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Network Solutions Inc/DE – ‘10-Q’ for 6/30/98

As of: Friday, 8/14/98 · For: 6/30/98 · Accession #: 950133-98-3087 · File #: 0-22967

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 8/14/98  Network Solutions Inc/DE          10-Q        6/30/98    2:79K                                    Bowne - DC/FA

Quarterly Report — Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Network Solutions Inc 10-Q                            23    142K 
 2: EX-27.1     Financial Data Schedule                                1      6K

10-Q — Network Solutions Inc 10-Q
Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Changes in Securities and Use of Proceeds Company, The Cost of revenue Exhibits and Reports on Form 8-K Factors Affecting Operating Results Interest income Item 1 Legal Proceedings Management's Discussion and Analysis of Financial Condition and Results of Operations Net revenue Quantitative and Qualitative Disclosures About Market Risk Registration Services Research and development expenses Selling, general and administrative expenses Submission of Matters to A Vote of Security Holders The Company Year 2000
1	1st Page - Filing Submission
2	Item 1
9	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
"	Registration Services
11	The Company
"	Net revenue
"	Cost of revenue
12	Research and development expenses
"	Selling, general and administrative expenses
"	Interest income
13	Factors Affecting Operating Results
16	Year 2000
18	Item 3. Quantitative and Qualitative Disclosures About Market Risk
"	Item 1. Legal Proceedings
20	Item 2. Changes in Securities and Use of Proceeds
"	Item 4. Submission of Matters to A Vote of Security Holders
21	Item 6. Exhibits and Reports on Form 8-K

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

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

FORM 10-Q 

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

FOR THE QUARTERLY PERIOD ENDED JUNE 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 organization)  Identification No.)

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 August 7, 1998, the Registrant had 4,122,938 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.    

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                                                                [Download Table]

                                                                       PAGE
                                                                       ----
                                                                           
PART I   FINANCIAL INFORMATION                                             

Item 1.  Financial Statements                                              
         Statements of Financial Position as of December 31, 1997 and      
           June 30, 1998 (unaudited).................................    3 
         Unaudited Statements of Operations for the three and six          
           months ended June 30, 1997 and 1998.......................    4 
         Unaudited Statements of Changes in Stockholders' Equity for       
           the six months ended June 30, 1998........................    5 
         Unaudited Statements of Cash Flows for the six months ended       
           June 30, 1997 and 1998....................................    6 
         Notes to 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......................................................   18 

PART II  OTHER INFORMATION                                                 
Item 1.  Legal Proceedings...........................................   18 
Item 2.  Changes in Securities and Use of Proceeds...................   20 
Item 4.  Submission of Matters to a Vote of Security Holders.........   20 
Item 6.  Exhibits and Reports on Form 8-K............................   21 
Signature............................................................   22 
Index to Exhibits....................................................   23 

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PART I  FINANCIAL INFORMATION                                                   

ITEM 1.  FINANCIAL STATEMENTS.                                                  

NETWORK SOLUTIONS, INC. 
STATEMENTS OF FINANCIAL POSITION

                                                        [Enlarge/Download Table]

                                                              DECEMBER 31,     JUNE 30,   
                                                                  1997           1998     
                                                              ------------   ------------ 
                                                                             (UNAUDITED)  
                                                                                          
ASSETS                                                                                    
Current assets:                                                                           
  Cash and cash equivalents.................................  $ 41,146,000   $ 17,928,000 
  Short-term investments, marketable securities.............    40,200,000     79,516,000 
  Accounts receivable, net..................................     5,792,000     11,226,000 
  Prepaids and other assets.................................     1,005,000      2,365,000 
  Deferred tax asset........................................    20,153,000     26,219,000 
  Restricted assets.........................................    25,873,000     39,764,000 
                                                              ------------   ------------ 
Total current assets........................................   134,169,000    177,018,000 
Furniture and equipment, net................................     6,146,000      8,872,000 
Long-term investments, marketable securities................            --      6,374,000 
Deferred tax asset..........................................     8,128,000      9,416,000 
Goodwill, net...............................................     1,177,000        905,000 
                                                              ------------   ------------ 
Total Assets................................................  $149,620,000   $202,585,000 
                                                              ============   ============ 
LIABILITIES AND STOCKHOLDERS' EQUITY                                                      
Current liabilities:                                                                      
  Accounts payable and accrued liabilities..................  $  6,426,000   $ 11,198,000 
  Due to parent.............................................     1,250,000      2,358,000 
  Income taxes payable......................................     5,042,000        529,000 
  Current portion of capital lease obligations..............       842,000        868,000 
  Deferred revenue, net.....................................    43,789,000     64,977,000 
  Internet fund liability...................................    25,873,000     39,764,000 
                                                              ------------   ------------ 
Total current liabilities...................................    83,222,000    119,694,000 
Capital lease obligations...................................     1,081,000        643,000 
Long-term deferred revenue, net.............................    17,662,000     23,974,000 
                                                              ------------   ------------ 
Total liabilities...........................................   101,965,000    144,311,000 
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 4,083,263 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     62,336,000 
  Accumulated deficit.......................................    (8,812,000)    (4,300,000)
  Accumulated other comprehensive income....................            --        222,000 
                                                              ------------   ------------ 
Total stockholders' equity..................................    47,655,000     58,274,000 
                                                              ------------   ------------ 
Total Liabilities and Stockholders' Equity..................  $149,620,000   $202,585,000 
                                                              ============   ============ 

The accompanying notes are an integral part of these financial statements.
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NETWORK SOLUTIONS, INC. 

STATEMENTS OF OPERATIONS
(UNAUDITED) 

                                                        [Enlarge/Download Table]

                                              THREE MONTHS ENDED           SIX MONTHS ENDED      
                                                   JUNE 30,                    JUNE 30,          
                                           -------------------------   ------------------------- 
                                              1997          1998          1997          1998     
                                           -----------   -----------   -----------   ----------- 
                                                                                                 
Net revenue............................... $10,069,000   $20,476,000   $18,724,000   $36,968,000 
Cost of revenue...........................   6,141,000     8,791,000    11,435,000    16,139,000 
                                           -----------   -----------   -----------   ----------- 
Gross profit..............................   3,928,000    11,685,000     7,289,000    20,829,000 
Research and development expenses.........     407,000       815,000       718,000     1,540,000 
Selling, general and administrative                                                              
  expenses................................   2,487,000     8,008,000     4,788,000    14,190,000 
Interest income...........................    (335,000)   (1,416,000)     (484,000)   (2,743,000)
Other expenses............................          --        32,000            --        67,000 
                                           -----------   -----------   -----------   ----------- 
Income before income taxes................   1,369,000     4,246,000     2,267,000     7,775,000 
Provision for income taxes................     629,000     1,783,000     1,011,000     3,263,000 
                                           -----------   -----------   -----------   ----------- 
Net income................................ $   740,000   $ 2,463,000   $ 1,256,000   $ 4,512,000 
                                           ===========   ===========   ===========   =========== 
Earnings per common share:                                                                       
  Basic................................... $      0.06   $      0.15   $      0.10   $      0.29 
                                           ===========   ===========   ===========   =========== 
  Diluted................................. $      0.06   $      0.15   $      0.10   $      0.27 
                                           ===========   ===========   ===========   =========== 

The accompanying notes are an integral part of these financial statements.
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NETWORK SOLUTIONS, INC. 

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY 
(UNAUDITED) 

                                                        [Enlarge/Download Table]

                               CLASS A              CLASS B                                                           
                             COMMON STOCK         COMMON STOCK      ADDITIONAL   COMPRE-    RETAINED         TOTAL    
                          ------------------  --------------------    PAID-IN    HENSIVE    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.................    288,263                                   3,767,000                             3,767,000 
Tax benefit associated                                                                                                
  with stock plans......                                              2,118,000                             2,118,000 
Unrealized gain on                                                                                                    
  securities............                                                          222,000                     222,000 
Net income for the six                                                                                                
  months ended June 30,                                                                                               
  1998..................                                                                     4,512,000      4,512,000 
                          ---------   ------  ----------   -------  -----------  --------  -----------    ----------- 
Balance, June 30,                                                                                                     
  1998..................  4,083,263   $4,000  11,925,000   $12,000  $62,336,000  $222,000  $(4,300,000)   $58,274,000 
                          =========   ======  ==========   =======  ===========  ========  ===========    =========== 

The accompanying notes are an integral part of these financial statements.
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NETWORK SOLUTIONS, INC. 

STATEMENTS OF CASH FLOWS
(UNAUDITED) 

                                                        [Enlarge/Download Table]

                                                                  SIX MONTHS ENDED      
                                                                      JUNE 30,          
                                                             -------------------------- 
                                                                1997           1998     
                                                             -----------   ------------ 
                                                                                        
CASH FLOWS FROM OPERATING ACTIVITIES:                                                   
  Net income................................................ $ 1,256,000   $  4,512,000 
  Adjustments to reconcile net income to net cash provided                              
     by operating activities:                                                           
     Depreciation and amortization..........................   1,017,000      1,459,000 
     Provision for uncollectible accounts receivable........   3,624,000      2,168,000 
     Deferred income taxes..................................  (2,415,000)    (7,499,000)
     Changes in operating assets and liabilities:                                       
       Decrease (increase) in accounts receivable...........   2,576,000     (7,602,000)
       Increase in prepaids and other assets................    (425,000)    (1,045,000)
       Increase in accounts payable and accrued                                         
        liabilities.........................................   1,378,000      4,908,000 
       Decrease in income taxes payable.....................          --     (4,513,000)
       Increase in deferred revenue.........................  16,276,000     27,500,000 
                                                             -----------   ------------ 
          Net cash provided by operating activities.........  23,287,000     19,888,000 
                                                             -----------   ------------ 
CASH FLOWS FROM INVESTING ACTIVITIES:                                                   
  Purchase of furniture and equipment.......................    (317,000)    (4,364,000)
  Purchase of short-term investments, net...................  (3,625,000)   (39,316,000)
  Purchase of long-term investments.........................          --     (6,007,000)
                                                             -----------   ------------ 
          Net cash used in investing activities.............  (3,942,000)   (49,687,000)
                                                             -----------   ------------ 
CASH FLOWS FROM FINANCING ACTIVITIES:                                                   
  Net transactions with SAIC................................  (8,729,000)     1,108,000 
  Repayment of capital lease obligations....................    (189,000)      (412,000)
  Issuance of common stock pursuant to stock plans..........          --      3,767,000 
  Tax benefit associated with stock plans...................          --      2,118,000 
                                                             -----------   ------------ 
          Net cash provided by (used in) financing                                      
             activities.....................................  (8,918,000)     6,581,000 
                                                             -----------   ------------ 
Net increase (decrease) in cash and cash equivalents........  10,427,000    (23,218,000)
Cash and cash equivalents, beginning of period..............  15,540,000     41,146,000 
                                                             -----------   ------------ 
Cash and cash equivalents, end of period.................... $25,967,000   $ 17,928,000 
                                                             ===========   ============ 

The accompanying notes are an integral part of these financial statements.
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NETWORK SOLUTIONS, INC. 

NOTES TO FINANCIAL STATEMENTS 

NOTE 1 -- ORGANIZATION AND BUSINESS                                             

 Network Solutions, Inc. ("the Company") currently acts as the exclusive
registrar of Internet domain names within the .com, .org, .net and .edu top     
level domains ("TLDs") pursuant to a cooperative agreement (the "Cooperative    
Agreement") with the National Science Foundation ("NSF"). Domain names are used 
to identify a unique site or presence on the Internet. As registrar of these    
TLDs, the Company registers new domain names and is responsible for the         
maintenance of the master file of domain names including daily updates to the   
Internet. The Company also provides enterprise network consulting services,     
focusing on network engineering, network and systems security and network       
management solutions for commercial customers.                                  

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. 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.                                           

NOTE 3 -- COMPUTATION OF EARNINGS PER SHARE                                     

    The following is a reconciliation of the numerator and denominator used in
the basic and diluted EPS computations for continuing operations:               

                                                        [Enlarge/Download Table]

                                                      INCOME        SHARES      PER SHARE
                                                    (NUMERATOR)  (DENOMINATOR)   AMOUNT  
                                                    -----------  -------------  ---------
                                                                                         
Three Months Ended June 30, 1998                                                         
--------------------------------------------------                                       
Basic.............................................  $2,463,000    15,895,000      $0.15  
                                                                                  =====  
Dilutive securities:                                                                     
  Outstanding options.............................          --       848,000             
                                                    ----------    ----------             
Diluted...........................................  $2,463,000    16,743,000      $0.15  
                                                    ==========    ==========      =====  
Three Months Ended June 30, 1997                                                         
--------------------------------------------------                                       
Basic.............................................  $  740,000    12,500,000      $0.06  
                                                                                  =====  
Dilutive securities:                                                                     
  Outstanding options.............................          --        91,000             
                                                    ----------    ----------             
Diluted...........................................  $  740,000    12,591,000      $0.06  
                                                    ==========    ==========      =====  

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NOTE 3 -- COMPUTATION OF EARNINGS PER SHARE -- (CONTINUED)                      

                                                        [Enlarge/Download Table]

                                                      INCOME        SHARES      PER SHARE
                                                    (NUMERATOR)  (DENOMINATOR)   AMOUNT  
                                                    -----------  -------------  ---------
                                                                                         
Six Months Ended June 30, 1998                                                           
--------------------------------------------------                                       
Basic.............................................  $4,512,000    15,811,000      $0.29  
                                                                                  =====  
Dilutive securities:                                                                     
  Outstanding options.............................          --       632,000             
                                                    ----------    ----------             
Diluted...........................................  $4,512,000    16,443,000      $0.27  
                                                    ==========    ==========      =====  
Six Months Ended June 30, 1997                                                           
--------------------------------------------------                                       
Basic.............................................  $1,256,000    12,500,000      $0.10  
                                                                                  =====  
Dilutive securities:                                                                     
  Outstanding options.............................          --        91,000             
                                                    ----------    ----------             
Diluted...........................................  $1,256,000    12,591,000      $0.10  
                                                    ==========    ==========      =====  

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

NOTE 4 -- ACCUMULATED OTHER COMPREHENSIVE INCOME BALANCES                       

 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 six months ended June 30, 1998 as follows:                 

                                                        [Enlarge/Download Table]

                                                                             ACCUMULATED 
                                                                                OTHER    
                                                          UNREALIZED GAINS  COMPREHENSIVE
                                                           ON SECURITIES       INCOME    
                                                          ----------------  -------------
                                                                                         
Pre-tax amount...........................................     $367,000        $367,000   
Income tax...............................................      145,000         145,000   
                                                              --------        --------   
Net of tax amount........................................     $222,000        $222,000   
                                                              ========        ========   

NOTE 5 -- COMMITMENTS AND CONTINGENCIES                                         

INTERNET GOVERNANCE                                                             

  On June 5, 1998, the U.S. government published in the Federal Register a
statement of policy entitled "Management of Internet Names and Addresses,"      
informally called the "White Paper" (the "Statement of Policy"). 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. Following the publication of the Statement of Policy,  
the International Forum for the White Paper (the "IFWP"), an ad hoc coalition of
Internet stakeholders, was initiated to coordinate international meetings for   
stakeholders to discuss the transition of the domain name system ("DNS")        
administration to the private sector. The IFWP is seeking to establish a        
consensus among the stakeholders on a framework under which the new corporation 
will be formed and operate. The Statement of Policy states that the U.S.        
government and the Company will hold discussions about the terms and conditions 
of the ramp down of the Cooperative Agreement and sets forth certain of the     
government's expectations with regard to the Company's actions that will be     
required to permit the development of competition in domain name registration.  
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  
to the                                                                          

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NOTE 5 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)                          
private sector and, if it does, the effect of such transition and private sector
administration of the DNS on the Company. It is also impossible to predict at   
this time the outcome of discussions between the Company and the government     
concerning the terms and conditions of the ramp down of the Cooperative         
Agreement.                                                                      

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 Securities
and Exchange Commission 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.                                       

OVERVIEW                                                                        

  The Company currently acts as the exclusive registrar of Internet domain
names within the .com, .org, .net and .edu TLDs pursuant to the Cooperative     
Agreement with the NSF. Domain names are used to identify a unique site or      
presence on the Internet. As registrar to these TLDs, the Company registers new 
domain names and is responsible for the maintenance through daily updates of the
master file of domain names. A pioneer in Internet technology since 1979, the   
Company also provides enterprise network consulting services, focusing on       
network engineering, network and systems security and network management        
solutions for commercial customers. The Company's consulting services division  
delivers full life cycle network engineering and consulting for a broad range of
companies including major financial institutions and multinational oil and gas  
corporations. The Company also develops internally and together with other      
companies new technology, products and services that may be offered in          
conjunction with the Company's domain name registration and consulting services.

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    
renewal, 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. The Cooperative Agreement is   
subject to review by the NSF and may be terminated by the NSF at any time at its
discretion or by mutual agreement. The NSF has stated that it will not be       
re-awarding a cooperative agreement at the end of the flexibility period.       

The original terms of the Cooperative Agreement provided for a cost   
reimbursement plus fixed-fee contract (with a 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 renewal fee of $50 per                       

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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 is required to 
be set aside for the enhancement of the intellectual infrastructure of the      
Internet and, as such, is 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. This restricted cash at December  
31, 1997 and June 30, 1998 was approximately $23,512,000 and $39,564,000,       
respectively. The set aside funds, plus any interest earned, are intended to be 
disbursed at the direction of the NSF. Future collection or disbursement of     
these set aside funds will have no significant effect on the Company's business,
net financial position or results of operations.                                

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 renewal fee of $35 per year thereafter. This amendment   
will have no effect on the revenue currently recognized on each registration    
($70 for initial registrations and $35 for renewals), 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 will decline.                                   

    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 June 1998, approximately 30% of
new registrations have ultimately been deactivated for non-payment. The Company 
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 transferors 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 June 1998 and is considered adequate by  
the Company.                                                                    

  Registration fees charged to end users for registration services, net of
any 30% set aside funds, are recognized as revenue evenly over the registration 
term. For example, the Company recognizes $70 (for registrations prior to April 
1, 1998 this represents the $100 fee less $30 set aside) on a straight-line     
basis over the two-year services period for each initial domain name            
registration, equivalent to $35 per year. Renewals of domain name registrations 
are recorded as revenue based upon $35 (for renewals prior to April 1, 1998 this
represents the $50 fee less $15 set aside) recognized on a straight-line basis  
over the one-year services 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 June 30, 1998, the Company  
had net deferred revenue of $89.0 million.                                      

Consulting Services.  Substantially all of the Company's 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.                                                                  

NationsBanc Services, Inc. ("NationsBanc") is the Company's largest   
consulting services customer. NationsBanc originally contracted with the Company
in 1993 to provide ongoing analysis, design, implementation and support         
engineering for its enterprise network. The Company currently provides network  
design and engineering services as well as a variety of project specific        
services for NationsBanc. The Company's current contract with NationsBanc is a  
three-year contract which commenced January 1, 1997 and is a requirements       
contract under which the Company's services are ordered by task orders issued by
NationsBanc. The NationsBanc contract may be terminated by NationsBanc at any   
time upon 30-days' prior written notice to                                      
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the Company. There can be no assurance that the Company will obtain any         
additional task orders under the NationsBanc contract.                          

RESULTS OF OPERATIONS                                                           

   Net Revenue.  Net revenue increased 103% from $10.1 million for the three
months ended June 30, 1997 to $20.5 million for the three months ended June 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 121% from $8.6 million for the     
three months ended June 30, 1997 to $19.0 million for the three months ended    
June 30, 1998. Net new registrations increased 91% from 232,000 for the three   
months ended June 30, 1997 to 443,000 for the three months ended June 30, 1998. 
This also represents a 30% increase over the 340,000 net new registrations for  
the three months ended March 31, 1998. Growth in net registrations continues to 
be driven by the widespread use and adoption by businesses of the Internet and  
Intranets on a global basis. Cumulative net registrations as of June 30, 1997   
were 1,040,000 as compared to 2,289,000 as of June 30, 1998, for a 120%         
increase. In addition, this growth in cumulative net registrations is a 23%     
increase in the Company's entire customer base since March 31, 1998.            

    Net revenue from consulting services was $1.5 million for the three months
ended June 30, 1998 and 1997. While flat in comparison to the same period in the
prior year, this represents a 50% increase in net revenue from consulting       
services from the three months ended March 31, 1998. NationsBanc accounted for  
$497,000 or 4.9% of the Company's total net revenue for the three months ended  
June 30, 1997 and $561,000 or 2.7% of the Company's total net revenue for the   
three months ended June 30, 1998.                                               

    Net revenue increased 97% from $18.7 million for the six months ended June
30, 1997 to $37.0 million for the six months ended June 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 127% from $15.2 million for the six months ended
June 30, 1997 to $34.5 million for the six months ended June 30, 1998. The      
provision for uncollectible accounts used in determining net new registration   
revenue for the six months ended June 30, 1997 and 1998 was consistently applied
at a rate of 30%.                                                               

    Net registrations increased 81% from 413,000 for the six months ended June
30, 1997 to 748,000 for the six months ended June 30, 1998.                     

  Net revenue from consulting services decreased 29% from $3.5 million for
the six months ended June 30, 1997 to $2.5 million for the six months ended June
30, 1998. This was primarily attributable to a reduction in business from       
NationsBanc, which accounted for $1.5 million or 7.8% of the Company's total net
revenue for the six months ended June 30, 1997 and $1.1 million or 3.0% for the 
six months ended June 30, 1998, as well as the completion of other fixed period 
contracts in late 1997.                                                         

During the three and six months ended June 30, 1998, the consulting   
services division continued to add new leadership in sales and operations and   
retained 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.    
Consulting services' proposal activities remain strong although the sales       
closure cycle has been longer than anticipated.                                 

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 43% from $6.1 million for the three months ended June 30, 1997
to $8.8 million for the three months ended June 30, 1998. The increase was      
primarily driven by the growth of the Company's registration business which     
experienced additional outsourcing costs of $1.4 million in support of the      
Company's invoicing, collection and processing activities and additional        
depreciation charges and equipment expenditures of $766,000. In June 1997, the  
Company opened a 31,200 square foot facility to support its Internet business   
operations and in January 1998, the Company signed an agreement to lease an     
additional 9,100 square feet at the same location. The Company continues to     
invest in improvements to the back office component of its domain name          
registration business including investments in additional hardware, software,   
staffing and                                                                    

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facilities and currently anticipates that it will continue to make significant  
investments in its back office for the foreseeable future.                      

  As a percentage of net revenue, cost of revenue decreased from 61.0% for
the three months ended June 30, 1997 to 42.9% for the three months ended June   
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 41% from $11.4 million for the six months ended
June 30, 1997 to $16.1 million for the six months ended June 30, 1998. This     
increase was driven by a $2.5 million increase in outsourcing costs and $1.8    
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 61.1% for
the six months ended June 30, 1997 to 43.7% for the six months ended June 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 expenses to support the creation, development 
and enhancement of the Company's products, services and technologies. Research  
and development expenses increased 100% from $407,000 for the three months ended
June 30, 1997 to $815,000 for the three months ended June 30, 1998. To date, all
significant 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 were 4.0% for the three months
ended June 30, 1997 and 1998.                                                   

    Research and development expenses increased 114% from $718,000 for the six
months ended June 30, 1997 to $1.5 million for the six months ended June 30,    
1998. As a percentage of net revenue, research and development expenses         
increased from 3.8% for the six months ended June 30, 1997 to 4.2% for the six  
months ended June 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 acquisition by SAIC. Selling, general and administrative expenses 
increased 222% from $2.5 million for the three months ended June 30, 1997 to    
$8.0 million for the three months ended June 30, 1998. The increase is primarily
attributable to increases in marketing and business development expenses of $3.7
million including television and on-line advertising and a targeted direct mail 
campaign. 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 dot com Web address, future value-added services, and 
international channel development.                                              

As a percentage of net revenue, selling, general and administrative   
expenses increased from 24.7% for the three months ended June 30, 1997 to 39.1% 
for the three months ended June 30, 1998.                                       

Selling, general and administrative expenses increased 196% from $4.8 
million for the six months ended June 30, 1997 to $14.2 million for the six     
months ended June 30, 1998. The increase was attributable to a $5.0 million     
increase in marketing and business development expenses, increased staffing     
expenses of $1.7 million and an increase in legal and other professional costs  
of $1.8 million.                                                                

As a percentage of net revenue, selling, general and administrative   
expenses increased from 25.6% for the six months ended June 30, 1997 to 38.4%   
for the six months ended June 30, 1998.                                         

   Interest Income.  The Company had net interest income of $335,000 for the
three months ended June 30, 1997 as compared to $1.4 million for the three      
months ended June 30, 1998.                                                     

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  The Company had net interest income of $484,000 for the six months ended
June 30, 1997 as compared to $2.7 million for the six months ended June 30,     
1998. The increase for both the three month and six month comparisons is        
attributable to the investment of the net proceeds of the Company's stock       
offering as well as positive cash flow resulting from increasing domain name    
registrations.                                                                  

   Income Taxes.  The provision for income taxes was 46% of pretax earnings,
or $629,000 for the three months ended June 30, 1997, and 42% or $1.8 million   
for the three months ended June 30, 1998.                                       

    The provision for income taxes was 45% of pretax earnings, or $1.0 million
for the six months ended June 30, 1997, and 42%, or $3.3 million for the six    
months ended June 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 June 30, 1998, the Company's principal source of liquidity was its cash
and cash equivalents of $17.9 million and its short-term investments of $79.5   
million, which when combined represent an increase of $16.1 million from the    
December 31, 1997 balance in those accounts. The Company also has $6.4 million  
of marketable securities held as long term investments as of June 30, 1998.     

At June 30, 1998, the Company's cumulative net obligation to SAIC for 
intercompany activity was $2.4 million, a net increase of $1.1 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 $19.9 million for the six months ended June
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.                                                     

   Investing activities totalled $49.7 million for the six months ended June
30, 1998, of which $39.3 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 to 18 months.                     

FACTORS AFFECTING OPERATING RESULTS                                             

Limited Operating History.  The Company has only a limited operating  
history under its current subscription-based pricing model for its domain name  
registration business upon which an evaluation of the Company and its prospects 
can be based. 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. There can be no     
assurance that the Company will be successful in addressing such risks or that  
the Company will continue to obtain new registrations at current rates or obtain
renewals from a significant portion of its customers.                           

     Quarterly sales and operating results generally depend on the volume of and
ability to fulfill registration requests and consulting services contract       
awards, which are difficult to forecast. The Company may be unable to adjust its
variable or fixed spending in a timely manner to compensate for any unexpected  
revenue shortfall. Accordingly, any significant shortfall of demand for the     
Company's services in relation to the Company's expectations may have an        
immediate adverse impact on the Company's business, operating results and       
financial condition. In addition, the Company expects a significant increase in 
its operating expenses as it                                                    

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funds greater levels of product and services development, increases its sales   
and marketing operations, updates systems and infrastructure, expands its       
facilities, develops new distribution channels and broadens its customer support
capabilities. While no individual expenditure is anticipated to have a material 
impact on the Company's operating results, the combined effect could be         
significant and cannot be reasonably estimated at this time. To the extent that 
such expenses precede or are not subsequently followed by an increase in        
revenue, the Company's business, financial condition and results of operations  
will be materially and adversely affected.                                      

 Potential Fluctuations in Quarterly Results.  The Company believes that
future operating results will be subject to quarterly fluctuations 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,       
increased competition, through the introduction of competing TLDs or competing  
registrars in .com, .org or .net or otherwise, variations in the number of      
requests for domain name registrations, 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 providing     
domain name registration services, litigation costs, adverse results of         
litigation, termination or completion of contracts in the Company's consulting  
services business or failure to obtain additional contracts in its consulting   
services business, patterns of growth in the use of and interest in the Internet
and general economic conditions. Operating results would be adversely affected  
by a downturn in the market for domain name registrations or a failure to       
maintain existing or obtain anticipated contracts in its consulting services    
business. Because the Company expects an increase in its operating expenses for 
personnel, back office infrastructure and marketing and business development,   
the Company would be materially and adversely affected if its revenues did not  
correspondingly increase.                                                       

   Uncertainty of Internet Governance and Regulation.  On February 20, 1998,
the U.S. government published in the Federal Register "A Proposal to Improve    
Technical Management of Internet Names and Addresses" (the "Proposed Rule") to  
provide notice and seek public comment on a proposal to improve the technical   
management of Internet names and addresses. The proposal suggested the creation 
of a representative not-for-profit corporation to manage those functions that   
should be coordinated. The proposal also suggested that steps be taken, in an   
orderly fashion, to move to more competitive markets in those functional areas  
that can be market driven. Comments on the proposed rule revealed substantial   
differences regarding how the domain name system ("DNS") should evolve and      
elicited competing proposals concerning DNS management. Because of the public   
comment and "the continued rapid technological development of the Internet," the
U.S. government determined that it should issue a general statement of policy   
rather than define or impose a substantive regulatory regime for the DNS.       
Accordingly, on June 10, 1998, the U.S. government published in the Federal     
Register a statement of policy entitled "Management of Internet Names and       
Addresses," informally called the "White Paper" (the "Statement of Policy").    

Several proposals advanced in the Proposed Rule were eliminated in the
Statement of Policy including, but not limited to, proposals relating to        
specific requirements for the membership of the new corporation, the creation   
during a transition period of a specified number of new generic TLDs and minimum
dispute resolution and other procedures related to trademarks.                  

 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 states 
that the new corporation should be headquartered and incorporated in the United 
States and have a Board of Directors from around the world. The Statement of    
Policy provides that in making a decision to enter into an agreement to         
establish a process to transfer U.S. government oversight of the DNS to the new 
entity, the U.S. government will be guided by, and consider the entity's        
commitment to, the principles of stability, competition, private bottom-up      
coordination and representation. The Statement of Policy provides that to the   
extent that the new corporation is established and operationally stable,        
September 30, 2000 is the "outside date" for the transition to the private      
sector of DNS administration to be complete.                                    

     The Statement of Policy provides that the new corporation ultimately should
have the authority to (1) set policy for and direct allocation of Internet      
Protocol number blocks to regional Internet number registries; (2) oversee      
operation of the authoritative Internet root server system; (3) oversee policy  
for determining the                                                             

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circumstances under which any new TLDs are added to the root system; and (4)    
coordinate the assignment of other Internet technical parameters as needed to   
maintain universal connectivity on the Internet.                                

 Following the publication of the Statement of Policy, the International
Forum for the White Paper (the "IFWP"), an ad hoc coalition of Internet         
stakeholders including internet service providers, content developers, trademark
owners, networkers, intergovernmental groups, policy experts, end-users and     
others, was initiated to coordinate international meetings for stakeholders to  
discuss the transition of DNS administration to the private sector as outlined  
in the Statement of Policy. The IFWP is seeking to establish a consensus among  
the stakeholders on a framework under which the new corporation will be formed  
and operate. The IFWP has held three meetings to date, in which the Company has 
been an active participant. The U.S. government has stated that if the private  
sector does not demonstrate by September 30, 1998, sufficient progress towards  
implementing the recommendations of the Statement of Policy, the government may 
assume a more active role in defining the future of DNS administration. There is
a risk that failure to achieve consensus through the IFWP process could, among  
other things, prevent or delay the implementation of a coordinated process for  
transitioning DNS administration to the private sector. There is also a risk    
that any consensus that is reached or, if no consensus is reached, any action   
taken by the government, could produce consequences that are not favorable to   
the Company or not consistent with the Company's current or future plans. There 
is a further risk that any consensus that is reached, any policies or programs  
adopted by the new corporation or any actions taken by the government could be  
challenged. If the new corporation is formed, there is a risk that the U.S.     
government will not agree to transfer to it oversight of DNS policy. There is   
also a risk that the new corporation will adopt or promote policies or programs 
that are not favorable to the Company or not consistent with the Company's      
current or future plans. Any of such events could have a material adverse effect
on the Company's business, financial condition and results of operations through
a direct effect on the Company's operations or through continued uncertainty    
about future Internet governance or a disruption to the administration,         
effective operation, or maintenance and expansion of the Internet, in general,  
or the domain name registration system, in particular.                          

 The Statement of Policy states that the U.S. government and the Company
will hold discussions about the terms and conditions of the ramp down of the    
Cooperative Agreement and sets forth certain of the government's expectations   
with regard to the Company's actions that will be required to permit the        
development of competition in domain name registration. There is a risk that an 
agreement may not be reached between the Company and the government or that any 
such agreement may contain provisions that are not favorable to the Company or  
not consistent with the Company's current or future plans. Any of such events   
could have a material adverse effect on the Company's business, financial       
condition and results of operations.                                            

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 to the private sector and, if it does, the effect of such        
transition and private sector administration of the DNS on the Company. It is   
also impossible to predict at this time the outcome of discussions between the  
Company and the government concerning the terms and conditions of the ramp down 
of the Cooperative Agreement. Any of such events could have a material adverse  
effect on the Company's business, financial condition and results of operations.

     Competition.  A principal objective expressed in the Statement of Policy is
the introduction of competition into the technical management of Internet names 
and addresses. This could include, among other things, competition among        
registrars within a single TLD and competition among existing and new TLDs. 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 currently
being registered by the Company. A number of entities have already begun to     
offer competing registration services using other TLDs. Future competition in   
the Company's domain name registration business could come from many different  
companies, including, but not limited to, major telecommunications firms, cable 
companies and Internet access providers. Such 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.
Other companies with some or all of these capabilities may also enter the       
registration business. Also emerging is a growing contingent of domain name     
resellers. The                                                                  
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Company's position as the leading registrar of domain names could be materially 
and adversely affected by the emergence of any of the foregoing 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. In addition, the  
Company's revenue and registration fees could be reduced due to increased       
competition or pricing pressures. For example, other entities may bundle domain 
name registrations with other products or services, effectively providing such  
registration services for free. The Company believes that it is well positioned 
to succeed in a more competitive environment. However, 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. In addition, the Company faces substantial competition in
its consulting services business and in the development and distribution of     
future products and services for the Internet-based services markets.           

 Litigation.  The Company is a party in a number of legal proceedings as
described in "Part II -- Item 1 -- Legal Proceedings." While the Company cannot 
reasonably estimate the potential impact of the claims advanced in the PG Media 
suit described therein, a successful claim against the Company could have a     
material adverse effect on the Company's business, financial condition and      
results of operations. In addition, while the Company cannot predict what       
relief, if any, might be sought, awarded or imposed as a result of any civil    
action which could be filed by the Department of Justice arising from its       
investigation regarding Internet registration products and services, any such   
relief could have a material adverse effect on the Company's business, financial
condition and results of operations. Moreover, 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 Company's personnel. See "Part II -- Item        
1 -- Legal Proceedings."                                                        

System Interruption and Security Risks.  The Company's operations are 
dependent upon its ability to maintain its computer and telecommunications      
equipment in effective working order and to reasonably protect its systems      
against damage from fire, natural disaster, sabotage, power loss,               
telecommunication failure, human error or similar events. In addition, growth of
the Company's customer base may put strain on the capacity of its computers and 
telecommunications systems and the Company's inability to sufficiently maintain 
or upgrade its systems could lead to degradation in performance or system       
failure. Any damage, failure or delay that causes significant interruptions in  
the Company's systems would have a material adverse effect on the Company's     
business, financial condition and results of operations.                        

Year 2000.  The Company is in the process of assessing the potential  
effects of the "Year 2000" millenium change on the Company's internal computer  
software applications and systems and on the Company's business in general.     
Based on its initial 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 millenium  
change, portions of these systems with new systems which will also be Year 2000 
compliant. At this time, the Company believes that its incremental remediation  
costs, if any, needed to make its systems Year 2000 compliant are not material. 
Failure of any new system to be Year 2000 compliant despite the vendors'        
assurances, or a failure to fully identify or remediate any Year 2000 problems  
in the Company's systems which are not being replaced or upgraded could have a  
material adverse effect on the Company's business, financial condition or       
results of operations.                                                          

    In addition, the Company is contacting its hardware and software suppliers
and other significant suppliers, service providers, outsourcing vendors and     
other contracting parties to determine the extent to which such third parties'  
systems and products are or will be Year 2000 compliant. At the present time,   
the Company does not expect Year 2000 issues of such third parties to materially
affect the Company's services. 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 the software applications and systems of     
third parties on which the Company's systems rely or to which they are          
connected, including other Internet-related companies, such as Internet web     
hosting companies, Internet access providers, Internet root server operators and
the companies that maintain the Internet "backbone." 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    
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operation of the Internet is disrupted by the Year 2000 millenium change, the   
Company's business, financial condition or results of operations could be       
materially and adversely affected.                                              

     Technological Change and Additional Technology, Products and Services.  The
Company's future financial success will be highly dependent upon its ability to 
develop and commercialize in a timely manner new technology, products and       
services that can be offered in conjunction with the Company's current domain   
name registration and consulting services and that can meet the changing        
requirements of its current and future customers. The market for such           
technology, products and services is characterized by rapidly changing          
technology, evolving industry standards and frequent introductions of new       
Intranet and Internet-related products and services. Generally, the successful  
development and commercialization of new technology, products and services      
involves many risks, including the identification of new Intranet and           
Internet-related product and service opportunities, the successful completion of
the development process, and the identification, retention and hiring of        
appropriate research, development and technical personnel. There can be no      
assurance that the Company can successfully identify new product and service    
opportunities and develop and bring to market in a timely manner new            
technologies, products or services, or that technologies, products or services  
developed by others will not render those of the Company noncompetitive or      
obsolete. Failure by the Company to develop new technologies, products or       
services and bring them to market in a timely manner could have a material      
adverse effect on the Company's business, financial condition and results of    
operations.                                                                     

    Intellectual Property Rights.  If it were determined that the Company does
not have ownership rights in its database of information relating to customers  
in its registration business or if the Company is unable to protect such rights 
in this database or is required to share the database with potential            
competitors, there could be a material adverse effect on the Company's business,
financial condition and results of operations. The U.S. government states in the
Statement of Policy that "the U.S. Government expects [the Company] to agree to 
make available on an ongoing basis appropriate databases, software,             
documentation thereof, technical expertise, and other intellectual property for 
DNS management and shared registration of domain names." If certain of the      
Company's software and data generated which is proprietary to the Company were  
to be provided to the new corporation and in turn provided to competing         
registries or registrars, the Company's business, financial condition and       
results of operations could be materially and adversely affected.               

The Company relies upon a combination of nondisclosure and other      
contractual arrangements with its employees and third parties and trade secret  
laws to protect its proprietary rights and limit the distribution of its        
proprietary information. There can be no assurance that the steps taken by the  
Company in this regard will be adequate to deter misappropriation of proprietary
information or that the Company will be able to detect unauthorized use of its  
proprietary information and take appropriate steps to enforce its intellectual  
property rights. Furthermore, even if these steps are successful, there can be  
no assurance that others will not 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 it has all rights necessary to utilize the intellectual property       
employed in its business, the Company is subject to the risk of claims alleging 
infringement of third party intellectual property rights. Any such claims could 
require the Company to spend significant sums in litigation, pay damages and    
develop noninfringing intellectual property or acquire licenses to the          
intellectual property that is the subject of asserted infringement. Failure by  
the Company to adequately protect its proprietary rights or litigation relating 
to intellectual property rights could have a material adverse effect on the     
Company's business, financial condition and results of operations.              

Shares Eligible for Future Sale.  SAIC owns 100% of the Company's     
outstanding Class B common stock, which, as of August 7, 1998, represented      
approximately 74.3% of the outstanding common stock of the Company. A decision  
by SAIC to sell such shares could materially and adversely affect the market    
price of the Class A common stock. The Company and SAIC have entered into a     
registration rights agreement which requires the Company to effect a            
registration statement covering some or all of the shares of Class A common     
stock to be owned by SAIC upon conversion of the Class B common stock owned by  
SAIC and any other shares of Class A common stock otherwise acquired by SAIC,   
subject to certain terms and conditions. The Company has agreed to indemnify    
SAIC in connection with any such registration.                                  

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   In certain circumstances, including without limitation, a public offering
or distribution of Class B common stock by SAIC, the Class B common stock would 
trade separately from the Class A common stock in the public market. Separate   
trading of the Class B common stock in the public market or the perception that 
such trading could occur, could materially and adversely affect the market price
of the Class A common stock.                                                    

Possible Volatility of Stock Price.  The market price of the shares of
Class A common stock at times has been highly volatile and may be significantly 
affected by factors such as actual or anticipated fluctuations in the Company's 
results of operations, announcements of technological innovations, developments 
in Internet governance, announcement of additional competing registries,        
registrars or TLDs, litigation costs, results of litigation, introduction of new
products or services by the Company or its competitors, developments with       
respect to patents, copyrights or proprietary rights, conditions and trends in  
the networking and other technology industries, changes in or failure by the    
Company to meet securities analysts' expectations, general market conditions and
other factors. In addition, the stock market has from time to time experienced  
significant price and volume fluctuations that have particularly affected the   
market prices for the common stocks of technology 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 against that company. There can be no assurance that such    
litigation will not occur in the future with respect to the Company. Such       
litigation could result in substantial costs and a diversion of management's    
attention and resources, which could have a material adverse effect upon the    
Company's business, financial condition and results of operations.              

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.             

Not Applicable.                                                       

PART II  OTHER INFORMATION                                                      

ITEM 1. LEGAL PROCEEDINGS.                                                      

As of August 1, 1998, the Company was a defendant in three 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. Further, trademark owners also have alleged that the Company should
be required to monitor future domain name registrations and to reject           
registrations of domain names which are identical or allegedly similar to the   
trademark owners' federally registered trademarks. 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 August 
1, 1998, 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 from both sides.                                                   

   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 to determine whether there is, has been, or may be an 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 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                          
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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. The Company believes that
it has meritorious defenses and intends to vigorously defend itself against such
motion and the claims of PG Media. 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 July 20, 1998, a    
hearing on all parties' cross-motions for summary judgment occurred. The 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 the decision.                                     

     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 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     
Court's denial of plaintiffs' motion for preliminary injunction against the     
Company. On July 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. Currently, all motions and the
plaintiffs' remaining appeal are pending.                                       

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.                                                                       

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  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.                                    

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.                    

    The Company's Annual Meeting of Stockholders was held on May 19, 1998 (the
"Annual Meeting"). At the Annual Meeting, stockholders voted on four matters:   
(i) the election of nine directors; (ii) the approval of the Company's 1997     
Employee Stock Purchase Plan; (iii) the approval of the Company's 1996 Stock    
Incentive Plan, as amended; and (iv) the ratification of the appointment of     
Price Waterhouse LLP (effective July 1, 1998, PricewaterhouseCoopers LLP) as the
Company's independent accountants for the period ending December 31, 1998. The  
stockholders elected management's nominees as the directors in an uncontested   
election, approved the Company's 1997 Employee Stock Purchase Plan and 1996     
Stock Incentive Plan and ratified the appointment of Price Waterhouse LLP as the
Company's independent accountants by the following votes, respectively:         

(i) Election of directors:                                            

                                                        [Enlarge/Download Table]

                         DIRECTOR                           VOTES FOR   VOTES WITHHELD
                         --------                          -----------  --------------
                                                                                      
Gabriel A. Battista....................................... 122,306,075      5,150     
Michael A. Daniels........................................ 122,306,275      4,950     
Donald N. Telage.......................................... 122,305,975      5,250     
J. Robert Beyster......................................... 122,305,575      5,650     
Craig I. Fields........................................... 122,305,375      5,850     
John E. Glancy............................................ 122,304,775      6,450     
J. Dennis Heipt........................................... 122,304,775      6,450     
William A. Roper, Jr...................................... 122,305,075      6,150     
Stratton D. Sclavos....................................... 122,305,375      5,850     

(ii) Approval of 1997 Employee Stock Purchase Plan ("1997 Plan"):     

                                                        [Enlarge/Download Table]

                                                   VOTES FOR   VOTES AGAINST  ABSTENTIONS
                                                  -----------  -------------  -----------
                                                                                         
1997 Plan........................................ 120,563,069     154,815       11,120   

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(iii) Approval of 1996 Stock Incentive Plan ("1996 Plan"):            

                                                        [Enlarge/Download Table]

                                                   VOTES FOR   VOTES AGAINST  ABSTENTIONS
                                                  -----------  -------------  -----------
                                                                                         
1996 Plan........................................ 120,094,202     652,187       11,825   

(iv) Ratify Appointment of Price Waterhouse LLP:                      

                                                        [Enlarge/Download Table]

                                                   VOTES FOR   VOTES AGAINST  ABSTENTIONS
                                                  -----------  -------------  -----------
                                                                                         
Ratify Appointment............................... 122,302,333      4,400         4,492   

     For further discussion of these matters, see the Company's definitive Proxy
Statement for the May 19, 1998 Annual Meeting of Stockholders, which was filed  
with the Commission on April 14, 1998.                                          

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

(a) Exhibits -- See Exhibit Index                                               

(b) Reports on Form 8-K -- None                                                 

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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.

Date: August 14, 1998                     By   /s/ ROBERT J. KORZENIEWSKI       
                                            ------------------------------------
                                            Robert J. Korzeniewski
                                           Chief Financial Officer
                                           and
                                            Authorized Signatory

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EXHIBIT INDEX 

NETWORK SOLUTIONS, INC. 

                                                                [Download Table]

EXHIBIT                                                                   
  NO.                      DESCRIPTION OF EXHIBITS                        
-------                    -----------------------                        
                                                                          
27.1     Financial Data Schedule                                          

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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘10-Q’ Filing	Date	First	Last	Other Filings

	9/30/00	14
	12/31/98	20		10-K, 8-K
	9/30/98	9	15	10-Q
Filed on:	8/14/98	22
	8/7/98	1	17
	8/1/98	18
	7/27/98	19
	7/20/98	19
	7/1/98	20
For Period End:	6/30/98	1	13
	6/10/98	14
	6/8/98	19
	6/5/98	8
	6/4/98	19
	5/19/98	20	21	DEF 14A
	5/14/98	19
	5/5/98	19
	5/1/98	19
	4/30/98	19
	4/14/98	21		DEF 14A
	4/6/98	19
	4/1/98	9	10
	3/31/98	9	11	10-K, 10-Q
	3/17/98	19
	3/12/98	10		SC 13G/A
	2/24/98	19
	2/20/98	14
	2/10/98	19
	2/2/98	19
	1/30/98	19
	1/1/98	8
	12/31/97	2	13	10-K
	10/17/97	19
	10/1/97	10	20
	9/26/97	13	20	424B1
	9/25/97	20		S-1/A
	9/17/97	19
	6/30/97	2	13
	6/27/97	18
	4/1/97	10
	3/31/97	10
	3/20/97	18
	1/1/97	10
	9/14/95	9	10
	4/1/93	9
	1/1/93	9
				List all Filings

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Network Solutions Inc/DE – ‘10-Q’ for 6/30/98

As of: Friday, 8/14/98 · For: 6/30/98 · Accession #: 950133-98-3087 · File #: 0-22967

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Quarterly Report — Form 10-QFiling Table of Contents

10-Q — Network Solutions Inc 10-QDocument Table of Contents

Dates Referenced Herein and Documents Incorporated by Reference

Quarterly Report — Form 10-Q
Filing Table of Contents

10-Q — Network Solutions Inc 10-Q
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