -------- --------
(207,502) -- --
--------- -------- --------
Income tax benefit............................. (77,922) -- --
--------- -------- --------
Charge (benefit) to comprehensive loss
attributable to investment securities........... 3,522 (30,963) 29,670
Tax benefit from employee stock plans credited to
stockholders' equity............................ -- (67,448) (29,778)
--------- -------- --------
$ (74,400) $(98,411) $ (108)
========= ======== ========
97
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
The difference between income tax expense and the amount resulting from
applying the Federal statutory rate of 35% to income before income taxes is
attributable to the following:
Year Ended December 31,
---------------------------------
2001 2000 1999
----------- ----------- -------
(In thousands)
Income tax benefit at Federal Statutory rate..... $(4,700,241) $(1,090,416) $ 1,384
State taxes, net of Federal benefit.............. (21,765) (1,732) 1
Foreign taxes.................................... 3,137 871 1,108
Goodwill amortization and in-process research and
development.................................... 4,594,096 1,009,765 --
Current year operating losses and temporary
differences for which no tax benefit is
recognized..................................... -- 59,852 (1,726)
Research and experimentation credit.............. (5,483) (1,444) (1,101)
Other............................................ 52,334 23,104 334
----------- ----------- -------
$ (77,922) $ -- $ --
=========== =========== =======
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,
--------------------
2001 2000
--------- ---------
(In thousands)
Deferred tax assets:
Net operating loss carryforwards.............. $ 186,403 $ 148,282
Deductible goodwill........................... 170,155 67,198
Tax credit carryforwards...................... 12,325 4,332
Property and equipment........................ 10,605 6,204
Deferred revenue, accruals and reserves....... 209,072 153,557
Unrealized loss............................... -- 1,293
Other......................................... 3,247 899
--------- ---------
591,807 381,765
Valuation allowance.............................. (340,480) (68,843)
Deferred tax liabilities:
Non-deductible acquired intangibles........... (249,178) (312,922)
Unrealized gain............................... (2,149) --
--------- ---------
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
98
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
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
$271,637,000 in 2001 and $61,107,000 in 2000. Of the total valuation allowance
at December 31, 2001, $270,891,000 arises from deferred tax assets related to
stock compensation deductions. If realized, this amount will be credited to
additional paid-in capital. The remaining balance of the valuation allowance,
$69,589,000, if realized will be credited to the statement of operations.
As of December 31, 2001, VeriSign has available net operating loss
carryforwards for federal income tax purposes of approximately $492,370,000
related to stock compensation deductions. VeriSign has available net operating
loss carryforwards for state income tax purposes of approximately $313,785,000
related to stock compensation deductions. At December 31, 2001, VeriSign has no
net operating loss carryforwards for federal or state income tax purposes
related to its operations. The federal net operating loss carryforwards will
expire, if not utilized, in 2010 through 2021. The state net operating loss
carryforwards will expire, if not utilized, in 2004 through 2021.
As of December 31, 2001, VeriSign has available for carryover research and
experimentation tax credits for federal income tax purposes of approximately
$8,931,000 and for state income tax purposes of approximately $5,189,000. The
federal research and experimentation tax credits will expire, if not utilized,
in 2010 through 2021. State research and experimental tax credits carry forward
indefinitely until utilized.
Note 11. Commitments and Contingencies
Leases
Iluminet, a wholly-owned subsidiary of VeriSign, has entered into various
capital lease obligations that expire in 2002 and 2003 for network assets. The
majority of the capital lease agreements allow Illuminet to purchase the assets
at the end of the lease term for a nominal amount. The cost of property and
equipment held under capital leases at December 31, 2001 was $3,480,000 and was
included in computer equipment and purchased software. Related accumulated
depreciation at December 31, 2001 was $177,000.
99
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
VeriSign leases a portion of its facilities under operating leases that
extend through 2011. Future minimum lease payments under non-cancelable
operating leases and the present value of future minimum capital lease payments
as of December 31, 2001 are as follows:
Capital Operating
Leases Leases
------- ---------
(In thousands)
2002....................................................... $2,164 $ 27,320
2003....................................................... 409 20,804
2004....................................................... 58 18,094
2005....................................................... 6 14,499
2006....................................................... -- 10,301
Thereafter................................................. -- 23,241
------ --------
Total minimum lease payments............................ 2,637 $114,259
========
Less amount representing interest (at 8.12%)............... 150
------
Obligations under capital leases........................... $2,487
======
Obligations under capital leases are included in other long-term liabilities
in the accompanying consolidated balance sheets.
Net rental expense under operating leases was $33,167,000 in 2001,
$15,198,000 in 2000 and $3,700,000 in 1999. VeriSign has sub-leased offices to
various companies under non-cancelable operating leases. VeriSign received
payments of $3,020,000 in 2001, $1,222,000 in 2000 and $507,000 in 1999 and
will receive payments of $2,451,000 in 2002 and $822,000 in 2003.
In December 2001, VeriSign signed a master contract with IBM under which it
committed to purchase $30 million of IBM technology over the next three years.
Legal Proceedings
VeriSign is engaged in several 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 12. 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 Enterprise
and Service Provider Division and the Mass Markets Division. The segments were
determined based primarily on how the chief operating decision maker
100
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
("CODM") views and evaluates VeriSign's operations. VeriSign's Chief Executive
Officer has been identified as the CODM as defined by SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." Other
factors, including customer base, homogeneity of products, technology and
delivery channels, were also considered in determining the reportable segments.
The performance of each segment is measured based on several metrics, including
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 products and services to organizations that
want to establish and deliver Internet-based and telecommunications-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, 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."
The following table reflects the results of VeriSign's reportable segments
under VeriSign's management system. The "Other" segment consists primarily of
unallocated corporate expenses. These results are used, in part, by the CODM
and by management, in evaluating the performance of, and in allocating
resources to, each of the segments. Internal revenues and segment gross margin
include transactions between segments that are intended to reflect an arm's
length transfer at the best price available for comparable external
transactions.
Enterprise and Mass
Service Provider Markets Total
Division Division Other Segments
---------------- -------- ------- ----------
(In thousands)
Year ended December 31, 2001:
External revenues................... $428,503 $555,061 $ -- $ 983,564
Internal revenues................... 130,597 -- -- 130,597
-------- -------- ------- ----------
Total revenues.................. $559,100 $555,061 $ -- $1,114,161
======== ======== ======= ==========
Gross margin........................ $249,368 $396,587 $(6,112) $ 639,843
======== ======== ======= ==========
Year ended December 31, 2000:
External revenues................... $192,132 $282,634 $ -- $ 474,766
Internal revenues................... 63,140 -- $ -- 63,140
-------- -------- ------- ----------
Total revenues.................. $255,272 $282,634 $ -- $ 537,906
======== ======== ======= ==========
Gross margin........................ $175,478 $136,239 $ -- $ 311,717
======== ======== ======= ==========
101
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
The following table presents revenue for groups of similar services:
Year Ended
December 31,
-----------------
2001 2000
-------- --------
(In thousands)
Web presence and trust services............................ $555,061 $282,634
Managed security and network services...................... 298,000 147,984
Registry and telecommunications services................... 130,503 44,148
-------- --------
Revenues as reported.................................... $983,564 $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,
-------------------------
2001 2000
------------ -----------
(In thousands)
Revenues:
Total segments.......................................... $ 1,114,161 $ 537,906
Elimination of internal revenues........................ (130,597) (63,140)
------------ -----------
Revenues, as reported................................... $ 983,564 $ 474,766
============ ===========
Net loss:
Total segments' gross margin............................ $ 639,843 $ 311,717
Operating expenses...................................... (14,050,669) (3,512,026)
Other income (expense).................................. (22,469) 86,169
Income tax benefit...................................... 77,922 --
Minority interest in net income of subsidiary........... (579) (1,334)
------------ -----------
Net loss, as reported................................... $(13,355,952) $(3,115,474)
============ ===========
Geographic information
Year Ended December 31,
-------------------------
2001 2000 1999
-------- -------- -------
(In thousands)
Revenues:
United States................................. $854,495 $407,843 $61,997
All other countries........................... 129,069 66,923 22,779
-------- -------- -------
Total..................................... $983,564 $474,766 $84,776
======== ======== =======
102
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 2001, 2000 AND 1999
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.
Year Ended December 31,
-------------------------------
2001 2000 1999
---------- ----------- --------
(In thousands)
Long-lived assets:
United States................................. $6,244,315 $17,539,817 $155,992
All other countries........................... 202,634 468,973 2,332
---------- ----------- --------
Total..................................... $6,446,949 $18,008,790 $158,324
========== =========== ========
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 2001, 2000
or 1999.
Note 13. Related Party Transactions
VeriSign recognized revenues totaling $64.0 million in 2001, $13.2 million
in 2000 and $.9 million in 1999 from customers, including VeriSign Affiliates,
with whom it participated in a private equity round of financing.
Science Application International Corporation ("SAIC") is an approximately
5% shareholder in VeriSign. In 2001, VeriSign incurred and paid $644,000 to
SAIC for subcontractor labor and expenses for the operation of foreign offices.
In 2000, VeriSign 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 and $.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 14. Subsequent Event (unaudited)
In February 2002, VeriSign completed its acquisition of H.O. Systems, Inc.,
a provider of billing and customer care solutions to wireless carriers.
VeriSign paid approximately $350 million in cash for all of the outstanding
stock of H.O. Systems. The total purchase price will be allocated to the
tangible and intangible assets acquired and the liabilities assumed based on
their respective fair values on the acquisition date. H.O. System's results of
operations will be included in the consolidated financial statements from its
date of acquisition.
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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
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21.01 Subsidiaries of the Registrant
23.01 Consent of KPMG LLP
104