Network Solutions Inc/DE – ‘10-Q’ for 9/30/98

As of:  Monday, 11/16/98   ·   For:  9/30/98   ·   Accession #:  950133-98-3899   ·   File #:  0-22967   ·   Correction:  This Filing’s “Filed as of” Date was Corrected and “Changed as of” 11/20/98 by the SEC on 11/20/98. ®

in

this entire Filing. an “Entity” Search.

Show

Documents searched

and

each “hit”. the 1st “hit”.

↓↑Hints

Quarterly Report   —   Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                      32    195K 
 2: EX-10.22    Amendment No. 10 to the Cooperative Agreement          5     24K 
 3: EX-27.1     Financial Data Schedule                                1      6K 

10-Q   —   Quarterly Report
Document Table of Contents

10-Q
1st Page of 32
TOC
↑Top
Previous
Next
↓Bottom
Just 1st
 

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM 10-Q 
(MARK ONE)                                                                      

[X]             QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)                
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 

OR

[ ]            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)                
OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 0-22967 

NETWORK SOLUTIONS, INC. 
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                                                                [Download Table]
                                                      
          DELAWARE                      52-1146119    
(STATE OR OTHER JURISDICTION         (I.R.S. EMPLOYER 
    OF INCORPORATION OR            IDENTIFICATION NO.)
        ORGANIZATION)                                 

505 HUNTMAR PARK DRIVE
HERNDON, VIRGINIA 20170 
(703)742-0400 
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, 
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) 

  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 November 6, 1998, the Registrant had 4,168,202 shares of Class A
common stock, $0.001 par value per share, issued and outstanding, and 11,925,000
shares of Class B common stock, $0.001 par value per share, issued and          
outstanding.                                                                    

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

10-Q
2nd Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 2nd

                                                                [Download Table]

                                                                        PAGE
                                                                        ----
                                                                            
PART I    FINANCIAL INFORMATION                                             
Item 1.   Financial Statements                                              
          Condensed Statements of Financial Position as of December         
            31, 1997 and September 30, 1998 (unaudited)...............    3 
          Unaudited Condensed Statements of Operations for the three        
            and nine months ended September 30, 1997 and 1998.........    4 
          Unaudited Condensed Statements of Changes in Stockholders'        
            Equity for the nine months ended September 30, 1998.......    5 
          Unaudited Condensed Statements of Cash Flows for the nine         
            months ended September 30, 1997 and 1998..................    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......................................................   27 
PART II   OTHER INFORMATION                                                 
Item 1.   Legal Proceedings...........................................   28 
Item 2.   Changes in Securities and Use of Proceeds...................   29 
Item 6.   Exhibits and Reports on Form 8-K............................   30 
Signature ............................................................   31 
Index to Exhibits.....................................................   32 

 2

10-Q
3rd Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 3rd

PART I  FINANCIAL INFORMATION                                                   

ITEM 1.  FINANCIAL STATEMENTS.                                                  

NETWORK SOLUTIONS, INC. 

CONDENSED STATEMENTS OF FINANCIAL POSITION

                                                        [Enlarge/Download Table]

                                                             DECEMBER 31,   SEPTEMBER 30,
                                                                 1997           1998     
                                                             ------------   -------------
                                                                             (UNAUDITED) 
                                                                                         
ASSETS                                                                                   
Current assets:                                                                          
  Cash and cash equivalents................................. $ 41,146,000   $  9,124,000 
  Short-term investments, marketable securities.............   40,200,000    107,876,000 
  Accounts receivable, net..................................    5,792,000     13,922,000 
  Prepaids and other assets.................................    1,005,000      1,512,000 
  Deferred tax asset........................................   20,153,000     30,941,000 
  Restricted assets.........................................   25,873,000        627,000 
                                                             ------------   ------------ 
Total current assets........................................  134,169,000    164,002,000 
Furniture and equipment, net................................    6,146,000      9,579,000 
Long-term investments, marketable securities................           --      6,272,000 
Deferred tax asset..........................................    8,128,000     11,292,000 
Goodwill, net...............................................    1,177,000        770,000 
                                                             ------------   ------------ 
Total Assets................................................ $149,620,000   $191,915,000 
                                                             ============   ============ 
LIABILITIES AND STOCKHOLDERS' EQUITY                                                     
Current liabilities:                                                                     
  Accounts payable and accrued liabilities.................. $  6,426,000   $ 15,565,000 
  Due to parent.............................................    1,250,000      2,587,000 
  Income taxes payable......................................    5,042,000      3,090,000 
  Current portion of capital lease obligations..............      842,000        861,000 
  Deferred revenue, net.....................................   43,789,000     77,766,000 
  Internet fund liability...................................   25,873,000        627,000 
                                                             ------------   ------------ 
Total current liabilities...................................   83,222,000    100,496,000 
Capital lease obligations...................................    1,081,000        436,000 
Long-term deferred revenue, net.............................   17,662,000     28,964,000 
                                                             ------------   ------------ 
Total liabilities...........................................  101,965,000    129,896,000 
Commitments and contingencies                                                            
Stockholders' equity:                                                                    
  Preferred stock, $.001 par value, authorized 10,000,000                                
     shares; none issued and outstanding in 1997 and 1998...           --             -- 
  Class A common stock, $.001 par value; authorized                                      
     100,000,000 shares;                                                                 
     3,795,000 and 4,139,838 issued and outstanding in 1997                              
     and 1998...............................................        4,000          4,000 
  Class B common stock, $.001 par value; authorized                                      
     30,000,000 shares;                                                                  
     11,925,000 issued and outstanding in 1997 and 1998.....       12,000         12,000 
  Additional paid-in capital................................   56,451,000     63,147,000 
  Accumulated deficit.......................................   (8,812,000)    (1,295,000)
  Accumulated other comprehensive income....................           --        151,000 
                                                             ------------   ------------ 
Total stockholders' equity..................................   47,655,000     62,019,000 
                                                             ------------   ------------ 
Total Liabilities and Stockholders' Equity.................. $149,620,000   $191,915,000 
                                                             ============   ============ 

The accompanying notes are an integral part of these financial statements.
 3

10-Q
4th Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 4th

NETWORK SOLUTIONS, INC. 

CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED) 

                                                        [Enlarge/Download Table]

                                              THREE MONTHS ENDED           NINE MONTHS ENDED     
                                                 SEPTEMBER 30,               SEPTEMBER 30,       
                                           -------------------------   ------------------------- 
                                              1997          1998          1997          1998     
                                           -----------   -----------   -----------   ----------- 
                                                                                                 
Net revenue............................... $12,172,000   $25,427,000   $30,896,000   $62,395,000 
Cost of revenue...........................   7,033,000    10,312,000    18,468,000    26,451,000 
                                           -----------   -----------   -----------   ----------- 
Gross profit..............................   5,139,000    15,115,000    12,428,000    35,944,000 
Research and development expenses.........     377,000     1,353,000     1,095,000     2,893,000 
Selling, general and administrative                                                              
  expenses................................   3,105,000    10,248,000     7,893,000    24,438,000 
Interest income...........................    (570,000)   (1,680,000)   (1,054,000)   (4,423,000)
Other expenses............................          --        26,000            --        93,000 
                                           -----------   -----------   -----------   ----------- 
Income before income taxes................   2,227,000     5,168,000     4,494,000    12,943,000 
Provision for income taxes................     995,000     2,163,000     2,006,000     5,426,000 
                                           -----------   -----------   -----------   ----------- 
Net income................................ $ 1,232,000   $ 3,005,000   $ 2,488,000   $ 7,517,000 
                                           ===========   ===========   ===========   =========== 
Earnings per common share:                                                                       
  Basic................................... $      0.10   $      0.19   $      0.20   $      0.47 
                                           ===========   ===========   ===========   =========== 
  Diluted................................. $      0.10   $      0.18   $      0.20   $      0.45 
                                           ===========   ===========   ===========   =========== 

The accompanying notes are an integral part of these financial statements.
 4

10-Q
5th Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 5th

NETWORK SOLUTIONS, INC. 

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY 
(UNAUDITED) 

                                                        [Enlarge/Download Table]

                                CLASS A              CLASS B                       ACCUMULATED                              
                              COMMON STOCK         COMMON STOCK      ADDITIONAL       OTHER       RETAINED         TOTAL    
                           ------------------  --------------------    PAID-IN    COMPREHENSIVE   EARNINGS     STOCKHOLDERS'
                            SHARES     AMOUNT    SHARES     AMOUNT     CAPITAL       INCOME       (DEFICIT)       EQUITY    
                           ---------   ------  ----------   -------  -----------  -------------  -----------   -------------
                                                                                                                            
Balance, December 31,                                                                                                       
  1997.................... 3,795,000   $4,000  11,925,000   $12,000  $56,451,000                 $(8,812,000)   $47,655,000 
Issuance of common stock                                                                                                    
  pursuant to stock                                                                                                         
  plans...................   344,838                                   4,456,000                                  4,456,000 
Tax benefit associated                                                                                                      
  with                                                                                                                      
  stock plans.............                                             2,240,000                                  2,240,000 
Unrealized gain on                                                                                                          
  securities..............                                                           $151,000                       151,000 
Net income for the nine                                                                                                     
  months ended September                                                                                                    
  30, 1998................                                                                         7,517,000      7,517,000 
                           ---------   ------  ----------   -------  -----------     --------    -----------    ----------- 
Balance, September 30,                                                                                                      
  1998.................... 4,139,838   $4,000  11,925,000   $12,000  $63,147,000     $151,000    $(1,295,000)   $62,019,000 
                           =========   ======  ==========   =======  ===========     ========    ===========    =========== 

The accompanying notes are an integral part of these financial statements.
 5

10-Q
6th Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 6th

NETWORK SOLUTIONS, INC. 

CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED) 

                                                        [Enlarge/Download Table]

                                                                  NINE MONTHS ENDED      
                                                                    SEPTEMBER 30,        
                                                             --------------------------- 
                                                                 1997           1998     
                                                             ------------   ------------ 
                                                                                         
CASH FLOWS FROM OPERATING ACTIVITIES:                                                    
  Net income................................................ $  2,488,000   $  7,517,000 
  Adjustments to reconcile net income to net cash provided                               
     by operating activities:                                                            
     Depreciation and amortization..........................    1,635,000      2,613,000 
     Provision for uncollectible accounts receivable........    5,577,000      2,168,000 
     Deferred income taxes..................................   (9,649,000)   (14,061,000)
     Tax benefit associated with stock plans................           --      2,240,000 
     Changes in operating assets and liabilities:                                        
       Decrease (increase) in accounts receivable...........      348,000    (10,298,000)
       Increase in prepaids and other assets................     (896,000)      (507,000)
       Increase in accounts payable and accrued                                          
          liabilities.......................................    1,811,000      9,139,000 
       Decrease in income taxes payable.....................           --     (1,952,000)
       Increase in deferred revenue.........................   25,156,000     45,279,000 
                                                             ------------   ------------ 
       Net cash provided by operating activities............   26,470,000     42,138,000 
                                                             ------------   ------------ 
CASH FLOWS FROM INVESTING ACTIVITIES:                                                    
  Purchase of furniture and equipment.......................   (1,254,000)    (5,639,000)
  Purchase of short-term investments, net...................  (28,321,000)   (67,676,000)
  Purchase of long-term investments.........................           --     (6,012,000)
                                                             ------------   ------------ 
       Net cash used in investing activities................  (29,575,000)   (79,327,000)
                                                             ------------   ------------ 
CASH FLOWS FROM FINANCING ACTIVITIES:                                                    
  Net transactions with SAIC................................    6,627,000      1,337,000 
  Repayment of capital lease obligations....................           --       (626,000)
  Issuance of common stock pursuant to stock plans..........           --      4,456,000 
                                                             ------------   ------------ 
       Net cash provided by financing activities............    6,627,000      5,167,000 
                                                             ------------   ------------ 
Net increase (decrease) in cash and cash equivalents........    3,522,000    (32,022,000)
Cash and cash equivalents, beginning of period..............   15,540,000     41,146,000 
                                                             ------------   ------------ 
Cash and cash equivalents, end of period.................... $ 19,062,000   $  9,124,000 
                                                             ============   ============ 

The accompanying notes are an integral part of these financial statements.
 6

10-Q
7th Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 7th

NETWORK SOLUTIONS, INC. 

NOTES TO CONDENSED FINANCIAL STATEMENTS 

NOTE 1 -- ORGANIZATION AND BUSINESS                                             

Since 1993, Network Solutions, Inc. ("the Company") has acted as the  
exclusive registrar and registry of Internet domain names within the .com, .org,
.net and .edu top level domains ("TLDs") under a cooperative agreement (as    
amended, the "Cooperative Agreement") with the National Science Foundation      
("NSF") and, currently, the Department of Commerce's National Telecommunications
and Information Administration ("NTIA"). Domain names are used to identify a    
unique site or presence on the Internet. As registrar and registry for these    
TLDs, the Company registers new domain names and is responsible for the         
maintenance and dissemination of the master file of domain names through daily  
updates to the Internet. The Company also provides enterprise network consulting
services to large companies, focusing on network engineering, network and       
systems security and network management.                                        

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES                                       

INTERIM FINANCIAL STATEMENTS                                                    

     The interim financial statements have been prepared by the Company, 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 the Company       
considers necessary for fair presentation of the results of operations for the  
interim periods covered and of the financial position of the Company 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, the Company 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 the Company's December 31, 1997 audited financial   
statements and notes thereto included in the Company's Form 10-K annual report  
for the year ended December 31, 1997. Prior periods have been restated for      
comparative purposes.                                                           

NOTE 3 -- 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 SEPTEMBER 30, 1998                                        
Basic.................................. $3,005,000    16,041,000      $0.19  
                                                                      =====  
Dilutive securities:                                                         
  Outstanding options..................         --       705,000             
                                        ----------    ----------             
Diluted................................ $3,005,000    16,746,000      $0.18  
                                        ==========    ==========      =====  
THREE MONTHS ENDED SEPTEMBER 30, 1997                                        
Basic.................................. $1,232,000    12,502,000      $0.10  
                                                                      =====  
Dilutive securities:                                                         
  Outstanding options..................         --       118,000             
                                        ----------    ----------             
Diluted................................ $1,232,000    12,620,000      $0.10  
                                        ==========    ==========      =====  

 7

10-Q
8th Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 8th

                                                                [Download Table]

                                          INCOME        SHARES      PER SHARE
                                        (NUMERATOR)  (DENOMINATOR)   AMOUNT  
                                        -----------  -------------  ---------
                                                                             
NINE MONTHS ENDED SEPTEMBER 30, 1998                                         
Basic.................................. $7,517,000    15,888,000      $0.47  
                                                                      =====  
Dilutive securities:                                                         
  Outstanding options..................         --       656,000             
                                        ----------    ----------             
Diluted................................ $7,517,000    16,544,000      $0.45  
                                        ==========    ==========      =====  
NINE MONTHS ENDED SEPTEMBER 30, 1997                                         
Basic.................................. $2,488,000    12,501,000      $0.20  
                                                                      =====  
Dilutive securities:                                                         
  Outstanding options..................         --        99,000             
                                        ----------    ----------             
Diluted................................ $2,488,000    12,600,000      $0.20  
                                        ==========    ==========      =====  

Common shares issued are weighted for the period the shares were      
outstanding and incremental shares assumed issued under the treasury stock      
method for diluted earnings per share are weighted for the period the underlying
options were outstanding.                                                       

NOTE 4 -- ACCUMULATED OTHER COMPREHENSIVE INCOME                                

 Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which established standards for reporting and displaying 
comprehensive income and its components in a financial statement that is        
displayed with the same prominence as other financial statements. The changes in
the components of accumulated other comprehensive income are reported net of    
income taxes for the nine months ended September 30, 1998 as follows:           

                                                                [Download Table]

                                                               ACCUMULATED 
                                                                  OTHER    
                                          UNREALIZED GAINS    COMPREHENSIVE
                                           ON SECURITIES         INCOME    
                                          ----------------    -------------
                                                                           
Pre-tax amount..........................      $260,000          $260,000   
Income tax..............................       109,000           109,000   
                                              --------          --------   
Net of tax amount.......................      $151,000          $151,000   
                                              ========          ========   

NOTE 5 -- RESTRICTED ASSETS                                                     

Under the terms of the September 14, 1995 amendment to the Cooperative
Agreement, 30% of the registration fees collected by the Company is required to 
be set aside for the enhancement of the intellectual infrastructure of the      
Internet ("set aside funds") and, as such, is not recognized as revenue by the  
Company. The Company has reflected these set aside funds, along with the        
appropriate percentage of net accounts receivable as restricted assets, and has 
recorded an equivalent, related current liability. The Company maintains the    
cash received relating to the set aside funds in a separate interest bearing    
account. The set aside funds, plus any interest earned, are intended to be      
disbursed at the direction of the NSF. In September 1998, the Company disbursed 
$39.2 million out of this fund to the NSF at its direction, bringing cumulative 
disbursements since September 14, 1995 to $62.2 million.                        

On March 12, 1998, the NSF and the Company amended the Cooperative    
Agreement to eliminate the 30% set aside requirement effective April 1, 1998.   
Future disbursement of these set aside funds will have no significant effect on 
the Company's business, financial condition or results of operations. For       
purposes of the Company's statements of cash flows, amounts relating to these   
restricted assets and the Internet fund liability have been excluded in their   
entirety.                                                                       

 8

10-Q
9th Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 9th

NOTE 6 -- COMMITMENTS AND CONTINGENCIES                                         

INTERNET GOVERNANCE                                                             

   Within the U.S. Government, leadership for the continued privatization of
Internet administration is currently provided by the NTIA. After a series of    
draft proposals and public comment periods, on June 10, 1998, the NTIA 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     
responsibility for administration of the domain name system ("DNS"), but which  
is not expected to perform actual registration of domain names either as a      
registrar or registry. The Statement of Policy invites 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 calls for a separation of the registry and registrar functions of the    
DNS, both of which functions are currently performed exclusively by the Company 
in the .com, .org, .net and .edu TLDs.                                          

As part of the process initiated by the Statement of Policy, several  
proposals were put forward to the NTIA on the establishment and governance of   
the not-for-profit corporation. A newly-formed U.S. based private not-for-profit
corporation denoted the Internet Corporation for Assigned Names and Numbers     
("ICANN") has submitted a series of proposals which is forming the basis of     
public discussion at a series of meetings one of which was held on November 14, 
1998.                                                                           

As a result of these and other meetings and private negotiations, the 
process initiated by the Statement of Policy may result in U.S. Government      
recognition of ICANN as the not-for-profit corporation under the Statement of   
Policy. The NTIA plan calls for a phased transition of its responsibilities for 
the DNS to the not-for-profit corporation over the period ending on September   
30, 2000. 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 transition of DNS administration and, if it does,  
the effect on the Company of such transition.                                   

   In October 1998, the Cooperative Agreement was amended (the "October 1998
Amendment") to extend its term through September 30, 2000. As the U.S.          
Government transitions its authority over the DNS 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 the Company. In the October 1998 Amendment, the Company and the 
NTIA agreed to a plan for the transition to a shared registration system, in    
which multiple registrars may register domain names with the single registry for
each TLD, in a phased approach, the first phase of which is scheduled to be     
completed by March 31, 1999.                                                    

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 the Company are intended
to be forward-looking statements which may involve risk and uncertainty. There  
are a number of factors that could cause the Company's 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 the Company's 1997 Form 10-K, as filed with the SEC on    
March 31, 1998. 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, the Company's 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 1997 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 the Company's 1997 Form 10-K in order to have a more complete  
understanding of the principal risks associated with an investment in the       
Company's common stock.                                                         

 9

10-Q
10th Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 10th

OVERVIEW                                                                        

The Company currently acts as the exclusive registrar and registry of 
Internet domain names within the .com, .org, .net and .edu TLDs pursuant to the 
Cooperative Agreement with the NTIA. Domain names are used to identify a unique 
site or presence on the Internet. As registrar and registry for these TLDs, the 
Company registers new domain names and is responsible for the maintenance and   
dissemination of the master file of domain names through daily updates to the   
Internet.                                                                       

   The Company also delivers enterprise network consulting services to large
companies that desire to establish or enhance their Internet presence or        
re-engineer legacy network infrastructures to accommodate the integration of    
both Internet connectivity and internal enterprise network ("Intranet"),        
technology into their information technology base. The Company's consulting     
services include network engineering, network and systems security and network  
management.                                                                     

Registration Services.  In December 1992, the Company entered into the
Cooperative Agreement with the NSF under which the Company was to provide       
Internet domain name registration services for five TLDs: .com, .org, .net, .edu
and .gov. These registration services include 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 includes 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 NTIA took over the administration of the Cooperative Agreement from   
the NSF. In October 1998, the Cooperative Agreement was amended and extended    
until September 30, 2000.                                                       

The original terms of the Cooperative Agreement provided for a cost   
reimbursement plus fixed-fee contract (with an initial fee of 8%). Effective    
September 14, 1995, the NSF and the Company amended the Cooperative Agreement to
require the Company to begin charging end users a services fee of $50 per year  
for each domain name in the .com, .org and .net TLDs. 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 (collectively "registration fees"). The NSF paid the registration    
fees for domain names within the .edu and .gov TLDs through March 31, 1997.     
Commencing April 1, 1997, the Company agreed with the NSF to provide domain name
services within the .edu and .gov TLDs free of charge. As of October 1, 1997,   
the Company no longer registers or administers domain names in the .gov TLD.    

Under the terms of the September 14, 1995 amendment to the Cooperative
Agreement, 30% of the registration fees collected by the Company 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 the Company. The Company
has reflected these funds, along with the appropriate percentage of net accounts
receivable, as restricted assets and has recorded an equivalent, related current
liability. The Company maintains the cash received relating to the set aside    
funds in a separate interest bearing account. The set aside funds, plus any     
interest earned, are disbursed at the direction of the NSF. To date, the Company
has disbursed $62.2 million to the NSF at their direction, and as of September  
30, 1998, has a remaining restricted cash balance of approximately $627,000.    

On March 12, 1998, the NSF and the Company 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 re-registration fee of $35 per year thereafter. This     
amendment has no effect on the revenue currently recognized on each registration
($70 for initial registrations and $35 for re-registrations), since the Company 
previously did not recognize revenue on the 30% set aside funds. Accordingly,   
while the revenue to the Company on a per registration basis does not change,   
the amount charged to customers declined.                                       

    In order to provide prompt access to new domain names on the Internet, the
Company generally invoices customers and permits them to pay their registration 
fees after their domain names are registered. The Company's experience has been 
that, for the period from September 1995 through September 1998, approximately  
30% of new registrations have ultimately been deactivated for non-payment. The  
Company                                                                         

10

10-Q
11th Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 11th

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 transferring registration  
for such names at a profit. Such resellers have a greater tendency than other   
customers to default on their registration fees. As a consequence, the Company  
has recorded a comparable provision for uncollectible accounts in determining   
net registration revenue. This 30% provision has been consistently applied for  
the period from September 1995 through September 1998 and is considered adequate
by the Company.                                                                 

Registration fees charged to customers for registration services are  
recognized as revenue evenly over the registration term. For example, the       
Company recognizes $70 on a straight-line basis over the two-year service period
for each $70 initial domain name registration, equivalent to $35 per year.      
Annual re-registrations of domain names are recorded as revenue based upon $35  
recognized on a straight-line basis over the one-year service period. This      
subscription-based model defers revenue recognition until the Company provides  
the registration services, including maintenance of and unlimited modifications 
to individual domain name records, over the respective registration terms. At   
September 30, 1998, the Company had net deferred revenue of $106.7 million.     

     Enterprise Network Consulting Services.  Substantially all of the Company's
enterprise network consulting 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 the Company's enterprise network consulting services are
provided to customers in the financial services industry. Bank America (formerly
NationsBanc) is currently the Company's largest consulting services client,     
accounting for 49% of the Company's enterprise network consulting services      
business net revenue and 3.7% of the Company's total net revenue in the nine    
months ended September 30, 1998. NationsBanc originally contracted with the     
Company in 1993 and the Company 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 109% from $12.2 million for the three
months ended September 30, 1997 to $25.4 million for the three months ended     
September 30, 1998. This increase in net revenue was primarily attributable to  
the increase in the number of domain name registrations, principally in the .com
TLD. Net revenue from registration services increased 116% from $10.7 million   
for the three months ended September 30, 1997 to $23.1 million for the three    
months ended September 30, 1998. Net new registrations increased 89% from       
269,000 for the three months ended September 30, 1997 to 507,000 for the three  
months ended September 30, 1998. This also represents a 14% increase over the   
443,000 net new registrations for the three months ended June 30, 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 September 30, 1997 were 1,296,000 as compared to 2,777,000  
as of September 30, 1998, for a 114% increase. In addition, this growth in      
cumulative net registrations is a 21% increase in the Company's entire customer 
base since June 30, 1998.                                                       

    Net revenue from enterprise network consulting services increased 53% from
$1.5 million for the three months ended September 30, 1997 to $2.3 million for  
the three months ended September 30, 1998. This also represents a 53% increase  
over the $1.5 million in enterprise network consulting services revenue for the 
three months ended June 30, 1998. NationsBanc accounted for $305,000 or 2.5% of 
the Company's total net revenue for the three months ended September 30, 1997   
and $1.2 million or 4.7% of the Company's total net revenue for the three months
ended September 30, 1998.                                                       

 Net revenue increased 102% from $30.9 million for the nine months ended
September 30, 1997 to $62.4 million for the nine months ended September 30,     
1998. This increase in net revenue was primarily attributable to the increase in
the number of domain name registrations, principally in the .com TLD. Net       
revenue from registration services increased 123% from $25.9 million for the    
nine months ended September 30, 1997 to $57.7 million for the nine months ended 
September 30, 1998. Net new registrations increased 85% from 698,000 for the    
nine months ended September 30, 1997 to 1,290,000 for the nine months ended     
September 30,                                                                   
11

10-Q
12th Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 12th

1998. The provision for uncollectible accounts used in determining net new      
registration revenue for the nine months ended September 30, 1997 and 1998 was  
consistently applied at a rate of 30%.                                          

   Net revenue from enterprise network consulting services decreased 6% from
$5.0 million for the nine months ended September 30, 1997 to $4.7 million for   
the nine months ended September 30, 1998. NationsBanc accounted for $1.7 million
or 5.5% of the Company's total net revenue for the nine months ended September  
30, 1997 and $2.3 million or 3.7% for the nine months ended September 30, 1998. 

   During the three and nine months ended September 30, 1998, the consulting
services division continued to add new leadership in sales and operations and   
hired additional technical consultants. In addition, the division continued to  
emphasize its efforts targeted at lead generation and regional sales and        
marketing programs by opening offices in New York City and Atlanta, Georgia.    

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 from $7.0 million for the three months ended September 30,    
1997 to $10.3 million for the three months ended September 30, 1998. This 47%   
increase was primarily driven by the growth of the Company's registration       
business which experienced additional outsourcing costs of $1.2 million in      
support of the Company's invoicing, collection and processing activities and    
additional direct labor charges of $795,000 related to systems engineering and  
operations.                                                                     

  As a percentage of net revenue, cost of revenue decreased from 57.8% for
the three months ended September 30, 1997 to 40.6% for the three months ended   
September 30, 1998. This decrease primarily reflects economies of scale that the
Company 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.                                                

Cost of revenue increased from $18.5 million for the nine months ended
September 30, 1997 to $26.5 million for the nine months ended September 30,     
1998. This 43% increase was driven by a $1.8 million increase in labor, a $3.7  
million increase in outsourcing costs and $2.6 million in additional            
depreciation charges and equipment expenditures primarily associated with       
supporting the growth of the Company's registration services business.          

  As a percentage of net revenue, cost of revenue decreased from 59.8% for
the nine months ended September 30, 1997 to 42.4% for the nine months ended     
September 30, 1998 reflecting economies of scale achieved in the Company's      
registration business.                                                          

Research and Development Expenses.  Research and development expenses 
consist primarily of compensation and consultant expenses to support the        
creation, development and enhancement of the Company's products, services and   
technologies. Research and development expenses increased 259% from $377,000 for
the three months ended September 30, 1997 to $1.4 million for the three months  
ended September 30, 1998. To date, all research and development costs have been 
expensed as incurred. The Company expects that the level of research and        
development expenses will continue to increase in the near future in terms of   
absolute dollars as the Company invests in developing new product and service   
offerings. As a percentage of net revenue, research and development expenses    
increased from 3.1% for the three months ended September 30, 1997 to 5.3% for   
the three months ended September 30, 1998.                                      

    Research and development expenses increased 164% from $1.1 million for the
nine months ended September 30, 1997 to $2.9 million for the nine months ended  
September 30, 1998. As a percentage of net revenue, research and development    
expenses increased from 3.5% for the nine months ended September 30, 1997 to    
4.6% for the nine months ended September 30, 1998.                              

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 Science Applications International Corporation ("SAIC"),
legal and other professional costs and amortization of goodwill associated with 
the Company's 1995 acquisition by                                               

12

10-Q
13th Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 13th

SAIC. Selling, general and administrative expenses increased 230% from $3.1     
million for the three months ended September 30, 1997 to $10.2 million for the  
three months ended September 30, 1998. The increase is primarily attributable to
increases in marketing and business development expenses of $5.0 million        
including television, Internet banner advertising and targeted direct mail      
campaigns. The Company expects that the level of marketing and business         
development expenses will increase in the near future as the Company continues  
to promote the value of a .com Web address and other new Internet-based         
value-added services. The Company also plans to continue to develop its         
distribution channels, both domestically and internationally.                   

As a percentage of net revenue, selling, general and administrative   
expenses increased from 25.5% for the three months ended September 30, 1997 to  
40.3% for the three months ended September 30, 1998.                            

Selling, general and administrative expenses increased 210% from $7.9 
million for the nine months ended September 30, 1997 to $24.4 million for the   
nine months ended September 30, 1998. The increase was attributable to a $10.2  
million increase in marketing and business development expenses, increased      
staffing expenses of $1.5 million and an increase in legal and other            
professional costs of $2.7 million.                                             

As a percentage of net revenue, selling, general and administrative   
expenses increased from 25.5% for the nine months ended September 30, 1997 to   
39.2% for the nine months ended September 30, 1998.                             

     Interest Income.  The Company had interest income of $570,000 for the three
months ended September 30, 1997 as compared to $1.7 million for the three months
ended September 30, 1998.                                                       

   The Company had interest income of $1.1 million for the nine months ended
September 30, 1997 as compared to $4.4 million for the nine months ended        
September 30, 1998. The increase for both the three month and nine month        
comparisons is attributable to the investment of the net proceeds of the        
Company's initial public offering as well as positive cash flow resulting from  
increasing domain name registrations.                                           

   Income Taxes.  The provision for income taxes was 45% of pretax earnings,
or $995,000 for the three months ended September 30, 1997, and 42% or $2.2      
million for the three months ended September 30, 1998.                          

    The provision for income taxes was 45% of pretax earnings, or $2.0 million
for the nine months ended September 30, 1997, and 42%, or $5.4 million for the  
nine months ended September 30, 1998. The difference between the effective rates
for both periods presented is principally attributable to the relative impact   
that non-deductible goodwill had on pretax operating income. Goodwill is being  
amortized by the Company over five years and is associated with the acquisition 
of the Company by SAIC in 1995.                                                 

LIQUIDITY AND CAPITAL RESOURCES                                                 

    At September 30, 1998, the Company's principal source of liquidity was its
cash and cash equivalents of $9.1 million and its short-term investments of     
$107.9 million, which when combined represent an increase of $35.7 million from 
the December 31, 1997 balance in those accounts. The Company also has $6.3      
million of marketable securities held as long term investments as of September  
30, 1998.                                                                       

    At September 30, 1998, the Company's cumulative net obligation to SAIC for
intercompany activity was $2.6 million, a net increase of $1.3 million from     
December 31, 1997. Intercompany activity is primarily comprised of salaries and 
benefits paid by SAIC on behalf of the Company. The Company currently reimburses
SAIC for intercompany activity on a monthly basis. Pursuant to the Tax Sharing  
Agreement dated September 26, 1997, the Company 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.                             

 Cash provided by operations was $42.1 million for the nine months ended
September 30, 1998. This amount is principally attributed to net income plus the
increase in deferred revenue reflecting cash collected in advance of            
registration services revenue recognition 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 subsequent tax liabilities.                                                 

13

10-Q
14th Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 14th

Investing activities totaled $79.3 million for the nine months ended  
September 30, 1998, of which $67.7 million was net purchases of short-term      
investments and $6.0 million of long-term investments. These investments are    
primarily comprised of commercial investment grade securities.                  

   The Company believes that its existing cash balance, investments and cash
flows expected from future operations will be sufficient to meet the Company's  
capital requirements for at least the next 12 months.                           

FACTORS AFFECTING OPERATING RESULTS.                                            

Ongoing Privatization of Internet Administration.  The Internet is not
bound by geography, and neither the U.S. Government nor any single organization 
or entity currently has formal authority over all aspects of the Internet. There
is, however, a need for central policy decisions surrounding the coordination of
the administrative services required for the registration, allocation and use of
TLDs and Internet Protocol ("IP") numbers, and for the effective global         
operation of the Internet. This role has been filled through mutual cooperation 
and interrelated informal agreements, historical leadership from an             
unincorporated entity called the Internet Assigned Numbers Authority (the       
"IANA") and growing involvement from the U.S. Government. With the onset of     
increased commercial growth of the Internet, the U.S. Government has initiated  
an activity directed at increased privatization of the policy making and central
administration of the Internet. Without authoritative policy making, it is      
becoming increasingly more difficult to achieve consensus in the historical     
manner. Failure to achieve consensus among the various groups who now informally
administer the Internet could disrupt Internet operations or delay              
infrastructure improvements or changes in operations needed to maintain and     
expand the Internet. The Company's business, financial condition and results of 
operations could be materially and adversely affected by such a failure.        

 Within the U.S. Government, leadership for the further privatization of
Internet administration is currently provided by the NTIA. After a series of    
draft proposals and public comment periods, on June 10, 1998, the NTIA published
in the Federal Register the Statement of Policy, calling for the formation of a 
not-for-profit corporation to assume responsibility for administration of the   
DNS, but which is not expected to perform actual registration of domain names   
either as a registrar or registry. The Statement of Policy invites 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 calls for a separation of the registry and      
registrar functions of the DNS, both of which functions are currently performed 
exclusively by the Company in the .com, .org .net, and .edu TLDs.               

As part of the process initiated by the Statement of Policy, several  
proposals were put forward to the NTIA on the establishment and governance of   
the not-for-profit corporation. ICANN has submitted a series of proposals which 
is forming the basis of public discussion at a series of meetings one of which  
was held on November 14, 1998.                                                  

As a result of these and other meetings and private negotiations, the 
process initiated by the Statement of Policy may result in U.S. Government      
recognition of ICANN as the not-for-profit corporation under the Statement of   
Policy. The NTIA plan calls for a phased transition of its responsibilities for 
the DNS to the not-for-profit corporation over the period ending on September   
30, 2000.                                                                       

   There are several risks associated with the recognition of private sector
DNS administration and the establishment of, and transfer of DNS administration 
from the NTIA to, the not-for-profit corporation. Some of those risks include:  

- failure to achieve consensus on the many issues relating to the     
  establishment and governance of the not-for-profit corporation could
      prevent or delay the transition and thereby result in instability in DNS
administration,                                                   

  - the not-for-profit corporation could fail to achieve consensus or gain
   legitimacy resulting in instability in the operation of the Internet,

  - the U.S. Government could refuse to transfer some responsibilities for
       DNS administration to the not-for-profit corporation thereby resulting in
fragmentation or other instability in DNS administration,         

14

10-Q
15th Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 15th

   - the Company might not succeed in establishing an acceptable contractual
agreement with the not-for-profit corporation, and                

- the not-for-profit corporation could adopt or promote policies,     
      procedures or programs that are unfavorable to the Company's role in the
registration of domain names or that are not consistent with, or  
preclude, the Company's 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 transition of DNS administration and, if it does, the 
effect on the Company of such transition. The Company's business, financial     
condition and results of operations could be materially and adversely affected  
by any of these events and the uncertainty regarding authoritative sources for  
domain name registration policies.                                              

     Status of Cooperative Agreement.  On January 1, 1993, the Company initiated
phase-in of the Cooperative Agreement. 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 30, 1998. Effective
in September 1998, the responsibility for the Cooperative Agreement was         
transferred to the NTIA. In October 1998, the Cooperative Agreement was amended 
to extend its term through September 30, 2000. As the U.S. Government           
transitions its responsibilities for the DNS 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
the Company. In the October 1998 Amendment, the Company and the NTIA agreed to a
plan for the transition to a shared registration system, in which multiple      
registrars may register domain names with the single registry for each TLD, in a
phased approach, the first phase of which is scheduled to be completed by March 
31, 1999.                                                                       

    While the Cooperative Agreement by its terms expires in September 2000, it
may be terminated earlier by the NTIA. The Company's business, financial        
condition and results of operations could be materially and adversely affected  
by a termination or a change in the terms of the Cooperative Agreement. There is
also a risk that the U.S. Government's interpretation of certain provisions of  
the Cooperative Agreement could differ from the Company's. Certain aspects of   
implementation of the Cooperative Agreement also remain to be negotiated. If the
Company is unsuccessful in negotiating acceptable terms of implementation, the  
costs of implementation of the Cooperative Agreement, the Company's relationship
with the not-for-profit corporation and other matters affecting the Company's   
position in a more competitive DNS environment could all be materially and      
adversely affected.                                                             

There is a risk that withdrawal of or challenges to the government's  
sponsorship or authorization of certain functions that the Company performs     
could create a public perception or result in a legal finding that the Company  
lacks authority to continue in the Company's current role as registry or        
registrar within the .com, .org, .net and .edu TLDs. The legal authority        
underlying the roles of NTIA and the not-for-profit corporation with regard to  
the DNS system also could be challenged. The impact, if any, of any such public 
perception or finding is unknown but it could materially and adversely affect   
the Company's business, financial condition and results of operations.          

  Increased Competition in Domain Name Registration Business.  A principal
objective of the Statement of Policy is to introduce additional competition and 
global participation in the management of Internet names and addresses,         
including competition among registrars within a single TLD and competition among
existing and new TLDs. The October 1998 Amendment reflects this objective with  
the transition to a shared registration system in a phased approach, the first  
phase of which is scheduled to be completed by March 31, 1999. Many aspects of  
how competition will work in the DNS, however, remain unsettled and could be    
impacted by, among other things, actions of the not-for-profit corporation.     
Although the Statement of Policy contemplates establishment of additional       
competition, the Company currently faces competition in the domain name         
registration business from registries for country codes, third level domain name
providers such as Internet access providers and registries of TLDs other than   
those TLDs which the Company currently registers. A number of entities have     
already begun to offer competing registration services using other TLDs and when
the shared registration system takes effect the Company will no longer be the   
exclusive registrar in .com, .org and .net TLDs.                                
15

10-Q
16th Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 16th

     Future competition in the Company's domain name registration business could
come from many different companies, including:                                  

- domain name registration resellers,                                 

- Internet access providers,                                          

- major telecommunications firms, and                                 

- cable companies.                                                    

Many of these entities have core capabilities to deliver registration 
services, such as help desks, billing services and network management, along    
with strong name recognition and Internet industry experience. The Company's    
position as the leading registrar of domain names could be materially and       
adversely affected by the emergence of any of these competitors and potential   
competitors, many of which have longer operating histories and significantly    
greater name recognition and greater financial, technical, marketing,           
distribution and other resources than the Company. The Company's revenue from   
registration fees 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. The       
introduction of additional competition into the domain name registration        
business could have a material adverse effect on the Company's business,        
financial condition and results of operations.                                  

 Limited Service Offerings to Date; Reliance on Domain Name Registration
Services for a Significant Portion of Revenues.  The Company's domain name      
registration services business generates over 90% of the Company's revenue and  
is expected to continue to account for a very significant portion of the        
Company's revenue in at least the near term. The Company's future success will  
depend largely on:                                                              

- the continued increase in domain name registrations,                

- re-registration rates of the Company's customers,                   

- the Company's ability to maintain its 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.              

    Although the Company has experienced revenue growth in recent periods, the
Company may not be able to sustain it and such growth may not be indicative of  
future operating results. For example, the Company may not be able to maintain  
its current position in providing domain name registration services or develop  
or market additional services. The Company's failure to do so could materially  
and adversely affect the Company's business, financial condition and results of 
operations.                                                                     

  Limited Operating History.  Prior to September 14, 1995, the Company was
paid directly by the NSF for providing registration services on a cost          
reimbursement plus fixed fee basis. Accordingly, the Company has only a limited 
operating history for its current domain name registration business upon which  
to base an evaluation of the Company and its prospects. The Company's prospects 
must be considered in light of the risks frequently encountered by companies in 
their early stages of development, particularly companies in new and rapidly    
evolving markets. To address these risks, the Company must, among other things: 

- respond to competitive developments,                                

- increase its sales and marketing operations,                        

     - continue to identify, attract, retain and motivate qualified persons, and

  - continue to upgrade and integrate technologies, products and services.

    Due to the rapidly evolving nature of Internet technologies, the Company's
enterprise network consulting services business faces similar risks. The Company
may not be successful in addressing such risks.                                 

   Evolving Sales and Marketing Organization and Distribution Channels.  The
Company will need to effectively manage its growing sales and marketing         
organization if the Company wants to achieve future                             
16

10-Q
17th Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 17th

revenue growth. The Company does not know if it will be able to identify,       
attract and retain experienced sales and marketing personnel with relevant      
experience. Further, the Company's sales and marketing organization may not be  
able to successfully compete against the significantly more extensive and       
well-funded sales and marketing operations of its current or potential          
competitors.                                                                    

In addition to establishing direct sales channels, the Company is also
developing multiple distribution channels. The Company's ability to achieve     
future revenue growth will also depend on its establishing and maintaining      
relationships with Internet access providers and other third parties and on     
effective use of the Internet as a medium of distribution.                      

If the Company fails to manage and grow its new sales and marketing   
organization, develop and expand its distribution channels or effectively use   
the Internet as a medium of distribution, the Company's business, financial     
condition and results of operations could be materially and adversely affected. 

Reliance on Third Parties.  The functioning of the DNS is facilitated 
through a hierarchy of domain name servers (specialized software programs       
resident in network computers). The top level of this hierarchy consists of 13  
globally distributed servers (ten in the United States, two in Europe and one in
Asia), which together are referred to as the Root Server System. These root     
servers function as the equivalent of master "white pages" of the Internet. The 
Company administers and operates two of the 13 root servers (designated by the  
letters A and J). Root Server A has special significance. Every night the       
Company updates the Root Server A database by adding the newly registered second
level domain names and updating existing domain name records. The 12 other root 
servers then copy the updated database.                                         

     All 13 root servers contain information with respect to all TLDs, including
country code TLDs. Also, nine of the 13 root servers currently are populated    
with the domain names registered by the Company. When communication with a      
particular host within a domain name is required and the IP address of that host
is not known locally, the root servers make that information available or       
"point" to a direct or indirect source of the information. Multiple root servers
are required for purposes of load balancing and redundancy.                     

The location and control of these root servers historically has been  
determined by consensus of various members of the Internet community. The eleven
root servers that the Company does not maintain and control are maintained and  
controlled by independent operators on a volunteer basis. If these volunteer    
operators at any time, for any reason, fail to properly maintain such servers or
abandon such servers, the Company's business, financial condition and results of
operations could be materially and adversely affected.                          

     Further, as no single organization or entity currently has formal authority
over all aspects of the Internet, neither the U.S. Government nor any           
organization or entity has clear legal authority to direct root server          
operations including where the root servers are to be pointed. If any or all of 
the root servers fail to include or provide accessibility to the Company's data,
the Internet and the Company's business, financial condition and results of     
operations would be materially and adversely affected.                          

The Company's success and ability to compete also depend upon its     
relationships with Internet service providers ("ISPs") worldwide. The Company's 
business, financial condition and results of operations would be materially and 
adversely affected if enough ISPs decided not to route Internet communications  
to or from domain names registered by the Company or if enough ISPs decided to  
provide routing to a set of accepted root servers which did not point to the    
Company's TLD servers.                                                          

    System Interruption and Security Risks.  A failure in the operation of the
Company's registration system could result in deletion of one or more domain    
names from the Internet for a period of time. A failure in the                  

17

10-Q
18th Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 18th

operation or update of Root Server A could result in deletion of one or more    
TLDs from the Internet and the discontinuation of domain names in those TLDs for
a period of time.                                                               

     The Company's operations depend on its ability to maintain its computer and
telecommunications equipment in effective working order and to reasonably       
protect its systems against interruption. Such 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 the Company's customer base and
      the Company's inability to sufficiently maintain or upgrade its systems.

     The Company's business, financial condition and results of operations could
be materially and adversely affected by any damage, failure or delay that causes
significant interruptions in the Company's systems.                             

 Regulation.  In the United States, apart from the Company's obligations
under the Cooperative Agreement, the Company is not currently subject to direct 
regulation other than federal and state regulation applicable to businesses     
generally. However, if there are changes in the regulatory environment, the     
Company could become subject to direct regulation by U.S. regulatory agencies.  
For example, the Company is aware that certain industry requests have been made 
to the Federal Communications Commission (the "FCC") to review the impact of    
Internet usage on the U.S. telecommunications service providers, in particular, 
the generally lower cost for data transmission versus voice. In addition, as the
Internet becomes more widespread internationally, international regulation      
becomes more likely. The Company cannot predict whether or to what extent any   
such new regulation will occur; however, such regulation could have a material  
adverse effect on the Company's business, financial condition and results of    
operations.                                                                     

     Additionally, the Company is not certain how existing laws governing issues
such as intellectual property ownership would be applied to it. The Company also
is not certain how courts will interpret the obligation of domain name          
registration providers to prevent trademark infringement and other legal issues.
See "-- Legal Proceedings."                                                     

   Legal Proceedings.  The Company is involved in several legal proceedings.
As of November 1, 1998, the Company was named as a defendant in two active      
lawsuits involving domain name disputes between trademark owners and domain name
holders. In addition, on March 20, 1997, PG Media, Inc., a New York-based       
corporation, filed a lawsuit (the "PG Media suit"), alleging that the Company   
had violated the Sherman Act by restricting access to the Internet by not adding
PG Media's requested TLDs to the Internet root zone system. In its complaint, PG
Media has, in addition to requesting damages, asked that the Company be ordered 
to include reference to PG Media's TLDs and name servers in the root zone file  
that the Company administers under the Cooperative Agreement. The Company       
received written direction from the NSF not to take any action which would      
create additional TLDs or to add any new TLDs to the Internet root zone until   
the NSF provides further guidance. On September 17, 1997, PG Media filed a      
Second Amended Complaint adding the NSF as a defendant. On May 14, 1998, PG     
Media served the Company with a motion for a preliminary injunction against both
defendants. The motion sought a hearing before the court on June 8, 1998 to     
compel both defendants to add PG Media's TLDs to the Internet root zone within  
30 days. In response, both the Company and the NSF filed cross motions for      
summary judgment against PG Media. On July 20, 1998, all motions were heard. The
basic issue before the court was the NSF's authority to control the Internet's  
root zone system. The court has taken the issue under advisement and no date has
been indicated for the issuance of a decision.                                  

18

10-Q
19th Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 19th

     On October 17, 1997, a group of six plaintiffs filed a lawsuit (the "Thomas
suit") against the Company and the NSF. The lawsuit:                            

  - challenged the legality of fees charged by the Company for domain name
registration services; and                                        

   - sought restitution of fees collected from domain name registrants in an
amount in excess of $100 million.                                 

 The plaintiffs alleged violations of the Administrative Procedures Act,
Independent Offices Appropriations Act, the Sherman Act and the U.S.            
Constitution. In August 1998, the court dismissed all of the plaintiffs' claims 
against the Company. In October 1998, however, the plaintiffs appealed the      
court's dismissal of their claims.                                              

  While the Company cannot reasonably estimate the potential impact of the
claims advanced in the PG Media or Thomas suits, a successful claim against the 
Company in either of these proceedings could have a material adverse effect on  
the Company's business, financial condition and results of operations.          

   In addition, on June 27, 1997, SAIC received a Civil Investigative Demand
("CID") from the U.S. Department of Justice ("DOJ") issued in connection with an
investigation regarding possible antitrust violations under the Sherman Act     
relating to Internet registration products and services. The Company cannot     
reasonably estimate the potential impact of the investigation nor can the       
Company predict whether a civil action will ultimately be filed by the DOJ or   
the form of relief that might be sought. Any such relief could have a material  
adverse effect on the Company's business, financial condition and results of    
operations.                                                                     

    On August 17, 1998, the Company received notice from the Commission of the
European Communities (the "EC") of an investigation concerning the Company's    
Premier Domain Registration Service Program ("Premier Program") in Europe. The  
EC requested production of these agreements and related materials for review.   
The Company cannot reasonably estimate the potential impact of the investigation
nor can the Company predict whether an action will ultimately be brought by the 
EC or the form of relief that might be sought. Any such relief could have a     
material adverse effect on the Company's business, financial condition and      
results of operations.                                                          

     Legal proceedings in which the Company is involved have resulted and likely
will result in, and any future legal proceedings can be expected to result in,  
substantial legal and other expenses to the Company and a diversion of the      
efforts of the Company's personnel.                                             

     Technological Change and Additional Technology, Products and Services.  The
Company's future financial success will depend upon its ability to develop,     
integrate or commercialize in a timely manner new technology, products and      
services that can be offered with the Company's current domain name registration
and enterprise network consulting services and that can meet the changing       
requirements of the Company's current and future customers. The market for such 
technology, products and services is characterized by rapidly changing          
technology and evolving industry standards. Generally, the successful           
development and commercialization of new technology, products and services      
involves many risks, including:                                                 

- identifying opportunities for new products or services,             

  - identifying, hiring and retaining appropriate research and development
personnel,                                                        

- successfully completing the development process, and                

- customer acceptance of the product or service.                      

    Uncollectible Receivables; Modifications to Billing Practices.  Currently,
the Company invoices a majority of its customers and permits them to pay their  
services fee after the domain name is registered. The Company believes it has   
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 reselling such names at a  
profit. The Company's experience has been that such resellers have a greater    
tendency than other customers to default on their services fees. The Company has
established a                                                                   

19

10-Q
20th Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 20th

provision for uncollectible accounts which the Company believes to be adequate  
to cover anticipated uncollectible receivables; however, actual results could   
differ from the Company's estimates.                                            

   The Company continually reviews its billing practices for modification to
respond to market conditions and to implement operational improvements. These   
modifications could have unanticipated consequences which could materially and  
adversely affect the Company's business, financial condition and results of     
operations.                                                                     

    Competition in Internet-Based Businesses and Enterprise Network Consulting
Services.  In developing and distributing products and services for the         
Internet-based services markets, the Company faces intense competition and      
expects to have multiple competitors for each of the products or services the   
Company develops or sells. Many of the Company's potential competitors for these
products have longer operating histories, greater name recognition and          
significantly greater financial, technical, marketing, distribution and other   
resources than the Company does. In addition, the Company's industry is         
characterized by rapid changes and frequent product and service introductions.  
To the extent a competitor introduces a competitive product or service before   
the Company introduces the same or similar product or service, market acceptance
of the competitor's product or service may adversely affect the Company's       
competitive position.                                                           

   The Company's current and potential competitors in its enterprise network
consulting services business are companies with Internet expertise including    
systems integrators and consulting firms, such as Andersen Consulting, IBM      
Global Services and International Network Services. The Company also competes   
with certain companies that have developed products that automate the management
of IP addresses and name maps throughout enterprise-wide networks and with      
companies with internally-developed systems integration efforts. Many of these  
competitors and potential competitors have longer operating histories, greater  
name recognition and significantly greater financial, technical, marketing,     
distribution and other resources than the Company does.                         

   Management of Growth; Dependence on Key Personnel.  The Company continues
to experience growth in the number of its employees and in the scope of its     
operating and financial systems. This growth has increased the responsibilities 
for both existing and new management personnel. To manage growth, the Company   
will have to successfully integrate its management team, continue to implement  
and improve its operational, financial and management information systems and to
train, motivate, manage and retain its employees. If the Company cannot manage  
its growth, its business, financial condition and results of operations could be
materially and adversely affected. In addition, growth of the Company's customer
base may strain the capacity of its computers and telecommunications systems.   
Therefore, the Company must maintain or upgrade its systems or risk degradation 
in performance or system failure.                                               

   The Company's future success also depends on the continued service of its
key engineering, sales, marketing, executive and administrative personnel, and  
its ability to identify, hire and retain additional personnel. On November 16,  
1998, the Company announced the resignation of Gabriel A. Battista from his     
positions as Chief Executive Officer and Director of the Company. While the     
Company conducts a search for a new Chief Executive Officer, Michael A. Daniels,
Chairman of the Board, will assume the executive responsibilities previously    
performed by Mr. Battista. In addition, Robert J. Korzeniewski, Chief Financial 
Officer, will also be acting as the Company's Chief Operating Officer, assuming 
responsibility for day-to-day operations. In addition, the future success of the
Company's enterprise network consulting services business depends in large part 
on its ability to hire, train and retain engineers who have expertise in a wide 
array of network and computer systems and a broad understanding of the          
industries the Company serves. If the Company fails to hire, train and retain a 
sufficient number of qualified engineers, the Company's ability to adequately   
manage and complete its existing projects or to obtain new projects, as well as 
expanding its business, could be impaired. Competition for engineering, sales,  
marketing and executive personnel is intense. The Company cannot be certain that
it will be able to retain existing personnel or identify, hire or retain        
additional qualified personnel. It is impossible to reasonably estimate the     
potential financial impact of hiring a new Chief Executive Officer at this time.

     Intellectual Property Rights.  As required under the Cooperative Agreement,
on or before November 6, 1998, the Company submitted to the U.S. Government an  
electronic copy of all software and data generated                              
20

10-Q
21st Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 21st

under the Cooperative Agreement through September 30, 1998. By December 6, 1998,
the Company must submit to the U.S. Government a copy of all existing           
documentation for that software and data generated through September 30, 1998.  
The U.S. Government is required to take appropriate measures to protect the     
confidentiality of such data, software and documentation. The Company's         
business, financial condition and results of operations could be materially and 
adversely affected if:                                                          

  - the Company's ownership rights in its data, software and documentation
were to be successfully challenged,                               

- the Company cannot protect such rights,                             

 - the Company is required to share its data, software and documentation
with potential competitors, or                                    

 - the Company's potential competitors were otherwise able to obtain its
data, software or documentation.                                  

    The Company relies on a combination of nondisclosure and other contractual
arrangements with its employees and third parties, privacy and trade secret laws
to protect its proprietary rights and limit the distribution of its proprietary 
information. Although these actions are considered reasonable and adequate, no  
controls can guarantee the protection of the Company's proprietary rights.      
Furthermore, even if these steps are successful, other companies may develop    
technologies that are similar or superior to the Company's proprietary          
technology. Although the Company believes that its services do not infringe on  
the intellectual property rights of others and that the Company has all rights  
needed to use the intellectual property employed in its business, it is possible
that the Company could become subject to claims alleging infringement of third  
party intellectual property rights. Any claims could subject the Company to     
costly litigation, and may require the Company to pay damages and develop       
non-infringing intellectual property or acquire licenses to the intellectual    
property that is the subject of the alleged infringement. If the Company fails  
to adequately protect its proprietary rights or if the Company becomes involved 
in litigation relating to intellectual property rights, the Company's business, 
financial condition and results of operations could be materially and adversely 
affected.                                                                       

Dependence on Future Growth of the Internet and Internet              
Infrastructure.  The Company's 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 at its current pace, the Company's business, 
financial condition and results of operations would be materially and adversely 
affected. Continued growth of the Internet could be slowed by:                  

- inadequate infrastructure,                                          

   - lack of availability of cost-effective, high speed systems and service,

- failure to maintain a reliable network system,                      

  - delays in developing or adopting new standards and protocols to handle
increased levels of Internet activity, or                         

- government regulation.                                              

If the use of the Internet does not continue to grow, if the necessary
infrastructure or complementary products are not developed or do not effectively
support growth that may occur, or if the Internet does not become a viable      
information medium or commercial marketplace, the Company's business, financial 
condition and results of operations would be materially and adversely affected. 

    Uncertainty of Future Acquisitions and Investments.  The Company evaluates
potential acquisitions and investments on an ongoing basis. The Company may not 
be able to compete successfully for available acquisition candidates, complete  
future acquisitions and investments or accurately estimate the financial effect 
on the Company of any businesses the Company acquires or investments the Company
makes. Future acquisitions and investments may require the Company to spend     
significant cash amounts or decrease operating income, either of which could    
have a material adverse effect on the Company's business, financial             

21

10-Q
22nd Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 22nd

condition and results of operations. The Company's failure to implement         
successfully its acquisition and investment strategy could materially and       
adversely affect the Company's business, financial condition and results of     
operations. The Company may also make future acquisitions or investments in     
companies which are in the early stages of development. To the extent that any  
of these companies fail, it could have a material adverse effect on the         
Company's financial condition.                                                  

Potential Fluctuations in Quarterly Results.  The Company's quarterly 
operating results may fluctuate significantly in the future due to a variety of 
factors, many of which are beyond the Company's control. Such factors may       
include, but are not limited to:                                                

- developments in Internet governance including establishment of the  
      not-for-profit corporation and the effect of the October 1998 Amendment,

- increased competition, through the introduction of competing TLDs or
competing registrars in .com, .net or .org,                       

 - variations in the number of requests for domain name registrations or
demand for the Company's services,                                

- introduction or enhancements of services by the Company or its      
competitors,                                                      

- market acceptance of new service offerings,                         

     - costs associated with developing or providing domain name registration or
other services,                                                   

- litigation costs,                                                   

- adverse results of litigation,                                      

- termination or completion of contracts in the Company's enterprise  
  network consulting services business or failure to obtain additional
contracts in that business,                                       

- patterns of growth in the use of and interest in the Internet, or   

- general economic conditions.                                        

  In addition, the Company expects a significant increase in its operating
expenses as it:                                                                 

- increases sales and marketing operations,                           

- updates systems and infrastructure,                                 

- funds greater levels of product and services development,           

- develops new distribution channels,                                 

- broadens customer support capabilities, and                         

- expands facilities.                                                 

     If the increase in the Company's expenses is not followed by an increase in
revenue, the Company's business, financial condition and results of operations  
could be materially and adversely affected.                                     

In addition, a majority of the Company's enterprise network consulting
services operating expenses, particularly personnel and related costs,          
depreciation and rent, are substantially fixed before any particular quarter. As
a result, any under-utilization of engineers may cause the Company's operating  
results to vary significantly in any particular quarter and could result in     
losses for such quarter.                                                        

    Control by SAIC.  As of November 6, 1998, SAIC owned 100% of the Company's
outstanding Class B Common Stock, representing approximately 74.1% of the       
Company's outstanding Common Stock and approximately 96.6% of the combined      
voting power of the Company's outstanding Common Stock. The Class B Common Stock
is convertible into Class A Common Stock, subject to certain limitations set    
forth in the Company's Second Amended and Restated Certificate of Incorporation 
(the "Certificate of Incorporation"). As a result, SAIC effectively controls all
matters requiring approval by the Company's stockholders                        

22

10-Q
23rd Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 23rd

including the election of members of the Company's Board of Directors, changes  
in the size and composition of the Board of Directors and a change in control.  
The Company does not have an agreement with SAIC which restricts its rights to  
convert, distribute or sell its shares of the Company's Common Stock and there  
can be no assurance that SAIC will maintain its ownership of the Company's Class
B Common Stock.                                                                 

   Reliance on SAIC for Certain Corporate Services.  The Company has entered
into certain intercompany agreements with SAIC, including an agreement pursuant 
to which SAIC will provide various corporate services to the Company that may be
material to the conduct of the Company's business (the "Corporate Services      
Agreement"). These services include certain routine and ordinary corporate      
services, including business insurance, accounting systems, employee benefits,  
payroll, tax and legal services as well as assistance in government relations   
and corporate quality assurance services as described in the Corporate Services 
Agreement. With respect to matters covered by the Corporate Services Agreement, 
the Company's relationship with SAIC is intended to continue in a manner        
generally consistent with past practices. If SAIC's ownership of the Company's  
outstanding Common Stock drops below 50%, the Corporate Services Agreement will 
be terminable by either party upon 180 days' prior written notice. Certain      
individual services are also terminable by either party upon 180 days' prior    
written notice, regardless of SAIC's ownership interests. Although neither the  
Company nor SAIC currently intends to terminate the Corporate Services          
Agreement, if SAIC did elect to terminate the Corporate Services Agreement, the 
Company may not be able to secure alternative sources for such services within  
180 days or such services may only be available at prices higher than those     
charged by SAIC.                                                                

 Certain Charter Provisions and Limitations on Liability.  The Company's
Certificate of Incorporation includes provisions relating to competition by SAIC
with the Company, 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. The Company's Certificate of          
Incorporation provides that any person purchasing or acquiring an interest in   
shares of the Company's 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 the Company 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 the Company but adverse to SAIC.

 Under the Company's Certificate of Incorporation, the personal monetary
liability of the Company's directors for breach of their fiduciary duty of care,
including actions involving gross negligence, is eliminated to the fullest      
extent permitted under Delaware law.                                            

International Revenues.  While substantially all of the Company's     
operations, facilities, and personnel are located within the United States, the 
Company's revenues from sources outside the U.S. have increased significantly   
and may continue to increase in the future. As a result, the Company is subject 
to the risks of conducting business internationally, including unexpected       
changes in regulatory requirements, fluctuations in the U.S. dollar, tariffs and
other barriers and restrictions and the burdens of complying with a variety of  
foreign laws. The Company does not know what the impact of such regulatory,     
geopolitical and other factors will be on its business in the future or if the  
Company will have to modify its business practice. In addition, the laws of     
certain foreign countries may not protect the Company's proprietary rights to   
the same extent as do the laws of the United States.                            

Possible Volatility of Stock Price.  The market price of the Company's
Class A Common Stock has been and is likely to continue to be highly volatile   
and may be significantly affected by factors such as actual or anticipated      
fluctuations in the Company's quarterly operating results, announcements of     
technological innovations, industry conditions and trends, changes in or the    
Company's failure to meet the expectations of securities analysts and investors,
general market conditions and other factors. It is possible that in some future 
quarter, the Company's operating results may be below the expectations of       
securities analysts and investors. If this occurs, the price of the Company's   
Class A Common Stock would likely decline, perhaps substantially. In            

23

10-Q
24th Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 24th

addition, the stock market has experienced significant price and volume         
fluctuations that have particularly affected the market prices of the stocks of 
technology companies, including Internet-related companies. These broad market  
fluctuations may adversely affect the market price of the Company's Class A     
Common Stock. 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 management's attention and resources, which could have a material  
adverse effect on the Company's business, financial condition and results of    
operations.                                                                     

YEAR 2000 COMPLIANCE                                                            

 The Company is in the process of assessing the potential effects of the
Year 2000 millennium change on the Company's business systems and processes,    
including the Internet root servers under the Company's control,                
telecommunications systems, facilities, data-networking infrastructure,         
commercial-off-the-shelf hardware, software and components used by its employees
and its outsourcing vendors. The Company's Year 2000 project is proceeding on   
schedule. The project goal is to ensure that the Company's business is not      
impacted by the date transitions associated with the Year 2000.                 

    The Company's 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 the Company's business systems and processes, including the       
Internet root servers under the Company's 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 the Company's domain name registration business.   
The Company's Year 2000 project is comprised of the following phases:           

     - Phase 1 -- Inventory all of the Company's business systems and processes,
including the Internet root servers under the Company's 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 is expected to be completed in November 1998;

  - Phase 2 -- Assess the Year 2000 compliance of all inventoried business
  systems and processes, including the Internet root servers under the
Company's 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.
This phase is expected to be completed by December 1998;          

     - Phase 3 -- Complete remediation, if any is required, of any non-Year 2000
   compliant business systems and processes, including the Internet root
servers under the Company's 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 won't be remediated.
All remediation efforts, if any are required, are expected to be  
completed by April 30, 1999;                                      

   - Phase 4 -- Test and validate remediated and replacement systems, if any
 such remediation or replacement is required, to ensure inter-system
   compliance and mission critical system functionality. The testing and
      validation efforts, if any are required, are expected to be completed by
May 31, 1999;                                                     

  - Phase 5 -- Deploy and implement remediated and replacement systems, if
   any deployment or implementation is required, after the completion of
     successful testing and validation. The deployment and implementation of
     the remediated or replacement systems, if any is required, are expected
to be completed by October 31, 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 the
Company's employees due to the                                    
24

10-Q
25th Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 25th

Year 2000 millennium change. The initial contingency and business 
continuation plan is expected to be in place by December 31, 1998.

  Based on its inventory and assessment to date, the Company believes that
its internal mission critical systems are Year 2000 compliant. The Company, 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, the Company 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 ensure the Year 2000 
compliance of such systems prior to acceptance and deployment in the Company's  
business. This enhancement effort is a function of the Company's business growth
and not a Year 2000 remediation effort.                                         

  Based on its inventory and assessment to date, the Company believes that
its facilities and telecommunications systems are Year 2000 compliant. The      
Company has conducted detailed assessments of the components of its             
telecommunications infrastructure and is working to identify appropriate system 
testing guidelines. In addition, the Company 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 the Company's control, 
the Company has deployed back-up power systems capable of operating its core    
business indefinitely.                                                          

    At this time, the Company believes that its incremental remediation costs,
if any, needed to make its current business systems and processes, including the
Internet root servers under the Company's 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 the Company is incurring some incremental costs directly        
relating to staff augmentation for the Year 2000 program management and         
technical assessment, the costs expended by the Company through October 31, 1998
are less than $100,000. The Company's expected total costs, including           
remediation and replacement costs, if any, are estimated to be between $500,000 
and $1,000,000 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.                                                 

  The Company is contacting its other hardware and software vendors, other
significant suppliers, outsourcing service providers and other contracting      
parties to determine the extent to which the Company is vulnerable to any such  
third party's failure to achieve Year 2000 compliance for their own systems. At 
the present time, the Company does not expect Year 2000 issues of any such third
parties to materially affect the Company's business. Furthermore, the Company's 
business depends on the continued operation of, and widespread access to, the   
Internet. This, in turn, depends to a large extent on third parties on which the
Company's systems rely or to which they are connected or of other               
Internet-related companies, including Internet web hosting companies, Internet  
access providers and Internet root server operators. The Company can give no    
assurances that the systems of such companies 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 the Company. To the extent that the normal    
operation of the Internet is disrupted by the Year 2000 millennium change, the  
Company's business, financial condition or results of operations could be       
materially and adversely affected.                                              

Should the Company fail to solve a Year 2000 compliance problem to its
mission critical business systems and processes, including the Internet root    
servers under the Company's 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. The Company 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. The                                                                  

25

10-Q
26th Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 26th

Company's 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 the Company's business are as follows:                              

   - Significant and protracted interruption of electrical power to data and
call-center operations in the Company's engineering facility could
    materially and negatively impact the Company's ability to provide data
and call-center operations. To mitigate this risk, the Company has
deployed back-up power systems capable of operating indefinitely. 
       However, electrical power interruptions that impact Internet connectivity
   providers could adversely impact the Company because of the Company's
  reliance upon Internet-based operations for its day to day business.

  - Significant and protracted interruption of telecommunications and data
     network services in either of the Company's headquarters or engineering
     facilities could materially and negatively impact the Company's ability
   to provide data and call-center operations. The Company has conducted
detailed assessments of the components of its telecommunications  
  infrastructure and is working to identify appropriate system testing
      guidelines. As part of the technical assessment scheduled for completion
 by the end of 1998, the Company will have identified the compliance
  status of its data networking infrastructure and developed plans for
remediation, if necessary. Finally, the Company 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 the Company's current back office and domain
      name registration related systems could materially and negatively impact
      the Company's 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, the Company is conducting a technical
      assessment of the current systems and their software applications in the
     event that the deployment of the new systems is delayed beyond December
1999.                                                             

   - Despite the assurances of the Company's 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 the Company's business. The Company is conducting
monthly discussions with its mission critical outsourcing service 
providers to determine the progress of their Year 2000 compliance 
programs.                                                         

  Despite the Company's belief that its mission critical computer software
applications and systems are Year 2000 compliant and the 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, the Company is currently developing a business  
continuation contingency plan and is performing a test on the existing core     
registration-related systems that are being replaced. The Company expects to    
finalize its initial contingency plan and to complete the testing of all        
existing systems by December 31, 1998.                                          

    Although the Company is taking appropriate steps relative to ensuring that
the Company's business is not impacted by the date transitions associated with  
the Year 2000, the Company has no responsibility for, nor control over other    
Internet root server operators or tens of thousands of lower level domain name  
system server operators that are critical to the efficient operation of the     
Internet. The Company has no way of knowing whether such root server operators  
or other server operators have hardware, software or firmware that is Year 2000 
compliant. The Company is notifying various federal government authorities of   
this issue and requesting that the necessary steps be taken to ensure the       
uninterrupted and efficient operation of the Internet.                          

Forward-Looking Statements                                                      

  The foregoing Year 2000 discussion 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 the Company 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.                  

26

10-Q
27th Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 27th

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 the Company, 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 the Company          
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.            

Not Applicable.                                                       

27

10-Q
28th Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 28th

PART II  OTHER INFORMATION                                                      

ITEM 1.  LEGAL PROCEEDINGS.                                                     

    As of November 1, 1998, the Company was a defendant in two active lawsuits
involving domain name disputes between trademark owners and domain name holders.
The Company is drawn into such disputes, in part, as a result of claims by      
trademark owners that the Company is legally required, upon request by a        
trademark owner, to terminate the right the Company 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 the Company's right, absent a court order, to take any action  
which suspends their use of the domain names in question. Although 43 out of    
approximately 4,000 of these situations have resulted in suits actually naming  
the Company as a defendant, as of November 1, 1998, no adverse judgment has been
rendered and no award of damages has ever been made against the Company. The    
Company believes that it has meritorious defenses and vigorously defends itself 
against these claims.                                                           

On March 20, 1997, PG Media, Inc., a New York-based corporation ("PG  
Media"), filed a lawsuit against the Company in the United States District      
Court, Southern District of New York alleging that the Company had restricted   
access to the Internet by not adding PG Media's requested TLDs to the Internet  
root zone system in violation of the Sherman Act. In its complaint, PG Media    
has, in addition to requesting damages, asked that the Company be ordered to    
include reference to PG Media's TLDs and name servers in the root zone file     
administered by the Company under the Cooperative Agreement. The Company        
answered the complaint. In June 1997, the Company received written direction    
from the NSF not to take any action which would create additional TLDs or to add
any new TLDs to the Internet root zone until the NSF provides further guidance. 
On September 17, 1997, PG Media filed a Second Amended Complaint adding the NSF 
as a defendant. On May 14, 1998, PG Media served the Company with a motion for a
preliminary injunction against both defendants. The motion sought a hearing     
before the court on June 8, 1998 to compel both defendants to add PG Media's    
TLDs to the Internet root zone within 30 days. On July 20, 1998, a hearing on   
all parties' motions occurred. The basic issue before the court is the NSF's    
authority to control the Internet's root zone system. The court has taken the   
issue under advisement and no date has been indicated for the issuance of a     
decision. Although the Company cannot reasonably estimate the potential impact  
of such claims, a successful claim under the plaintiff's theory could have a    
material adverse effect on the Company's business, financial condition and      
results of operations.                                                          

     On October 17, 1997, a group of six plaintiffs filed a lawsuit (the "Thomas
suit") against the Company and the NSF 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 originally alleged         
violations of the Competition in Contracting Act ("CICA"), the Sherman Act and  
the U.S. Constitution. Following the filing of motions to dismiss by the        
defendants, the plaintiffs filed an amended complaint on January 30, 1998,      
dropping the cause of action based upon CICA, but adding alleged violations of  
the Administrative Procedures Act and the Independent Offices Appropriations    
Act. The plaintiffs also filed a motion for preliminary injunctive relief       
against the NSF concerning the "Intellectual Infrastructure Fund." On February  
2, 1998, the United States District Court, District of Columbia, issued an order
granting the plaintiffs' motion for a preliminary injunction, enjoining the NSF 
from spending any of the money collected by the Company for the Intellectual    
Infrastructure Fund. On February 10, 1998, the plaintiffs filed a motion for    
preliminary injunction against the Company seeking several items of relief. On  
February 24, 1998, the Company and the NSF filed motions to dismiss the amended 
complaint. Also on February 24, the plaintiffs filed a motion for partial       
summary judgment concerning the Intellectual Infrastructure Fund. The           
plaintiffs' motion for preliminary injunction against the Company and partial   
summary judgment against the NSF, and both motions to dismiss were heard before 
the Court on March 17, 1998. 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 the    
Company's motion to dismiss all other counts (II through X) and simultaneously  
denied the plaintiffs' preliminary injunction motion against the Company.       
Subsequently, the NSF appealed the February 2, 1998 preliminary injunction      
against it. On April 30, 1998, Congress passed H.R. 3579 which was signed into  
law by                                                                          

28

10-Q
29th Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 29th

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 NSF to deposit the entire fund into the U.S. Treasury. On May 5,   
1998, the NSF filed a motion to vacate the preliminary injunction and to dismiss
the case. On June 4, 1998, the plaintiffs filed a notice of appeal on the       
Court's dismissal of counts II through X and on the plaintiff's motion for      
preliminary injunction against the Company. On June 27, 1998, the United States 
Court of Appeals for the District of Columbia Circuit dismissed the plaintiffs' 
appeal of the Court's dismissal of counts II through X at this juncture in the  
case. On August 28, 1998, the District Court dismissed the entire case, issuing 
a final judgment in the matter. Following that decision, the plaintiffs         
dismissed all pending appeals in the Court of Appeals. The plaintiffs, however, 
on October 23, 1998, filed a new notice of appeal from the final order filed by 
the District Court on August 28, 1998.                                          

 On June 27, 1997, SAIC received a CID from the DOJ 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 seeks documents and information from SAIC and the
Company relating to their Internet registration business. The Company cannot    
reasonably estimate the potential impact of the investigation nor can it predict
whether a civil action may ultimately be filed by the DOJ or the form of relief 
that might be sought. Any such relief from such a suit could have a material    
adverse effect on the Company's business, financial condition and results of    
operations.                                                                     

    On August 17, 1998, the Company received notice from the Commission of the
European Communities of an investigation concerning the Company's Premier       
Program agreements in Europe. The EC requested production of these agreements   
and related materials for review. The Company cannot reasonably estimate the    
potential impact of the investigation nor can the Company predict whether an    
action will ultimately be brought by the EC or the form of relief that might be 
sought. Any such relief could have a material adverse effect on the Company's   
business, financial condition and results of operations.                        

The Company is involved in various other investigations, claims and   
lawsuits arising in the normal conduct of its business, none of which, in the   
opinion of the Company's management, will have a material adverse effect on its 
financial position, results of operations, cash flows or its ability to conduct 
business.                                                                       

  Litigation in which the Company is involved has resulted and likely will
result in, and any future litigation can be expected to result in, substantial  
legal and other expenses to the Company and a diversion of the efforts of the   
Company's 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.                                    

29

10-Q
30th Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 30th

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.                                      

(a) Exhibits -- See Exhibit Index                                     

  (b) The Company filed a report on Form 8-K on October 6, 1998 announcing
         that it had entered into an amendment to its Cooperative Agreement with
       the United States Department of Commerce (the "Amendment"). A copy of
 the Amendment and a press release related thereto were filed as
exhibits to the Form 8-K.                                     

30

10-Q
31st Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 31st

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: November 16, 1998                                                         

31

10-Q
Last Page of 32
TOC
1st
Previous
Next
↓Bottom
Just 32nd

EXHIBIT INDEX 

NETWORK SOLUTIONS, INC. 

                                                                [Download Table]

EXHIBIT                                                     
  NO.    DESCRIPTION OF EXHIBITS                            
-------  -----------------------                            
                                                            
10.22    Amendment No. 10 to the Cooperative Agreement dated
         September 29, 1998                                 
27.1     Financial Data Schedule                            

32

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10-Q’ Filing		Date		First		Last			Other Filings
		9/30/00		9		15
		10/31/99		24
		5/31/99		24
		4/30/99		24
		3/31/99		9		15			10-Q
		12/31/98		25		26			10-K,  8-K
		12/6/98		21
Changed as of / Corrected on:		11/20/98							8-K
Filed on:		11/16/98		20		31			8-K
		11/14/98		9		14
		11/6/98		1		22
		11/1/98		18		28
		10/31/98		25
		10/23/98		29
		10/6/98		30					8-K,  SC 13G/A
For Period End:		9/30/98		1		21
		9/9/98		10
		8/28/98		29
		8/17/98		19		29
		7/20/98		18		28
		6/30/98		11					10-Q
		6/27/98		29
		6/10/98		9		14
		6/8/98		18		28
		6/4/98		29
		5/14/98		18		28
		5/5/98		29
		5/1/98		29
		4/30/98		28
		4/6/98		28
		4/1/98		8		10
		3/31/98		9		15			10-K,  10-Q
		3/17/98		28
		3/12/98		8		10			SC 13G/A
		2/24/98		28
		2/10/98		28
		2/2/98		28
		1/30/98		28
		1/1/98		8
		12/31/97		2		13			10-K
		10/17/97		19		28
		10/1/97		10		29
		9/30/97		2		13			10-Q
		9/26/97		13		29			424B1
		9/25/97		29					S-1/A
		9/17/97		18		28
		6/27/97		19		29
		4/1/97		10
		3/31/97		10
		3/20/97		18		28
		9/14/95		8		16
		4/1/93		10		15
		1/1/93		10		15
									List all Filings