Document/Exhibit Description Pages Size
1: 10-Q Form 10-Q for Network Solutions, Inc. 30 158K
2: EX-10.25 Amend #13 to the Cooperative Agreement Dated 5/6 19 65K
3: EX-10.26 Lease Agreement Between Corporate Oaks & Network 44 210K
4: EX-27.1 Financial Data Schedule 1 6K
5: EX-27.2 Restated Financial Data Schedule 1 8K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER: 0-22967
NETWORK SOLUTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 52-1146119
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR IDENTIFICATION NO.)
ORGANIZATION)
505 HUNTMAR PARK DRIVE
HERNDON, VIRGINIA 20170
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(703)742-0400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 [ ]
As of May 10, 1999, the Registrant had 18,424,134 shares of Class A common
stock, $0.001 par value per share, issued and outstanding, and 14,850,000 shares
of Class B common stock, $0.001 par value per share, issued and outstanding.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Financial Position as of December
31, 1998 and March 31, 1999 (Unaudited)................... 3
Unaudited Condensed Statements of Operations for the three
months ended March 31, 1998 and 1999...................... 4
Unaudited Condensed Statements of Changes in Stockholders'
Equity for the three months ended March 31, 1999.......... 5
Unaudited Condensed Statements of Cash Flows for the three
months ended March 31, 1998 and 1999...................... 6
Notes to Condensed Financial Statements..................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of
Operations................................................ 9
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 26
Item 2. Changes in Securities and Use of Proceeds................... 27
Item 6. Exhibits and Reports on Form 8-K............................ 27
Signature ........................................................... 29
Index to Exhibits.................................................... 30
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NETWORK SOLUTIONS, INC.
CONDENSED STATEMENTS OF FINANCIAL POSITION
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DECEMBER 31, MARCH 31,
1998 1999
------------ -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 12,862,000 $ 26,954,000
Short-term investments.................................... 118,808,000 121,544,000
Accounts receivable, net.................................. 22,628,000 35,745,000
Prepaids and other assets................................. 4,001,000 5,889,000
Deferred tax asset........................................ 40,508,000 56,954,000
------------ ------------
Total current assets........................................ 198,807,000 247,086,000
Furniture and equipment, net................................ 16,005,000 31,224,000
Long-term investments....................................... 13,590,000 53,223,000
Deferred tax asset.......................................... 14,831,000 7,466,000
Goodwill, net............................................... 634,000 498,000
------------ ------------
Total Assets................................................ $243,867,000 $339,497,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 28,287,000 $ 29,350,000
Due to SAIC............................................... 4,766,000 4,578,000
Income taxes payable...................................... 5,409,000 29,345,000
Current portion of capital lease obligations.............. 834,000 761,000
Deferred revenue, net..................................... 93,720,000 119,912,000
------------ ------------
Total current liabilities................................... 133,016,000 183,946,000
Capital lease obligations................................... 247,000 100,000
Long-term deferred revenue, net............................. 35,474,000 48,450,000
------------ ------------
Total liabilities........................................... 168,737,000 232,496,000
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.001 par value, authorized 10,000,000
shares; none issued and outstanding in 1998 and 1999... -- --
Class A common stock, $.001 par value; authorized
100,000,000 shares; 9,140,372 and 18,390,684 issued and
outstanding in 1998 and 1999........................... 9,000 18,000
Class B common stock, $.001 par value; authorized
30,000,000 shares; 23,850,000 and 14,850,000 issued and
outstanding in 1998 and 1999........................... 24,000 15,000
Additional paid-in capital................................ 72,331,000 77,046,000
Retained earnings......................................... 2,407,000 7,205,000
Accumulated other comprehensive income.................... 359,000 22,717,000
------------ ------------
Total stockholders' equity.................................. 75,130,000 107,001,000
------------ ------------
Total Liabilities and Stockholders' Equity.................. $243,867,000 $339,497,000
============ ============
The accompanying notes are an integral part of these financial statements.
3
NETWORK SOLUTIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
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THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1999
----------- -----------
Net revenue................................................. $16,492,000 $38,132,000
Cost of revenue............................................. 7,348,000 14,541,000
----------- -----------
Gross profit................................................ 9,144,000 23,591,000
Research and development expenses........................... 725,000 2,035,000
Selling, general and administrative expenses................ 6,182,000 15,265,000
Interest income............................................. (1,327,000) (1,930,000)
Other expenses.............................................. 35,000 19,000
----------- -----------
Income before income taxes.................................. 3,529,000 8,202,000
Provision for income taxes.................................. 1,480,000 3,404,000
----------- -----------
Net income.................................................. $ 2,049,000 $ 4,798,000
=========== ===========
Earnings per common share:
Basic..................................................... $ 0.07 $ 0.14
=========== ===========
Diluted................................................... $ 0.06 $ 0.14
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
NETWORK SOLUTIONS, INC.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
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CLASS A CLASS B ACCUMULATED
COMMON STOCK COMMON STOCK ADDITIONAL OTHER
-------------------- -------------------- PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME EARNINGS INCOME
---------- ------- ---------- ------- ----------- ------------- ---------- -------------
Balance, December 31,
1998.................. 9,140,000 $9,000 23,850,000 $24,000 $72,331,000 $ 359,000 $2,407,000 $ --
Issuance of common
stock pursuant to
stock plans........... 251,000 -- -- -- 1,809,000 -- -- --
Tax benefit associated
with stock plans...... -- -- -- -- 2,906,000 -- -- --
Conversion of Class B
Common Stock.......... 9,000,000 9,000 (9,000,000) (9,000) -- -- -- --
Comprehensive income:
Net income for the
period ended March 31,
1999.................. -- -- -- -- -- -- 4,798,000 4,798,000
Other comprehensive
income, net of tax:
Unrealized gains on
securities............ -- -- -- -- -- 22,358,000 -- 22,358,000
-----------
Comprehensive income... -- -- -- -- -- -- -- $27,156,000
---------- ------- ---------- ------- ----------- ----------- ---------- ===========
Balance, March 31,
1999.................. 18,391,000 $18,000 14,850,000 $15,000 $77,046,000 $22,717,000 $7,205,000
========== ======= ========== ======= =========== =========== ==========
TOTAL
STOCKHOLDERS'
EQUITY
-------------
Balance, December 31,
1998.................. $ 75,130,000
Issuance of common
stock pursuant to
stock plans........... 1,809,000
Tax benefit associated
with stock plans...... 2,906,000
Conversion of Class B
Common Stock.......... --
Comprehensive income:
Net income for the
period ended March 31,
1999.................. 4,798,000
Other comprehensive
income, net of tax:
Unrealized gains on
securities............ 22,358,000
Comprehensive income... --
------------
Balance, March 31,
1999.................. $107,001,000
============
The accompanying notes are an integral part of these financial statements.
5
NETWORK SOLUTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 2,049,000 $ 4,798,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 717,000 1,474,000
Provision for uncollectible accounts receivable........ 2,168,000 --
Deferred income taxes.................................. (4,603,000) (25,271,000)
Tax benefit associated with stock plans................ -- 2,906,000
Change in operating assets and liabilities:
Increase in accounts receivable...................... (4,092,000) (13,117,000)
Increase in prepaids and other assets................ (126,000) (1,888,000)
Increase in accounts payable and accrued
liabilities....................................... 579,000 1,063,000
Increase in income taxes payable..................... 2,202,000 23,936,000
Increase in deferred revenue......................... 11,069,000 39,168,000
------------ ------------
Net cash provided by operating activities............ 9,963,000 33,069,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment....................... (622,000) (16,557,000)
Purchase of short-term investments, net................... (38,681,000) (1,821,000)
Purchase of long-term investments......................... (6,152,000) (2,000,000)
------------ ------------
Net cash used in investing activities................ (45,455,000) (20,378,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net transactions with SAIC................................ 1,129,000 (188,000)
Repayment of capital lease obligations.................... (205,000) (220,000)
Issuance of common stock pursuant to stock plans.......... 253,000 1,809,000
------------ ------------
Net cash provided by financing activities............ 1,177,000 1,401,000
------------ ------------
Net increase (decrease) in cash and cash equivalents........ (34,315,000) 14,092,000
Cash and cash equivalents, beginning of period.............. 41,146,000 12,862,000
------------ ------------
Cash and cash equivalents, end of period.................... $ 6,831,000 $ 26,954,000
============ ============
The accompanying notes are an integral part of these financial statements.
6
NETWORK SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS
Network Solutions currently acts as the exclusive registry and registrar of
Internet domain names within the .com, .org, .net and .edu top level domains
pursuant to the Cooperative Agreement with the Department of Commerce. Domain
names are used to identify a unique site or presence on the Internet. As
registry and registrar for these top level domains, Network Solutions registers
new domain names and is responsible for the maintenance of the master file of
domain names through daily updates to the Internet. Network Solutions also
provides Internet Technology Services, focusing on architecture, implementation
and support services to help large enterprises and Internet service providers
improve their operational effectiveness.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The interim financial statements have been prepared by Network Solutions
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). In the opinion of management, financial statements
included in this report reflect all normal recurring adjustments which Network
Solutions considers necessary for fair presentation of the results of operations
for the interim periods covered and of the financial position of Network
Solutions at the date of the interim balance sheet. Certain information and
footnote disclosures normally included in the annual financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. However, Network
Solutions believes that the disclosures are adequate for understanding the
information presented. The operating results for interim periods are not
necessarily indicative of the operating results for the entire year. These
interim financial statements should be read in conjunction with Network
Solutions' December 31, 1998 audited financial statements and notes thereto
included in Network Solutions' Form 10-K annual report for the year ended
December 31, 1998. Prior periods have been restated for comparative purposes.
NOTE 3 -- STOCK SPLIT AND SECONDARY STOCK OFFERING
STOCK SPLIT
On December 31, 1998, Network Solutions' board of directors approved a
two-for-one stock split of the shares of Class A common stock and Class B common
stock, to be effected in the form of a 100% stock dividend on shares of Class A
common stock and Class B common stock outstanding on February 26, 1999. The
stock dividend was distributed on March 23, 1999. Share and per share
information for all periods presented in the accompanying financial statements
have been adjusted to reflect the two-for-one stock split.
SECONDARY STOCK OFFERING
On February 12, 1999, Network Solutions completed a secondary stock
offering in which a total of 9,160,000 shares of Class A common stock were sold.
Concurrent with the offering, Science Applications International Corporation,
commonly known as "SAIC", converted 9,000,000 shares of Class B common stock
into 9,000,000 shares of Class A common stock sold in the offering. The
remaining 160,000 shares of Class A common stock were sold by other selling
stockholders after they exercised the applicable stock options simultaneously
with the closing of the offering. Network Solutions was not a selling
stockholder, and, therefore, did not receive any proceeds from the stock
offering other than proceeds from options exercised as part of the offering.
After the offering, SAIC owns approximately 89% of the combined voting power and
approximately 45% of the economic interest of the outstanding common stock.
By May 31, 1999, SAIC intends to convert all of the remaining Class B
common stock into an identical number of shares of Class A common stock. After
that conversion, Class A common stock will be the only
7
class of common stock outstanding and SAIC will own approximately 45% of the
voting power and economic interest of Network Solutions' outstanding common
stock.
NOTE 4 -- COMPUTATION OF EARNINGS PER SHARE
The following is a reconciliation of the numerator and denominator used in
the basic and diluted earnings per share computations:
[Download Table]
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
THREE MONTHS ENDED MARCH 31, 1998
Basic.................................. $2,049,000 31,453,000 $0.07
=====
Dilutive securities:
Outstanding options.................. -- 824,000
---------- ----------
Diluted................................ $2,049,000 32,277,000 $0.06
========== ========== =====
THREE MONTHS ENDED MARCH 31, 1999
Basic.................................. $4,798,000 33,121,000 $0.14
=====
Dilutive securities:
Outstanding options.................. -- 1,614,000
---------- ----------
Diluted................................ $4,798,000 34,735,000 $0.14
========== ========== =====
Common shares issued are weighted for the period the shares were
outstanding and incremental shares assumed issued under the treasury stock
method for diluted EPS are weighted for the period the underlying options were
outstanding.
NOTE 5 -- ACCUMULATED OTHER COMPREHENSIVE INCOME BALANCES
The changes in the components of accumulated other comprehensive income are
reported net of income taxes for the three months ended March 31, 1999 as
follows:
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ACCUMULATED
OTHER
UNREALIZED GAINS COMPREHENSIVE
ON SECURITIES INCOME
---------------- -------------
Pre-tax amount.......................... $38,547,000 $38,547,000
Income taxes............................ 16,189,000 16,189,000
----------- -----------
Net of tax amount....................... $22,358,000 $22,358,000
=========== ===========
NOTE 6 -- SUBSEQUENT EVENTS
LITIGATION
On May 14, 1999, the U.S. Court of Appeals for the District of Columbia
Circuit unanimously affirmed Federal District Court Judge Thomas F. Hogan's
decision in Thomas v. Network Solutions and the National Science Foundation,
thus affirming the validation of Network Solutions' role in providing domain
name registration services and charging fees for such services. The lawsuit,
which had been filed in October 1997, named the National Science Foundation and
Network Solutions as defendants, and alleged that the National Science
Foundation lacked authority to permit Network Solutions to charge for Internet
registration services, and to set aside 30 percent of all fees for the
preservation and enhancement of the Internet's infrastructure. The suit further
had charged that the National Science Foundation had created an illegal monopoly
in Internet registration services and that Network Solutions had illegally
precluded competition.
On May 7, 1999, in the case of Bruce Watts v. Network Solutions, Inc., U.S.
District Court Judge Hamilton of the Southern District of Indiana granted
Network Solutions' motion to dismiss allegations of
8
antitrust liability under the Sherman Act and also granted Network Solutions'
motion for summary judgment on allegations of contributory trademark
infringement under the Lanham Act. Watts had challenged Network Solutions'
first-come, first-served domain name registration policy, alleging that Network
Solutions failed to stop cybersquatting and violated the Sherman Act and Lanham
Act and the common law of unfair uncompetition.
On April 26, 1999, the Pennsylvania Attorney General dismissed Network
Solutions from a suit brought by the Pennsylvania Attorney General's Office
against a domain holder who was alleged to have used his domain name in
connection with a web site promoting white supremacy and threatening certain
state employees. Named in the suit were all of the communications companies in
any way connected with the domain name or web site.
STATUS OF COOPERATIVE AGREEMENT
On January 1, 1993, we initiated phase-in of a Cooperative Agreement with
the National Science Foundation. The three-month phase-in was followed by a
five-year operations period, commencing April 1, 1993 and ending March 31, 1998,
and a six-month flexibility period through September 1998. Effective in
September 1998, the responsibility for the Cooperative Agreement was transferred
to the Department of Commerce. In October 1998, the Cooperative Agreement was
amended to extend the flexibility period through September 30, 2000 and to
transition to a shared registration system.
In accordance with the terms of the October 1998 amendment to the
Cooperative Agreement, as amended in March 1999, we have developed a protocol
and associated software to support a Shared Registration System which will
permit multiple registrars to provide registration services within the top level
domains for which we will act as registry. Network Solutions has deployed its
proprietary Shared Registration System on schedule by establishing a test bed to
support actual registrations by five new registrars. We have entered into
license agreements with the five new registrars to provide access to the Shared
Registration System, permitting them to directly register and maintain actual
domain names.
During the current 60-day test bed period, we have agreed to charge the new
registrars an interim registry fee of $18 for each new two-year registration. To
date, none of the new test bed registrars have completed their systems
development and testing to enable them to register actual names within the
Shared Registration System.
Network Solutions continues to work with the U.S. Government in
establishing the post-test bed registry price and other issues surrounding the
registry operations in a competitive environment.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This quarterly report on Form 10-Q contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Statements
regarding the intent, belief or current expectations of Network Solutions are
intended to be forward-looking statements which may involve risk and
uncertainty. There are a number of factors that could cause Network Solutions
actual results to differ materially from those indicated by such forward-looking
statements, including, but not limited to, those discussed in "Part I -- Item 1
-- Business -- Risk Factors" and "Part II -- Item 7 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Factors
Affecting Operating Results" contained in Network Solutions' 1998 Form 10-K, as
filed with the Securities and Exchange Commission on March 30, 1999. In
addition, set forth below under the heading "Factors Affecting Operating
Results" is a further discussion of certain of those risks as they relate to the
period covered by this report, Network Solutions' near term outlook with respect
thereto, and the forward-looking statements set forth herein; however, the
absence in this quarterly report of a complete recitation of or update to all
risk factors identified in the 1998 Form 10-K should not be interpreted as
modifying or superseding any such risk factors, except to the extent set forth
below. Investors should review this quarterly report in combination with Network
Solutions' 1998 Form 10-K in order to have a more
9
complete understanding of the principal risks associated with an investment in
Network Solutions' common stock.
OVERVIEW
Network Solutions currently acts as the registry and exclusive registrar of
Internet domain names within the .com, .net, .org and .edu top level domains
pursuant to the Cooperative Agreement with the Department of Commerce. Domain
names are used to identify a unique site or presence on the Internet. As
registry and registrar for these top level domains, Network Solutions registers
new domain names, maintains the master file of domain names and updates that
master file to the Internet daily. Network Solutions also provides Internet
Technology Services, focusing on network engineering, network and systems
security and network management solutions.
Registration Services. In December 1992, Network Solutions entered into
the Cooperative Agreement with the National Science Foundation under which
Network Solutions was to provide Internet domain name registration services for
five top level domains: .com, .org, .net, .edu and .gov. These registration
services include the initial two year domain name registration and annual
re-registration, and throughout the registration term, maintenance of and
unlimited modifications to individual domain name records and updates to the
master file of domain names. The Cooperative Agreement became effective January
1, 1993. It included a three-month phase-in period, a five-year operational
period, commencing April 1, 1993 and ending March 31, 1998, and a six-month
flexibility period through September 30, 1998. Effective September 9, 1998, the
Department of Commerce took over the administration of the Cooperative Agreement
from the NSF. In October 1998, the Cooperative Agreement was amended to extend
the flexibility period until September 30, 2000 and to transition to a shared
registration system.
The original terms of the Cooperative Agreement provided for a cost
reimbursement plus fixed-fee contract. Effective September 14, 1995, the
National Science Foundation and Network Solutions amended the Cooperative
Agreement to require Network Solutions to begin charging end users a services
fee of $50 per year for each domain name in the .com, .org and .net top level
domains. Prior to April 1, 1998, registrants paid a services fee of $100 for two
years of domain name services upon each initial registration and an annual re-
registration fee of $50 per year thereafter. The National Science Foundation
paid the registration fees for domain names within the .edu and .gov top level
domains through March 31, 1997. Commencing April 1, 1997, Network Solutions
agreed with the National Science Foundation to provide domain name services
within the .edu and .gov top level domains free of charge. As of October 1,
1997, Network Solutions no longer registers or administers domain names in the
.gov top level domain.
Under the terms of the September 14, 1995 amendment to the Cooperative
Agreement, 30% of the registration fees collected by Network Solutions was
required to be set aside for the enhancement of the intellectual infrastructure
of the Internet and, as such, was not recognized as revenue by Network
Solutions. The set aside funds, plus any interest earned, were disbursed at the
direction of the National Science Foundation. As of December 31, 1998, the
Company had cumulatively disbursed all set aside funds collected and associated
interest earned for a total of $62.3 million to the National Science Foundation
at their direction.
On March 12, 1998, the NSF and Network Solutions amended the Cooperative
Agreement to eliminate the 30% set aside requirement effective April 1, 1998 and
to reduce the registration fees by a corresponding amount. Initial registrations
on and after April 1, 1998 are charged $70 for two years of registration
services and an annual renewal fee of $35 per year thereafter. This amendment
had no effect on the revenue recognized on each registration ($70 for initial
registrations and $35 for renewals), since Network Solutions previously did not
recognize revenue on the 30% set aside funds. Accordingly, while the revenue to
Network Solutions on a per registration basis did not change, the amount charged
to customers declined.
In order to provide prompt access to new domain names on the Internet,
Network Solutions generally invoices customers and permits them to pay their
registration fees after their domain names are registered. Network Solutions'
experience has been that, for the period from September 1995 through March 1999,
approximately 34% of registrations have ultimately been deactivated for
non-payment. Network Solutions
10
believes that this level of uncollectible receivables is due to, among other
factors, the large number of individuals and corporations that have registered
multiple domain names with the apparent intention of reselling such names at a
profit. Such resellers have a greater tendency than other customers to default
on their registration fees. As a consequence, Network Solutions has recorded a
comparable provision for uncollectible accounts in determining net registration
revenue.
Registration fees charged to end users for registration services, net of
any 30% set aside funds, are recognized as revenue evenly over the registration
term. Accordingly, Network Solutions recognizes $70 on a straight-line basis
over the two-year services period for each initial domain name registration,
equivalent to $35 per year. Annual re-registrations of domain name registrations
are recorded as revenue based upon $35 recognized on a straight-line basis over
the one-year services period. This subscription-based model defers revenue
recognition until Network Solutions provides the registration services,
including maintenance of and unlimited modifications to individual domain name
records, over the respective registration terms. At March 31, 1999, Network
Solutions had net deferred revenue of $168.4 million.
Internet Technology Services. Substantially all of Network Solutions'
Internet Technology Services revenue is derived from professional services which
are generally provided to clients on a time and expense basis and is recognized
as services are performed.
The majority of Network Solutions' Internet Technology Services are
provided to customers in the financial services industry. Citicorp is currently
Network Solutions' largest Internet Technology Services client, accounting for
45.2% of Network Solutions' Internet Technology Services business net revenue
and 3.9% of Network Solutions' total net revenue for the three months ended
March 31, 1999. Citicorp originally contracted with Network Solutions in August
1998 and Network Solutions currently provides network design and engineering
services as well as a variety of project specific services under the contract.
RESULTS OF OPERATIONS
Net Revenue. Net revenue increased 131% from $16.5 million for the three
months ended March 31, 1998 to $38.1 million for the three months ended March
31, 1999. This increase in net revenue was primarily attributable to the
increase in the number of domain name registrations, principally in the .com top
level domain. Net revenue from registration services increased 125% from $15.5
million for the three months ended March 31, 1998 to $34.8 million for the three
months ended March 31, 1999. Net new registrations increased 171% from 340,000
for the three months ended March 31, 1998 to 922,000 for the three months ended
March 31, 1999. This also represents a 49% increase over the 621,000 net new
registrations for the three months ended December 31, 1998. Growth in net
registrations continues to be driven by the widespread use and adoption by
businesses of the Internet and Intranets on a global basis. Cumulative net
registrations as of March 31, 1998 were 1,862,000 as compared to 4,225,000 as of
March 31, 1999, for a 127% increase. In addition, this growth in cumulative net
registrations is a 26% increase in Network Solutions' entire customer base since
December 31, 1998.
Net revenue from Internet Technology Services increased 230% from $1.0
million for the three months ended March 31, 1998 to $3.3 million for the three
months ended March 31, 1999. Citicorp accounted for $1.5 million or 3.9% of
Network Solutions' total net revenue for the three months ended March 31, 1999.
Cost of Revenue. Cost of revenue consists primarily of salaries and
employee benefits, fees paid to subcontractors for work performed in connection
with revenue producing projects, depreciation and equipment costs, lease costs
of the operations infrastructure and the associated operating overhead. Cost of
revenue increased 98% from $7.3 million for the three months ended March 31,
1998 to $14.5 million for the three months ended March 31, 1999. The increase
was primarily driven by the growth of Network Solutions' registration business
which experienced additional outsourcing costs of $3.5 million in support of
invoicing, collection and processing activities and additional direct labor
charges of $1.3 million related to systems engineering and operations. Further,
direct labor and subcontractor costs attributable to Internet Technology
Services increased $1.4 million.
11
As a percentage of net revenue, cost of revenue decreased from 44.6% for
the three months ended March 31, 1998 to 38.1% for the three months ended March
31, 1999. This decrease primarily reflects economies of scale that Network
Solutions has continued to achieve due to the growth of its subscription-based
domain name registration business. In the near term, the continued need for back
office investments is expected to partially offset future margin improvements
arising from economies of scale.
Research and Development Expenses. Research and development expenses
consist primarily of compensation expenses to support the creation, development
and enhancement of Network Solutions' products and technologies. Research and
development expenses increased 181% from $725,000 for the three months ended
March 31, 1998 to $2,035,000 for the three months ended March 31, 1999. Network
Solutions expects that the level of research and development expenses will
continue to increase in the near future in absolute dollars as Network Solutions
invests in developing new product and service offerings. As a percentage of net
revenue, research and development expenses were 4.4% for the three months ended
March 31, 1998 and 5.3% for the three months ended March 31, 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of salaries of business development,
general management, administrative and financial personnel, marketing expenses,
corporate services from SAIC, legal and other professional costs and
amortization of goodwill associated with Network Solutions' 1995 acquisition by
SAIC. Selling, general and administrative expenses increased 147% from $6.2
million for the three months ended March 31, 1998 to $15.3 million for the three
months ended March 31, 1999. The increase was attributable to a $7.3 million
increase in marketing and business development expenses including television,
Internet banner advertising and targeted direct mail campaigns, and increased
staffing expenses of $1.0 million. As a percentage of net revenue, selling,
general and administrative expenses increased from 37.5% for the three months
ended March 31, 1998 to 40.0% for the three months ended March 31, 1999. Network
Solutions expects that the level of selling, general and administrative expenses
will continue to increase significantly in the near future in terms of absolute
dollars as operations continue to expand. In particular, sales, marketing and
business development expenses will increase as Network Solutions continues to
promote the value of a .com web address and other new Internet-based value-added
services. Network Solutions also plans to continue to develop and enhance its
distribution channels, both domestically and internationally.
Interest Income. Network Solutions had net interest income of $1.3 million
for the three months ended March 31, 1998 as compared to $1.9 million for the
three months ended March 31, 1999. The increase is attributable to the
investment of the positive cash flow resulting primarily from increasing domain
name registrations.
Income Taxes. The provision for income taxes was 42% of pretax earnings,
or $1.5 million for the three months ended March 31, 1998, and 42% or $3.4
million for the three months ended March 31, 1999. The difference between the
effective rate for both periods presented and the statutory rate is principally
attributable to the relative impact that non-deductible goodwill had on pretax
operating income. Goodwill is being amortized by Network Solutions over five
years and is associated with the acquisition of Network Solutions by SAIC in
1995.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, Network Solutions' principal source of liquidity was its
cash and cash equivalents of $26.9 million and its short-term investments of
$121.5 million, which when combined represent an increase of $16.8 million from
its December 31, 1998 balances in those accounts.
At March 31, 1999, Network Solutions' cumulative net obligation to SAIC for
intercompany activity was $4.6 million, a decrease of $0.2 million for the
quarter. Intercompany activity is primarily comprised of salaries and benefits
paid by SAIC on behalf of Network Solutions. Network Solutions currently
reimburses SAIC for intercompany activity on a monthly basis. Pursuant to the
Tax Sharing Agreement dated September 26, 1997, Network Solutions now generally
remits income tax payments directly to tax authorities as it no longer is part
of SAIC's consolidated group for federal income tax purposes.
12
Cash provided by operations was $33.0 million for the three months ended
March 31, 1999. This amount is principally attributed to net income plus the
increase in deferred revenue reflecting cash collected in advance of
registration services revenue recognition which occurs ratably over the two- and
one-year registration terms. Partially offsetting this amount is an increase in
deferred tax assets resulting from accelerated revenue recognition for tax
purposes and the associated tax liabilities, generally paid on a quarterly
basis.
Investing activities totaled $20.4 million for the three months ended March
31, 1999, of which $3.8 million was net purchases of short and long-term
investments. Included in the investments purchased during the period was a $2.0
million investment in a strategic business partner which subsequently
consummated its initial public offering during the three month period ended
March 31, 1999.
Capital expenditures were $16.6 million for the quarter, primarily for
computer equipment and software. Network Solutions will continue to invest in
the back office infrastructure in advance of continued growth in domain name
registrations and as Network Solutions designs and builds the shared
registration system in accordance with the Cooperative Agreement.
Network Solutions believes that its existing cash balance, investments and
cash flows expected from future operations will be sufficient to meet Network
Solutions' capital requirements for at least the next 12 months.
FACTORS AFFECTING OPERATING RESULTS
INDUSTRY RISKS
Ongoing privatization of Internet administration could harm our registration
business
Within the U.S. Government, leadership for the continued privatization of
Internet administration is currently provided by the Department of Commerce.
After a series of draft proposals and public comment periods, on June 10, 1998,
the Department of Commerce published in the Federal Register a plan referred to
as the Statement of Policy or "White Paper," calling for the formation of a
not-for-profit corporation to assume certain responsibilities relating to the
domain name system, but not to perform actual registration of domain names
either as a registrar or registry. The Statement of Policy called for increased
competition and invited private sector Internet stakeholders to work together to
form a new private, not-for-profit corporation to oversee policy for the
Internet name and address system.
The Statement of Policy distinguished between the registry and registrar
functions of the domain name system, both of which functions are currently
performed exclusively by us in the .com, .org, .net and .edu top level domains.
The technical structure of the Internet only permits one registry for each top
level domain. A registrar acts as the interface between the registry and the
end-user domain name holders. Registrars submit to the registry certain limited
information for each of their customers that has a second level domain name in
that top level domain. A registrar can provide value-added products and services
in addition to its basic registration service. Numerous registrars will be able
to operate within each top level domain.
As part of the process initiated by the Statement of Policy, several
proposals were put forward to the Department of Commerce on the establishment
and governance of the not-for-profit corporation. The proposals differed in
several respects including, among others, their approaches to the following
issues: place and form of incorporation; method for selection of the interim and
permanent board of directors; who should be eligible to become a member and on
what questions should the members vote; what authority should be granted to the
board of directors and what authority should be reserved to the members, if any;
and whether there should be separate supporting organizations and, if so, what
authority these organizations should have. A U.S. based private not-for-profit
corporation with an international board of directors, denoted the Internet
Corporation for Assigned Names and Numbers, or "ICANN," submitted various
proposals which formed the basis of discussion at a number of public and private
meetings. As a result of these and other meetings and private negotiations, the
process initiated by the Statement of Policy has resulted in the entry by the
U.S. Government into a Memorandum of Understanding, or "MOU," with ICANN. Under
the MOU, the parties will jointly design, develop and test the mechanisms,
methods and procedures that should be in place
13
and the steps necessary to transition management responsibility for certain
domain name system functions to a private-sector not-for-profit entity. The MOU
provides that once testing is successfully completed, it is contemplated that
management of certain domain name system functions will be transitioned to the
mechanisms, methods and procedures designed and developed in this joint project.
The U.S. Government has sent us a letter directing us to treat ICANN as the
not-for-profit corporation identified in the October amendment to the
Cooperative Agreement, in the performance of ICANN's obligations under the MOU
and until such time as the MOU is terminated. We have not yet responded to that
letter.
ICANN's bylaws call for the creation of supporting organizations that will
select some ICANN board members and provide policy recommendations in particular
areas. ICANN called for submission by February 5, 1999 of applications from
groups urging "recognition" of a domain name supporting organization that would
be charged with developing recommendations for policies ICANN might apply when,
and if, it begins exercising responsibility over certain domain name system
functions. Those responsibilities could include entering into contracts with
registries for all top level domains and adding new top level domains. We
submitted comments regarding the structure and function of such a domain name
supporting organization. On March 4, 1999, the ICANN Board adopted a domain name
supporting organization formation concept statement reflecting some, but not all
of our comments. On March 15, 1999, ICANN released a staff draft of amendments
to its bylaws based on the formation concept statement to establish a domain
name supporting organization that will first meet in May 1999. On March 31,
1999, the ICANN Board adopted bylaw changes to govern establishment of the
domain name supporting organization. We have proposed to organize a global top
level domain registry constituency for the domain name supporting organization
and may join other constituencies. We believe that further organizational steps
are planned for the next ICANN meeting in late May 1999.
We cannot be sure that ICANN will take positions favorable to us in the
process of implementing the final bylaws, recognizing domain name supporting
constituencies or in its further policy development or contract formation.
The Statement of Policy calls for a phased transition of the Department of
Commerce's responsibilities for the domain name system to a not-for-profit
corporation by September 30, 2000. We face risks from this transition,
including:
- failure to achieve consensus on the many issues relating to the
functioning and governance of the not-for-profit corporation could result
in instability in domain name system administration,
- the not-for-profit corporation could fail to gain legitimacy resulting in
instability in domain name system administration,
- the U.S. Government could refuse to transfer certain responsibilities for
domain name system administration to the not-for-profit corporation due
to security, stability or other reasons resulting in fragmentation or
other instability in domain name system administration, and
- the not-for-profit corporation could adopt or promote policies,
procedures or programs that are unfavorable to our role in the
registration of domain names or that are not consistent with our current
or future plans.
Despite the significant efforts undertaken to date, it is impossible to
predict at this time whether or when the process initiated by the Statement of
Policy will result in the full transition to the not-for-profit corporation of
domain name system responsibilities as and to the extent contemplated in the
Statement of Policy and, if it does, the effect on us of such transition.
Operations under, changes to or disputes under the cooperative agreement could
harm our business
As the U.S. Government transitions certain responsibilities for domain name
system administration to the not-for-profit corporation, corresponding
obligations under the Cooperative Agreement may be terminated and, as
appropriate, covered in a contract between the not-for-profit corporation and
us. The U.S. Government sent us a letter directing us to treat ICANN as the
not-for-profit corporation identified in the amended
14
Cooperative Agreement in the performance of ICANN's obligations under the MOU
and until such time as the MOU is terminated. We have not yet responded to that
letter. We have not yet reached agreement with the U.S. Government or ICANN with
respect to the terms of the transition. We may not be able to reach agreement
and either ICANN or the U.S. Government may take positions that adversely affect
us.
We held two meetings of a technical advisory group to comment on and
participate in testing of our shared registration system and a third meeting is
scheduled for late May 1999. The group included members suggested by ICANN to
the Department of Commerce and other individuals.
In the transition to a shared registration system under the Cooperative
Agreement, we are operationally separating our registry business from our
registrar business. Additional, competing registrars will be able to market
registration services in the .com, .net and .org top level domains, with the
domain names registered through the registry that we maintain for each of those
top level domains. Accordingly, persons registering second level domain names
will be able to choose among a number of different registrars, including us. We
began this transition on schedule, with the launch of a testbed phase involving
the following five registrars accredited by ICANN: America Online, Inc., CORE or
"Internet Council of Registrars", France Telecom/ Oleane, Melbourne IT and
Register.com. As the registry, we have contracts with each of these registrars
allowing them to directly register names through our registry services division
using our proprietary Shared Registration System. Registrations of domain names
by these five testbed registrars have not as yet commenced. ICANN also
accredited 29 additional registrars to begin offering registration services
after the testbed. The proposed accreditation contract between the registrars
and ICANN would require payment of fees to ICANN and would impose special
restrictions on a registrar also acting as the registry. We filed substantial
comments with ICANN objecting to various aspects of the proposed accreditation
approach. Our registry services under the Cooperative Agreement will be subject
to a price cap. During the testbed phase, the cap was set at $18 for a two-year
registration and $9 for a one-year re-registration and our Registrar License and
Agreement under which we, as the registry, grant a license to use the Shared
Registration System, was approved for use by agreement with the Department of
Commerce under Amendment 13 to the Cooperative Agreement. Registrar services,
once competitive, may be priced in different ways by us and competing
registrars.
Termination, or a change in the terms, of the Cooperative Agreement could
harm our business. While the Cooperative Agreement by its terms expires in
September 2000, it may be terminated earlier. We are currently in discussions
with the U.S. Government regarding adequate testing and full implementation of
the Shared Registration System and a wide range of contractual issues. The
Department of Commerce's interpretation of certain provisions of the Cooperative
Agreement could differ from ours. For example, the Department of Commerce has
publicly expressed concerns about our use of the WHOIS service, the internic.net
website and our access policy to our top level domain name zone file. We have
reached agreements with the U.S. Government concerning the temporary provision
of access to the top level domain zone file, operation of the WHOIS service and
use of the internic.net website. Nevertheless, some differences of opinion or
interpretation remain to be addressed. These differences in interpretation or
opinion could lead to disputes between us and the Department of Commerce or the
not-for-profit corporation, which may or may not be resolved in our favor.
Certain aspects of implementation of the Cooperative Agreement also remain to be
fully negotiated, including the maximum price we will charge after the testbed
period for registry services in the top level domains for which we now act as
registry. If we are unsuccessful in negotiating acceptable terms of
implementation, the costs of implementation of the Cooperative Agreement, our
relationship with the not-for-profit corporation and other matters affecting our
position in a more competitive domain name system environment could be harmed.
Challenges to authority over domain name administration could harm our business
Withdrawal of or challenges to the U.S. Government's sponsorship or
authorization of certain functions that we perform could create a public
perception or result in a legal finding that we lack authority to continue in
our current role as registry or registrar within the .com, .org, .net and .edu
top level domains. The legal authority underlying the roles of the Department of
Commerce and the not-for-profit corporation with regard
15
to the domain name system also could be challenged. The impact, if any, of any
such public perception or finding is unknown, but it could be harmful to our
business.
We may not be able to compete effectively due to increased competition in the
domain name registration business
The introduction of additional competition into the domain name
registration business could be harmful to our business. This includes, in
particular, competition among registrars within a single top level domain, like
.com, and competition among registrars and registries of existing and potential
new top level domains. We already face competition in the domain name
registration business from registries for country code top level domains, third
level domain name providers such as Internet access providers and registrars and
registries of top level domains other than those top level domains which we
currently register. A number of entities have already begun to offer competing
registration services using other top level domains. Our shared registration
system is now available to the five testbed registrars in the .com, .org and
.net top level domains. More competing registrars are scheduled to offer
competing registration services in these top level domains in the near future.
Future competition in the domain name registration business as a registry
or registrar could come from many different companies, including:
- domain name registration resellers,
- country code registries,
- Internet access providers, and
- major telecommunications firms.
Many of these entities have core capabilities to deliver registry and/or
registrar services, such as help desks, billing services and network management,
along with strong name recognition and Internet industry experience. Our revenue
could be reduced due to increased competition, pricing pressures or a
modification of billing practices. For example, other entities may bundle domain
name registrations with other products or services.
We depend on future growth of the Internet and Internet infrastructure
Our future success substantially depends on the continued growth in the use
of the Internet. If the use of and interest in the Internet does not continue to
grow, our business would be harmed. Continued growth of the Internet could be
slowed by:
- inadequate infrastructure,
- lack of availability of cost-effective, high speed systems and service,
- delays in developing or adopting new standards and protocols to handle
increased levels of Internet activity, or
- government regulation.
We rely on third parties who maintain and control root zone and top level domain
zone servers
We currently administer and operate only two of the 13 root zone servers
and four top level domain 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 and top level domain zone
servers, our registration business could be harmed if these volunteer operators
fail to properly maintain such servers or abandon such servers.
Further, our registration business could be harmed if any of these
volunteer operators fail to include or provide accessibility to the data that we
maintain in the root zone servers and the top level domain zone servers that we
control.
16
We rely on Internet service providers
Our registration business could be harmed if enough Internet service
providers decided not to route Internet communications to or from domain names
registered by us or if enough Internet service providers decided to provide
routing to a set of domain name servers which did not point to our top level
domain zone servers.
System failure or interruption, security breaches or our failure to meet
increasing demands on our systems could harm our business
Any significant problem with our systems or operations could result in lost
revenue, customer dissatisfaction or lawsuits against us. A failure in the
operation of our registration system or other events could result in deletion of
one or more domain names from the Internet for a period of time. A failure in
the operation or update of the master database that we maintain could result in
deletion of one or more top level domains from the Internet and the
discontinuation of second level domain names in those top level domains for a
period of time. The inability of our registration system, including our back
office billing and collections infrastructure, and telecommunications systems to
meet the demands of the increasing number of domain name registration requests
and corresponding customer e-mails and telephone calls could result in
substantial degradation in our customer support service and our ability to
process, bill and collect registration requests in a timely manner.
Our operations depend on our ability to maintain our computer and
telecommunications equipment in effective working order and to reasonably
protect our systems against interruption. The root zone servers and top level
domain zone servers that we operate are critical hardware to our operations.
Interruptions could result from:
- fire, natural disaster, sabotage, power loss, telecommunication failure,
human error or similar events,
- computer viruses, hackers or similar disruptive problems caused by
employees, customers or other Internet users, and
- systems strain caused by the growth of our customer base and our
inability to sufficiently maintain or upgrade our systems.
We may lose revenue or incur significant costs if Year 2000 compliance issues
are not properly addressed
Our failure, or the failure of third parties on which we rely, to
adequately address Year 2000 compliance issues may cause us to lose revenue or
to incur significant costs. The primary risks that we face with regard to Year
2000 failures are those which impact our domain name registration business.
These risks include:
- significant and protracted interruption of electrical power to data and
systems in our engineering and customer service facilities,
- significant and protracted interruption of telecommunications and data
network services in any of our headquarters, engineering or customer
service facilities,
- the failure of components of our current back office and domain name
registration related systems, and
- the occurrence of a Year 2000 problem with respect to third-party
suppliers', vendors' and outsourcing service providers' products and
services.
If we fail to solve a Year 2000 compliance problem with our mission
critical business systems and processes, including the domain name servers under
our control, telecommunications systems, facilities, data-networking
infrastructure, commercial-off-the-shelf hardware or software and components
used by our employees, the result could be a failure of or interruption to
normal business operations. Furthermore, our business depends on the continued
operation of, and widespread access to, the Internet. This, in turn, depends to
a large extent on the software and systems of third parties on which our systems
rely or to which they are connected. These third parties include, among others,
Internet-related companies, including Internet web hosting companies, Internet
access providers and Internet domain name server operators.
17
We have no responsibility for, nor control over, other Internet domain name
server operators that are critical to the efficient operation of the Internet.
We do not know whether such domain name server operators have hardware, software
or firmware that is Year 2000 compliant.
COMPANY RISKS
Our search for a new chief executive officer presents risks and uncertainties
On November 16, 1998, we announced the resignation of Gabriel A. Battista
from his positions as Chief Executive Officer and director. We cannot reasonably
estimate at this time the potential impact on us of the hiring of a new Chief
Executive Officer. While we conduct a search for a new Chief Executive Officer,
Michael A. Daniels, our Chairman of the Board, is acting as the Chief Executive
Officer and assuming the executive responsibilities previously performed by Mr.
Battista. In addition, Robert J. Korzeniewski, our Chief Financial Officer, is
also acting as our Chief Operating Officer, assuming responsibility for
day-to-day operations. We cannot be certain of the timing of our hiring of a new
Chief Executive Officer or the effect of any delays in our hiring of a new Chief
Executive Officer on the development or implementation of our strategic plan.
We must attract, integrate, train and retain key personnel knowledgeable about
our business
Given the relative "newness" and rapid growth of the Internet, there is
intense competition for the limited supply of people qualified to work for us.
Our future success depends on the continued service of key engineering, sales,
marketing, executive and administrative personnel, and our ability to attract,
hire, integrate, train and retain such personnel. Competition for engineering,
sales, marketing and executive personnel is intense, particularly in the
technology and Internet sectors and in the regions where our facilities are
located. We cannot be certain that we will be able to retain existing personnel
or attract, hire or retain additional qualified personnel. The loss of the
services of any of our senior management team or other key employees or our
failure to attract, integrate, train and retain additional key employees could
harm our business.
Our near term success depends on the growth of our domain name registration
business
We may not be able to sustain the revenue growth we have experienced in
recent periods. In addition, past revenue growth may not be indicative of future
operating results. If we do not successfully maintain our current position as a
leading provider of domain name registration services or develop or market
additional services, our business could be harmed.
Our domain name registration services business generates over 90% of our
revenue and is expected to continue to account for a very significant portion of
our revenue in at least the near term. Our future success will depend largely
on:
- the continued increase in domain name registrations,
- re-registration rates of our customers,
- our ability to maintain our current position as a leading registrar of
domain names, and
- the successful development, introduction and market acceptance of new
services that address the demands of Internet users.
We must effectively manage our marketing organization and establish and maintain
distribution channels
We will need to effectively manage our growing sales and marketing
organization if we want to achieve future revenue growth. We do not know if we
will be able to identify, attract and retain experienced sales and marketing
personnel with relevant experience. Further, our sales and marketing
organization may not be able to successfully compete against the significantly
more extensive and well-funded sales and marketing operations of our current or
potential competitors for registration or consulting services.
18
Our ability to achieve future revenue growth will also depend on our
ability to continue to establish direct sales channels and to develop multiple
distribution channels. To do this we must maintain relationships with Internet
access providers and other third parties.
We have a high level of uncollectible receivables
Because of our high level of uncollectible receivables, we continually
review our billing practices. Any modifications that we implement as a result of
these reviews could have unanticipated harmful consequences to our business. We
believe we have experienced a high level of uncollectible receivables due to,
among other factors, the large number of individuals and corporations that have
registered multiple domain names with the apparent intention of transferring
such names at a profit. Our experience has been that such resellers have a
greater tendency than other customers to default on their services fees. We have
established a provision for uncollectible accounts which we believe to be
adequate to cover anticipated uncollectible receivables; however, actual results
could differ from our estimates.
We are party to several legal proceedings which could have a negative financial
impact on us
We are involved in several legal proceedings. We cannot reasonably estimate
the potential impact of any of these proceedings. An adverse determination in
any of these proceedings, however, could harm our business. Legal proceedings in
which we are involved are expensive and divert our personnel. See
"Part II -- Item 1 -- Legal Proceedings."
We may not be able to protect our intellectual property rights and proprietary
information
We rely on a combination of nondisclosure and other contractual
arrangements with the U.S. government, our employees, and third parties, as well
as privacy and trade secret laws, to protect and limit the distribution of our
proprietary data, computer software, documentation, and processes used in
conducting our domain name registration business. If we fail to adequately
protect our intellectual property rights and proprietary information, or if we
are subject to adverse results in litigation relating to our intellectual
property rights and proprietary information, our business could be harmed. Any
actions we take may not be adequate to protect our intellectual property rights
and proprietary information. Other companies may develop competing technology
that is similar or superior to our technology. The U.S. government could take
positions adverse to our claims regarding proprietary rights and/or could
attempt to require us to enter into agreements limiting such claims. Although we
have no reason to believe that our domain name registration business activities
infringe on the intellectual property rights of others, and we believe that we
have all rights needed to conduct our business, it is possible that we could
become subject to claims alleging infringement of third party intellectual
property rights. Any such claims could subject us to costly litigation, and any
adverse final rulings on any such claims could require us to pay damages, seek
to develop alternative technology, and/or seek to acquire licenses to the
intellectual property that is the subject of any such alleged infringement, and
any such rulings could have a material adverse effect on our business.
Unsuccessful future acquisitions and investments could decrease operating
income, cause operational problems or otherwise disrupt our business
We evaluate potential acquisitions and investments on an ongoing basis for
various reasons including, among others, diversification of our domain name
registration and consulting businesses. Our acquisition and investment strategy
poses many risks, including:
- we may not be able to compete successfully for available acquisition
candidates, complete future acquisitions and investments or accurately
estimate the financial effect on our company of any businesses we acquire
or investments we make,
19
- future acquisitions and investments may require us to spend significant
cash amounts or may decrease our operating income,
- we may have trouble integrating the acquired business and retaining
personnel,
- acquisitions or investments may disrupt our business and distract our
management from other responsibilities, and
- to the extent that any of the companies which we acquire or in which we
invest fail, our business could be harmed.
Whether or when pooling of interests accounting for acquisitions might
become available to us depends on many factors beyond our control.
We face increasing risks associated with our international business
While substantially all of our operations, facilities, and personnel are
located within the United States, our revenues from sources outside the U.S.
have increased significantly and may continue to increase in the future. As a
result, we are subject to the risks of conducting business internationally,
including unexpected changes in regulatory requirements, competition from
foreign companies, fluctuations in the U.S. dollar, tariffs and other barriers
and restrictions and the burdens of complying with a variety of foreign laws. We
do not know what the impact of such regulatory, geopolitical and other factors
will be on our business in the future or if we will have to modify our business
practice. In addition, the laws of certain foreign countries may not protect our
proprietary rights to the same extent as do the laws of the United States.
Our quarterly operating results may fluctuate; our future revenue and
profitability are uncertain
Our quarterly operating results may fluctuate significantly in the future
due to a variety of factors, some of which are beyond our control. Factors that
may affect our revenue include:
- variations in the number of requests for domain name registrations or
demand for our services,
- successful competition by others,
- termination or completion of contracts in our Internet Technology
Services business or failure to obtain additional contracts in that
business, and
- market acceptance of new service offerings.
In addition, we expect a significant increase in our operating expenses as
we:
- increase our sales and marketing operations and activities, and
- continue to update our systems and infrastructure.
If the increase in our expenses is not followed by an increase in our
revenue, our operating results will be harmed. The fact that in the past our
revenues have increased and we have been profitable on a quarterly and annual
basis is not indicative of whether our revenues will increase or whether we will
be profitable on a quarterly or annual basis in the future.
INVESTMENT RISKS
Our stock price, like that of many Internet companies, is highly volatile
The market price of our Class A common stock has been and is likely to
continue to be highly volatile and significantly affected by factors such as:
- general market and economic conditions and market conditions affecting
technology and Internet stocks generally,
- actual or anticipated fluctuations in our quarterly or annual
registrations or operating results,
20
- announcements of technological innovations, acquisitions or investments,
developments in Internet governance or corporate actions such as stock
splits, and
- industry conditions and trends.
The stock market has experienced significant price and volume fluctuations
that have particularly affected the market prices of the stocks of technology
companies, especially Internet-related companies. These broad market or
technology or Internet sector fluctuations may adversely affect the market price
of our Class A common stock. Recently, the market price of our Class A common
stock, like that of many Internet-related companies, has experienced significant
fluctuations. For instance, from January 1, 1999 through May 10, 1999, the
reported sales price for our Class A common stock ranged from $60 per share to
$144 per share. On May 10, 1999, the reported last sale price of our Class A
common stock was $67.688 per share.
The market price of our Class A 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, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought. Such litigation could result in substantial costs and a diversion
of our management's attention and resources.
Future sales of common stock could affect our stock price
SAIC owns 14,850,000 of the outstanding shares of our common stock. A
decision by SAIC to sell such stock could depress the market price of the Class
A common stock.
SAIC may maintain significant influence over us
Because it holds a significant number of shares of our Class B common
stock, which have ten votes per share, SAIC controls 89% of the combined voting
power of the Class A and Class B common stock and, therefore, effectively
controls all matters requiring approval by our stockholders including the
election of members of our board of directors, changes in the size and
composition of the board of directors and a change in control. We do not have an
agreement with SAIC which restricts its rights to convert, distribute or sell
its shares of our common stock.
If SAIC converts all of its remaining shares of Class B common stock into
Class A common stock its economic interest and voting power will be below 50% of
the total economic interest and voting power of our common stock after such
conversion. Nonetheless, SAIC will remain our largest stockholder and may be
able to exercise significant influence over us.
Certain directors may have conflicts of interest
Certain of our directors currently serve as directors, officers and
employees of SAIC. Therefore, there may be various conflicts of interest or
conflicting duties for these individuals. Since our directors and officers may
also own stock of SAIC, there may be conflicts of interest when directors and
officers are faced with decisions that could have different implications for us
and SAIC.
We rely on SAIC for certain corporate services and employee benefits
We currently receive corporate services under an agreement with SAIC. Were
SAIC to terminate these services, we may not be able to secure alternative
sources for such services or such services may only be available to us at prices
higher than those charged by SAIC.
Our employees are currently eligible to participate in certain SAIC
employee benefit plans. If SAIC converts its remaining shares of Class B common
stock to Class A common stock, we will have to establish certain employee
benefit plans of our own which could result in incremental costs to us.
21
Our certificate of incorporation contains provisions relating to SAIC that may
adversely affect us or our stockholders
Our certificate of incorporation includes provisions relating to
competition by SAIC with us, allocations of corporate opportunities,
transactions with interested parties and intercompany agreements and provisions
limiting the liability of certain people. It is unclear whether such provisions
are enforceable under Delaware corporate law. Our certificate of incorporation
provides that any person purchasing or acquiring an interest in shares of our
capital stock shall be deemed to have consented to the provisions in the
certificate of incorporation relating to competition with SAIC, conflicts of
interest, corporate opportunities and intercompany agreements, and such consent
may restrict such person's ability to challenge transactions carried out in
compliance with such provisions. The corporate charter of SAIC does not include
similar provisions. Therefore, persons who are directors and/or officers of ours
and who are also directors and/or officers of SAIC may choose to take action in
reliance on such provisions rather than act in a manner that might be favorable
to us but adverse to SAIC.
YEAR 2000 COMPLIANCE
Network Solutions is continually assessing the potential effects of the
"Year 2000" millennium change on Network Solutions' business systems and
processes, including the Internet domain name servers under Network Solutions'
control, telecommunications systems, facilities, data-networking infrastructure,
commercial-off-the-shelf hardware, software and components used by its employees
and its outsourcing vendors. Network Solutions' Year 2000 project is proceeding
on schedule. The project goal is to ensure that Network Solutions' business is
not impacted by the date transitions associated with the Year 2000.
Network Solutions' Year 2000 project plan is coordinated by a team that
reports directly to senior management. The project team is evaluating the Year
2000 compliance of Network Solutions' business systems and processes, including
the Internet domain name servers under Network Solutions' control,
telecommunications systems, facilities, data-networking infrastructure,
commercial-off-the-shelf hardware, software and components used by its employees
and its outsourcing vendors whom provide services relating to Network Solutions'
domain name registration business. Network Solutions' Year 2000 project is
comprised of the following parallel phases:
- Phase 1 -- Inventory all of Network Solutions' business systems and
processes, including the Internet domain name servers under Network
Solutions' control, telecommunications systems, facilities,
data-networking infrastructure, commercial-off-the-shelf hardware,
software and components used by its employees in order to assign
priorities to potentially impacted systems and services. This phase has
been completed;
- Phase 2 -- Assess the Year 2000 compliance of all inventoried business
systems and processes, including the Internet domain name servers under
Network Solutions' control, telecommunications systems, facilities,
data-networking infrastructure, commercial-off-the-shelf hardware,
software and components used by its employees and determine whether to
renovate or replace any non-Year 2000 compliant systems and services. The
assessment of mission critical systems has been completed; however,
assessment continues as a life cycle development activity;
- Phase 3 -- Complete remediation of any non-Year 2000 compliant business
systems and processes, including the Internet domain name servers under
Network Solutions' control, telecommunications systems, facilities,
data-networking infrastructure, commercial-off-the-shelf hardware,
software and components used by its employees. Conduct procurements to
replace any other non-Year 2000 compliant business systems and processes,
telecommunications systems, facilities, data-networking infrastructure,
commercial-off-the-shelf hardware, software and components used by its
employees that will not be remediated. All remediation efforts are
expected to be completed by June 30, 1999;
- Phase 4 -- Test and validate remediated systems to ensure inter-system
compliance and mission critical system functionality. The testing will
begin in parallel as software is remediated. As remediated
22
code is successfully tested, it will be released into production
incrementally, a process which will last until October 30, 1999;
- Phase 5 -- Deploy and implement remediated and replacement systems after
the completion of successful testing and validation. The deployment and
implementation of the remediated or replacement systems are expected to
be completed by October 30, 1999; and
- Phase 6 -- Design contingency and business continuation plans in the
event of the failure of business systems and processes,
telecommunications systems, facilities, data-networking infrastructure,
commercial-off-the-shelf hardware, software and components used by
Network Solutions' employees due to the Year 2000 millennium change. The
initial contingency and business continuation plan has been developed.
The final contingency plan will be completed during the second quarter of
1999 and it will be updated throughout the year as appropriate.
Based on its inventory and assessment, Network Solutions has found that
less than one-half of one percent of the software code of its mission critical
systems needs to be remediated to be made Year 2000 compliant. However, Network
Solutions, in its normal course of business, anticipates replacing or upgrading,
prior to the millennium change, portions of these systems with new systems which
will also be Year 2000 compliant. Currently, Network Solutions is enhancing its
"back-office" and registration-related systems and the software relating to its
core domain name registration services business. When complete in 1999, this
enhancement effort will result in replacing portions of the existing
registration-related systems which will be procured from vendors as Year 2000
compliant and will be subjected to both component and end-to-end testing and
validation to determine the Year 2000 compliance of such systems prior to
acceptance and deployment in Network Solutions' business. This enhancement
effort is a function of Network Solutions' business growth and not a Year 2000
remediation effort.
Based on its inventory and assessment, Network Solutions has found no
material Year 2000 problems with its facilities and telecommunications systems.
Network Solutions has conducted detailed assessments of the components of its
telecommunications infrastructure and is working to identify appropriate system
testing guidelines. In addition, Network Solutions is seeking assurances from
its facilities' landlords and telecommunications equipment vendors and data
circuit providers regarding the Year 2000 compliance of their facilities and
equipment. In the event of electrical power interruption outside of Network
Solutions' control, Network Solutions has deployed back-up power systems capable
of operating its core business indefinitely.
Network Solutions is now in the remediation and testing phases of its
project cycle. At this time, Network Solutions believes that its incremental
remediation costs needed to make its current business systems and processes,
including the Internet domain name servers under Network Solutions' control,
telecommunications systems, facilities, data-networking infrastructure,
commercial-off-the-shelf hardware, software and components used by its employees
Year 2000 compliant are not material. While Network Solutions is incurring some
incremental costs directly relating to staff augmentation for the Year 2000
program management and technical assessment, the costs expended by Network
Solutions through March 31, 1999 are less than $500,000. Network Solutions'
expected total costs, including remediation and replacement costs, are estimated
to be between $2,000,000 and $2,375,000 over the life of the Year 2000 project.
Since portions of the mission critical "back office" and domain name
registration-related systems will generally be replaced as a function of
business growth, the labor and capital costs associated with such replacement
systems are not directly attributed to achieving Year 2000 compliance. Network
Solutions will also incur costs for extending its software testing architecture
which, in addition to testing remediated systems, will be used as a normal
component of Network Solutions quality assurance infrastructure. As such these
costs are not directly categorized as Year 2000 project costs but as normal
business development and engineering costs.
Network Solutions is contacting its hardware and software vendors,
significant suppliers, outsourcing service providers and contracting parties to
determine the extent to which Network Solutions is vulnerable to any such third
party's failure to achieve Year 2000 compliance for their own systems. At the
present time, Network Solutions does not expect Year 2000 issues of any such
third parties to materially affect Network Solutions' business. Furthermore,
Network Solutions' business depends on the continued operation of, and
widespread access to, the Internet. This, in turn, depends to a large extent on
the software and systems of third
23
parties on which Network Solutions' systems rely or to which they are connected.
These third parties include, among others, Internet-related companies, including
Internet web hosting companies, Internet access providers and Internet domain
name server operators. Network Solutions can give no assurances that the
software or systems of such third parties will be Year 2000 compliant or that
the failure of such third parties to achieve Year 2000 compliance will not have
a material adverse effect on Network Solutions. To the extent that the normal
operation of the Internet is disrupted by the Year 2000 millennium change,
Network Solutions' business, financial condition or results of operations could
be materially and adversely affected.
Should Network Solutions fail to solve a Year 2000 compliance problem to
its mission critical business systems and processes, including the Internet
domain name servers under Network Solutions' control, telecommunications
systems, facilities, data-networking infrastructure, commercial-off-the-shelf
hardware, software and components used by its employees, the result could be a
failure or interruption to normal business operations. Network Solutions
believes that, with the deployment of the new "back office" and domain name
registration related systems in 1999, the potential for significant
interruptions to normal operations should be minimized. Network Solutions'
primary risks with regard to Year 2000 failures are those which impact its
domain name registration business. The reasonably likely worst case risks
inherent in Network Solutions' business are as follows:
- Significant and protracted interruption of electrical power to data and
systems in Network Solutions' engineering and customer support facilities
could materially and negatively impact Network Solutions' ability to
provide data and call-center operations. To mitigate this risk, Network
Solutions has deployed back-up power systems capable of operating
indefinitely. However, electrical power interruptions that impact
Internet connectivity providers could adversely impact Network Solutions
because of Network Solutions' reliance upon Internet-based operations for
its day to day business.
- Significant and protracted interruption of telecommunications and data
network services in any of Network Solutions' headquarters, engineering
or customer support facilities could materially and negatively impact
Network Solutions' ability to provide data and call-center operations.
Network Solutions has conducted detailed assessments of the components of
its telecommunications infrastructure and is working to identify
appropriate system testing guidelines. As part of its technical
assessment, Network Solutions identified the compliance status of its
data networking infrastructure and developed plans for remediation.
Finally, Network Solutions has plans to seek additional assurances and a
better understanding of the compliance programs of its telecommunications
and data circuit providers.
- The failure of components of Network Solutions' current "back office" and
domain name registration related systems could materially and negatively
impact Network Solutions' business. However, as a function of business
growth, these systems are planned to be retired before the end of 1999.
As a contingency planning measure, Network Solutions has conducted a
technical assessment of the current systems and their software
applications and is currently remediating and testing such systems.
- Despite the assurances of Network Solutions' third-party suppliers,
hardware and software vendors, and outsourcing service providers
regarding the Year 2000 compliance of their products and services, the
potential exists that a Year 2000 problem relating to such third-party
suppliers, vendors and outsourcing service providers' products and
services could have a material impact on Network Solutions' business.
Network Solutions is conducting monthly discussions with its mission
critical outsourcing service providers to determine the progress of their
Year 2000 compliance programs.
Although Network Solutions has found that it only has to remediate a small
portion of its software code in its internal mission critical systems and
despite Network Solutions' expectation that its enhancement effort will result
in Year 2000 compliant "back-office" and registration-related systems and
software relating to its core domain name registration services business,
Network Solutions is currently developing a business continuation contingency
plan and is performing a test on the existing core registration-related systems
that are being replaced. Network Solutions finalized its initial contingency
plan and completed testing of all existing systems. The final business
continuation plan will be completed during the second quarter of 1999 and will
be updated as appropriate throughout the year.
24
Although Network Solutions is taking appropriate steps so that Network
Solutions' business is not impacted by the date transitions associated with the
Year 2000, Network Solutions has no responsibility for, nor control over other
Internet domain name server operators or tens of thousands of lower level domain
name system server operators that are critical to the efficient operation of the
Internet. Network Solutions has not determined whether such domain name server
operators or other server operators have hardware, software or firmware that is
Year 2000 compliant. Network Solutions has notified the Department of Commerce
of this issue.
Forward-Looking Statements
The foregoing Year 2000 discussion and the information contained herein is
provided as a "Year 2000 Readiness Disclosure" as defined in the Year 2000
Information and Readiness Disclosure Act of 1998 (Public Law 105-271, 112 Stat.
2386) enacted on October 19, 1998 and contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, including without limitation, anticipated costs and the dates by
which Network Solutions expects to complete certain actions, are based on
management's best current estimates, which were derived utilizing numerous
assumptions about future events, including the continued availability of certain
resources, representations received from third parties and other factors.
However, there can be no guarantee that these estimates will be achieved, and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
ability to identify and remediate all relevant systems, results of Year 2000
testing, adequate resolution of Year 2000 issues by governmental agencies,
businesses and other third parties who are outsourcing service providers,
suppliers, and vendors of Network Solutions, unanticipated system costs, the
adequacy of and ability to implement contingency plans and similar
uncertainties. The "forward-looking statements" made in the foregoing Year 2000
discussion speak only as of the date on which such statements are made, and
Network Solutions undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Network Solutions is exposed to the impact of interest rate changes and
change in the market values of its investments.
Interest Rate Risk. Network Solutions' exposure to market rate risk for
changes in interest rates relates primarily to the Company's investment
portfolio. Network Solutions has not used derivative financial instruments in
its investment portfolio. Network Solutions invests its excess cash in debt
instruments of the U.S. Government and its agencies, and in high-quality
corporate issuers and, by policy, limits the amount of credit exposure to any
one issuer. The Company protects and preserves its invested funds by limiting
default, market and reinvestment risk.
Investments in both fixed rate and floating rate interest earning
instruments carries a degree of interest rate risk. Fixed rate securities may
have their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, the Company's future investment income
may fall short of expectations due to changes in interest rates or the Company
may suffer losses in principal if forced to sell securities which have declined
in market value due to changes in interest rates.
Investment Risk. The Company has invested in the equity instruments of a
privately-held, information technology company for business and strategic
purposes. This investment is included in other long-term assets and is accounted
for under the cost method which approximates fair value. Network Solutions is
also exposed to equity price risks on the marketable portion of its equity
securities. Network Solutions' available-for-sale securities include investments
in publicly-held companies in the Internet industry sector, many of which have
experienced significant historical volatility in their stock prices.
25
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of April 30, 1999, we were a defendant in two 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 right we granted to a domain name holder to register a domain name which is
alleged to be similar to the trademark in question. The holders of the domain
name registrations in dispute have, in turn, questioned our right, absent a
court order, to take any action which suspends their use of the domain names in
question. Although 49 out of approximately 6,000 of these situations have
resulted in suits actually naming us as a defendant, as of April 30, 1999, no
adverse judgment has been rendered and no award of damages has ever been made
against us. We believe that we have meritorious defenses and vigorously defend
ourselves against these claims.
On March 20, 1997, PG Media, Inc., a New York-based corporation filed a
lawsuit against us in the United States District Court, Southern District of New
York alleging that we had restricted access to the Internet by not adding PG
Media's requested top level domains to the Internet root zone system in
violation of the Sherman Act. In its complaint, PG Media, in addition to
requesting damages, asked that we be ordered to include reference to PG Media's
top level domains and name servers in the root zone file administered by us
under the Cooperative Agreement. In June 1997, we received written direction
from the National Science Foundation not to take any action which would create
additional top level domains or to add any new top level domains to the Internet
root zone until the National Science Foundation provides further guidance. On
September 17, 1997, PG Media filed a Second Amended Complaint adding the
National Science Foundation as a defendant. On May 14, 1998, PG Media served us
with a motion for a preliminary injunction against both defendants to compel
both defendants to add PG Media's top level domains to the Internet root zone
within 30 days. In response, both defendants filed cross-motions for summary
judgment against PG Media. On July 20, 1998, a hearing on all parties' motions
occurred. The basic issue before the court is the National Science Foundation's
authority to control the Internet's root zone system. On March 16, 1999, the
court granted both our and the National Science Foundation's motions for summary
judgment, holding that the National Science Foundation does have authority over
the root zone system and that the federal instrumentality immunity doctrine
immunizes us against liability under both sections 1 and 2 of the Sherman Act.
PG Media noticed its appeal on April 15, 1999. While we cannot reasonably
estimate the potential impact of the claims advanced in this lawsuit, a
successful claim could harm our business.
On October 17, 1997, a group of six plaintiffs filed the Thomas suit
against us and the National Science Foundation in the United States District
Court, District of Columbia, challenging the legality of fees defendants charge
for the registration of domain names on the Internet and seeking restitution of
fees collected from domain name registrants in an amount in excess of $100
million, damages, and injunctive and other relief. Plaintiffs alleged violations
of the Sherman Act, the U.S. Constitution, the Administrative Procedures Act and
the Independent Offices Appropriations Act. On February 10, 1998, the plaintiffs
filed a motion for preliminary injunction against us seeking several items of
relief. On April 6, 1998, the Court issued its opinion granting summary judgment
in favor of the plaintiffs on the Intellectual Infrastructure Fund, ruling it an
"unlawful tax." The court also granted our motion to dismiss all other counts
(II through X) and simultaneously denied the plaintiffs' preliminary injunction
motion against us. On April 30, 1998, Congress passed H.R. 3579 which was signed
into law by the President on May 1, 1998. Section 8003 of H.R. 3579 legalized,
ratified and confirmed the entire Intellectual Infrastructure Fund and
authorized and directed the National Science Foundation to deposit the entire
fund into the U.S. Treasury. On August 28, 1998, the District Court dismissed
the entire case, issuing a final judgment in the matter. In October 1998, the
plaintiffs appealed the court's dismissal of their claims, and oral argument
occurred on February 25, 1999. On May 14, 1999, the Court of Appeals ruled in
favor of Network Solutions by unanimously affirming the District Court's
decision.
On October 20, 1998, we were included as a defendant in a suit brought by
the Pennsylvania Attorney General's office against a domain name holder who was
alleged to have used his domain name in connection with a web site promoting
white supremacy and threatening certain state employees. The Pennsylvania
26
Attorney General named all of the communications companies in any way connected
with the domain name or web site. The Pennsylvania Attorney General seeks to
permanently enjoin these entities, including us, from providing services to this
domain name holder in the event that the domain name holder fails to comply with
the order of the court. We have answered the complaint denying any knowledge or
participation in the actions of the primary defendant. The Attorney General
dismissed the case against us on April 26, 1999.
On June 27, 1997, SAIC received a Civil Investigative Demand, or "CID,"
from the U.S. Department of Justice issued in connection with an investigation
to determine whether there is, has been, or may be any antitrust violation under
the Sherman Act relating to Internet registration products and services. The CID
sought documents and information from SAIC and us relating to our Internet
registration business. On April 29, 1999, we received a second CID seeking
additional information and documents relating to our ownership rights in,
policies relating to access to, and our use of, data that we compile in the
course of operating our Internet registration business. We are providing
information responsive to the CID. Because the investigation, as currently
focused, is still at a preliminary stage, we cannot reasonably estimate the
potential impact of the investigation nor can we predict whether a civil action
might ultimately be filed by the Department of Justice or the form of relief
that might be sought. Any such relief from such a suit could have a harmful
effect on our business.
On August 17, 1998, we received notice from the Commission of the European
Communities, or "EC," of an investigation concerning the Company's Premier
Program agreements in Europe. The EC requested production of these agreements
and related materials for review and we complied. We cannot reasonably estimate
the potential impact of the investigation nor can we predict whether an action
will ultimately be brought by the EC or the form of relief that might be sought.
Any such relief could harm our business.
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.
Legal proceedings in which we are involved have resulted and likely will
result in, and any future legal proceedings can be expected to result in,
substantial legal and other expenses and a diversion of the efforts of our
personnel.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The Company's Registration Statement on Form S-1 (Registration No.
333-30705) was declared effective September 25, 1997 by the Securities and
Exchange Commission. The managing underwriters of the Class A common stock
offering commencing September 26, 1997 were Hambrecht & Quist, J.P. Morgan & Co.
and PaineWebber Incorporated. The Company registered and sold 3,220,000 shares
for its own account at an aggregate price of $57,960,000 and the selling
stockholder (SAIC) registered and sold 575,000 shares for its account at an
aggregate price of $10,350,000, for a combined total of 3,795,000 shares at an
aggregate price of $68,310,000. The offering has since terminated.
The total amount of expenses incurred for the Company's account in
connection with the offering were $5,555,200, which is comprised of $4,057,200
for underwriting discounts and commissions and $1,498,000 of other expenses. No
expenses were paid to directors, officers or persons owning more than ten
percent of any class of the Company's equity securities. The resultant Company's
net offering proceeds were $52,404,800. The net proceeds to SAIC for its account
were $9,625,500 after deducting the associated underwriting discounts and
commissions of $724,500.
On October 1, 1997, the Company received the offering proceeds from which a
$10,000,000 dividend was paid to SAIC. SAIC owns ten percent or more of a class
of the Company's equity securities and is an affiliate of the Company. The
remaining proceeds have been invested in investment grade government discount
notes, commercial paper and corporate bonds.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits -- See Exhibit Index
27
(b) Reports on Form 8-K --
The following reports on Form 8-K were filed during the quarter ended March
31, 1999:
On January 15, 1999, we filed a report on Form 8-K, pursuant to Item 5 of
such form, to report that our Board of Directors had approved a two-for-one
split of our Class A Common Stock and Class B Common Stock, to be effected in
the form of a 100% stock dividend.
On February 9, 1999, we filed a report on Form 8-K, pursuant to Item 5 of
such form, to report that the Internet Corporation for Assigned Names and
Numbers had issued, in preliminary form, its "Guidelines for Accreditation of
Internet Domain Name Registrars and for Selection of Registrars for the Shared
Registry System TestBed for .com, .net and .org Domains."
On February 11, 1999, we filed a report on Form 8-K, pursuant to Item 5 of
such form, to report our issuance of a press release announcing our 1998 fourth
quarter and annual revenue and earnings.
28
SIGNATURE
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.
NETWORK SOLUTIONS, INC.
By: /s/ ROBERT J. KORZENIEWSKI
Robert J. Korzeniewski
Chief Financial Officer, Acting
Chief Operating Officer and
Authorized Signatory
Date: May 17, 1999
29
INDEX TO EXHIBITS
NETWORK SOLUTIONS, INC.
THREE MONTHS ENDED MARCH 31, 1999
[Download Table]
EXHIBIT SEQUENTIAL
NO. DESCRIPTION OF EXHIBITS PAGE NO.
------- ----------------------- ----------
10.25 Amendment No. 13 to the Cooperative Agreement dated May 6,
1999
10.26 Lease Agreement By and Between Corporate Oaks LP and Network
Solutions dated March 11, 1999
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
30
Dates Referenced Herein and Documents Incorporated by Reference
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