-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L5f1uQnNIx3PVIl7IRR4C66CTydpewGzF6nQAPBKIuMBoFgNd3ciFlbAS+WUJDiE bLFbivLiHY2EwnnJQIJiDQ== 0000950133-97-003115.txt : 19970828 0000950133-97-003115.hdr.sgml : 19970828 ACCESSION NUMBER: 0000950133-97-003115 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19970827 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETWORK SOLUTIONS INC /DE/ CENTRAL INDEX KEY: 0001030341 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 521146119 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-30705 FILM NUMBER: 97670837 BUSINESS ADDRESS: STREET 1: 505 HUNTMAR PARK DR CITY: HERNDON STATE: VA ZIP: 20170 BUSINESS PHONE: 7037420400 MAIL ADDRESS: STREET 1: 505 HUNTMAR PARK DRIVE CITY: HERNDON STATE: VA ZIP: 20170 FORMER COMPANY: FORMER CONFORMED NAME: NETWORK SOLUTIONS INC /DE/ DATE OF NAME CHANGE: 19970702 S-1/A 1 NETWORK SOLUTIONS S-1/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 27, 1997 REGISTRATION NO. 333-30705 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ Amendment No. 1 Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ NETWORK SOLUTIONS, INC. (Exact name of registrant as specified in its charter) DELAWARE 7379 52-1146119 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification No.) incorporation or organization)
505 HUNTMAR PARK DRIVE, HERNDON, VIRGINIA 20170 (703) 742-0400 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------ GABRIEL A. BATTISTA Chief Executive Officer Network Solutions, Inc. 505 Huntmar Park Drive, Herndon, Virginia 20170 (703) 742-0400 (Name, address, including zip code, and telephone number, including area code, of agent for service of process) ------------------------ Copies to: JORGE DEL CALVO, ESQ. DOUGLAS E. SCOTT, ESQ. MICHAEL D. NATHAN, ESQ. KEITH J. MENDELSON, ESQ. ALOMA H. AVERY, ESQ. SIMPSON THACHER & BARTLETT DAVINA K. KAILE, ESQ. SCIENCE APPLICATIONS 425 Lexington Avenue PILLSBURY MADISON & SUTRO LLP INTERNATIONAL New York, NY 10017 2700 Sand Hill Road CORPORATION (212) 455-2000 Menlo Park, CA 94025 10260 Campus Point Drive (415) 233-4500 San Diego, CA 92121 (619) 546-6000
------------------------ Approximate date of commencement of proposed sale to the public: AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement numbers of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROPOSED CLASS OF SECURITIES MAXIMUM AGGREGATE AMOUNT OF TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE(2) - ----------------------------------------------------------------------------------------------------- Class A Common Stock, $0.001 par value............... $42,320,000 $12,825 =====================================================================================================
(1) Estimated solely for the purpose of computing the registration fee. The estimate is made pursuant to Rule 457(o) of the Securities Act of 1933, as amended. (2) A filing fee of $10,606 was paid by the Registrant on July 3, 1997. ----------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED AUGUST 27, 1997 PROSPECTUS 2,300,000 SHARES LOGO CLASS A COMMON STOCK All of the 2,300,000 shares of Class A Common Stock offered hereby are being sold by Network Solutions, Inc. ("NSI" or the "Company"). The Company has two classes of authorized Common Stock, Class A Common Stock and Class B Common Stock. Holders of Class A Common Stock generally have identical rights to holders of Class B Common Stock, except that holders of Class A Common Stock are entitled to one vote per share while holders of Class B Common Stock are entitled to ten votes per share on all matters submitted to a vote of stockholders. See "Relationship with SAIC and Certain Transactions" and "Description of Capital Stock." The Company is a wholly-owned subsidiary of Science Applications International Corporation, a Delaware corporation ("SAIC"). Upon completion of this offering, SAIC will own 100% of the Company's outstanding Class B Common Stock, which will represent approximately 84.5% of the outstanding Common Stock of the Company (approximately 82.5% if the Underwriters' over-allotment option is exercised in full) and approximately 98.2% of the combined voting power of the Company's outstanding Common Stock (approximately 97.9% if the Underwriters' over-allotment option is exercised in full), and will continue to control the Company. See "Principal Stockholders" and "Relationship with SAIC and Certain Transactions." The Underwriters have reserved up to 5% of the shares of the Class A Common Stock offered hereby for sale at the initial public offering price to certain employees, officers and directors of SAIC and the Company and other persons designated by the Company. See "Underwriting." Prior to this offering, there has been no public market for the Class A Common Stock of the Company. It is currently estimated that the initial public offering price will be between $14.00 and $16.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The Company has applied to have the Class A Common Stock approved for quotation on the Nasdaq National Market under the symbol NSOL. ------------------ THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 7. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. =========================================================================================================== PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) - ----------------------------------------------------------------------------------------------------------- Per Share............................ $ $ $ - ----------------------------------------------------------------------------------------------------------- Total(3)............................. $ $ $ ===========================================================================================================
(1) See "Underwriting" for indemnification arrangements with the several Underwriters. (2) Before deducting expenses payable by the Company estimated at $1,100,000. (3) The Company has granted to the Underwriters a 30-day option to purchase up to 345,000 additional shares of Class A Common Stock solely to cover over-allotments, if any. If all such shares are purchased, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------ The shares of Class A Common Stock are offered by the several Underwriters subject to prior sale, receipt and acceptance by them and subject to the right of the Underwriters to reject any order in whole or in part and certain other conditions. It is expected that certificates for such shares will be available for delivery on or about , 1997, at the office of the agent of Hambrecht & Quist LLC in New York, New York. HAMBRECHT & QUIST J.P. MORGAN & CO. PAINEWEBBER INCORPORATED , 1997 3 [INSIDE FRONT COVER OF PROSPECTUS] Bar graph depicting domain name registration growth from September 1995 to June 1997 appears here CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON STOCK, INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." The Company's name and logo are service marks of the Company. This Prospectus also includes trademarks of companies other than the Company. 2 4 [GATE FOLD] Depiction of Registration Process THE REGISTRATION PROCESS DEPICTION OF DOMAIN NAME REQUEST COMPUTER SCREEN RECEIVED VIA INTERNET NETWORK SOLUTIONS LOGO NSI ASSIGNS DOMAIN NAME DEPICTION OF ROOT SERVERS POPULATED ROOT SERVERS DAILY BY NSI .GOV .NET .COM .ORG .NET DOMAIN NAME GLOBALLY ACCESSIBLE
5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Unless the context requires otherwise, all references to the "Company," "Network Solutions" and "NSI" shall refer to Network Solutions, Inc., a Delaware corporation, and its predecessor, Network Solutions Incorporated, a Washington, D.C. corporation. The Class A Common Stock offered hereby involves a high degree of risk. See "Risk Factors." References in this Prospectus to the "Common Stock" shall include both the Company's Class A Common Stock, par value $0.001 per share (the "Class A Common Stock"), and the Company's Class B Common Stock, par value $0.001 per share (the "Class B Common Stock"). As used herein, net registrations are defined as the gross number of domain name registrations less management's estimates of uncollectible registrations and of non-renewals. Except as otherwise noted, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. See "Description of Capital Stock," "Underwriting" and Notes to Financial Statements. THE COMPANY Network Solutions is the leading Internet domain name registration service provider worldwide. The Company currently acts as the exclusive registrar for second level domain names within the .com, .org, .net, .edu and .gov top-level domains ("TLDs"). By registering Internet domain names, the Company enables businesses, other organizations and individuals to establish a unique Internet presence from which to communicate and conduct commerce. Net registrations within the TLDs maintained by the Company increased by 206% from approximately 340,000 domain names registered at June 30, 1996 to approximately 1,040,000 domain names registered at June 30, 1997. The Company believes that commercial enterprises and individual Internet users worldwide are increasingly recognizing the .com TLD as a desirable address for commercial presence on the Internet. Net registrations in the .com TLD increased from approximately 304,000 at June 30, 1996 to approximately 908,000 at June 30, 1997, representing 87% of the Company's total net registrations at June 30, 1997. With over 10 million businesses and over 750,000 active trademarks and service marks in the United States alone, the Company believes that the potential for continued growth of domain name registrations by commercial entities and services related to those registrations is substantial. Net revenue from Internet domain name registration subscriptions accounted for 81.0% of the Company's net revenue for the six months ended June 30, 1997. The Company also provides Intranet consulting and network design and implementation services to large companies that desire to establish or enhance their Internet presence or "re-engineer" legacy network infrastructures to accommodate the integration of both Internet connectivity and Intranet network technology into their information technology base. The Company's Intranet services presently include: (i) Intranet development and re-engineering; (ii) network and systems security; and (iii) Intranet-enabled business solutions. According to Zona Research, Inc., the market for Intranet services in the year 1999 will exceed $14 billion, up from $3 billion in 1996. There can be no assurance that such market forecast will be achieved. Net revenue from Intranet services accounted for 19.0% of the Company's net revenue for the six months ended June 30, 1997. The Company currently acts as the registrar for second level domain names within the .com, .org, .net, .edu and .gov TLDs pursuant to a cooperative agreement (the "Cooperative Agreement") with the National Science Foundation (the "NSF"). Prior to September 14, 1995, the Cooperative Agreement was a cost reimbursement plus fixed-fee contract and the Company was paid directly by the NSF for providing registration services. Effective September 14, 1995, the NSF and the Company amended the Cooperative Agreement to authorize the Company to charge customers a subscription fee of $50 per year for each second level domain name registered. The Company's registration services customers in the .com, .org and .net TLDs are invoiced for a two-year subscription fee of $100 for initial registrations and $50 per year for renewals of initial registrations. Pursuant to the Cooperative Agreement, the Company presently is required to set aside 30% of the subscription fees collected for the enhancement of the intellectual infrastructure of the Internet. These funds are not recognized as revenue by the Company and will be disbursed in a manner approved by the NSF. The Cooperative Agreement by its terms expires in March 1998, although the NSF may, at its option, extend the Cooperative Agreement to September 1998. The Cooperative Agreement is subject to review by the NSF and may be terminated at any time by the NSF at its discretion or by mutual agreement. The NSF has stated that the Cooperative Agreement will not be re-awarded to the Company or awarded to any other entity. See "Risk Factors -- Uncertain Status of the Cooperative Agreement," "-- Recommendations and 3 6 Proposals to Increase Competition in Registration Services" and "Business -- Relationship with the NSF; Recent Developments in the Internet Community." The Company believes that it has certain competitive advantages in the domain name registration business, including: (i) a large established customer base; (ii) recognition of the .com TLD; (iii) strategic agreements with Internet access providers; (iv) an established technical infrastructure; (v) experience in the administration of a domain name dispute policy; and (vi) skilled technical personnel who are experienced in the domain name registration business. The Company believes that the technical and procedural requirements to build and to operate a competitive domain name registry are significant. Substantial portions of the Company's registration software have been custom- developed and are proprietary. The Company's in-house registration software includes an automated registration capability which currently processes in excess of 90% of all new registration requests without human intervention. In connection with the Company's domain name registration service, the Company: (i) cooperates with government and nonprofit organizations that develop and implement Internet standards and policies; (ii) provides customer service support, which includes back office capability, a telephone help desk and electronic support via e-mail and the World Wide Web; and (iii) disseminates domain name database information to root servers throughout the world. The Company is working to expand its domain name registration business and to continue to improve the registration process by: (i) increasing the use of the .com TLD worldwide; (ii) expanding its relationships with Internet access providers by offering enhanced registration services to their customers; (iii) stimulating demand for domain names in targeted customer segments; (iv) working with major platform providers to embed the registration function into server software applications; (v) facilitating ease of use of and access to registration services; and (vi) establishing international alliances and developing multilingual capability. In addition, the Company intends to develop a portfolio of Internet-enabling products and services, which may include directory and distribution services, that allows the Company to build upon its position in the registration process and makes proper use of the customer data that the Company collects. The Company was incorporated in Washington, D.C. in 1979 as Network Solutions Incorporated and was reincorporated as Network Solutions, Inc. in Delaware in November 1996. The Company's principal executive offices are located at 505 Huntmar Park Drive, Herndon, Virginia 20170, and its telephone number is (703) 742-0400. THE OFFERING Class A Common Stock offered by the Company...... 2,300,000 shares Common Stock to be outstanding after the offering Class A Common Stock........................... 2,300,000 shares(1) Class B Common Stock........................... 12,500,000 shares(2) Total.................................. 14,800,000 shares Voting Rights.................................... Holders of Class A Common Stock vote together as a class with, and generally have identical rights, including as to dividends, to, those of holders of Class B Common Stock, except that holders of Class A Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to ten votes per share. See "Description of Capital Stock -- Common Stock -- Voting Rights." Use of Proceeds.................................. For working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol........... NSOL
- ------------------------------ (1) Excludes 2,556,250 shares of Class A Common Stock reserved for issuance under the Company's 1996 Stock Incentive Plan, of which 1,539,725 shares were subject to options outstanding as of July 31, 1997, with a weighted average exercise price of $13.18 per share. See "Capitalization" and "Management -- 1996 Stock Incentive Plan" and Notes 10 and 14 of Notes to Financial Statements. (2) Upon completion of the offering, SAIC will own 100% of the Class B Common Stock. 4 7 SUMMARY FINANCIAL AND OPERATING INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS FISCAL YEAR ENDED DECEMBER 31, ENDED JUNE 30, -------------------------------------------- ----------------- 1992 1993 1994 1995(1) 1996 1996 1997 ------ ------ ------ ------- ------- ------- ------- STATEMENT OF OPERATIONS DATA: Net revenue............................................. $1,160 $4,369 $5,029 $ 6,486 $18,862 $ 6,829 $18,724 Income (loss) from continuing operations................ 93 (110) 189 (1,434) (1,625) (1,458) 1,256 Net income (loss)....................................... $ 681 $ (386) $ (980) $(2,837) $(1,625) $(1,458) $ 1,256 Unaudited pro forma net income (loss) per share......... $ (0.12) $ (0.11) $ 0.09 Unaudited pro forma shares used in computing net income (loss) per share(2)................................... 13,349 13,349 13,349 OTHER OPERATING DATA(3): Net new registrations................................... -- 13 24 141 489 180 429 Less: registrations not renewed......................... -- -- -- 1 39 17 16 Net registrations at period end......................... -- 13 37 177 627 340 1,040
JUNE 30, 1997 ------------------------- ACTUAL AS ADJUSTED(4) ------- -------------- BALANCE SHEET DATA: Cash and cash equivalents............................................................. $25,967 $ 46,952 Working capital(5).................................................................... 6,280 27,265 Total assets(6)....................................................................... 92,250 113,235 Deferred revenue, net(5).............................................................. 45,628 45,628 Capital lease obligations............................................................. 2,348 2,348 Total stockholders' equity............................................................ 2,693 23,678
SUMMARY QUARTERLY FINANCIAL AND OPERATING INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED --------------------------------------------------------------------------- DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, 1995 1996 1996 1996 1996 1997 1997 -------- -------- -------- --------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Net revenue..................................... $1,533 $ 2,333 $ 4,496 $ 5,180 $ 6,853 $ 8,655 $10,069 Income (loss) from continuing operations........ (844) (1,102) (356) (293) 126 516 740 Net income (loss)............................... $ (851) $(1,102) $ (356) $ (293) $ 126 $ 516 $ 740 Unaudited pro forma net income (loss) per share......................................... $ (0.08) $ (0.03) $ (0.02) $ 0.01 $ 0.04 $ 0.06 Unaudited pro forma shares used in computing net income (loss) per share(2).................... 13,349 13,349 13,349 13,349 13,349 13,349 OTHER OPERATING DATA(3): Net new registrations........................... 43 75 105 139 170 197 232 Less: registrations not renewed................. 1 6 11 18 4 6 10 Net registrations as of period end.............. 177 246 340 461 627 818 1,040
- ------------------------------ (1) The Summary Financial Data for the year ended December 31, 1995 was derived by combining the Company's Results of Operations for the period January 1, 1995 through March 10, 1995 and the period March 11, 1995 through December 31, 1995 which, respectively, are periods before and after the date of the SAIC acquisition discussed below. The data for these two periods were prepared on differing bases of accounting and, accordingly, the comparability of such data with other periods is limited, primarily as a result of goodwill amortization, new corporate services agreements and the repayment of outstanding debt balances. See Note 1 of Notes to Financial Statements for a discussion of the presentation for each of these periods. (2) See Note 2 of Notes to Financial Statements for an explanation of the determination of shares used in computing the unaudited pro forma net income (loss) per share. (3) Net new registrations for each period include gross new registrations less an estimate of registrations that are uncollectible. Net registrations include net new registrations less management's estimate of registrations not renewed. Prior to September 14, 1995, net registrations equaled gross registrations because the Company was reimbursed by the NSF for all registrations under a cost reimbursement plus fixed-fee contract. (4) As adjusted to give effect to the $10,000 dividend to be paid to SAIC declared on August 21, 1997 and payable on August 31, 1997 and to reflect the sale of 2,300,000 shares of Class A Common Stock offered by the Company hereby at an assumed initial public offering price of $15.00 per share and the receipt of the estimated net proceeds therefrom. See "Use of Proceeds," "Dividend Policy" and "Capitalization." (5) Includes $31,990 of current deferred revenue at June 30, 1997. (6) Total assets include $31,056 of restricted assets at June 30, 1997. See Notes 2 and 3 of Notes to Financial Statements. 5 8 RELATIONSHIP WITH SAIC AND FINANCIAL PRESENTATION The Company was acquired by Science Applications International Corporation ("SAIC"), an employee-owned, diversified professional and technical services company, on March 10, 1995. The financial statements of the Company presented for periods subsequent to March 10, 1995 are presented on the new basis of accounting arising from the SAIC acquisition. The Company is currently a wholly- owned subsidiary of SAIC. Upon completion of the offering, SAIC will own 100% of the Company's outstanding Class B Common Stock, which will represent approximately 84.5% of the outstanding Common Stock of the Company (approximately 82.5% if the Underwriters' over-allotment option is exercised in full) and approximately 98.2% of the combined voting power of the Company's outstanding Common Stock (approximately 97.9% if the Underwriters' over-allotment option is exercised in full). As a result, SAIC will continue to have the ability to elect all of the directors of the Company and otherwise exercise control over the business and affairs of the Company. See "Principal Stockholders," "Risk Factors -- Control By SAIC," "-- Potential Conflicts of Interest" and "Relationship with SAIC and Certain Transactions." Upon completion of the offering, SAIC will continue to provide certain services to the Company in a manner generally consistent with past practices. Prior to completion of the offering, the Company and SAIC will enter into a number of intercompany agreements with respect to such services and other matters, including a tax sharing agreement. See "Risk Factors -- Intercompany Agreements Not Subject to Arm's Length Negotiations; Reliance on SAIC for Certain Corporate Services," "-- Control of Tax Matters; Tax and ERISA Liability" and "Relationship With SAIC and Certain Transactions." Prior to the acquisition of the Company by SAIC, the Company's business included commercial and government contracts awarded to the Company on a competitive basis, including government contracts that were awarded to the Company based partially upon the Company's then minority-owned status. The contracts which had been awarded to the Company based partially upon the Company's then minority-owned status were transferred into a separately-owned entity prior to the acquisition of the Company by SAIC. In November 1995, SAIC adopted a plan to transfer the Company's remaining government-based business to SAIC in order to enable the Company to focus on the growth of its commercial business, which includes registration services and Intranet services. This transfer was effective as of February 1996. The operating results of both the minority-based government contracts business and the remaining government-based business are reflected as discontinued operations in the Company's financial statements for all periods presented. 6 9 RISK FACTORS An investment in the shares of Class A Common Stock offered hereby involves a high degree of risk. Prospective investors should consider carefully the following risk factors, in addition to the other information presented in this Prospectus, before purchasing the shares of Class A Common Stock offered hereby. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in this Prospectus. Limited Operating History. While the Company has been in business since 1979, it has only been involved in the domain name registration business pursuant to the Cooperative Agreement since 1993. Further, prior to September 14, 1995, the Company operated its domain name registration business under a cost reimbursement plus fixed-fee contract with the NSF and the Company was paid directly by the NSF for providing registration services. Accordingly, 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. In 1995 and 1996, the Company incurred net losses in part as a result of the Company's transition to a subscription-based pricing model, where revenue is recognized on a straight-line basis over the subscription period, combined with the increased costs to support the increase in its subscriber base, including costs for product and services development, increased sales and marketing operations, upgrading systems and infrastructure, developing new distribution channels and broadening customer support capabilities. The Company incurred a net loss of approximately $1.6 million for the year ended December 31, 1996 and had an accumulated deficit of approximately $1.8 million through June 30, 1997. The Company's prospects must be considered in light of the risks frequently encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets. To address these risks, the Company must, among other things, respond to competitive developments, increase its sales and marketing organization, continue to identify, attract, retain and motivate qualified persons and continue to upgrade its technologies and commercialize products and services incorporating such technologies. While the Company has been involved in network services and consulting since its inception, due to the rapidly evolving nature of Internet technologies, the Company's Intranet services business faces similar risks. An Intranet is an internal network which uses Internet technologies. 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 renew the registration of a significant portion of its customers. See "-- Absence of Sales and Marketing Experience; Evolving Distribution Channels" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." As a result of the Company's limited operating history, especially with regard to its subscription-based registration services business, the Company does not have significant historical financial data on which to base planned operating expenses. Accordingly, the Company's expense levels are based in part on its expectations as to future revenue and to a large extent are fixed. As a result, quarterly sales and operating results generally depend on the volume of and ability to fulfill registration requests, which are difficult to forecast. The Company may be unable to adjust 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 would 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 funds greater levels of product and services development, increases its sales and marketing operations, upgrades systems and infrastructure, opens new offices, develops new distribution channels and broadens its customer support capabilities. To the extent that such expenses precede or are not subsequently followed by an increase in revenue, the Company's business, operating results and financial condition will be materially and adversely affected. Uncertain Status of the Cooperative Agreement. In 1993, the Company entered into the Cooperative Agreement with the NSF to act as the registrar for second level domain names within the .com, 7 10 .org, .net, .edu and .gov TLDs. With the commercialization of the Internet, the role, if any, that the NSF will play in the Internet and the legal authority underlying its role are at present unclear. Withdrawal of or challenges to the NSF's sponsorship or authorization of the Company's activities could create a public perception or result in a finding that the Company lacks authority to continue in its role as registrar or to charge fees for its domain name registration services. The impact, if any, of any such public perception or finding is unknown but could materially and adversely affect the Company's business, financial condition and results of operations. Further, the Cooperative Agreement by its terms expires in March 1998, although the NSF may, at its option, extend the Cooperative Agreement to September 1998. The terms of the Cooperative Agreement are subject to review and adjustment by the NSF on an annual basis. In addition, the Cooperative Agreement may be terminated by the NSF at any time at its discretion or by mutual agreement. When the Cooperative Agreement is terminated or if there is a change in the terms of the Cooperative Agreement or the Company's status as the exclusive registrar for domain names in the .com TLD, the Company's business, financial condition and results of operations could be materially and adversely affected. The NSF has stated that the Cooperative Agreement will not be re-awarded to the Company or awarded to any other entity. However, there can be no assurance that the NSF will not award the Cooperative Agreement to another entity and, if the Cooperative Agreement is awarded to another entity, the Company's business, financial condition and results of operations would be materially and adversely affected. See "-- Uncertainty of Internet Governance and Regulation" and "Business -- Relationship with the NSF; Recent Developments in the Internet Community." Competition in Domain Name Registration Business. The Company currently is the exclusive registrar for second level domain names in the .com, .org, .net, .edu and .gov TLDs. Multiple registries do not currently register names in the same TLD, but this may change in the future. 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 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 subscription fees could be reduced due to increasing competition. For example, other entities may bundle domain name registrations with other products or services, effectively providing such registration services for free. If operational and administrative arrangements or technology permitting multiple competitors to register domain names in the same or other TLDs are developed and competition occurs in the domain name registration business, the Company's business, financial condition and results of operations could be materially and adversely affected. See "Business -- Competition." Recommendations and Proposals to Increase Competition in Registration Services. The Cooperative Agreement does not prohibit the establishment of competing registries. No single organization or entity (including the NSF) currently has formal authority over all aspects of the Internet and the Internet currently operates under a system of mutual cooperation. As a result, it is unclear which organization or entity, if any, will govern the authorization for the registration of domain names. Various governmental, technical and Internet groups are currently discussing how the award and administration of future contracts for registration services in the .com TLD, other existing TLDs and new TLDs may take place and are considering whether and how to enable other parties to enter the domain name registration business. The Company is also an active participant in this process. A 8 11 consensus regarding such issues could be reached and implemented in the near future and prior to the expiration of the Cooperative Agreement. For example, some members of the Internet community have discussed various concepts such as adding new TLDs, which could result in significant competition for domain name registrations, including competition on the price charged by the Company for domain name registrations. In February 1997, an international ad hoc committee (the "IAHC"), the members of which have been selected by certain entities involved in the Internet and intellectual property fields, issued its recommendation designed to increase competition in domain name registration in which it proposed the creation of additional registries, additional TLDs and the possible sharing of new and existing TLDs. In April 1997, the IAHC issued a Memorandum of Understanding ("MOU") seeking support for its recommendations. This MOU has been signed by a number of organizations in the Internet community. In April 1997, the Company issued its own recommendations to increase competition in domain name registration. The Company's recommendations focus on creating additional TLDs as well as on the future administration and technical operation of the Internet. Other groups or entities may also make other proposals concerning these and other issues. Implementation of competing registries, additional TLDs, the sharing of the Company's TLDs or other recommendations or proposals of these groups could have a material adverse effect on the Company's business, financial condition and results of operations. See "-- Uncertainty of Internet Governance and Regulation" and "Business -- Relationship with the NSF; Recent Developments in the Internet Community." Uncertainty of Internet Governance and Regulation. The Internet historically has been loosely administered by a number of government agencies which were involved in the creation of its infrastructure, initially the Department of Defense's Advanced Research Projects Agency ("ARPA") and, more recently, the NSF. No single organization or entity (including the NSF) currently has formal authority over all aspects of the Internet and it currently operates under a system of mutual cooperation. Since the original role of the Internet was to link computers at governmental and academic institutions to facilitate communication and research, the Internet was historically administered by entities which were involved in sponsoring research rather than by any of the traditional federal or state regulatory agencies. With the commercialization and internationalization of the Internet, the role of these entities in Internet administration has become less clear and private parties have begun to assume a larger role in the enhancement and maintenance of the Internet's infrastructure. This lack of regulation and the legal uncertainties arising from it poses risks to the Company and to the commercial Internet industry in general. As described above, it is unclear which organization or entity, if any, will govern the authorization for the registration of domain names in the future. The lack of an appropriate organization or entity to govern the authorization for the registration of domain names could have a material adverse effect on the Company's business, financial condition and results of operations. The effective operation of the Internet is dependent on the continued mutual cooperation and consensus among an increasing number of entities, many of which have widely divergent interests. For example, the IP addresses allocated by Internet service providers ("ISPs") to their customers are originally allocated by the Internet Assigned Numbers Authority (the "IANA"). Thus, the effective operation of the Internet is dependent on such continued allocation of IP addresses by IANA. Continuing to achieve consensus may become difficult or impossible and may become extremely time-consuming and costly. Achieving consensus may be made more difficult because of the lack of leadership by any one entity. This lack of regulation also creates great uncertainty as to the legality of any action, making business planning and operations difficult. Conversely, the lack of regulation could theoretically result in individuals and entities taking harmful or disruptive actions with respect to the Internet with impunity. There is a risk that a failure to achieve consensus among the various groups which are now informally administering the Internet could result in the disruption of Internet operations, the inability of any user to communicate with another user or otherwise utilize the Internet or the delay of infrastructure improvements necessary to the maintenance and expansion of the Internet. Any disruption to the administration, effective operation or maintenance and expansion of the Internet, in general, or the domain name registration system in particular, would have a material 9 12 adverse effect on the Company's business, financial condition and results of operation. See "-- Uncertain Status of the Cooperative Agreement; "-- Recommendations and Proposals to Increase Competition in Registration Services" and "Business -- Relationship with the NSF; Recent Developments in the Internet Community." The current lack of any centralized Internet management could also cause the U.S. federal or other governments to intervene with uncertain results. The U.S. government has formed an interagency task force ("ITF") consisting of various federal agencies to study the issues surrounding domain name registration and governance of the Internet. The ITF is expected to solicit broad public input to these and other issues. This process is expected to be completed in early 1998. On July 1, 1997, the National Telecommunications Information Administration of the Department of Commerce ("the NTIA") published a request for comments on the registration and administration of Internet domain names. This request appeared in the form of a notice of inquiry (the "NOI") in the U.S. Federal Register with August 18, 1997 as the closing date for receipt of comments. The NOI requested specific input in five broad areas: general principles, general/organizational framework issues, creation of new TLDs, policy issues for new registrars and trademark dispute issues. The Company has submitted a response to the NOI request which includes a recommendation, among others, that an international public advisory group with U.S. government sponsorship be established to manage the Internet, including the domain name system, and that the U.S. government sponsorship of this international public advisory group continue through a transition period until a suitable international sponsor is selected. The NTIA is expected to issue a report on the results of this NOI and to recommend a future course of action prior to June 1998 for the role of the U.S. government in Internet domain name registration. The ITF or NTIA processes or any other government-sponsored process could result in policies which may not be favorable to the Company or consistent with the Company's current or future plans. The outcome of these activities, therefore, could have a material adverse effect on the Company's business, financial condition and results of operations. In the United States, apart from its obligations under the Cooperative Agreement, the Company is not currently subject to direct regulation other than federal and state regulation applicable to businesses generally. However, changes in the regulatory environment could result in the Company being subject to direct regulation by the Federal Communications Commission (the "FCC") or other U.S. regulatory agencies. For example, the Company is aware of certain industry requests to the FCC to review the impact of Internet usage on the U.S. telecommunications service providers, in particular, the generally lower cost structure for data transmission versus voice. In addition, as Internet usage becomes more widespread internationally, there is an increased likelihood of international regulation. The Company cannot predict whether or to what extent any such new regulation will occur; however, such regulation could have a material adverse effect on the Company's business, financial condition and results of operations. Additionally, the applicability to the Company of existing laws governing issues such as intellectual property ownership is uncertain. Courts have indicated that, under certain circumstances, ISPs could be held responsible for the failure to prevent the distribution of material that infringes on others' copyrights and other intellectual property. The future interpretation by the courts of the obligation of domain name registration providers to prevent trademark infringement and other legal issues is uncertain. See "-- Litigation; Antitrust Investigation" and "Business -- Litigation; Antitrust Investigation." Costs incurred or decisions rendered as a result of government actions, including enactment of new laws or adoption of new regulations, investigations or lawsuits relating to any of the foregoing, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Uncertainty of Internet Governance and Regulation." Reliance on Third Parties. Reliable communications over the Internet are dependent upon Internet root servers, which serve as the equivalent of master "white pages" of the Internet. Currently, there are 13 root servers, ten of which are located in the United States, two of which are located in Europe and one of which is located in Asia. Nine of the root servers currently are populated with the domain names registered by the Company, while these nine and the other four also contain 10 13 information with respect to other TLDs, including country TLDs. When communication with a particular host within a domain name is required and the IP address of that host is not known locally, the root servers make that information available or "point" to a direct or indirect source of the information. Multiple root servers are required for purposes of load balancing and redundancy. The location and control of these root servers has been determined by consensus of various members of the Internet community. The Company controls only one of these root servers and currently temporarily administers another root server. The other eleven root servers are maintained and controlled by independent operators on a volunteer basis. These volunteer operators may at any time, for any reason, fail to properly maintain such servers or abandon such servers. The occurrence of any such events would have a material adverse effect on the Company's business, financial condition and results of operations. Further, as no single organization or entity currently has formal authority over all aspects of the Internet, no organization or entity (including the Company) has the legal authority to direct where the root servers are to be pointed. However, the operators of the root servers have historically taken guidance from the IANA. It is possible that IANA could direct the root servers not to accept information updates from the Company or that the operators of the root servers could choose to no longer carry the Company's information. In the event that the root servers were changed to exclude the information maintained by the Company, all new domain names registered by the Company since the last update of the data in the TLDs for which the Company acts as the registrar would no longer be accessible by other users of the Internet. If some, but not all, of the root servers were changed to exclude the Company's data, the multiple root servers would contain inconsistent information. The failure by any or all of the root servers to include or provide accessibility to the Company's data would materially and adversely affect the Internet and the Company's business, financial condition and results of operations. The Company's success and ability to compete are also dependent upon the relationships between the Company and ISPs worldwide. Thus, if ISPs were to elect not to route Internet communications to or from domain names registered by the Company or if enough ISPs were to elect to provide routing to a set of accepted root servers which did not point to the Company's TLD servers, the Company's business, financial condition and results of operations would be materially and adversely affected. Litigation; Antitrust Investigation. As of July 31, 1997, the Company had received approximately 2,700 written objections to the registration and use of certain domain names. Of these, approximately 1,400 were disputes in which the Company's domain name dispute policy was involved. As of July 31, 1997, the Company had been named as a defendant in 36 lawsuits. As of such date, the Company had been dismissed as a party from 25 of the 36 lawsuits and no damages have been awarded against the Company to any plaintiff. The lawsuits have generally involved domain name disputes between trademark owners and domain name holders. The Company's domain name dispute policy seeks to take a neutral position regarding these competing claims and is designed to address claims that a domain name registered by the Company infringes a third party's federal trademark. 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 an alleged trademark infringer to register the domain name in question. Further, trademark owners have also alleged that the Company should be required to monitor future domain name registrations and reject registrations of domain names which are identical or similar to their federally registered trademark. 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 registration or use of the domain names in question. Such litigation has resulted 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. 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, 11 14 or may be a violation of antitrust laws 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. Neither SAIC nor the Company is aware of the scope or nature of the investigation. The Company cannot reasonably estimate the potential impact of the investigation nor can it predict whether a civil action will ultimately be filed by the DOJ or by private litigants as a result of the DOJ investigation or, if filed, what such action would entail. The Company is unable to predict the form of relief that might be sought in such an action or that might be awarded by a court or imposed as a result of any settlement between the Company and the DOJ or private litigants. Any such relief 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 Company had restricted access to the Internet by not adding TLDs in violation of the Sherman Act. In its complaint, PG Media has, in addition to requesting damages, asked that the Company be ordered to amend the root zone configuration file so that the file includes reference to PG Media's TLDs and nameservers. The Company has answered the complaint, but no motions are pending. In addition, the Company recently received written direction from the NSF not to take any action to create additional TLDs or to add any new TLDs to the Internet root servers until further guidance is provided by the NSF. The Company believes that it has meritorious defenses and intends to vigorously defend itself against the claims made by PG Media. While 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. There can be no assurance that the Company will not be involved in additional litigation, investigations or other proceedings in the future, including proceedings challenging the Company's authority to continue in its role as a registrar or to charge fees for its domain name registration services. Any such proceedings, with or without merit, could be costly and time-consuming to defend and could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Litigation; Antitrust Investigation." 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 interruption from fire, natural disaster, sabotage, power loss, telecommunication failure, human error or similar events. The vast majority of the Company's computer and telecommunications equipment is located in a single facility. Although the Company is in the process of establishing back-up facilities at another site, this measure, when implemented, will not eliminate the significant risk to the Company's operations from a natural disaster or system failure at its principal site. Despite the implementation of security measures and standard operating procedures, the Company's infrastructure may also be vulnerable to computer viruses, hackers, human error or similar disruptive problems caused by its employees, customers or other Internet users. Computer break-ins and other disruptions may jeopardize the security of information stored in and transmitted through the computer systems of the Company and may deter potential customers from utilizing the Company's services. 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. On July 17, 1997, during a routine update of the root server domain name files, the Company inadvertently released corrupted database files for the .com and .net TLDs, causing disruption throughout the Internet. The original problem, which was caused by a database error, was compounded when the normal quality control mechanisms used to validate the .com and .net TLD files were incorrectly overridden by Company personnel and the corrupted files were released. As a result, certain Internet users were unable to access certain websites. The database error was subsequently 12 15 fixed and the corrected files were regenerated and re-released by the Company within four hours, although the length of time during which certain Internet users experienced disruption in accessing the Internet varied. The Company has taken several steps to avoid any future occurrences of this or similar problems, including, but not limited to, adding software code to make it more difficult to transmit a problematic file and additional quality checks by a senior level person prior to each file transmission. There can be no assurance, however, that the Company's standard operating procedure or the additional measures recently implemented by the Company will prevent or mitigate a similar occurrence in the future. Separately, in July 1997, an entity which offers competing registration services using other TLDs exploited a security vulnerability in a third-party Internet software to temporarily redirect traffic intended for the Company's website. The Company is working with CERT (Computer Emergency Response Team) from Carnegie Mellon University to address this problem. If any of these or similar problems should recur or occur in the future, it could result in, among other things, damage to the Company's reputation and credibility, increased intervention by government regulators or reduced customer confidence, which could in turn materially and adversely affect the Company's business, financial condition and results of operations. Competition in Intranet Services and Internet-Enabling Businesses. Companies with Internet expertise are current or potential competitors to the Company's Intranet services business. Such companies include systems integrators and consulting firms, such as Andersen Consulting, IBM Global Services and International Network Services. The Company also competes with certain companies that have developed products that automate the management of Internet Protocol ("IP") addresses and name maps throughout enterprise-wide Intranets and with companies with internally-developed systems integration efforts. An IP address allows a router, a computer which connects networks together, to determine the network to which the router should send the data it receives. A number of these competitors and potential competitors have longer operating histories, greater name recognition and significantly greater financial, technical, marketing, distribution and other resources than the Company. There can be no assurance that the Company will be able to successfully compete in the Intranet services area. Failure by the Company to compete successfully in the Intranet services area could have a material adverse effect on the Company's business, financial condition and results of operations. In developing and distributing future products and services for the Internet-enabling services markets, the Company faces intense competition and expects to have multiple competitors for each of the products or services, if any, which it develops or sells. Many of the Company's potential competitors have longer operating histories, greater name recognition and significantly greater financial, technical, marketing, distribution and other resources than the Company. Furthermore, the industry in which the Company intends to compete is characterized by rapid changes and frequent product and service introductions. To the extent a competitor introduces a competitive product or service prior to the introduction of the same or similar product or service by the Company, market acceptance of the competitor's product or service may adversely affect the Company's competitive position. See "Business -- Competition." Uncollectible Receivables; Modifications to Billing Practices. The Company was reimbursed by the NSF for providing domain name registration services prior to September 14, 1995, at which time the Company began charging its customers fees for new domain name registrations pursuant to an amendment to the Cooperative Agreement. Currently, the Company invoices customers and permits them to pay the subscription fee after the domain name is registered. The Company believes it has experienced a high level of uncollectible receivables due to, among other factors, the large number of individuals and corporations that have registered multiple domain names with the apparent intention of reselling such names at a profit. The Company's experience has been that such resellers have a greater tendency than other customers to default on their subscription fees. Management has established a provision for uncollectible accounts which it believes to be adequate to cover anticipated 13 16 uncollectible receivables; however, actual results could differ from management's estimate and could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 of Notes to Financial Statements. The Company continually reviews its billing practices for modification to respond to market conditions and to implement operational improvements. Any such modification could have unanticipated consequences which could result in a material adverse effect on the Company's business, financial condition and results of operations. Limited Service Offerings to Date; Reliance on Domain Name Registration Services and Intranet Services for Substantially All Revenue. The Company's domain name registration services and Intranet services businesses have in the past generated substantially all of the Company's revenue from continuing operations and are expected to continue to account for substantially all of the Company's revenue from continuing operations in the near term. The Company's future success will be highly dependent upon the continued increase in domain name registrations with the Company, renewal rates of its customers, the ability of the Company to maintain its current position both as a registrar of domain names and as the leading registrar of domain names within the .com TLD and the successful development, introduction and market acceptance of new services that address the demands of Internet users. Although the Company has experienced revenue growth in recent periods, such growth may not be sustainable and may not be indicative of future operating results. There can be no assurance that the Company will be able to successfully retain its current position in providing domain name registration services or develop or market additional services. Failure to do so would materially and adversely affect the Company's business, financial condition and results of operations. The Company's future success will also be dependent on its ability to maintain and expand its Intranet services business. NationsBanc Services, Inc. ("NationsBanc"), the Company's largest Intranet services customer, accounted for 41.3% of the Company's Intranet services net revenue and 7.8% of the Company's total net revenue from continuing operations for the six months ended June 30, 1997. 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 the Company. During the first quarter of 1997, task orders for a number of services the Company had historically performed for NationsBanc were not renewed. The Company believes that this reflects NationsBanc's focus on increasing its internal information technology staff as well as its continued efforts to integrate information technology staff from recent acquisitions. The Company believes NationsBanc will continue to be a significant customer for its Intranet services group but less so than in previous years, both in terms of dollars and as a percentage of the Company's total net revenue. There can be no assurance that the Company will obtain any additional task orders under the NationsBanc contract or maintain or be able to expand its Intranet services business. Failure to do so would materially and adversely affect the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Technological Change and Additional Technology, Products and Services. The development of RWhois, a Company-developed, standard open protocol, and the associated technology, allows remote registration by others. The Company's efforts to standardize and proliferate RWhois as the registration standard may result in a material adverse effect on the Company's future competitive position by enabling others to establish registries more easily. RWhois is also the protocol that the Company may utilize for any global directory services which the Company might offer. The successful introduction of such directory services may blur the distinction between directory services and domain name registration. Should this or another global directory service become widely proliferated, domain name 14 17 registration may be subsumed into such a service. In that case, should the Company fail to secure a leadership position in providing such a global directory service or establish a system for charging for such service, the Company's business, financial condition and results of operations would be materially and adversely affected. See "Business -- NSI Services -- Registration Services" and "-- Other Products and Services Development." 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 Intranet 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 products 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. Dependence on Future Growth of the Internet and Internet Infrastructure. The Company's future success is substantially dependent upon continued growth in the use of the Internet. Rapid growth in the use of and interest in the Internet is a relatively recent phenomenon and there can be no assurance that use of the Internet will continue to grow at its current pace. Even if the Internet continues to experience significant growth in the number of users and level of use, there can be no assurance that the Internet infrastructure will continue to be able to support the demands placed upon it by such growth. The Company's success and the viability of the Internet as an information medium and commercial marketplace will depend in large part upon the development of a robust infrastructure for providing Internet access and carrying Internet traffic. Failure to develop a reliable network system, or timely development of complementary products, such as high speed modems, could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity or due to increased government regulation. The lack of Internet governance or the future imposition of restrictive governance or regulation could adversely affect the growth of the use of the Internet and have a material adverse effect on the Company's business, financial condition and results of operations. Because global commerce and on-line exchange of information on the Internet are new and evolving, it is difficult to predict with any assurance that the infrastructure or complementary products will be developed, or, if developed, that the Internet will become a viable information medium or commercial marketplace. If the use of the Internet does not continue to grow, if the necessary infrastructure or complementary products are not developed or do not effectively support growth that may occur, or if the Internet does not become a viable information medium or commercial marketplace, the Company's business, financial condition and results of operations would be materially and adversely affected. See "-- System Interruption and Security Risks" and "Business -- Industry Background." Intellectual Property Rights. The Company's principal intellectual property consists of, and its success is dependent upon, the Company's proprietary software utilized in its registration services business and certain methodologies and technical expertise it utilizes in both the design and planned implementation of its current and future registration service and proposed Internet-enabling services businesses. Some of the software and protocols used by the Company in its registration service and proposed Internet-enabling services businesses are in the public domain or are otherwise available to 15 18 the Company's competitors. In addition, in-depth technical knowledge and unique processes are critical to the Company's Intranet services business, in which a full range of consulting and systems integration services are offered in order to transition organizations from private, legacy networks to more scalable and efficient Intranets. The Company has no patents or registered copyrights but has several trademarks and service marks, including the Company's logo. The Company has compiled a database of information relating to customers in its registration business. While a portion of this database is available to the public, the Company believes that it has certain ownership rights in this database and is seeking to protect such rights. If it were determined that the Company does not have ownership rights in this database or if the Company is unable to protect such rights in this database or is required to share the database with its potential competitors, there could be a material adverse effect on the Company's business, financial condition and results of operations. 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 non-infringing intellectual property or acquire licenses to the intellectual property which 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. See "Business -- Intellectual Property Rights." 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, termination of the Cooperative Agreement or the award of the Cooperative Agreement to another entity, the introduction of additional competing registrars or TLDs, variations in the number of requests for domain name registrations or demand for the Company's services, introduction or enhancements of services by the Company or its competitors, market acceptance of new service offerings, increased competition, costs associated with providing domain name registration services, litigation costs, patterns of growth in the use of and interest in the Internet and general economic conditions. The Company is continuing to increase its operating expenses for personnel, facilities and new services development and, if its revenues do not correspondingly increase, the Company's business, financial condition and results of operations would be materially and adversely affected. Since professional services revenue for Intranet services is recognized by the Company only when network systems engineers are engaged on client projects, the relative utilization of network systems engineers directly affects the Company's operating results. In addition, a majority of the Company's Intranet services operating expenses, particularly personnel and related costs, depreciation and rent, are substantially fixed in advance of any particular quarter. As a result, any underutilization of network systems engineers may cause significant variations in operating results in any particular quarter and could result in losses for such quarter. Termination or completion of contracts in the Company's Intranet services business or failure to obtain additional contracts in its Intranet services business could have a material adverse effect on the Company's business, financial condition and results of operation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 16 19 Management of Growth; Dependence on Key Personnel. The Company has recently experienced growth in the number of its employees and in the scope of its operating and financial systems. This growth has resulted in an increase in responsibilities for both existing and new management personnel. In addition, the Company is currently seeking additional key marketing and business development personnel. The Company's ability to manage growth effectively will require it to successfully integrate its management team, continue to implement and improve its operational, financial and management information systems and to train, motivate, manage and retain its employees. There can be no assurance that the Company will be able to manage its expansion effectively and a failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. The rapid growth of the Company's domain name registration business during 1995 and 1996 significantly exceeded the Company's back office capabilities and control infrastructure. As a result, the Company was unable to keep current in the processing, billing, collection, reconciliation and other administrative and financial functions relating to the domain name registration business. In late 1996, the Company entered into outsourcing arrangements with third parties, which, in conjunction with new invoicing procedures implemented in 1997, enabled the Company to become current in these functions. There can be no assurance that such outsourcing arrangements and procedural changes will continue to be successful in addressing the current or future needs of the Company's domain name registration business or that the Company will remain current on the various administrative and financial functions relating to the domain name registration business. In addition, growth of the Company's customer base may strain 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. The Company's future success depends in part on the continued service of its key engineering, sales, marketing, executive and administrative personnel, and its ability to identify, hire and retain additional personnel. In addition, the future success of the Company's Intranet services will depend in large part on its ability to hire, train and retain network systems engineers who have expertise in a wide array of network and computer systems and a broad understanding of the industries the Company serves. An inability of the Company to identify, hire, train and retain a sufficient number of qualified network systems engineers could impair the Company's ability to adequately manage and complete its existing projects or to obtain new projects, which, in turn, could have a material adverse effect on the Company's business, financial condition and results of operations and could impair the Company's expansion of its business. Competition for engineering, sales, marketing and executive personnel is intense and there can be no assurance that the Company can retain existing personnel or identify, hire or retain additional qualified personnel. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Absence of Sales and Marketing Experience; Evolving Distribution Channels. The Company has limited experience in marketing and selling its services under its current subscription-based pricing model. The Company's ability to achieve revenue growth in the future will depend in large part on its ability to establish a sales and marketing organization. There can be no assurance that the Company will be able to identify, attract and retain experienced sales and marketing personnel with relevant experience, that the cost of such personnel will not exceed the revenue generated or that the Company's sales and marketing organization will be able to successfully compete against the significantly more extensive and well-funded sales and marketing operations of the Company's current or potential competitors. In addition to establishing its direct sales channels, the Company's distribution strategy is to develop multiple distribution channels. Accordingly, the Company's ability to achieve revenue growth in the future will also depend in large part on establishing and maintaining relationships with Internet access providers and other third parties and on effectively using the Internet as a medium of distribution. There can be no assurance that the Company will be able to successfully establish its sales and marketing organization, develop third party distribution channels, develop its own capabilities to 17 20 distribute services using the Internet or that any such expansion will result in an increase in revenue. Any failure by the Company to establish its sales and marketing organization, expand its distribution channels or use the Internet as a medium of distribution could materially and adversely affect the Company's business, financial condition and results of operations. Control by SAIC. Upon completion of this offering, SAIC will own 100% of the Company's outstanding Class B Common Stock, which will represent approximately 84.5% of the outstanding Common Stock of the Company (approximately 82.5% if the Underwriters' over-allotment option is exercised in full) and approximately 98.2% of the combined voting power of the Company's outstanding Common Stock (approximately 97.9% if the Underwriters' over-allotment option is exercised in full). As a result, SAIC will be able to effectively control all matters requiring approval by the stockholders of the Company, including the election of members of the Company's Board of Directors, changing the size and composition of the Board of Directors and preventing a change in control of the Company. The Class B Common Stock is convertible into Class A Common Stock, subject to certain limitations set forth in the Company's Second Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation"). See "Description of Capital Stock." SAIC has no agreement with the Company not to sell or distribute its shares of the Company's Common Stock and, except for the restrictions in the Underwriting Agreement set forth below, there can be no assurance that SAIC will maintain its ownership of the Company's Class B Common Stock. Pursuant to the Underwriting Agreement, SAIC has agreed, subject to certain exceptions, not to sell or otherwise dispose of, directly or indirectly, any shares of Common Stock owned by it for a period of 180 days after the date of this Prospectus without the prior written consent of Hambrecht & Quist LLC. The Internal Revenue Code of 1986, as amended (the "Code"), requires beneficial ownership by SAIC of at least 80% of the total voting power and value of the outstanding Common Stock of the Company in order to include the Company in its consolidated group for federal income tax purposes. In addition, SAIC must beneficially own at least 80% of the total voting power and 80% of each class of nonvoting capital stock of the Company in order to be able to effect a tax-free spin-off of the Company under the Code. Because SAIC may seek to maintain its beneficial ownership percentage of the Company for tax planning purposes or otherwise and may not desire to acquire additional shares of Common Stock in connection with a future issuance of shares by the Company, the Company may be constrained in its ability to raise equity capital in the future or to issue Common Stock or other equity securities in connection with acquisitions. See "Relationship with SAIC and Certain Transactions." Intercompany Agreements Not Subject to Arm's-Length Negotiations; Reliance on SAIC for Certain Corporate Services. Since its acquisition by SAIC, the Company has not been operated independently of SAIC. Prior to the completion of the offering, SAIC and the Company will enter into certain intercompany agreements, including an agreement pursuant to which SAIC will provide various corporate services to the Company that may be material to the conduct of the Company's business (the "Corporate Services Agreement"). These services include certain routine and ordinary corporate services, including financial, insurance, accounting, employee benefits, payroll, tax and legal services as well as strategic corporate planning services as described in the Corporate Services Agreement. Subsequent to the acquisition of the Company by SAIC, the Company's Statements of Operations include revenue and costs directly attributable to the Company, as well as certain allocations from SAIC of indirect costs. Such allocations generally are based upon a number of factors, including, but not limited to, the proportionate labor costs of the Company to the rest of SAIC. The results of operations also include allocations of: (i) costs for administrative functions and services performed on behalf of the Company by centralized staff groups within SAIC; (ii) SAIC's general corporate expenses; (iii) other benefit costs, including, but not limited to, health insurance, disability and retirement costs; and (iv) cost of capital (through December 31, 1996). Through August 9, 1996, the amounts allocated by SAIC to the Company included both administrative and overhead costs, which are included in selling, general and administrative expenses and cost of revenue, respectively. Effective August 10, 1996, SAIC stopped allocating costs based upon pro rata labor and began assessing the Company for corporate services provided by SAIC at a fee equal to 2.5% of net revenue, with such percentage to be re-evaluated by both parties on an annual basis. This fee is included in its entirety in 18 21 selling, general and administrative expenses. With respect to matters covered by the Corporate Services Agreement, the relationship between SAIC and the Company is intended to continue in a manner generally consistent with past practices. Because the Company is currently a wholly-owned subsidiary of SAIC, none of the intercompany agreements will result from arm's-length negotiations. These agreements may include terms and conditions that may be more or less favorable to the Company than terms contained in similar agreements negotiated with third parties. After SAIC's ownership of the Company's Common Stock drops below 50% of the Company's issued and outstanding Common Stock, the Corporate Services Agreement will be terminable by either party upon 180 days' prior written notice. Certain individual services are also terminable by either party upon 180 days' prior written notice, regardless of SAIC's stock holdings. In the event that SAIC elects to terminate the Corporate Services Agreement, there can be no assurance that the Company would be able to secure alternative sources for such services within 180 days or that such services could be obtained for costs comparable to costs to be charged by SAIC. See "Relationship with SAIC and Certain Transactions." Control of Tax Matters; Tax and ERISA Liability. By virtue of its controlling ownership and the terms of a tax sharing agreement (the "Tax Sharing Agreement") to be entered into between the Company and SAIC, SAIC will effectively control all of the Company's tax decisions. Under the Tax Sharing Agreement, SAIC will have sole authority to respond to and conduct all tax proceedings (including tax audits) relating to the Company, to file federal, state and local returns on behalf of the Company and to calculate the amount of the Company's liability to SAIC under the Tax Sharing Agreement. Further, pursuant to the terms of the Tax Sharing Agreement, upon deconsolidation, the Company's ability to recognize a benefit for tax losses it incurs is subject to SAIC's approval. SAIC may choose to contest, compromise or settle any adjustment or deficiency proposed by the relevant taxing authority in a manner that may be beneficial to SAIC and detrimental to the Company. Each member of a consolidated group for federal income tax purposes is jointly and severally liable for the federal income tax liability of each other member of the consolidated group. In addition, under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and federal income tax law, each member of the controlled group is jointly and severally liable for funding and termination liabilities of tax qualified defined benefit retirement plans as well as certain plan taxes. Accordingly, during the period in which the Company is included in SAIC's consolidated or controlled group, the Company could be liable if such liability or tax is incurred, and not discharged, by any other member of SAIC's consolidated or controlled group. See "Relationship with SAIC and Certain Transactions -- Tax Sharing Agreement." Potential Conflicts of Interest. Various conflicts of interest between the Company and SAIC could arise following the completion of this offering, and persons serving as directors, officers and employees of both the Company and SAIC may have conflicting duties to each. Currently, Michael A. Daniels, the Company's Chairman of the Board, also serves as a Sector Vice President and Sector Manager of SAIC, Donald N. Telage, the Company's Senior Vice President, Internet Relations and Special Programs and one of the Company's directors, also serves as a Group Senior Vice President of SAIC, Robert J. Korzeniewski, the Company's Chief Financial Officer, also serves as a Corporate Vice President for Administration of SAIC, Raymond S. Corson, the Company's Senior Vice President, Business Development, also serves as a Vice President of SAIC, A. Scott Williamson, the Company's Vice President, Engineering, also serves as a Vice President of SAIC and Russell L. Helbert, the Company's Controller, also serves as an Assistant Vice President for Administration of SAIC. Further, J. Robert Beyster, a director of the Company, is also the Chief Executive Officer and Chairman of the Board of SAIC, John E. Glancy, a director of the Company, is also a Corporate Executive Vice President and a director of SAIC and William A. Roper, Jr., a director of the Company, is also Senior Vice President and Chief Financial Officer of SAIC. It is currently contemplated that, upon completion of the offering, all of the Company's executive officers who currently also hold positions with SAIC (other than Donald N. Telage) will resign from their respective positions with SAIC. Ownership interests of directors or officers of the Company in the common stock of SAIC could also create or appear to create potential conflicts of interest when directors and officers are faced with decisions that could have different 19 22 implications for the Company and SAIC. In addition, for financial reporting purposes, the Company's financial results will be included in SAIC's consolidated financial statements. The members of the Board of Directors of the Company and executive officers of the Company who are affiliated with SAIC will consider not only the short-term and long-term impact of financial and operating decisions on the Company, but also the impact of such decisions on SAIC's consolidated financial results. In some instances, the impact of such decisions could be disadvantageous to the Company while advantageous to SAIC. Certain Charter Provisions and Limitations on Liability. The Company's Certificate of Incorporation includes provisions relating to competition by SAIC with the Company, allocations of corporate opportunities, transactions with interested parties and intercompany agreements and provisions limiting the liability of certain persons. See "Description of Capital Stock -- Certain Certificate of Incorporation and Bylaw Provisions." The enforceability under Delaware corporate law of such provisions which eliminate certain rights that might have been available to stockholders under Delaware law had such provisions not been included has not been established and thus counsel to the Company is not able to render an opinion regarding the enforceability of such provisions. The Company's Certificate of Incorporation provides that any person purchasing or acquiring an interest in shares of capital stock of the Company, including the Underwriters, shall be deemed to have consented to the provisions in the Certificate of Incorporation relating to competition by SAIC with the Company, conflicts of interest, corporate opportunities and intercompany agreements, and such consent may restrict such person's ability to challenge transactions carried out in compliance with such provisions. The Company intends to disclose the existence of such provisions in its Annual Reports on Form 10-K as well as in certain other filings with the Securities and Exchange Commission (the "Commission"). The corporate charter of SAIC does not include comparable provisions and, as a result, persons who are directors and/or officers of the Company and who are also directors and/or officers of SAIC may choose to take action in reliance on such provisions rather than act in a manner that might be favorable to the Company but adverse to SAIC. See "Description of Capital Stock -- Certain Certificate of Incorporation and Bylaw Provisions." Under the Company's Certificate of Incorporation, the personal monetary liability of the directors of the Company for breach of their fiduciary duty of care, including actions involving gross negligence, is eliminated to the fullest extent permitted under Delaware law. See "Description of Capital Stock -- Certain Certificate of Incorporation and Bylaw Provisions." International Operations. The Company anticipates that revenue from sources outside the U.S. may increase in the future. As a result, the Company will increasingly be subject to the risks of conducting business internationally, including unexpected changes in regulatory requirements, fluctuations in the U.S. dollar, tariffs and other barriers and restrictions and the burdens of complying with a variety of foreign laws. In addition, the Company will increasingly be subject to general geo-political risks, such as political and economic instability and changes in diplomatic and trade relationships, in connection with its international operations. There can be no assurance that such regulatory, geo-political and other factors will not adversely impact the Company's operations in the future or require the Company to modify its business practice. In addition, the laws of certain foreign countries may not protect the Company's proprietary rights to the same extent as do the laws of the United States. Shares Eligible for Future Sale. Sales of substantial amounts of Class A Common Stock in the public market, whether by purchasers in the offering or other stockholders of the Company, or the perception that such sales could occur, may materially and adversely affect the market price of the Class A Common Stock. Upon completion of the offering, SAIC will own 100% of the Company's outstanding Class B Common Stock, which will represent approximately 84.5% of the outstanding Common Stock of the Company (approximately 82.5% if the Underwriters' over-allotment option is exercised in full). 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 (the 20 23 "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. The Company intends to register a total of 2,556,250 shares of Class A Common Stock reserved for issuance under its 1996 Stock Incentive Plan as soon as practicable following the date of this Prospectus. See "Relationship with SAIC and Certain Transactions -- Registration Rights Agreement," "Shares Eligible for Future Sale" and "Description of Capital Stock." 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, may materially and adversely affect the market price of the Class A Common Stock. Upon completion of the offering, the shares of Class A Common Stock offered hereby will be freely tradable without restriction or further registration under the Securities Act by persons other than executive officers and directors of SAIC or the Company (the "Restricted Persons"). The shares of Common Stock which are held by SAIC and certain Restricted Persons are subject to a "lock-up" agreement under which SAIC and such Restricted Persons have agreed, subject to certain exceptions, not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock without the prior written consent of Hambrecht & Quist LLC, for a period of 180 days after the date of this Prospectus. Following such period, SAIC and any such Restricted Person who is an affiliate of the Company may sell such shares only pursuant to the requirements of Rule 144 under the Securities Act of 1933, as amended (the "Securities Act") or pursuant to an effective registration statement under the Securities Act. The Securities and Exchange Commission has recently enacted revisions to Rule 144 which shortened the holding periods under Rule 144 from two years to one year and under Rule 144(k) from three years to two years. See "Shares Eligible for Future Sale" and "Underwriting." Lack of Prior Public Market and Possible Volatility of Stock Price. Prior to this offering, there has been no public market for the Company's Class A Common Stock and there can be no assurance that an active trading market will develop or be sustained after this offering. The initial public offering price will be determined through negotiations among the Company and the representatives of the Underwriters based on several factors and may not be indicative of the market price of the Class A Common Stock after this offering. See "Underwriting." The market price of the shares of Class A Common Stock is likely to be 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, changes in Internet governance, announcement of additional competing registrars or TLDs, 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. Dilution. Based upon the assumed initial public offering price per share of $15.00 (and assuming no exercise of the Underwriters' over-allotment option), the Company's net tangible book value per share of Common Stock as of June 30, 1997, after giving effect to the transactions set forth in 21 24 "Capitalization," would have been $1.47. This represents an immediate increase in net tangible book value of $2.21 per share to the existing stockholder and an immediate dilution of $13.53 per share to purchasers of the Class A Common Stock in the offering. See "Dilution." Effect of Certain Charter Provisions; Anti-takeover Effects of Certificate of Incorporation and Delaware Law. The holders of Class A Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to ten votes per share. Holders of Class A Common Stock and Class B Common Stock generally vote together as a single class. The Class B Common Stock held by SAIC is convertible into Class A Common Stock under certain conditions set forth in the Company's Amended and Restated Certificate of Incorporation. See "Description of Capital Stock." Upon completion of this offering, the Company's Board of Directors will have the authority to issue up to 10,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights of such shares, without any further vote or action by the Company's stockholders. Such charter provisions could have the effect of delaying or preventing a change of control of the Company. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. The Company has no current plans to issue shares of Preferred Stock. Further, certain provisions of the Company's Certificate of Incorporation and of Delaware law could delay or make more difficult a merger, tender offer or proxy contest involving the Company. See "Description of Capital Stock -- Preferred Stock" and "-- Delaware Antitakeover Law and Certain Charter Provisions." Discretion as to Use of Proceeds. The Company intends to use the proceeds of this offering for working capital and other general corporate purposes, including business development, marketing and promotional activities, continued development of enhancements or new services complementary to the Company's registration business and other uses as deemed appropriate by the Board of Directors. The amounts and timing of these expenditures will vary significantly depending upon a number of factors, including the amount of cash generated by the Company's operations, the progress of the Company's product and services development activities and the market response to the introduction of any new products and services. In addition, the Company may use a portion of the net proceeds of this offering to acquire or invest in businesses, products, services or technologies complementary to the Company's current business, through mergers, acquisitions, joint ventures or otherwise. However, the Company has no specific agreements or commitments and is not currently engaged in any negotiations with respect to such transactions. Accordingly, the Company's management will retain broad discretion as to the allocation of the net proceeds of this offering. See "Use of Proceeds." 22 25 USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,300,000 shares of Class A Common Stock offered by the Company hereby at an assumed initial public offering price of $15.00 per share are estimated to be $30,985,000 ($35,797,750 if the Underwriters' over-allotment option is exercised in full). The Company intends to use the proceeds of this offering for working capital and other general corporate purposes, including business development, marketing and promotional activities, continued development of enhancements or new services complementary to the Company's registration business and other uses as deemed appropriate by the Board of Directors. The amounts and timing of these expenditures will vary significantly depending upon a number of factors, including the amount of cash generated by the Company's operations, the progress of the Company's product and services development activities and the market response to the introduction of any new products and services. In addition, the principal purposes of this offering include increasing the Company's equity capital, creating a public market for the Company's Class A Common Stock, providing liquidity for the Company's stockholders and facilitating future access by the Company to public equity markets. A $10,000,000 dividend to be paid to SAIC was declared on August 21, 1997 and is payable on August 31, 1997. In addition, the Company may use a portion of the net proceeds of this offering to acquire or invest in businesses, products, services or technologies complementary to the Company's current business, through mergers, acquisitions, joint ventures or otherwise. However, the Company has no specific agreements or commitments and is not currently engaged in any negotiations with respect to such transactions. Accordingly, the Company's management will retain broad discretion as to the allocation of the net proceeds of this offering. Pending the uses described above, the Company intends to invest the net proceeds of this offering in short-term, interest-bearing investment grade securities. DIVIDEND POLICY With the exception of a $10,000,000 dividend to be paid to SAIC declared on August 21, 1997 and payable on August 31, 1997, to date, the Company has neither declared nor paid dividends on its Common Stock. Other than the dividend to be paid to SAIC, the Company currently intends to retain its earnings, if any, for future growth and does not anticipate paying any dividends in the foreseeable future. The Company's future dividend policy will be determined by its Board of Directors on the basis of various factors, including the Company's results of operations, financial condition, capital requirements and investment opportunities. 23 26 CAPITALIZATION The following table sets forth the capitalization of the Company as of June 30, 1997: (i) on an actual basis, (ii) on a pro forma basis to give effect to the dividend to be paid on August 31, 1997 to SAIC and (iii) as adjusted to give effect to the sale by the Company of the 2,300,000 shares of Class A Common Stock offered hereby at an assumed initial public offering price of $15.00 per share and the application of the estimated net proceeds therefrom. This table should be read in conjunction with the Financial Statements of the Company and the Notes thereto included elsewhere in this Prospectus.
JUNE 30, 1997 --------------------------------------- ACTUAL PRO FORMA(2) AS ADJUSTED ------ ------------ ----------- (IN THOUSANDS) STOCKHOLDERS' EQUITY: Preferred Stock, $0.001 par value, 10,000,000 shares authorized; none issued and outstanding........... $ -- $ -- $ -- Class A Common Stock, $0.001 par value, 100,000,000 shares authorized; none issued and outstanding, actual and pro forma; 2,300,000 issued and outstanding, as adjusted(1)....................... -- -- 2 Class B Common Stock, $0.001 par value, 40,000,000 shares authorized; 12,500,000 issued and outstanding, actual and pro forma; 12,500,000 issued and outstanding, as adjusted............... 12 12 12 Additional paid-in capital.......................... 4,468 4,468 35,451 Accumulated deficit................................. (1,787) (11,787) (11,787) ------ -------- --------- Total stockholders' equity..................... 2,693 (7,307) 23,678 ------ -------- --------- Total capitalization...................... $2,693 $ (7,307) $ 23,678 ====== ======== =========
- ------------------------------ (1) Excludes 2,556,250 shares of Class A Common Stock reserved for issuance under the Company's 1996 Stock Incentive Plan, of which 1,539,725 shares were subject to outstanding options as of July 31, 1997 at a weighted average exercise price of $13.18 per share. See "Management -- 1996 Stock Incentive Plan" and Notes 10 and 14 of Notes to Financial Statements. (2) Adjusted to reflect the dividend to be paid to SAIC. See policy regarding Pro Forma Balance Sheet and Earnings per Share at Note 2 of Notes to Financial Statements. 24 27 DILUTION As of June 30, 1997, the Company had a pro forma net tangible book value before the offering of approximately $(9,230,000) or $(0.74) per share of Common Stock. Pro forma net tangible book value per share is equal to the amount of total tangible assets (including deferred tax assets of $17,470,000 at June 30, 1997) of the Company less total liabilities after giving effect to the dividend to SAIC, divided by the number of shares of Common Stock outstanding. Without taking into account any other changes in the pro forma net tangible book value after June 30, 1997, other than to give effect to the receipt by the Company of the net proceeds from the sale of the 2,300,000 shares of Class A Common Stock offered by the Company hereby at an assumed initial public offering price of $15.00 per share and the application of the estimated net proceeds therefrom, the pro forma net tangible book value of the Company at June 30, 1997 after the offering would have been approximately $21,755,000 or $1.47 per share. This represents an immediate increase in such net tangible book value of $2.21 per share to the existing stockholder and an immediate dilution of $13.53 per share to new investors purchasing shares of Class A Common Stock in this offering. The following table illustrates this per share dilution: Assumed initial public offering price per share..................... $15.00 ------ Net tangible book value per share before the offering.......... $ 0.06 Decrease in net tangible book value attributable to dividend... (0.80) ------ Pro forma net tangible book value per share before the offering...................................................... (0.74) Increase per share attributable to new investors............... 2.21 ------ Pro forma net tangible book value per share after the offering...... 1.47 ------ Dilution per share to new investors............................ $13.53 ======
The following table summarizes, on a pro forma basis, as of June 30, 1997, the differences between the existing stockholder and purchasers of shares in this offering with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid and the average consideration per share paid:
SHARES PURCHASED TOTAL CONSIDERATION --------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing stockholder......... 12,500,000 84.5% $ 4,480,000 11.5% $ 0.36 New investors................ 2,300,000 15.5% 34,500,000 88.5% $ 15.00 ---------- ------- ----------- ------- -------- Total................... 14,800,000 100.0% $38,980,000 100.0% ========= ======= ========== =======
The foregoing table is based on the total consideration paid by SAIC for its shares based on the price of the shares of SAIC Class A Common Stock (as determined by the Board of Directors of SAIC in accordance with established procedures) used to acquire the entire Company, including the government-based business which was later transferred to SAIC, and does not give effect to the $10,000,000 dividend payable to SAIC. The foregoing table also assumes (i) an initial public offering price of $15.00 per share before deduction of estimated underwriting discounts and commissions and offering expenses payable by the Company and (ii) no exercise of the Underwriters' over-allotment option or of any outstanding stock options. As of July 31, 1997, there were outstanding options to purchase 1,539,725 shares of Class A Common Stock, with a weighted average exercise price of $13.18 per share. To the extent that options are granted and exercised, there may be further dilution to new investors. See "Management -- 1996 Stock Incentive Plan" and Notes 10 and 14 of the Notes to Financial Statements. 25 28 SELECTED FINANCIAL DATA The following table sets forth selected financial and operating data of the Company for the periods indicated and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and the Notes related thereto included elsewhere in this Prospectus. The selected financial data for the years ended December 31, 1996 and 1994 and for the periods January 1, 1995 to March 10, 1995 and March 11, 1995 to December 31, 1995 were derived from the Company's audited financial statements included elsewhere in this Prospectus. The information for fiscal years 1992 and 1993 and the six months ended June 30, 1996 and 1997 is derived from the Company's unaudited financial statements which, in the opinion of management, reflect all adjustments (consisting only of normal recurring items) necessary to present fairly the financial position and results of operations for the periods then ended. The selected financial data for the year ended December 31, 1995 was derived by combining the Company's Results of Operations for the period January 1, 1995 through March 10, 1995 and the period March 11, 1995 through December 31, 1995, both as derived from the Company's audited financial statements included elsewhere in this Prospectus. Comparability of pre-acquisition periods to post-acquisition periods is limited because the financial statements have been prepared on differing bases of accounting as a result of the acquisition by SAIC. See Note 1 of Notes to Financial Statements. The accompanying financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for all periods presented for continuing operations reflect the results of operations of the commercial business of the Company, which includes registration services and Intranet services. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview -- The SAIC Acquisition" and "-- Registration Services."
SIX MONTHS FISCAL YEAR ENDED DECEMBER 31, ENDED JUNE 30, --------------------------------------------- ----------------- 1992 1993 1994 1995(1) 1996 1996 1997 ------ ------ ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net revenue............................ $1,160 $4,369 $ 5,029 $ 6,486 $18,862 $ 6,829 $18,724 Cost of revenue........................ 695 2,924 3,073 5,704 14,666 6,521 11,435 ------ ------ ------- ------- ------- ------- ------- Gross profit........................... 465 1,445 1,956 782 4,196 308 7,289 Research and development expenses...... -- -- -- -- 680 58 718 Selling, general and administrative expenses.............. 275 1,401 1,544 2,394 6,280 2,370 4,788 Interest expense (income).............. 42 120 109 61 (496) (86) (484) ------ ------ ------- ------- ------- ------- ------- Income (loss) from continuing operations before income taxes and cumulative effect of a change in accounting principle.............. 148 (76) 303 (1,673) (2,268) (2,034) 2,267 Provision (benefit) for income taxes... 55 34 114 (239) (643) (576) 1,011 ------ ------ ------- ------- ------- ------- ------- Income (loss) from continuing operations........................... 93 (110) 189 (1,434) (1,625) (1,458) 1,256 Income (loss) from discontinued operations, net of income taxes(2)... 588 (936) (1,169) (1,403) -- -- -- Cumulative effect of change in accounting for income taxes.......... -- 660 -- -- -- -- -- ------ ------ ------- ------- ------- ------- ------- Net income (loss)...................... $ 681 $ (386) $ (980) $(2,837) $(1,625) $(1,458) $ 1,256 ====== ====== ======= ======= ======= ======= ======= Unaudited pro forma net income (loss) per share............................ $ (0.12) $ (0.11) $ 0.09 ======= ======= ======= Unaudited pro forma shares used in computing net income (loss) per share(3)............................. 13,349 13,349 13,349 ======= ======= ======= OTHER OPERATING DATA(4): Net new registrations.................. -- 13 24 141 489 180 429 Less: registrations not renewed........ -- -- -- 1 39 17 16 Net registrations at period end........ -- 13 37 177 627 340 1,040
26 29
SIX MONTHS FISCAL YEAR ENDED DECEMBER 31, ENDED JUNE 30, --------------------------------------------------------- -------------------- 1992 1993 1994 1995 1996 1996 1997 ------ ------ ------- ------- ------- ------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents......... $ -- $ -- $ 136 $ 5 $15,540 $ 27 $25,967 Working capital(5).... (307) (179) (1,340) (559) 1,362 (6,423) 6,280 Total assets(6)....... 1,272 3,124 2,448 11,748 66,118 30,220 92,250 Deferred revenue, net................. 32 73 137 3,346 29,352 14,356 45,628 Long-term obligations, excluding current portion............. 479 344 81 1,353 9,440 5,183 15,193 Total stockholders' equity.............. 56 1,221 252 3,062 1,437 1,604 2,693
- ------------------------------ (1) The Selected Financial Data for the year ended December 31, 1995 was derived by combining the Company's Results of Operations for the period January 1, 1995 through March 10, 1995 and the period March 11, 1995 through December 31, 1995, which, respectively, are periods before and after the date of the SAIC acquisition. The data for these two periods were prepared on differing bases of accounting and, accordingly, the comparability of such data with other periods is limited, primarily as a result of goodwill amortization, new corporate services agreements and the repayment of outstanding debt balances. See Note 1 of Notes to Financial Statements for a discussion of the presentation for each of these periods. (2) See Note 11 of Notes to Financial Statements for a discussion of discontinued operations. (3) See Note 2 of Notes to Financial Statements for an explanation of the determination of shares used in computing the unaudited pro forma net income (loss) per share. (4) Net new registrations for each period include gross new registrations less an estimate of registrations that are uncollectible. Net registrations includes net new registrations less an estimate of registrations not renewed. Prior to September 14, 1995, net registrations equaled gross registration because the Company was reimbursed by the NSF for all registrations under a cost plus fixed-fee contract. (5) Working capital calculation includes $32, $73, $137, $1,993, $19,912, $9,173, and $31,990 of current deferred revenue as of December 31, 1992, 1993, 1994, 1995 and 1996 and June 30, 1996 and 1997, respectively. (6) Total assets include $0, $0, $0, $1,408, $17,453, $7,453 and $31,056 of restricted assets as of December 31, 1992, 1993, 1994, 1995 and 1996 and June 30, 1996 and 1997, respectively. See Notes 2 and 3 of Notes to Financial Statements. 27 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with "Selected Financial Data" and the Company's Financial Statements and Notes thereto included elsewhere in this Prospectus. Except for the historical information contained herein, the discussion in this Prospectus contains certain forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this Prospectus. The Company's actual results may differ materially from the results discussed in the forward-looking statements as a result of certain factors, including, but not limited to, those discussed in "Risk Factors" and elsewhere in this Prospectus. Unless otherwise indicated, the accompanying financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for all periods presented for continuing operations reflect the financial position and results of operations of the Company's commercial business, which includes registration services and Intranet services. OVERVIEW The SAIC Acquisition. The Company was incorporated in the District of Columbia in 1979 and was reincorporated in Delaware in 1996. The Company was acquired by SAIC on March 10, 1995 in a stock-for-stock transaction accounted for as a purchase and is currently a wholly-owned subsidiary of SAIC. Prior to the acquisition of the Company by SAIC, the Company's principal lines of business consisted of providing integration, engineering for computer and telecommunications networks for government and commercial customers and domain name registration services. The Company's business included commercial and government contracts awarded to the Company on a competitive basis, including government contracts that were awarded to the Company based partially upon the Company's then minority-owned status. The contracts which had been awarded to the Company based in part on the Company's then minority-owned status were transferred into a separately-owned entity prior to the acquisition of the Company by SAIC. In November 1995, SAIC adopted a plan to transfer the Company's remaining government-based business to SAIC in order to enable the Company to focus on the growth of its commercial business, which includes registration services and Intranet services. This transfer was effective as of February 1996. The operating results of both the minority-based government contracts business and the remaining government-based business are reflected as discontinued operations in the Company's financial statements for all periods presented. The Company. The Company currently acts as the registrar for second level domain names within the .com, .org, .net, .edu and .gov TLDs pursuant to the Cooperative Agreement with the NSF. Net registrations (gross registrations less management's estimates of uncollectible registrations and of non-renewals) within the TLDs maintained by the Company increased by 206% from approximately 340,000 domain names registered at June 30, 1996 to approximately 1,040,000 domain names registered at June 30, 1997. Net registrations in the .com TLD represented 87% of the Company's total net registrations as of June 30, 1997. Net revenue from Internet domain name registration subscriptions accounted for 59.1% and 81.0% of the Company's net revenue for the year ended December 31, 1996 and the six months ended June 30, 1997, respectively. The Company also provides Intranet consulting services to large companies that desire to establish or enhance their Internet presence or "re-engineer" legacy network infrastructures to accommodate the integration of both Internet connectivity and Intranet network technology into their information technology base. The Company's Intranet services presently include: (i) Intranet development and re-engineering; (ii) network and systems security; and (iii) Intranet-enabled business solutions. Net revenue from Intranet services accounted for 40.9% and 19.0% of the Company's net revenue for the year ended December 31, 1996 and the six months ended June 30, 1997, respectively. Registration Services. In January 1993, the Company entered into the Cooperative Agreement with the NSF under which the Company provides Internet registration services for five TLDs: .com, .org, .net, .edu and .gov. With the commercialization of the Internet, the role, if any, that the NSF will 28 31 play in the Internet and the legal authority underlying its role are at present unclear. 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 Cooperative Agreement by its terms expires in March 1998, although the NSF may, at its option, extend the Cooperative Agreement to September 1998. The NSF has stated that the Cooperative Agreement will not be re-awarded to the Company or awarded to any other entity. See "Risk Factors -- Limited Operating History," "-- Uncertain Status of the Cooperative Agreement," and "-- Recommendations and Proposals to Increase Competition in Registration Services." Originally, the Cooperative Agreement was structured as a cost reimbursement plus fixed-fee contract. Effective September 14, 1995, the NSF and the Company amended the Cooperative Agreement to authorize the Company to begin charging customers a subscription fee of $50 per year for each second level domain name in the .com, .org, .net, .edu and .gov TLDs. The Company's registration services customers in the .com, .org and .net TLDs are invoiced for a two-year subscription fee of $100 for initial registrations and $50 per year for renewals of initial registrations. The NSF has agreed to pay the registration and renewal fees for registrations within the .edu and .gov TLDs through March 31, 1997. The Company has recently agreed with the NSF to provide registrations in the .gov and .edu TLDs free of charge from April 1, 1997 through March 31, 1998. The cost of providing these registration services is not expected to have a material adverse effect on the Company's business, financial condition or results of operations. At September 14, 1995, the Company had approximately 131,000 registered domain names that were subject to annual renewal. From September 14, 1995 through June 30, 1997, the Company had approximately 965,000 net new registrations. At June 30, 1997, of the approximate 1,040,000 net registrations, 75,000 were subject to annual renewal. The remaining 965,000 represent the net new registrations since September 14, 1995 and, therefore, will begin annual renewals commencing September 1997 based upon their respective two-year anniversaries of initial registration. There can be no assurance that the Company will continue to obtain new registrations at current rates or renew the registration of a significant portion of its customers. Under the terms of the amendment to the Cooperative Agreement, 30% of the new registration and renewal fees collected is required to be set aside to be reinvested for the enhancement of the intellectual infrastructure of the Internet and, as such, is not recognized as revenue by the Company. The Company reflects 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. These funds, plus any interest earned, will be disbursed in a manner approved by the NSF. At June 30, 1997, the restricted assets totaled $31.1 million. None of the restricted set aside funds have been disbursed. Future disbursements of these funds will not have an effect on the Company's business, financial condition or results of operations. The Company was reimbursed by the NSF for providing domain name registration services prior to September 14, 1995, at which time the Company began charging its customers fees for new domain name registrations pursuant to the amendment to the Cooperative Agreement. The Company began charging its customers fees for renewals of existing domain name registrations in December 1995. Currently, the Company invoices customers and permits them to pay the subscription fee after the customer's domain name is registered. The Company's experience has been that, for the period from September 1995 to June 1997, approximately 30% of registrations have ultimately been deactivated for non-payment. 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 September 1995 to June 1997 and is considered adequate by the Company. The growth in the allowance for uncollectible accounts receivable is primarily driven by the growth of the Company's registration services business during this period. Write-offs of accounts receivable are charged to the allowance for uncollectible accounts as registrations are deactivated. Due to the growth of the registration business in 1995 and 1996, deactivations due to non-payment of fees were not current as of December 31, 1996. The Company is now current in this function. However, the delay in 29 32 deactivation did not have an impact on the adequacy of the allowance and the current provision rate of 30% is still considered adequate by the Company. See Note 3 of Notes to Financial Statements. The Company believes that it has experienced a high level of uncollectible receivables due to, among other factors, the large number of individuals and corporations that have registered multiple domain names with the apparent intention of reselling such names at a profit. The Company's experience has been that such resellers have a greater tendency than other customers to default on their subscription fees. The Company believes that the new procedures implemented in 1997 regarding invoicing and prompt deactivation of delinquent customers has significantly improved timeliness of customer payments. See "Risk Factors -- Limited Operating History," "-- Uncertain Status of the Cooperative Agreement," "-- Uncollectible Receivables; Modifications to Billing Practices, -- Management of Growth; Dependence on Key Personnel" and "Business -- Operations." Prior to September 14, 1995, the Company recognized revenue under the Cooperative Agreement on the basis of direct cost plus allowable indirect costs and the earned portion of the fee. Since September 14, 1995, fees for services provided by the Company pursuant to new registrations have been recognized as revenue evenly over the initial 24-month subscription period. Fees from renewals are recognized as revenue evenly over the 12-month subscription period. The Company records revenue net of an estimated provision for uncollectible accounts. At June 30, 1997, the Company had net deferred revenue of $45.6 million, of which $32.0 million will be recognized over the next twelve months. See Notes 2 and 3 of Notes to Financial Statements. Expenses for the Company increased each quarter during 1995, 1996 and the first two quarters of 1997 as a result of increased business activities, primarily attributable to subscriber growth for the Company's registration services business. The Company believes continued investments in its back office infrastructure as well as significant expansion of its sales and marketing and product development activities are critical to the achievement of its goals and anticipates that costs and expenses will continue to increase in each quarter for the forseeable future. Intranet Services. Substantially all of the Company's Intranet services revenue is derived from professional services which are generally provided to clients on a "time and expense" basis. Professional services revenue is recognized as services are performed. The Company also performs a limited number of fixed-price projects under which revenue is recognized using the percentage-of-completion method. The Company also derives revenue from remote monitoring and hosting services; however, such revenue has not been significant to date. Remote monitoring and hosting revenue is recognized ratably over the term of the contract. Since professional services revenue for Intranet services is recognized by the Company only when network systems engineers are engaged on client projects, the relative utilization of network systems engineers directly affects the Company's operating results. In addition, a majority of the Company's Intranet services operating expenses, particularly personnel and related costs, depreciation and rent, are substantially fixed in advance of any particular quarter. As a result, any underutilization of network systems engineers may cause significant variations in operating results in any particular quarter and could result in losses for such quarter. Termination or completion of contracts in the Company's Intranet services business or failure to obtain additional contracts in its Intranet services business could have a material adverse effect on the Company's business, financial condition and results of operation. See "Risk Factors -- Potential Fluctuations in Quarterly Results." NationsBanc is the Company's largest Intranet services customer and accounted for 47.6% and 41.3% of the Company's Intranet services net revenue and 19.5% and 7.8% of the Company's total net revenue for the year ended December 31, 1996 and the six months ended June 30, 1997, respectively. 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 30 33 NationsBanc at any time upon 30-days' prior written notice to the Company. During the first quarter of 1997, task orders for a number of services the Company had historically performed for NationsBanc were not renewed. The Company believes this reflects NationsBanc's focus on increasing its internal information technology staff as well as its continued efforts to integrate information technology staff from recent acquisitions. There can be no assurance that the Company will obtain any additional task orders under the NationsBanc contract or maintain or be able to expand its Intranet services business. Failure to do so would materially and adversely affect the Company's business, financial condition and results of operations. See "Risk Factors -- Limited Service Offerings to Date; Reliance on Domain Name Registration Services and Intranet Services for Substantially All Revenue." Financial Presentation. The accompanying historical financial statements for all periods presented reflect the results of continuing operations related to the commercial activities of the Company only. The operating results of both the minority-based government contracts business, which was transferred into a separate entity prior to the acquisition of the Company by SAIC, and the remaining government-based business, which was transferred to SAIC effective February 1996, are reflected as discontinued operations in the Company's financial statements. Subsequent to the acquisition of the Company by SAIC, SAIC has provided to the Company from time to time, upon request of the Company certain routine and ordinary corporate services, including financial, insurance, accounting, employee benefits, payroll, tax and legal services. SAIC has also provided strategic corporate planning services. The Company has also shared certain SAIC systems, including its management information system, accounting system and human resource system. Therefore, the Company's Statements of Operations include revenue and costs directly attributable to the Company, as well as certain allocations from SAIC of indirect costs associated with such services and shared systems. Such allocations include allocations of: (i) costs for administrative functions and services performed on behalf of the Company by centralized staff groups within SAIC; (ii) SAIC's general corporate expenses; (iii) other benefit costs, including, but not limited to, health insurance, disability and retirement costs; and (iv) cost of capital (through December 31, 1996). Through August 9, 1996, such allocations were generally based on, the proportionate labor costs of the Company to the rest of SAIC and were included in selling, general and administrative expenses and cost of revenue, respectively. Effective August 10, 1996, SAIC stopped allocating costs based upon pro rata labor and began assessing the Company for corporate services provided by SAIC at a fee equal to 2.5% of net revenue. This fee is included in its entirety in selling, general and administrative expenses with such percentage to be re-evaluated by both parties on an annual basis. The arrangement will continue indefinitely until terminated by either party upon 180 days' prior written notice. Current and deferred income taxes and related tax expense have been recorded by the Company as if it were a separate taxpayer. The allocations and estimates in the financial statements are based on assumptions that the Company's management believes are reasonable under the circumstances. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage relationship to net revenue of certain items in the Company's Statement of Operations. The percentage relationships for the year ended December 31, 1995 were derived by combining the Company's results of operations for the period January 1, 1995 through March 10, 1995 and the period March 11, 1995 through December 31, 1995 which, respectively, are periods before and after the date of the SAIC acquisition. Accordingly, the data for these two periods and the periods preceding and following the acquisition were prepared on differing bases of accounting and, as a result, the comparability of such percentage 31 34 relationships with other periods is limited, primarily as a result of the goodwill amortization, new corporate services agreements and interest expense related to outstanding debt balances.
PERCENTAGE OF NET REVENUE --------------------------------------------- SIX MONTHS FISCAL YEAR ENDED ENDED DECEMBER 31, JUNE 30 ------------------------- --------------- 1994 1995 1996 1996 1997 ----- ----- ----- ----- ----- Net revenue....................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenue................................... 61.1 87.9 77.8 95.5 61.1 ----- ----- ----- ----- ----- Gross profit...................................... 38.9 12.1 22.2 4.5 38.9 Research and development expenses................. -- -- 3.6 0.8 3.8 Selling, general and administrative expenses...... 30.7 36.9 33.3 34.7 25.6 Interest expense (income)......................... 2.2 0.9 (2.7) (1.2) (2.6) ----- ----- ----- ----- ----- Income (loss) from continuing operations before income taxes.................................... 6.0 (25.7) (12.0) (29.8) 12.1 Provision (benefit) for income taxes.............. 2.2 (3.6) (3.4) (8.5) 5.4 ----- ----- ----- ----- ----- Income (loss) from continuing operations, net of income taxes.................................... 3.8% (22.1)% (8.6)% (21.3)% 6.7% ===== ===== ===== ===== =====
In September 1995, the Cooperative Agreement between the Company and the NSF was amended from a cost reimbursement plus fixed-fee contract to a fee-based registration contract. The Company believes that the change to a subscription-based pricing model, combined with the Company's recent growth, make period to period comparisons of its operating results less meaningful and that the results for any period should not be relied upon as an indication of future performance. The limited operating history of the Company in its current business model makes the prediction of future results of operations difficult and, therefore, the recent revenue growth experienced by the Company should not be taken as being indicative of the rate of revenue growth, if any, that can be expected in the future. See "Risk Factors -- Limited Operating History" and "-- Potential Fluctuations in Quarterly Results." COMPARISON OF SIX MONTHS ENDED JUNE 30, 1996 AND 1997 Net Revenue. Net revenue increased 174% from $6.8 million for the six months ended June 30, 1996 to $18.7 million for the six months ended June 30, 1997. This increase in net revenue was primarily attributable to the increase in the number of domain name subscriptions, principally in the .com TLD. Subscription growth has been driven by the widespread use and adoption of the Internet and Intranets by businesses and individuals. Net revenue from registration services increased 424% from $2.9 million for the six months ended June 30, 1996 to $15.2 million for the six months ended June 30, 1997. Net registrations increased 206% from approximately 340,000 at June 30, 1996 to approximately 1,040,000 at June 30, 1997. Notwithstanding the $45.6 million of deferred revenue at June 30, 1997, of which $32.0 million will be recognized over the next twelve months, the Company's revenue is dependent in large part on the continued growth of the Internet and the Company's ability to maintain its position as the leading Internet domain name registration service provider worldwide. Net revenue from Intranet services decreased 10% from $4.0 million for the six months ended June 30, 1996 to $3.6 million for the six months ended June 30, 1997. This decrease was primarily attributable to a decrease in business from NationsBanc. NationsBanc, the Company's largest Intranet services client, accounted for $1.5 million or 7.8% of the Company's total net revenue for the six months ended June 30, 1997 and $1.8 million or 26.7% of the Company's total net revenue for the six months ended June 30, 1996. These actions will have a negative financial impact on the Company's Intranet services revenue for the balance of 1997. The Company believes NationsBanc will continue to be a significant customer of its Intranet services business, but to a lesser extent than in previous years, both in terms of dollars and as a percentage of the Company's total net revenue. See "Risk Factors -- Uncertain Status of the Cooperative Agree- 32 35 ment," "-- Competition in Domain Name Registration Business," "-- Recommendations and Proposals to Increase Competition in Registration Services" "-- Limited Services to Date; Reliance on Domain Name Registration Services and Intranet Services for Substantially All Revenue," and "-- Dependence on Future Growth of the Internet and Internet Infrastructure." Cost of Revenue. Cost of revenue consists primarily of salaries and employee benefits, fees paid to subcontractors for work performed in connection with projects, depreciation, lease costs of the operations infrastructure and the associated operating overhead. Cost of revenue increased 75% from $6.5 million for the six months ended June 30, 1996 to $11.4 million for the six months ended June 30, 1997. This increase was primarily associated with additional labor costs of $3.5 million required to support the Company's registration services business. The Company continues to invest in improvements to the back office component of its domain name registration business and has made investments in additional hardware, software, staffing and facilities and currently anticipates that it will continue to make significant investments in its back office for the foreseeable future. On June 16, 1997, the Company opened a 31,000 square foot facility to support its Internet business operations. This leased facility is designed to meet current registration services customer support needs as well as to provide expansion capability for future business. As a percentage of net revenue, cost of revenue decreased from 95.5% for the six months ended June 30, 1996 to 61.1% for the six months ended June 30, 1997. This decrease primarily reflects economies of scale that the Company has begun 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 significantly offset any overall margin improvements arising from economies of scale. Research and Development Expenses. Research and development expenses consist primarily of compensation expenses to support the development and enhancement of the Company's technologies. Research and development expenses for the six months ended June 30, 1996 were $58,000 and for the six months ended June 30, 1997 were $718,000, or 3.8% of net revenue. To date, all of the Company's development costs have been expensed as incurred. The Company expects that the level of research and development expenses will increase significantly in the near future in absolute dollars and as a percentage of net revenue as the Company invests in new product and service offerings. Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of salaries of business development, general management, administrative and financial personnel, outside professional fees and amortization of goodwill associated with the Company's acquisition by SAIC. Selling, general and administrative expenses increased 102% from $2.4 million for the six months ended June 30, 1996 to $4.8 million for the six months ended June 30, 1997. The increase was primarily attributable to increased management and administrative labor of $1.2 million and an increase in legal costs of $542,080 associated with the administration of the Company's domain name dispute policy. During the first quarter of 1997, the Company was notified that one of its Intranet services customers had filed for bankruptcy, resulting in a $194,000 bad debt write-off. These expenses include $325,000 of expenses allocated from SAIC during the six months ended June 30, 1996 in accordance with the then current intercompany agreement and $468,000 of expenses which were charged by SAIC during the six months ended June 30, 1997 based on the fee of 2.5% of net revenue. If the expenses for the six months ended June 30, 1996 were based on the fee of 2.5% of net revenue under the current intercompany agreement, such expenses would have been $171,000. As a percentage of net revenue, selling, general and administrative expenses decreased from 34.7% for the six months ended June 30, 1996 to 25.6% for the six months ended June 30, 1997. The decrease in percentage of net revenue reflects economies the Company has begun to achieve due primarily to the growth of its domain name registration business. The Company expects that the level of selling, general and administrative expenses will increase significantly in the near future in absolute dollars as operations expand. Interest Expense (Income). The Company had interest income of $86,000 for the six months ended June 30, 1996 as compared to $484,000 for the six months ended June 30, 1997. The change is attributable to increased cash flow associated with the Company's registration services business. 33 36 Income Taxes (Benefit). The income tax benefit was $576,000 for the six months ended June 30, 1996 as compared to an income tax expense of $1,011,000 for the six months ended June 30, 1997. The effective tax rate changed from 28.3% for the six months ended June 30, 1996 to 44.6% for the six months ended June 30, 1997. The difference between the effective rates was attributed to the relative impact that non-deductible goodwill had on pre-tax operating income or loss for the quarter. The goodwill amount is being amortized by the Company over five years and is associated with the acquisition of the Company by SAIC. Although the Company has a history of net losses, it has not established a valuation allowance for its deferred tax assets since, in the opinion of management, it is more likely than not that all of the deferred tax assets will be realized. The deferred tax assets relate primarily to registration fee revenues which are taxable upon registration but are recognized in the financial statements over the next 12 to 24 months -- the subscription period. COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1996 Net Revenue. Net revenue increased 191% from $6.5 million in 1995 to $18.9 million in 1996. This increase in net revenue was primarily attributable to the increase in the number of domain name subscriptions, principally in the .com TLD, as well as the Company's shift to a subscription-based pricing model. Net revenue from registration services increased 594% from $1.6 million in 1995 to $11.1 million in 1996. Net revenue in 1995 primarily reflects the cost reimbursement plus fixed-fee contract with the NSF whereas net revenue for 1996 reflects the Company's subscription-based pricing model. Net registrations to the Company's domain name registration service increased 254% from 177,000 at December 31, 1995 to approximately 627,000 at December 31, 1996. Net revenue from Intranet services increased 57% from $4.9 million in 1995 to $7.7 million in 1996, including an increase in net revenue from NationsBanc, the Company's largest Intranet services customer, which increased 42% from $2.6 million in 1995 to $3.7 million in 1996. The growth was primarily attributable to increased funding within NationsBanc to support internal network integration and expansion. The Company also experienced growth from a number of new Intranet services customers, many of which were obtained through subcontracting with and utilizing leads from SAIC. NationsBanc accounted for 19.5% of total net revenue in 1996. NationsBanc accounted for 40.8% of total net revenue and the NSF (under the cost reimbursement plus fixed-fee contract) accounted for 20.8% of total net revenue in 1995. No other source of revenue accounted for more than 7.1% of total net revenue in either year. Cost of Revenue. Cost of revenue increased 157% from $5.7 million in 1995 to $14.7 million in 1996. The increase in cost was related primarily to an increase in the cost of labor of $3.7 million as a result of the Company's rapid growth. Effective with the September 14, 1995 amendment to the Cooperative Agreement which implemented the subscription-based pricing model, the Company has established and continues to develop its back office capability. This required the Company to make significant investments in hardware and software as well as to utilize a number of third-party vendors in support of back office requirements. In particular, the Company began to outsource portions of its back office operations during the fourth quarter of 1996. The principal benefit of outsourcing was to increase the capacity and efficiency of its back office operations; however, such action alone has not significantly impacted operating margins. As a percentage of net revenue, cost of revenue decreased from 87.9% in 1995 to 77.8% in 1996. This decrease reflects economies of scale that the Company has begun to achieve due to the growth of its subscription-based registration business. Research and Development Expenses. There were no research and development expenses in 1995, in large part because registration system enhancements were reimbursable under the Cooperative Agreement. In 1996, research and development expenses were $680,000 or 3.6% of net revenue. To date, all of the Company's development costs have been expensed as incurred. 34 37 Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 162% from $2.4 million in 1995 to $6.3 million in 1996. This increase was primarily attributable to increases in management, administrative and business development staff, as well as increased legal costs associated with the administration of the Company's domain name dispute policy. Selling, general and administrative expenses include $237,000 in 1995 and $822,000 in 1996 of expenses allocated from SAIC in accordance with the then current intercompany agreement. If the expenses were based on the fee of 2.5% of net revenue under the current intercompany agreement, such expenses would have been $133,000 and $472,000, respectively. As a percentage of net revenue, selling, general and administrative expenses decreased from 36.9% in 1995 to 33.3% in 1996, reflecting the generally fixed nature of certain general and administrative expenses as well as management's control of such costs. Interest Expense (Income). The Company had net interest expense of $61,000 in 1995 as compared to interest income of $496,000 in 1996. The change is primarily attributable to positive cash flow in 1996 associated with the Company's subscription-based registration business. Income Taxes (Benefit). The income tax benefit was $239,000 in 1995 as compared to $643,000 in 1996. The effective tax rate increased from 14.3% in 1995 to 28.4% in 1996. The difference between the effective tax rates was primarily attributable to non-deductible goodwill comprising a higher percentage of the Company's net loss in 1995. Although the Company has a history of net losses, it has not established a valuation allowance for its deferred tax assets since, in the opinion of management, it is more likely than not that all of the deferred tax assets will be realized. The deferred tax assets relate primarily to registration fee revenues which are taxable upon registration but are recognized in the financial statements over the next 12 to 24 months -- the subscription period. Discontinued Operations. Immediately prior to the acquisition of the Company by SAIC, the portion of the Company's business relating to the minority-based government business had been transferred into a separately-owned entity. In November 1995, SAIC adopted a plan to transfer the Company's remaining government-based business to SAIC in order to enable the Company to focus on the growth of its commercial business, which includes registration services and Intranet services. This transfer was effective as of February 1996. November 1995 was the measurement date for discontinued operations for accounting purposes. The activities of both the minority-based government business and the remaining government-based business are reflected as discontinued operations. Net income (loss) from discontinued operations excludes general corporate overhead of the Company. No gain or loss was incurred as a consequence of the transfer of these businesses. In 1995, discontinued operations incurred a net loss of $1.4 million. The loss was primarily attributable to the Company's remaining government business, which increased the Company's provision for uncollectable accounts associated with the bankruptcy of a prime contractor, high interest costs associated with payment issues from other prime contractors and over-runs of fixed-price and fixed-rate contracts. As mentioned above, this business was transferred to SAIC effective as of February 1996. COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1995 Net Revenue. Net revenue increased 29% from $5.0 million in 1994 to $6.5 million in 1995. The increase in net revenue was primarily attributable to the Company's Intranet services business which increased its revenue 26% from $3.9 million in 1994 to $4.9 million in 1995. The Company developed a number of new customers mainly in the banking industry, as well as subcontracting with and utilizing leads from SAIC. NationsBanc and the NSF (under the cost reimbursement plus fixed-fee contract) together accounted for 85.2% and 61.6% of net revenue in 1994 and 1995, respectively. No other source of revenue accounted for more than 7.1% of net revenue in either year. Cost of Revenue. Cost of revenue increased 86% from $3.1 million or 61.1% of net revenue in 1994 to $5.7 million or 87.9% of net revenue in 1995. The 1995 increase in absolute dollars and as a 35 38 percentage of net revenue was attributable to increased costs in the Company's Intranet services business as the Company invested in technical support and additional infrastructure in order to attract and maintain clients in 1995. In addition, the Company began to significantly expand its back office capability in support of the September 14, 1995 amendment to its Cooperative Agreement with the NSF, which introduced a subscription-based pricing model for its domain name registration services. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 55% from $1.5 million or 30.7% of net revenue in 1994 to $2.4 million or 36.9% of net revenue in 1995. This increase was primarily attributable to additional costs necessary to support the growth in the Company's business and professional staff during 1995. Interest Expense (Income). Net interest expense decreased 44% from $109,000 or 2.2% of net revenue in 1994 to $61,000 or 0.9% of net revenue in 1995. The decrease was primarily attributable to cash flow improvements from the Company's Intranet services business. Income Taxes (Benefit). The income tax provision was $114,000 in 1994 compared with a $239,000 benefit for income taxes in 1995. The 1994 effective tax rate was 37.6% as compared to the 1995 effective tax rate of 14.3%. The difference between the effective rates was attributed to the relative impact which non-deductible goodwill had on pre-tax operating income or loss for the year. Discontinued Operations. Discontinued operations incurred a net loss of $1.2 million in 1994 as compared to a net loss of $1.4 million in 1995. The 1994 loss was primarily attributable to the minority-based government business which experienced several large over-runs related to fixed-price and fixed-rate contracts. This business was transferred into a separately-owned entity immediately prior to the acquisition of the Company by SAIC on March 10, 1995. The loss in 1995 was primarily attributable to the Company's remaining government business, which increased the Company's provision for uncollectable accounts associated with the bankruptcy of a prime contractor, high interest costs associated with payment issues from other prime contractors and over-runs of fixed-price and fixed-rate contracts. As mentioned above, this business was transferred to SAIC effective as of February 1996. FACTORS AFFECTING OPERATING RESULTS As a result of the Company's limited operating history, especially with regard to its subscription-based registration service business, the Company does not have significant historical financial data on which to base planned operating expenses. Accordingly, the Company's expense levels are based in part on its expectations as to future revenue and to a large extent are fixed. As a result, quarterly sales and operating results generally depend on the volume of and ability to fulfill registration requests, which are difficult to forecast. The Company may be unable to adjust 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 would 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 funds greater levels of product and services development, increases its sales and marketing operations, updates systems and infrastructure, opens new offices, 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, operating results and financial condition will be materially and adversely affected. 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, the introduction of competing TLDs, 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, increased competition, costs associated with providing domain name registration services, litigation costs, termination or completion of contracts in the Company's Intranet service business or failure to obtain additional contracts in its Intranet services business, patterns of growth in the use of and interest in the 36 39 Internet and general economic conditions. Operating results would be adversely affected by a downturn, or increased competition, in the market for domain name registrations or a failure to maintain existing or obtain anticipated contracts in its Intranet services business. Because the Company expects an increase in its operating expenses for personnel and new services development, the Company would be materially and adversely affected if its revenues did not correspondingly increase. 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. In addition, when the Cooperative Agreement is terminated or if there is a change in the Company's status as the exclusive registrar for domain names in the .com TLD the Company's business, financial condition and results of operations could be materially and adversely affected. See "Risk Factors -- Uncertain Status of the Cooperative Agreement," "-- Competition in Domain Name Registration Business," "-- Recommendations and Proposals to Introduce Competition in Registration Services," "-- Competition in Intranet Services and Internet-Enabling Businesses," "-- Uncollectible Receivables; Modifications to Billing Practices," "-- Technological Change and Additional Technology, Products and Services," and "-- Potential Fluctuations in Quarterly Results." 37 40 SELECTED QUARTERLY RESULTS OF OPERATIONS The following tables set forth certain unaudited quarterly financial information for each of the seven quarters in the period ended June 30, 1997. In the opinion of management, this information has been presented on the same basis as the audited financial statements appearing elsewhere in this Prospectus, and all necessary adjustments (consisting only of normal recurring adjustments) have been included in the amounts stated below to present fairly the unaudited quarterly results when read in conjunction with the audited financial statements of the Company and notes thereto. The operating results for any quarter are not necessarily indicative of results for any future period.
QUARTER ENDED --------------------------------------------------------------------------------- DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, 1995 1996 1996 1996 1996 1997 1997 -------- -------- -------- --------- -------- -------- -------- (IN THOUSANDS) Net revenue.................... $ 1,533 $ 2,333 $4,496 $ 5,180 $6,853 $8,655 $10,069 Cost of revenue................ 1,911 2,950 3,571 3,719 4,426 5,294 6,141 -------- -------- -------- --------- -------- -------- -------- Gross profit (loss)............ (378) (617) 925 1,461 2,427 3,361 3,928 Research and development expenses..................... -- -- 58 226 396 311 407 Selling, general and administrative expenses...... 607 921 1,449 1,932 1,978 2,301 2,487 Interest expense (income)...... 34 -- (86) (288) (122) (149) (335) -------- -------- -------- --------- -------- -------- -------- Income (loss) from continuing operations before income taxes........................ (1,019) (1,538) (496) (409) 175 898 1,369 Provision (benefit) for income taxes........................ (175) (436) (140) (116) 49 382 629 -------- -------- -------- --------- -------- -------- -------- Income (loss) from continuing operations................... $ (844) $(1,102) $ (356) $ (293) $ 126 $ 516 $ 740 ======== ======== ======== ======== ======== ======== ======== PERCENTAGE OF TOTAL NET REVENUE --------------------------------------------------------------------------------- Net revenue.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenue................ 124.7 126.4 79.4 71.8 64.6 61.2 61.0 -------- -------- -------- --------- -------- -------- -------- Gross profit (loss)............ (24.7) (26.4) 20.6 28.2 35.4 38.8 39.0 Research and development expenses..................... -- -- 1.3 4.4 5.8 3.5 4.0 Selling, general and administrative expenses...... 39.6 39.5 32.2 37.3 28.9 26.6 24.7 Interest expense (income)...... 2.2 -- (1.9) (5.6) (1.8) (1.7) (3.2) -------- -------- -------- --------- -------- -------- -------- Income (loss) from continuing operations before income taxes........................ (66.5) (65.9) (11.0) (7.9) 2.5 10.4 13.5 Provision (benefit) for income taxes........................ (11.4) (18.7) (3.1) (2.2) 0.7 4.4 6.2 -------- -------- -------- --------- -------- -------- -------- Income (loss) from continuing operations................... (55.1)% (47.2)% (7.9)% (5.7)% 1.8% 6.0% 7.3% ======== ======== ======== ======== ======== ======== ========
38 41 LIQUIDITY AND CAPITAL RESOURCES From its acquisition by SAIC in March 1995 until December 1996, the Company participated in SAIC's centralized cash management system whereby cash received from operations was transferred to SAIC's centralized cash accounts and cash disbursements were funded from such centralized cash accounts. Accordingly, cash requirements for operating purposes and for capital expenditures were met from this source. Beginning in 1997, the Company implemented its own cash management system. At June 30, 1997, the Company's cumulative net obligations to SAIC of $6.6 million were classified under current liabilities on the balance sheet as due to parent. The intercompany activity primarily comprises corporate tax payments made by SAIC on behalf of the Company in accordance with the tax sharing arrangement between the Company and SAIC and salaries and benefits paid by SAIC on behalf of the Company. Effective in the second quarter of 1997, corporate taxes are paid to SAIC on a quarterly basis, with all other intercompany balances between SAIC and the Company paid on a monthly basis. At June 30, 1997, the Company had unrestricted cash and cash equivalents totaling $26.0 million, as well as $3.6 million of short-term investments. The $10 million dividend to SAIC will be paid out of such cash balances. Pursuant to the terms of the September 14, 1995 amendment to the Cooperative Agreement, the Company is required to set aside 30% of collected registration and renewal fees. The Company reflects NSF's set aside funds along with the appropriate percentage of net accounts receivable as restricted assets and has recorded an equivalent, related current liability. At June 30, 1997, the restricted assets totaled $31.1 million. See Notes 2 and 3 to the Financial Statements. Revenue from the Company's two-year initial registration fee is effectively taxable in full in the year of registration, while for financial reporting purposes, the revenue is deferred and recognized ratably over the 24-month period. Thus, the provision (benefit) for income taxes based on book income (loss) from operations is significantly different from the required tax payments based on taxable income. Due to this accelerated revenue recognition for tax purposes, the Company's resultant tax liability is funded in advance of the corresponding financial reporting revenue. At June 30, 1997, the Company had $17.5 million of deferred tax assets primarily due to this revenue timing difference. See "Relationship with SAIC -- Corporate Services Agreement." The rapid growth of the Company's registration business in 1995 and 1996 significantly exceeded the Company's back office capabilities. As a result, the Company was unable to keep current in the processing, billing, collection, reconciliation and other administrative and financial functions related to the registration services business. Although the delay did not have a material impact on the Company's financial performance, it did have a significant impact on the Company's 1996 cash flows. During 1997, the Company became current in these functions. Accordingly, the Company's cash flows for 1997 were higher than normal and may not be indicative of future cash flows. In addition, the Company believes that the historical and anticipated costs associated with its legal proceedings are part of the Company's normal operating costs. There can be no assurance that the Company will not be involved in additional litigation, investigations or other proceedings in the future. Certain current and future proceedings, with or without merit, could be costly and time-consuming to defend and could have a material adverse effect on the Company's liquidity. See "Business -- Litigation; Antitrust Investigation." Capital expenditures for continuing operations were $1.9 million and $2.9 million for the year ended December 31, 1996 and the six months ended June 30, 1997, respectively. These expenditures were primarily for computer equipment. Commencing in August 1996, the Company adopted a program of leasing most of its computer equipment under noncancellable 24- and 36-month leases to allow the Company to maintain the latest technology within its operating infrastructure. The Company is currently reviewing its 1997 capital expenditure plans and anticipates expenditures of approximately $5 million to $7 million for the balance of 1997. The Company expects that a majority of these expenditures will be financed under lease agreements ranging from 24 to 36 months. 39 42 The Company believes that the net proceeds from the sale of Class A Common Stock offered hereby, together with its current cash balances, will be sufficient to meet its working capital and capital expenditure requirements for at least the next 12 months. Although operating activities may provide cash in certain periods, to the extent that the Company experiences growth in the future, the Company anticipates that its operating and investing activities may use cash. Consequently, any such growth may require the Company to obtain additional equity or debt financing. There can be no assurance that such additional financing will be available to the Company. The sale of additional equity or convertible debt securities will result in additional dilution to the Company's stockholders. In addition, although there are no present understandings, commitments or agreements with respect to any acquisitions of other businesses, products or technologies, the Company from time to time evaluates potential acquisitions of other businesses, products and technologies and may in the future require additional equity or debt financings to consummate such potential acquisitions. 40 43 BUSINESS The following discussion contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements as a result of certain factors including, but not limited to, those discussed in "Risk Factors" and elsewhere in the Prospectus. Network Solutions is the leading Internet domain name registration service provider worldwide. The Company currently acts as the exclusive registrar for second level domain names within the .com, .org, .net, .edu and .gov TLDs. By registering Internet domain names, the Company enables businesses, other organizations and individuals to establish a unique Internet presence from which to communicate and conduct commerce. Net registrations within the TLDs maintained by the Company increased by 206% from approximately 340,000 domain names registered at June 30, 1996 to approximately 1,040,000 domain names registered at June 30, 1997. The Company believes that commercial enterprises and individual Internet users worldwide are increasingly recognizing the .com TLD as a desirable address for commercial presence on the Internet. Net registrations in the .com TLD increased from approximately 304,000 at June 30, 1996 to approximately 908,000 at June 30, 1997, representing 87% of the Company's total net registrations at June 30, 1997. With over 10 million businesses and over 750,000 active trademarks and service marks in the United States alone, the Company believes that the potential for continued growth of domain name registrations by commercial entities and services related to those registrations is substantial. Net revenue from Internet domain name registration subscriptions accounted for 81.0% of the Company's net revenue for the six months ended June 30, 1997. The Company also provides Intranet consulting services to large companies that desire to establish or enhance their Internet presence, or "re-engineer" legacy network infrastructures to accommodate the integration of both Internet connectivity and Intranet network technology into their information technology base. The Company's Intranet services include: (i) Intranet development and re-engineering; (ii) network and systems security; and (iii) Intranet-enabled business solutions. According to Zona Research, Inc., the market for Intranet services in the year 1999 will exceed $14 billion, up from approximately $3 billion in 1996. There can be no assurance that such market forecast will be achieved. Net revenue from Intranet services accounted for 19.0% of the Company's net revenue for the six months ended June 30, 1997. The Company also intends to develop a portfolio of Internet-enabling products and services, which may include directory and distribution services, that allows the Company to build upon its position in the registration process and makes proper use of the customer data that it collects. INDUSTRY BACKGROUND The Internet is a global network of millions of interconnected computers and computer networks that allow businesses, other organizations and individuals to communicate. Historically, the Internet had been used by a limited number of academic institutions, defense contractors and government agencies to facilitate remote access to host computers and transmit electronic mail. Recently, however, use of the Internet has increasingly become dominated by a broad range of commercial organizations and individuals who utilize the Internet to communicate electronically, to distribute and retrieve information and to conduct commerce. Advances in technology, low-cost Internet access and an increasing corporate reliance on distributed information environments have fueled the rapid growth of the Internet. According to estimates published by the International Data Corporation, the number of World Wide Web users will be approximately 163 million by the end of 2000, compared to approximately 35 million at the end of 1996. The Internet has been and continues to be loosely administered by a number of government agencies that were involved in the creation of its infrastructure (initially ARPA and, more recently, the NSF) and a number of nonprofit groups formed to address specific Internet governance issues. As no single organization has formal authority over all aspects of the Internet, it continues to operate under a system of mutual collaboration and cooperation. With the commercialization of the Internet, the role of many of these entities in future Internet administration has become less clear and private parties 41 44 have begun to assume a larger role in the enhancement and maintenance of the Internet's infrastructure. The NSF, for example, has completed a two-year phased withdrawal of its funding for the Internet "backbone" and has transferred this responsibility to a group of private telecommunications carriers that are commercially funded. The Company believes that in order to support the demands placed on this evolving and rapidly growing medium of commerce and information exchange, a wide range of products and services will need to be developed and enhanced, including: (i) domain name registration services; (ii) Intranet services; and (iii) Internet-enabling products and services. Domain Name Registration Services. All communication on the Internet requires an electronic address. Currently, the Internet functions through the establishment of a unique Internet identity (a "domain name") for an electronic address and the proliferation of such domain name in the global Internet root servers. Currently, there are 13 root servers, ten of which are located in the United States, two of which are located in Europe and one of which is located in Asia. When communication with a particular host within a domain name is required and the IP address of that host is not known locally, the root servers make that information available or "point" to a direct or indirect source of the information. See "Risk Factors -- Reliance on Third Parties." An Internet domain name is made up of a top-level domain ("TLD"), such as .com or .net, and additional domain levels consisting of at least one additional domain level, referred to as a second level domain name. For example, in the domain name "companyX.com," "companyX" is the second level domain name. With the increased commercialization of the Internet, second level domain names are being utilized not only by large corporations but also increasingly by other users, including small businesses, organizations and individuals. Particularly within the .com TLD, users are also registering domain names to establish Internet identities for other purposes such as trademarks, products and events. The most common TLDs include .com, used primarily by commercial entities, .org for nonprofit organizations, .net for network service providers, .edu for universities and .gov for United States governmental entities, as well as country code TLDs represented by "." followed by two letter country codes (e.g., .us for the United States, .uk for the United Kingdom and .de for Germany). Because the Internet is not bound by geography or lines of business, coordination and administrative services are required for the registration, allocation and use of TLDs and for the effective operation of the Internet. Initially, in the United States, registration of domain names was primarily performed by government or nonprofit agencies. In 1993, the NSF entered into the Cooperative Agreement with the Company for the performance of these functions for the .com, .org, .net, .edu and .gov TLDs. The Cooperative Agreement by its terms expires in March 1998, although the NSF may, at its option, extend the Cooperative Agreement to September 1998. The Cooperative Agreement is subject to review by the NSF and may be terminated at any time by the NSF at its discretion or by mutual agreement. See "Risk Factors -- Uncertain Status of the Cooperative Agreement," "-- Recommendations and Proposals to Increase Competition in Registration Services" and "-- Relationship with the NSF; Recent Developments in the Internet Community." Intranet Services. Many enterprises are adopting "Intranets" that employ Internet data formats and communications protocols. Intranets enhance user productivity and connectivity allowing users controlled access to internal information while also accessing and exchanging information on the Internet. As more businesses, organizations and individuals establish an Internet presence and begin to deploy Intranets, there will be an increasing demand for Intranet development and re-engineering services, network and systems security services and Intranet-enabled business solutions. In addition, the Company believes that Intranets are becoming increasingly sophisticated and are allowing users increased capabilities and improved access to information. As a result, corporations are increasingly seeking experienced networking firms to enable all of these services. According to Zona Research, Inc., the market for Intranet services in the year 1999 will exceed $14 billion, up from approximately $3 billion in 1996. Internet-Enabling Products and Services. The proliferation of Internet users provides businesses, other organizations and individuals with new means by which to conduct business. To facilitate 42 45 business-to-business and business-to-consumer transactions, Internet users are seeking important enabling products and services, such as transaction security services, electronic payment mechanisms and directory and information services. The Company believes there will be opportunities for entities which can facilitate, develop and distribute such products and services and make them more readily accessible and easy to use. THE NSI SOLUTION Network Solutions is the leading Internet domain name registration service provider worldwide. The Company currently acts as the exclusive registrar of second level domain names within the .com, .org, .net, .edu and .gov TLDs. In this capacity, the Company enables the efficient operation of the Internet by supplying each of the Internet root servers located around the world with an identical copy of the file for all second level domain names in these TLDs. By registering Internet domain names, the Company enables businesses, other organizations and individuals to establish a unique Internet presence from which to communicate and conduct commerce. The Company believes that it has been at the forefront of the development, administration and coordination of standards, policies and functions needed to facilitate the registration process, including dissemination of domain name database information to root servers throughout the world and administration of a domain name dispute policy. The Company is working to expand its domain name registration business and to continue to improve the registration process by: (i) increasing the use of the .com TLD worldwide; (ii) expanding its relationships with Internet access providers by offering enhanced registration services to their customers; (iii) stimulating demand for domain name registrations in targeted customer segments; (iv) working with major platform providers to embed the registration function into server software applications; (v) facilitating ease of use of and access to its registration service; and (vi) establishing international alliances and developing multilingual capability. The Company intends to develop a portfolio of Internet-enabling products and services, which may include directory and distribution services, that allows the Company to build upon its position in the registration process and makes proper use of the customer data that it collects. The Company also provides Intranet consulting and network design and implementation services to large companies that desire to establish or enhance their Internet presence or "re-engineer" legacy network infrastructures to accommodate the integration of both Internet connectivity and Intranet network technology into their information technology base. The Company's Intranet services have evolved from the Company's Internet pioneering efforts that date back to 1979 and presently include: (i) Intranet development and re-engineering; (ii) network and systems security; and (iii) Intranet-enabled business solutions. THE NSI STRATEGY The Company's goal is to maintain its position as the leader in Internet domain name registration services and to build on this position to be a leading provider of Intranet services and Internet enabling products and services. The Company's strategy includes the following key elements: Maintain Position as a Leading Provider of Registration Services. The Company intends to maintain and enhance its position as a leader in domain name registration by promoting the .com TLD as the accepted and preferred Internet address for commercial presence on the Internet worldwide. The Company also intends to develop and implement standards, policies and functions designed to enhance the ease, speed and security of the registration process by adding new capabilities to facilitate the registration process and providing quality customer service and support. Establish and Expand Marketing Relationships. The Company intends to establish and expand relationships with companies worldwide to promote its services, penetrate new customer bases and integrate third party products and services. The Company has established, and is seeking to further pursue relationships with, Internet access providers to enhance its ability to offer second level domain names and pursue its Intranet services opportunities. 43 46 Maintain Active Role in Establishment of Future Internet Standards and Policies. The Internet currently operates under a system of mutual collaboration and cooperation and has historically been administered by governmental and nonprofit organizations. The Company intends to continue to cooperate with these organizations and maintain an active role in the global Internet community to ensure that the Internet continues to flourish and that the Company remains at the forefront of continuing change in the Internet. The Company believes that its expertise in the Internet and its participation in the Internet community should enable it to facilitate the proliferation of Internet usage worldwide and provide it with a competitive advantage in the development of its service offerings. Build and Strengthen Intranet Services Business. The Company intends to further develop its existing in-depth knowledge of and experience in Internet technologies to develop a leading Intranet services business. The Company believes that delivering dependable, high-quality Intranet solutions is critical to strengthening its relationships with existing clients, gaining repeat business and generating new business from referrals. Further, the Company intends to utilize its relationship with SAIC in this area by continuing to work with SAIC on a subcontract basis and seeking referrals to SAIC's customers and strategic partners. Provide Complementary Enabling Products and Services. The Company intends to develop a portfolio of Internet-enabling products and services that build on its registration activities and the customer data that the Company collects. These enabling products and services could include directory and other services to be developed by the Company and distribution of third party product and service offerings through on-line enrollment for such products and services embedded within the Company's domain name registration home page. Leverage Technology Leadership. The Company has assembled management and engineering teams with extensive experience in the information technology industry and specifically the Internet and intends to leverage this experience in the development of enabling technologies to support the continued enhancement of infrastructure flexibility and scalability, customer ease of use and embeddedness in access sources. The Company is committed to integrating state-of-the-art technology in its service offerings and believes that service quality and reliability should be a significant differentiating factor in its market. Pursue Strategic Acquisitions. The Company intends to identify and, where appropriate, pursue acquisition opportunities which would provide businesses, products, services or technologies complementary to the Company's current business, although it is not currently contemplating any such acquisitions. The Company's strategy involves substantial risk. There can be no assurance that the Company will be successful in implementing its strategy or that its strategy, even if implemented, will lead to successful achievement of the Company's objectives. If the Company is unable to implement its strategy effectively, the Company's business, financial condition and results of operations would be materially and adversely affected. NSI SERVICES Registration Services. Registration services is the Company's core business. The Company registers second level domain names in the .com, .org, .net, .edu and .gov TLDs, enabling registrants to establish a unique identity on the Internet. The Company's largest source of customers are Internet access providers, which request domain names on behalf of their subscribers. Prior to September 14, 1995, the Company was reimbursed by the NSF for providing registration services under a cost reimbursement plus fixed-fee contract. On September 14, 1995, the NSF amended the Cooperative Agreement to authorize the Company to begin charging customers a subscription fee of $50 per year for each second level domain name registered. The Company's registration services customers in the .com, .org and .net TLDs are invoiced for a two-year subscription fee of $100 for initial registrations and $50 per year for renewals of initial registrations. Under the terms of the amendment to the Cooperative Agreement, 30% of the subscription fees collected are required to be set aside to be 44 47 disbursed in a manner approved by the NSF for the enhancement of the intellectual infrastructure of the Internet. See "-- Relationship with the NSF; Recent Developments in the Internet Community." The Company believes that high quality customer support is vital to client satisfaction. The registration subscription fee provides the customer with access to a registry help desk and an on-line processing facility and account information updates. The Company's help desk and on-line processing facility are factors in the success of the Company's registration business because they are the front line to the customer and provide initial and ongoing customer service and support. This facility currently processes over 40,000 telephone calls and over 300,000 electronic transactions monthly. At the end of 1996, the Company entered into arrangements to outsource certain back office operations, which the Company believes has improved customer service and account handling and expanded the Company's capacity to service larger volumes of registrants. See "-- Operations." The Company has been registering domain names pursuant to the Cooperative Agreement since 1993 and has made significant investments in its registration services business. The Company believes that it currently possesses the following competitive advantages in the domain name registration business: - - Large, Established Customer Base. The Company currently maintains in excess of one million unique domain name registrations. As a result, the Company believes it has the infrastructure required to realize significant scale efficiencies throughout the registration process and believes that it has established credibility in the Internet community. In addition, this large customer base allows the Company to benefit from its policy which requires that customers prepay for two years for rights to a unique domain name registration. As customers invest in their web sites for advertising, branding and other business-critical activities, the Company believes they will be increasingly inclined to renew at the end of the initial two-year subscription period. - - Recognition of the .com TLD. The Company believes that the .com TLD, of which the Company is currently the exclusive registrar, has perceived value to commercial users on the Internet. Further, the Company believes that there is an emerging trend among commercial entities outside of the United States to establish an Internet presence within the .com TLD, rather than within or in addition to a country code TLD. - - Strategic Agreements with Internet Access Providers. The Company has entered into agreements to provide specialized services to certain Internet access providers who register a significant number of second-level domain names with the Company on behalf of such providers' customers. This program provides such Internet access providers with customized registration services and provides the Company with a multi-year registration stream from such providers. To date, the Company has entered into agreements with 29 Internet access providers, including: MCI, Inc., America Online, Incorporated (PrimeHost Division), TABNet and Rapidsite, Inc. - - Established Technical Infrastructure. The Company believes that the technical requirements to build and to operate a competitive domain name registry are significant. Substantial portions of the Company's software is custom-developed and proprietary. The Company's internal software includes an automated registration capability which currently processes in excess of 90% of all new registration requests without human intervention. See "-- Operations." - - Experience in the Administration of Domain Name Dispute Policy. The Company's staff is experienced in the establishment and administration of the Company's domain name dispute policy, which is an integral part of the maintenance and administration of the Company's domain name registration business. As of July 31, 1997, the Company had received over 2,700 written objections to the registration and use of certain domain names. Of these, approximately 1,400 were disputes in which the Company's domain name dispute policy was involved. Although 36 of these objections have resulted in litigation involving the Company, as of July 31, 1997, no damages have been awarded against the Company to any plaintiff. The Company expends considerable management and legal resources in the development, refinement and administration of its domain name dispute policy. 45 48 - - Skilled Technical Personnel. The Company believes that significant engineering talent is required to create a registration services capability and that knowledge of DNS structures, Internet security, data routing and routing protocols is critical to creating and enhancing registration service capabilities. The Company developed RWhois, a standard open protocol, that is used for the registration services business. The Company's engineering staff has significant expertise in the RWhois protocol. The Company believes that engineers skilled in protocol development are difficult to identify, hire and retain and thus its staff of engineers represents a valuable resource. The Company believes that these competitive advantages are significant and that existing and additional competing registries will need similar capabilities. In addition, the Company is working to expand its domain name registration business and to continue to improve the registration process by: - - Increasing the Use of the .com TLD Worldwide. The Company believes that it can continue to grow its Internet registration business by promoting global recognition of the .com TLD. The Company has begun and intends to continue to promote the use of the .com TLD and to establish .com as the most recognized domain for individuals and organizations conducting business on the Internet. - - Expanding Relationships With Internet Access Providers. The Company intends to build upon its current relationships with certain Internet access providers that have agreed to participate in its Premier Domain Registration Service program and intends to pursue relationships with additional Internet access providers. Through these relationships, the Company believes it will be able to deliver enhanced registration services and identify additional opportunities to expand its registration services business. - - Stimulating Demand for Domain Name Registrations in Targeted Customer Segments. The Company is seeking to expand the number of registrations in targeted customer segments both domestically and internationally. The Company believes that customer segments such as small business users, individuals, holders of trademarks, service marks and product marks and event sponsors could offer significant potential for growth if the Company actively markets a portfolio of registration services to these segments. - - Working with Major Platform Providers to Embed the Registration Function. The Company is seeking to expand its domain name registration business through agreements with major platform providers (i.e., operating system manufacturers or hardware vendors who provide bundled operating system software) to embed an automated registration function through a "point-and-click" interface directly into the installation procedures. For example, in December 1996, the Company entered into an agreement with Microsoft Corporation ("Microsoft") to provide a "point-and-click" interface intended to allow users to automatically register a domain name with the Company upon initialization of the server. - - Facilitating Ease of Use and Access to Registration Services. The Company has undertaken a number of initiatives that are intended to make the registration process easier, more streamlined and more accessible. The Company believes that ease of use is becoming increasingly important as the Internet is being more widely adopted by users who are less technically sophisticated. The Company is currently in the process of simplifying the registration template accessed by customers to effect registration of a domain name. To facilitate payment of registration renewal fees, the Company intends to implement electronic payment mechanisms that will allow the user to pay for the domain name directly from the user's host machine. - - Establishing International Alliances and Developing Multilingual Capability. The Company intends to establish strategic alliances with international registries to build a foundation for its international operations. As these entities add Internet service to their offerings for their customers, the Company intends to offer "ease of use" solutions for entities worldwide for registration in the .com, .org and .net TLDs. The Company also intends to establish a multilingual call center capability to further assist with international registrations. 46 49 Intranet Services. The Company provides consulting and network systems integration services for clients utilizing Internet technologies for internal networks (i.e., Intranets). The Company's network systems engineers have extensive knowledge of and experience in such areas as local area network ("LAN")/wide area network ("WAN") Internet protocols, router technology, switching technology, remote access technology, virtual private network technology, network security technology, network management technology, network components, IP addressing strategy, domain name architecture, efficient IP address space usage, Web applications development, UNIX systems (highly modular and flexible computer systems) and network operating systems. By leveraging this knowledge and experience, the Company is able to provide solutions to clients' complex network needs. As part of its Intranet services offering, the Company provides Intranet development and re-engineering; network and systems security; and Intranet-enabled business solutions. - - Intranet Development and Re-engineering. The Company offers a full line of services to help develop, optimize, and integrate Intranet solutions in a manner tailored to individual clients. Some of the more significant services include Intranet business workflow and service level analysis; IP address space engineering; domain name system ("DNS") and dynamic host configuration protocol ("DHCP") architecture engineering; routing and switching architecture engineering; Extranet (IP networks through which companies run Web applications for external use by their customers) architecture engineering; virtual private network architecture engineering; electronic messaging architecture engineering; network capacity and performance management; and new technology integration. The Company also provides planning and analysis to implement disaster recovery and contingencies for network system failures. - - Network and Systems Security. The Company provides a full range of security consulting services, including security architecture assessment, planning and implementation. The security architecture establishes the access and protection controls that will permit internal and remote users to access computer systems, databases and applications on the network, while protecting against unauthorized or inadvertent access to information or misuse of systems services. The Company's methods to secure the backbone, LAN-to-WAN access, remote access and facilities can supplement or replace existing systems security measures. The Company maintains resident expertise in emerging network protocols, encryption and key technologies, firewalls, packet filters, proxy services, secure remote access strategies and secure Intranet servers. - - Intranet-Enabled Business Solutions. The Company offers Intranet- and Extranet-enabled solutions for client business applications and services. In this regard, the Company leverages Internet technologies to deliver enterprise-wide solutions and develop business automation systems that can be accessed by any client system, are quickly adaptable, and are easily maintained. Such solutions may include: implementation of Extranets to support clients' electronic commerce applications; planning and implementation of clients' Internet presence and commerce capabilities; re-engineering of legacy applications for Intranet-based delivery; and hosting of private and public Intranet servers. The Company also maintains an Intranet Solutions Center which provides outsourcing services for remote network and security systems monitoring, network performance management and management of the development and hosting of clients' total Web presence. NationsBanc is currently the Company's largest Intranet services client, accounting for 41.3% of the Company's Intranet services business net revenue and 7.8% of the Company's total net revenue in the six months ended June 30, 1997. NationsBanc originally contracted with the Company in 1993 and the Company currently provides network design and engineering services as well as a variety of project specific services for NationsBanc. The Company's current contract with NationsBanc is a three-year contract commencing January 1, 1997 and is a requirements contract under which the Company's services are ordered by task orders issued by NationsBanc. The Company sells and markets its Intranet services business primarily to large companies that desire to establish or enhance their Internet presence. The Company's Intranet services are generally 47 50 provided to customers on a time and expense basis. The Company also performs a limited number of engagements on a fixed-price basis. Many of the Company's recent Intranet services clients have been developed through direct contact or referrals from its parent company, SAIC. The Company intends to continue to leverage its relationship with SAIC to access SAIC's major customers and strategic partners. The Company has recently begun to provide Intranet services on a limited basis in the Latin American market through Informatica, Negocios y Tecnologia S.A. ("INTESA"), SAIC's joint venture with Petroleos de Venezuela, S.A., the Venezuela National Oil Company. As part of this joint venture, the Company is currently subject to a noncompetition arrangement pursuant to which the Company has agreed to provide, with certain limited exceptions, Intranet services in the Latin American market solely through INTESA. See "Risk Factors -- Limited Service Offerings to Date; Reliance on Domain Name Registration Services and Intranet Services for Substantially All Revenue." MARKETING AND DISTRIBUTION RELATIONSHIPS The Company intends to establish and expand relationships with companies worldwide to promote its services, penetrate new customer bases and integrate third party products and services. Strategic Agreements with Internet Access Providers. The Company has developed a service offering which provides specialized services to Internet access providers who register a significant number of second-level domain names per month on behalf of their customers. The Company's Premier Domain Registration Service offering provides an Internet access provider with personalized account management, customized billing and financial reports, priority registration with 24-hour customer support, private e-mail boxes and other customized features. To date, the Company has entered into agreements with 29 Internet access providers, including: MCI, Inc., America Online, Incorporated (PrimeHost Division), TABNet and Rapidsite, Inc. Server Software Applications. The Company has entered into an agreement with Microsoft to provide a "point-and-click" interface for an automated registration function. This interface is designed to facilitate the ease of the registration process for users of the server software and to allow for the Company to have a preferred provider position on the registration wizard screen that appears during the server initialization process. The Company is currently in discussions with certain other server platform providers pursuant to which such a "point-and-click" interface will be embedded in their server software. Internet-Enabling Products and Services. The Company has entered into several agreements designed to allow the Company to build upon its strategy of becoming an Internet-enabling business center where a business or individual can have access to companies which provide the enabling products and services to conduct business on the Internet. The Company has entered into an agreement with VeriSign, Inc. ("VeriSign") pursuant to which the Company provides its customers with direct access to VeriSign's server security certificates through the Company's domain name registration process. The Company will receive a portion of VeriSign's subscription fees for providing such access to VeriSign subscribers. The Company has also entered into an agreement with First Virtual Holdings Corporation ("First Virtual") pursuant to which the Company implemented First Virtual's VirtualPIN as a form of payment for the Company's customers. Under the agreement, users may register for First Virtual VirtualPINs through the registration process for which the Company receives a portion of the fee, assuming certain targets are met. Several other initiatives are being pursued, all focusing on utilizing the registration process to provide access to Internet enabling products and services. OPERATIONS To register a domain name within the .com, .org, .net, .edu and .gov TLDs, the Company's customer or the customer's Internet access provider completes a registration template which is submitted to the Company via e-mail. Once the customer is registered, the Company loads the domain name into the root servers located around the United States and in Europe. The Company believes that the technical requirements to build and to operate a competitive domain name registry are significant. Substantial 48 51 portions of the Company's in-house registration software have been custom-developed and are proprietary. The Company's in-house registration software includes an automated registration capability which currently processes in excess of 90% of all new registration requests without human intervention. The Company maintains a help desk and on-line processing facility which provides initial and ongoing customer service and support. This facility currently processes over 40,000 telephone calls and over 300,000 electronic transactions monthly. The Company's registration services are supported by six T1 (high speed data communications line) links connected to four ISPs, with additional T1 links on order. By connecting to four different providers, the Company seeks to ensure constant access to the Internet. The Company currently uses an average of fifty percent of the bandwidth provided by the T1s and believes its current network and the anticipated increased capacity should sustain continued growth for the foreseeable future. The Company leases its computer equipment which allows the Company to maintain the latest technology within its operating infrastructure. The Company has approximately 100 UNIX workstations running a variety of applications to evenly distribute operations. Additionally, the Company utilizes several large network file servers to support its directory and registration services. These servers provide a mirrored file system for enhanced reliability and back-up coverage. On June 16, 1997, the Company opened a 31,000 square foot facility to support its Internet business operations. This leased facility is designed to meet current registration services customer support needs as well as to provide expansion capability for future business. It includes: (i) a call center; (ii) a training center equipped for both computer and telephone training, including a simulated operations environment; and (iii) a new computer room with expanded systems and telecommunications services. The Company believes that this new facility with the accompanying system enhancements should provide the environment and tools that are essential for quality customer support. Since November 1996, the Company has been outsourcing certain back office functions, including invoicing, check processing and credit card payment processing. The Company is not outsourcing its core proprietary automated registration process and associated security system. These outsourcing efforts, in conjunction with new invoicing procedures implemented in 1997, have improved customer service and account handling and expanded the Company's capacity to service larger volumes of registrants. OTHER PRODUCTS AND SERVICES DEVELOPMENT The Company's products and services development activities in areas other than registration services and Intranet services are focused primarily on the development of Internet-enabling products and services, including a possible directory service based on the RWhois protocol (an enhanced server version of the Whois protocol) developed by the Company. The Company's current directory service technology, which is made available free of charge, employs a look-up method called "Whois," a widely accepted Internet protocol and the interface to the Company's global registry database. Whois allows a user to perform simple queries for second level domain names and to retrieve additional information about a customer, including the customer's name, location and points of contact. The Company's Whois server currently receives more than 15 million queries per month. The Company intends to develop a portfolio of Internet-enabling products and services that allows the Company to build upon its position in the registration process and makes proper use of the customer data that it collects. There were no research and development expenses in 1995, in large part because any such expenditures were generally reimbursable under the NSF contract. In 1996, research and development expenses were $680,000 or 3.6% of net revenue. For the six months ended June 30, 1997, research and development expenses were $718,000 or 3.8% of net revenues. The Company believes that significant and continuing investments in products and services development will be required to maintain its position as the leader in the domain name registration business and to achieve its strategy of leveraging its registration services business to offer and distribute other enabling services. The Company's future 49 52 financial performance will be dependent upon its ability to develop and commercialize in a timely manner new services that can be offered in conjunction with the Company's current domain name registration services and that meet the changing requirements of its customers. 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 products 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. See "Risk Factors -- Technological Change and Additional Technology, Products and Services." RELATIONSHIP WITH THE NSF; RECENT DEVELOPMENTS IN THE INTERNET COMMUNITY In 1993, the Company entered into the Cooperative Agreement with the NSF, which had been funding the Defense Information Systems Agency, to act as the registrar for second level domain names within the .com, .org, .net, .edu and .gov TLDs. Under the Cooperative Agreement, the Company was given the responsibility for ensuring the quality, timeliness and effective management of registration services to non-military Internet users and networks. The registration services to be provided by the Company under the Cooperative Agreement included domain name registration, domain name server registration, network number assignment and autonomous system number assignment and IP address mapping and allocation worldwide. During the term of the Cooperative Agreement, the Company is required to file periodic reports regarding its status and proposed budget and goals. At the conclusion of the Cooperative Agreement, the Company will be required to submit a final report describing all work performed and problems encountered. Originally, the Cooperative Agreement was a cost reimbursement plus fixed-fee contract but expressly contemplated that possible future changes under the Cooperative Agreement could include the imposition of a user-based fee structure. In 1995, in response to the rapidly growing volume of registrations from commercial entities (primarily in the .com TLD), the NSF and the Company mutually agreed to move from a cost reimbursement plus fixed-fee contract to a subscription fee based contract. Effective September 14, 1995, the NSF and the Company amended the Cooperative Agreement to authorize the Company to begin charging customers a subscription fee of $50 per year for each second level domain name registered. The Company's registration services customers in the .com, .org and .net TLDs are invoiced for a two-year subscription fee of $100 for initial registrations and $50 per year payable for renewals of initial registrations. Under the terms of the amendment to the Cooperative Agreement, 70% of the subscription fees collected are retained by the Company and 30% are required to be set aside to be disbursed in a manner approved by the NSF for the enhancement of the intellectual infrastructure of the Internet. With the commercialization of the Internet, the role, if any, that the NSF will play in the Internet and the legal authority underlying its role are at present unclear. Withdrawal of or challenges to the NSF's sponsorship or authorization of the Company's activities could create a public perception or result in a finding that the Company lacks authority to continue in its role as registrar or to charge fees for its domain name registration services. The impact, if any, of any such public perception or finding is unknown but could materially and adversely affect the Company's business, financial condition and results of operations. Further, the Cooperative Agreement by its terms expires in March 1998, although the NSF may, at its option, extend the Cooperative Agreement to September 1998. The terms of the Cooperative Agreement are subject to review and adjustment by the NSF on an annual basis. In addition, the Cooperative Agreement may be terminated by the NSF at any time at its discretion or by mutual agreement. When the Cooperative Agreement is terminated or if there is a change in the terms of the Cooperative Agreement or the Company's status as the exclusive registrar for domain names in 50 53 the .com TLD, the Company's business, financial condition and results of operations could be materially and adversely affected. The NSF has stated that the Cooperative Agreement will not be re-awarded to the Company or awarded to any other entity. However, there can be no assurance that the NSF will not award the Cooperative Agreement to another entity and, if the Cooperative Agreement is awarded to another entity, the Company's business, financial condition and results of operations would be materially and adversely affected. The Cooperative Agreement does not prohibit the establishment of competing registries. No single organization or entity (including the NSF) currently has formal authority over all aspects of the Internet and the Internet currently operates under a system of mutual cooperation. As a result, it is unclear which organization or entity, if any, will govern the authorization for the registration of domain names. Various governmental, technical and Internet groups are currently discussing how the award and administration of future contracts for registration services in the .com TLD, other existing TLDs and new TLDs may take place, and are considering whether and how to enable other parties to enter the domain name registration business. The Company is also an active participant in this process. A consensus regarding such issues could be reached and implemented in the near future and prior to the expiration of the Cooperative Agreement. For example, some members of the Internet community have discussed various concepts such as adding new TLDs, which could result in significant competition for domain name registrations, including competition on the price charged by the Company for domain name registrations. In February 1997, the IAHC issued its recommendation designed to increase competition in domain name registrations in which it proposed the creation of additional registries, additional TLDs and the possible sharing of new and existing TLDs. In April 1997, the IAHC issued an MOU seeking support for its recommendations. This MOU has been signed by a number of organizations in the Internet community. In April 1997, the Company issued its own recommendations to increase competition in domain name registration. The Company's recommendations focus on creating additional TLDs as well as on the future administration and technical operation of the Internet. Other groups or entities may also make other proposals concerning these and other issues. Implementation of competing registries, additional TLDs, the sharing of the Company's TLDs or other recommendations or proposals of these groups could have a material adverse effect on the Company's business, financial condition and results of operations. See "-- Uncertainty of Internet Governance and Regulation" and "Risk Factors -- Uncertain Status of the Cooperative Agreement" and "-- Recommendations and Proposals to Increase Competition in Registration Services." The description of the Cooperative Agreement set forth above and elsewhere herein is intended to be a summary, and, while, material terms of the Cooperative Agreement are set forth herein, the description is qualified by reference to the Cooperative Agreement and the amendments thereto filed as exhibits to the Registration Statement of which this Prospectus forms a part. The Company has recently received authorization from the NSF to shift the allocation and administration of IP addresses to a not-for-profit organization. In support of this initiative, the Company has incorporated a not-for-profit organization named the American Registry for Internet Numbers (the "ARIN") to administer IP addresses for North and South America and parts of Africa. The Company anticipates that the responsibility for the allocation and administration of IP addresses will be transferred to ARIN by the fourth quarter of 1997. The Company has agreed with the NSF to provide financial support to ARIN through the end of the first quarter of 1998. The Company believes that the amount of such support will not differ materially from the amount which the Company currently pays in support of such activities. COMPETITION The Company currently is the exclusive registrar for second level domain names within the .com, .org, .net, .edu and .gov TLDs. Multiple registries do not currently register names in the same TLD, but this may change in the future. 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 51 54 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 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 subscription fees could be reduced due to increasing competition. For example, other entities may bundle domain name registrations with other products or services, effectively providing such registration services for free. If operational and administrative arrangements or technology permitting multiple competitors to register domain names in the same or other TLDs are developed or if competition occurs in the domain name registration business, the Company's business, financial condition and results of operations could be materially and adversely affected. See "Risk Factors -- Competition in Domain Name Registration Business." Companies with Internet expertise are current or potential competitors to the Company's Intranet consulting services. Such companies include systems integrators and consulting firms, such as Andersen Consulting, IBM Global Services and International Network Services. The Company also competes with certain companies that have developed products that automate the management of IP addresses and name maps throughout enterprise-wide Intranets, and with companies with internally-developed systems integration efforts. A number of these competitors and potential competitors have longer operating histories and greater name recognition and significantly greater financial, technical, marketing, distribution and other resources than the Company. There can be no assurance that the Company will be able to successfully compete in the Intranet services area. Failure by the Company to successfully compete in the Intranet services area could have a material adverse effect on the Company's business, financial condition and results of operations. In developing and distributing future products and services for the Internet-enabling services markets, the Company faces intense competition and expects to have multiple competitors for each of the products or services, if any, which it develops or sells. Many of the Company's potential competitors have longer operating histories, greater name recognition and significantly greater financial, technical, marketing, distribution and other resources than the Company. Furthermore, the industry in which the Company intends to compete is characterized by rapid changes and frequent product and service introductions. To the extent a competitor introduces a competitive product or service prior to introduction of the same or similar product or service by the Company, market acceptance of the competitor's product or service may adversely affect the Company's competitive position. See "Risk Factors -- Competition in Intranet Services and Internet-Enabling Businesses." UNCERTAINTY OF INTERNET GOVERNANCE AND REGULATION The Internet historically has been loosely administered by a number of government agencies which were involved in the creation of its infrastructure, initially ARPA and, more recently, the NSF. No single organization or entity (including the NSF) currently has formal authority over all aspects of the Internet and it currently operates under a system of mutual cooperation. Since the original role of the Internet was to link computers at governmental and academic institutions to facilitate communication and research, the Internet was historically administered by entities which were involved in sponsoring research rather than by any of the traditional federal or state regulatory agencies. With the commercialization and internationalization of the Internet, the role of these entities in Internet administration has become less clear and private parties have begun to assume a larger role in the enhancement and maintenance of the Internet's infrastructure. The NSF, for example, has completed a two-year phased withdrawal of its funding for the Internet "backbone" and has transferred this responsibility to a group of private telecommunications carriers which are commercially funded. This 52 55 lack of regulation and the legal uncertainties arising from it poses risks to the Company and to the commercial Internet industry in general. As described above, it is unclear which organization or entity, if any, will govern the authorization for the registration of domain names in the future. The lack of an appropriate organization or entity to govern the authorization for the registration of domain names could have a material adverse effect on the Company's business, financial condition and results of operations. The effective operation of the Internet is dependent on the continued mutual cooperation and consensus among an increasing number of entities, many of which have widely divergent interests. For example, the IP addresses allocated by ISPs to their customers are originally allocated by the IANA. Thus, the effective operation of the Internet is dependent on such continued allocation of IP addresses by IANA. Continuing to achieve consensus may become difficult or impossible and may become extremely time-consuming and costly. Achieving consensus may be made more difficult because of the lack of leadership by any one entity. This lack of regulation also creates great uncertainty as to the legality of any action, making business planning and operations difficult. Conversely, the lack of regulation could theoretically result in individuals and entities taking harmful or disruptive actions with respect to the Internet with impunity. There is a risk that a failure to achieve consensus among the various groups which are now informally administering the Internet could result in the disruption of Internet operations, the inability of any user to communicate with another user or the delay of infrastructure improvements necessary to the maintenance and expansion of the Internet. Any disruption to the administration, effective operation or maintenance and expansion of the Internet, in general, or the domain name registration system in particular, would have a material adverse effect on the Company's business, financial condition and results of operation. See "-- Relationship with the NSF; Recent Developments in the Internet Community" and "Risk Factors -- Uncertain Status of the Cooperative Agreement; Recommendations and Proposals to Increase Competition in Registration Services." The current lack of any centralized Internet management could also cause the U.S. federal or other governments to intervene with uncertain results. The U.S. government formed the ITF to study the issues surrounding domain name registration and governance of the Internet. The ITF is expected to solicit broad public input to these and other issues. This process is expected to be completed in early 1998. On July 1, 1997, the NTIA published a request for comments on the registration and administration of Internet domain names. This request appeared in the form of the NOI in the U.S. Federal Register with August 18, 1997 as the closing date for receipt of comments. The NOI requested specific input in five broad areas: general principles, general/organizational framework issues, creation of new TLDs, policy issues for new registrars and trademark dispute issues. The Company has submitted a response to the NOI request which includes a recommendation, among others, that an international public advisory group with U.S. government sponsorship be established to manage the Internet, including the domain name system, and that the U.S. government sponsorship of this international public advisory group continue through a transition period until a suitable international sponsor is selected. NTIA is expected to issue a report on the results of this NOI and to recommend a future course of action prior to June 1998 for the role of the U.S. government in Internet domain name registration. The ITF or NTIA processes or any other government-sponsored process could result in policies which may not be favorable to the Company or consistent with the Company's current or future plans. The outcome of these activities, therefore, could have a material adverse effect on the Company's business, financial condition and results of operations. In the United States, apart from its obligations under the Cooperative Agreement, the Company is not currently subject to direct regulation other than federal and state regulation applicable to businesses generally. However, changes in the regulatory environment could result in the Company being subject to direct regulation by the FCC or other U.S. regulatory agencies. For example, the Company is aware of certain industry requests to the FCC to review the impact of Internet usage on the U.S. telecommunications service providers, in particular, the generally lower cost structure for data transmission versus voice. In addition, as the Internet becomes more widespread internationally, there is an increased likelihood of international regulation. The Company cannot predict whether or to what 53 56 extent any such new regulation will occur; however, such regulation could have a material adverse effect on the Company's business, financial condition and results of operations. Additionally, the applicability to the Company of existing laws governing issues such as intellectual property ownership is uncertain. Courts have indicated that, under certain circumstances, ISPs could be held responsible for the failure to prevent the distribution of material that infringes on others' copyrights and other intellectual property. The future interpretation by the courts of the obligation of domain name registration providers to prevent trademark infringement and other legal issues is uncertain. See "-- Litigation; Antitrust Investigation" and "Risk Factors -- Litigation; Antitrust Investigation." Costs incurred or decisions rendered as a result of government actions, including enactment of new laws or adoption of new regulations, investigations or lawsuits relating to any of the foregoing, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Uncertainty of Internet Governance and Regulation." LITIGATION; ANTITRUST INVESTIGATION As of July 31, 1997, the Company had received approximately 2,700 written objections to the registration and use of certain domain names. Of these, approximately 1,400 were disputes in which the Company's domain name dispute policy was involved. As of July 31, 1997, the Company had been named as a defendant in 36 lawsuits. As of such date, the Company has been dismissed as a party from 25 of the 36 lawsuits and no damages have been awarded against the Company to any plaintiff. The lawsuits have generally involved domain name disputes between trademark owners and domain name holders. The Company's domain name dispute policy seeks to take a neutral position regarding these competing claims and is designed to address claims that a domain name registered by the Company infringes a third party's federal trademark. 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 it granted to an alleged trademark infringer to register the domain name in question. Further, trademark owners have also alleged that the Company should be required to monitor future domain name registrations and reject registrations of domain names which are identical or similar to their federally registered trademark. 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 registration or use of the domain names in question. Such litigation has resulted 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. Currently, domain name registration requests are allocated by the Company on a first-come, first-serve basis. The Company's domain name dispute policy is triggered when the Company is presented with a certified copy of a federal trademark certificate, proof that the trademark owner gave prior notice to the domain name registrant and an allegation of legal harm to the trademark owner. This policy provides for a detailed set of procedures designed to facilitate the resolution of such disputes between the parties. The policy also provides for the Company to be indemnified for any damages arising in connection with any litigation arising out of a dispute between claimants regarding the registration of a domain name. The Company bears its own costs and expenses associated with any litigation. On June 27, 1997, SAIC received a CID from the DOJ issued in connection with an investigation to determine whether there is, has been, or may be a violation of antitrust laws 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. Neither SAIC nor the Company is aware of the scope or nature of the investigation. The Company cannot reasonably estimate the potential impact of such investigation, nor can it predict whether a civil action will ultimately be filed by the DOJ or by private litigants as a result of the DOJ investigation or, if filed, what such action would entail. The Company is unable to predict the form of relief that might be sought in such an action or that might be awarded by a court or imposed as a result of any settlement between the 54 57 Company and the DOJ or private litigants. Any such relief could have a material adverse effect on the Company's business, financial condition and results of operations. On March 20, 1997, PG Media filed a lawsuit against the Company in the United States District Court, Southern District of New York alleging that the Company had restricted access to the Internet by not adding TLDs in violation of the Sherman Act. In its complaint, PG Media has, in addition to requesting damages, asked that the Company be ordered to amend the root zone configuration file so that the file includes reference to PG Media's TLDs and nameservers. The Company has answered the complaint, but no motions are pending. In addition, the Company recently received written direction from the NSF not to take any action to create additional TLDs or to add any new TLDs to the Internet root servers until further guidance is provided by the NSF. The Company believes that it has meritorious defenses and intends to vigorously defend itself against the claims made by PG Media. While 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. There can be no assurance that the Company will not be involved in additional litigation, investigations or other proceedings in the future, including proceedings challenging the Company's authority to continue in its role as a registrar or to charge fees for its domain name registration services. Any such proceedings, with or without merit, could be costly and time-consuming to defend, could divert management's attention and resources and could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Litigation; Antitrust Investigation." INTELLECTUAL PROPERTY RIGHTS The Company's principal intellectual property consists of, and its success is dependent upon, the Company's proprietary software utilized in its registration services business and certain methodologies and technical expertise it utilizes in both the design and planned implementation of its current and future registration service and proposed Internet-enabling services businesses. Some of the software and protocols used by the Company in its registration service and, proposed Internet-enabling businesses are in the public domain or are otherwise available to the Company's competitors. In addition, in-depth technical knowledge and unique processes are critical to the Company's Intranet services business, in which a full range of consulting and systems integration services are offered in order to transition organizations from private, legacy networks to more scalable and efficient Intranets. The Company has no patents or registered copyrights but has several trademarks and service marks, including the Company's logo. The Company has compiled a database of information relating to customers in its registration business. While a portion of this database is available to the public, the Company believes that it has certain ownership rights in this database and is seeking to protect such rights. If it were determined that the Company does not have ownership rights in this database or if the Company is unable to protect such rights in this database or is required to share the database with its potential competitors, there could be a material adverse effect on the Company's business, financial condition and results of operations. 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 55 58 infringement of third party intellectual property rights. Any such claims could require the Company to spend significant sums in litigation, pay damages and develop non-infringing intellectual property or acquire licenses to the intellectual property which 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. See "Risk Factors -- Intellectual Property Rights." EMPLOYEES As of June 30, 1997, the Company had approximately 220 full-time employees. None of the Company's employees are covered by collective bargaining agreements. The Company believes that its relations with its employees are good. FACILITIES The Company's principal executive office is located in Herndon, Virginia, in a 45,000 square foot facility subleased from SAIC under a sublease expiring in November 2002. The Company also leases an additional 31,000 square feet in a facility in Herndon, Virginia under a lease expiring in July 2002 and subleases a 10,000 square foot facility, also in Herndon, from SAIC under a sublease expiring in October 1999. Additionally, the Company subleases approximately 10,000 square feet in a facility in Charlotte, North Carolina, with portions of the sublease expiring in August 1998 and July 2002. The Company believes that its current facilities will be adequate for the next 12 months and that any additional facilities will be available in the future as needed on commercially reasonable terms. 56 59 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS Executive officers and directors of the Company and their ages as of July 31, 1997 are as follows:
NAME AGE POSITION - ------------------------------------- --- ------------------------------------------------- Gabriel A. Battista.................. 52 Chief Executive Officer and Director Michael A. Daniels(1)................ 51 Chairman of the Board Donald N. Telage..................... 52 Senior Vice President, Internet Relations and Special Programs and Director Robert J. Korzeniewski............... 40 Chief Financial Officer Raymond S. Corson.................... 51 Senior Vice President, Business Development David H. Holtzman.................... 40 Senior Vice President, Engineering A. Scott Williamson.................. 39 Vice President, Engineering Michael G. Voslow.................... 37 Treasurer Russell L. Helbert................... 40 Controller J. Robert Beyster(1)................. 72 Director Craig I. Fields(2)................... 51 Director John E. Glancy(2).................... 51 Director William A. Roper, Jr.(2)............. 51 Director Stratton D. Sclavos(1)............... 35 Director
- ------------------------------ (1) Member of Compensation Committee. (2) Member of Audit Committee. Gabriel A. Battista has served as Chief Executive Officer of the Company since October 1996 and as a director of the Company since November 1996. From September 1995 to October 1996, Mr. Battista served as President and Chief Executive Officer of Cable & Wireless, Inc., a telecommunications company and U.S. subsidiary of Cable & Wireless, P.L.C. From 1991 to 1995, Mr. Battista served as President and Chief Operating Officer of Cable & Wireless, Inc. and from 1987 to 1991, he served as the Chief Operating Officer of National Telephone Services, a long distance operator service company. Mr. Battista also serves as a director of Axent Technologies, Inc. and Systems & Computer Technology Corporation. Mr. Battista received a BSEE from Villanova University, an MSEE from Drexel University and an MBA from Temple University. Michael A. Daniels has served as Chairman of the Board of the Company since May 1995. Since 1986, Mr. Daniels has served in various positions with SAIC and has served as a Sector Vice President and Sector Manager for the Technology Applications Sector of SAIC since 1993. Prior thereto, Mr. Daniels served as a Group Senior Vice President of SAIC from 1991 to 1993. Mr. Daniels received a B.S. and an M.A. from Northwestern University and received a J.D. from the University of Missouri School of Law. Donald N. Telage has served as Senior Vice President of Internet Relations and Special Programs since February 1997 and as a director since May 1995. Dr. Telage also served as President and Chief Operating Officer of the Company from May 1995 to February 1997. Since 1986, Dr. Telage has served in various positions with SAIC and has served as a Group Senior Vice President of SAIC since 1993. Prior thereto, Dr. Telage served as a Corporate Vice President of SAIC from 1992 to 1993. Based on Dr. Telage's seniority, it was deemed appropriate for Dr. Telage to retain his titles with both SAIC and the Company. It is currently contemplated, however, that Dr. Telage will be devoting substantially all of his working time to the affairs of the Company. Dr. Telage received his B.A. in Psychology from the University of Connecticut and received an M.A. and a Ph.D. in Mathematics from Clark University. 57 60 Robert J. Korzeniewski has served as Chief Financial Officer of the Company since March 1996. Since 1987, Mr. Korzeniewski has held a variety of senior financial positions with SAIC and has served as a Corporate Vice President for Administration of SAIC since 1989. Prior to SAIC, Mr. Korzeniewski was the Corporate Controller of Halifax Corporation, a publicly traded technology services company. Mr. Korzeniewski is a Certified Public Accountant and received a B.S. in Business Administration from Salem State College. Raymond S. Corson has served as Senior Vice President, Business Development, of the Company since July 1996. Mr. Corson has also served as a Vice President of SAIC since 1995. Since 1987, Mr. Corson served in various positions with the Company, including serving as Vice President of Marketing from March 1995 to July 1996, Vice President of Operations from January 1994 to March 1995 and Vice President of Network Support Services from July 1989 to January 1994. Prior to joining the Company, Mr. Corson served as Department Manager of Command, Control, and Intelligence in Unisys' Defense Systems. Mr. Corson attended Virginia Polytechnic Institute and State University from 1963 through 1966, majoring in Economics. David H. Holtzman has served as Senior Vice President for Product Development and Technology of the Company since February 1997. From September 1995 until January 1997, he served as Chief Scientist, IBM Internet Information Technology (InfoMarket) group. Prior to this, he served as a Senior Associate at Booz-Allen & Hamilton. Mr. Holtzman has a B.A. in Philosophy from the University of Pittsburgh and a B.S. in Computer Science from the University of Maryland. A. Scott Williamson rejoined the Company as Vice President, Directory Services, in March 1996 and has served as Vice President, Engineering, of the Company since November 1996. Mr. Williamson has also served as a Vice President of SAIC since 1996. Prior to rejoining the Company, Mr. Williamson served as Thomson Technology Internet Lab's Principal Researcher for the Thomson Corporation, a publishing company, from January 1995 to March 1996. Mr. Williamson originally joined the Company in 1985 and served in a variety of positions, including serving as a program manager from January 1992 to December 1994. Mr. Williamson received an A.A. from Northern Virginia Community College. Michael G. Voslow has served as Treasurer of the Company since January 1997. From January 1995 to January 1997, Mr. Voslow was Vice President and Corporate Controller for MAXM Systems Corporation ("MAXM"), a worldwide provider of computer software and professional services. Prior to joining MAXM, Mr. Voslow was a Senior Manager at Price Waterhouse where he served from August 1983 to January 1995. Mr. Voslow is a Certified Public Accountant and received a B.S. in Business Administration from Miami University (Ohio) and an M.B.A. in Finance from Duke University. Russell L. Helbert has served as Controller of the Company since December 1990 and as Manager of Finance for the Company since August 1985. Mr. Helbert has also served as an Assistant Vice President for Administration of SAIC since 1995. Prior to joining the Company, Mr. Helbert was a Division Controller with Browning-Ferris, Industries, a waste management services company. Mr. Helbert received his B.A. in Business Administration from the University of Buffalo. J. Robert Beyster has served as a director of the Company since November 1996. Dr. Beyster is the Chief Executive Officer and Chairman of the Board of SAIC, a company he founded in 1969. Dr. Beyster is a Fellow of the American Nuclear Society and a Fellow of the American Physical Society. Dr. Beyster is also the founder, President and a member of the Board of Trustees of the Foundation for Enterprise Development, a non-profit organization that promotes employee ownership. Dr. Beyster received his B.S.E. in Engineering and Physics and an M.S. and Ph.D. in Nuclear Physics from the University of Michigan. Craig I. Fields has served as a director of the Company since January 1997. Dr. Fields has served as a consultant to SAIC since 1994. Prior thereto, Dr. Fields served as Vice Chairman of Alliance Gaming Corporation, a diversified entertainment company, from 1994 to 1997. From 1990 until 1994, Dr. Fields served as Chairman and Chief Executive Officer of the Microelectronics and Computer Technology Corporation, a research and development consortium. In addition, Dr. Fields serves as a director of 58 61 ENSCO International Incorporated, Projectavision, Inc., Perot Systems Corporation, Muzak Incorporated, Intertech and Firearms Training Systems, Inc. Dr. Fields received a B.S. from the Massachusetts Institute of Technology and a Ph.D. from the Rockefeller University. John E. Glancy has served as a director of the Company since July 1996. Dr. Glancy has held a number of senior positions with SAIC since February 1980. Dr. Glancy has served as a Corporate Executive Vice President of SAIC since January 1994 and as a director of SAIC since July 1994. From April 1991 until January 1994, Dr. Glancy served as a Sector Vice President of SAIC. Dr. Glancy received a B.S. in Physics from the University of Pittsburgh, an M.S. degree in Nuclear Engineering from Cornell University and a Ph.D. in Applied Physics from Cornell University. William A. Roper, Jr. has served as a director of the Company since July 1996. Since April 1990, Mr. Roper has served as Senior Vice President and Chief Financial Officer of SAIC. Mr. Roper received a B.A. in Mathematics from the University of Mississippi. Stratton D. Sclavos has served as a director of the Company since January 1997. Mr. Sclavos has served as the President and Chief Executive Officer of VeriSign, Inc. since July 1995. From 1994 until July 1995, Mr. Sclavos served as Vice President of Worldwide Marketing and Sales for Taligent, Inc., a joint venture of Apple Computer, Inc., IBM Corporation and The Hewlett-Packard Company, Inc. From 1992 until 1993, Mr. Sclavos served as Vice President of Worldwide Sales and Business Development for GO Corporation, a mobile computing company. From 1988 until 1993, Mr. Sclavos served in various executive positions with MIPS Computers Systems. Mr. Sclavos received a B.S. in Electrical and Computer Engineering from the University of California, Davis. The Company currently has authorized eight (8) directors. All directors are elected to hold office until the next annual meeting of stockholders of the Company and until their successors have been elected. Officers are elected at the first board of directors meeting following the stockholders' meeting at which the directors are elected and serve at the discretion of the Board of Directors. There are no family relationships among any of the directors or executive officers of the Company. COMPENSATION OF DIRECTORS The Company's non-employee directors ("Outside Directors") currently receive no cash fees or annual retainer payments as part of their compensation. All directors are reimbursed for expenses incurred in connection with attending Board and committee meetings. The Company's 1996 Stock Incentive Plan provides that the Board of Directors may determine to allow an Outside Director to elect to receive his or her annual retainer payments, if any, and meeting fees from the Company in the form of cash, NSOs, Stock Units or a combination thereof. The number of NSOs to be granted to Outside Directors in lieu of annual retainers and meeting fees that would otherwise be paid in cash will be calculated in a manner determined by the Board of Directors. The number of Stock Units to be granted to Outside Directors will be calculated by dividing the amount of the annual retainer or the meeting fee that would otherwise be paid in cash by the arithmetic mean of the fair market values of one share of Common Stock on the 10 consecutive trading days ending with the date such retainer or fee is payable. In January 1997, Craig I. Fields and Stratton D. Sclavos each received NSOs to purchase 30,750 shares of the Company's Class A Common Stock with exercise prices of $14.00 per share (which was equal to 100% of the fair market value as determined in the good faith judgment of the Board of Directors on the date of grant). All such stock options vest as to 30%, 30%, 20% and 20% on the first, second, third and fourth year anniversaries of the date of grant, respectively. 59 62 EXECUTIVE COMPENSATION The following table summarizes all compensation earned by or paid to the Company's current and former Chief Executive Officer and to each of the Company's four most highly compensated executive officers other than the Chief Executive Officer whose total annual salary and bonus exceeded $100,000 for services rendered in all capacities to the Company and SAIC during the fiscal year ended December 31, 1996 (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION -------------------------------- ANNUAL COMPENSATION RESTRICTED SECURITY ---------------------- STOCK UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) AWARDS ($)(1) OPTIONS (#)(2) COMPENSATION ($) - ------------------------------ ---------- --------- ------------- -------------- ---------------- Gabriel A. Battista(3)........ 60,577 37,500 -- 461,250 -- Chief Executive Officer Donald N. Telage.............. 165,719 35,010(4) 29,984(5) 153,750 13,209(6) Senior Vice President, Internet Relations and Special Programs Robert J. Korzeniewski........ 120,731 20,011 19,989(7) 115,300 9,954(6) Chief Financial Officer Raymond S. Corson............. 118,519 7,524 7,476(8) 30,750 9,815(6) Senior Vice President, Business Development Emmit J. McHenry(9)........... 17,523 -- -- -- 875,011(10)
- ------------------------------ (1) Represents restricted shares of SAIC Class A Common Stock. The amount reported represents the market value on the date of grant (calculated by multiplying the Formula Price of SAIC's Class A Common Stock on the date of grant by the number of shares awarded), without giving effect to the diminution in value attributable to the restriction on such stock. As of December 31, 1996, the aggregate restricted stock holding of SAIC Class A Common Stock for the Named Executive Officers were as follows: Gabriel A. Battista -- none; Donald N. Telage -- 1,930 shares, with a market value as of such date of $44,062; Robert J. Korzeniewski -- 261 shares, with a market value as of such date of $5,959; Raymond S. Corson -- 220 shares, with a market value as of such date of $5,023; Emmit J. McHenry -- none; and all other employees -- 571,260 shares, with a market value as of such date of $13,041,866. Dividends are payable on such restricted stock if and when declared. However, SAIC has never declared or paid a cash dividend on its capital stock and no cash dividends on its capital stock are contemplated in the foreseeable future. (2) Represents options to acquire shares of the Company's Class A Common Stock. (3) Gabriel A. Battista joined the Company in October 1996. Mr. Battista's annual salary for 1996 would have been $350,000. (4) Includes the award of 193 shares of SAIC Class A Common Stock which had a market value on the date of grant (calculated by multiplying the Formula Price of the SAIC Class A Common Stock on the date of grant by the number of shares awarded) of $5,010. (5) Represents 1,155 shares of SAIC Class A Common Stock which vest as to 20%, 20%, 20% and 40% on the first, second, third and fourth year anniversaries of the date of grant, respectively. (6) Represents amounts contributed by SAIC for the Named Executive Officers under SAIC's Cash or Deferred Arrangement, SAIC's Profit Sharing Plan and SAIC's Employee Stock Ownership Plan. (7) Represents 770 shares of SAIC Class A Common Stock which vest as to 20%, 20%, 20% and 40% on the first, second, third and fourth year anniversaries of the date of grant, respectively. (8) Represents 288 shares of SAIC Class A Common Stock which vest as to 20%, 20%, 20% and 40% on the first, second, third and fourth year anniversaries of the date of grant, respectively. (9) Emmit J. McHenry served as Chief Executive Officer of the Company until January 1996. (10) Represents amounts paid to Emmit J. McHenry in connection with the settlement of an earnout, covenant not to compete and other agreements. 60 63 STOCK OPTION GRANTS The following table summarizes options to acquire shares of the Company's Class A Common Stock granted during the Company's fiscal year ended December 31, 1996 to the Company's Named Executive Officers. The amounts shown as potential realizable values on the options identified in the table are based on assumed annualized rates of appreciation in the price of the Company's Class A Common Stock of five percent and ten percent over the term of the options, as set forth in the rules of the Securities and Exchange Commission. Actual gains, if any, on stock option exercises are dependent upon the future performance of the Company's Class A Common Stock. There can be no assurance that the potential realizable values reflected in this table will be achieved. No stock appreciation rights were granted during the Company's 1996 fiscal year. NSI OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE NUMBER OF VALUE AT ASSUMED SECURITIES PERCENTAGE OF ANNUAL RATES OF STOCK UNDERLYING TOTAL OPTIONS PRICE APPRECIATION FOR OPTIONS GRANTED TO EXERCISE OR OPTION TERM($)(5) GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ------------------------- NAME (#)(1) 1996(2) ($/SHARE)(3) DATE(4) 5% 10% - ------------------------- ---------- ------------- ------------- ---------- ---------- ---------- Gabriel A. Battista...... 461,250 37.6 11.25 10/14/01 1,433,642 3,167,975 Chief Executive Officer Donald N. Telage......... 153,750 12.6 14.00 11/24/01 594,696 1,314,123 Senior Vice President, Internet Relations and Special Programs Robert J. Korzeniewski... 115,300 9.4 14.00 11/24/01 445,974 985,485 Chief Financial Officer Raymond S. Corson........ 30,750 2.5 14.00 11/24/01 118,939 262,825 Senior Vice President, Business Development Emmit J. McHenry(6)...... -- -- -- -- -- --
- ------------------------------ (1) The stock options vest as to 30%, 30%, 20% and 20% on the first, second, third and fourth year anniversaries of the date of grant, respectively. Under the terms of the Company's 1996 Stock Incentive Plan (the "Stock Plan"), the committee designated by the Board of Directors to administer the Stock Plan retains the discretion, subject to certain limitations within the Stock Plan, to modify, extend or renew outstanding options and to reprice outstanding options. Options may be repriced by canceling outstanding options and reissuing new options with an exercise price equal to the fair market value on the date of reissue, which may be lower than the original exercise price of such canceled options. (2) Based on options to purchase an aggregate of 1,225,725 shares of Class A Common Stock granted to NSI employees in 1996, including the Named Executive Officers. (3) The exercise price on the date of grant was equal to 100% of the fair market value on the date of grant as determined in the good faith judgment of the Board of Directors. The exercise price may be paid in cash, check, by delivery of already-owned shares of the Company's Class A Common Stock subject to certain conditions, or pursuant to a cashless exercise procedure under which the optionee provides irrevocable instructions to a brokerage firm to sell the purchased shares and to remit to the Company, out of the sale proceeds, an amount equal to the aggregate exercise price plus all applicable withholding taxes. (4) The options have a term of 5 years, subject to earlier termination in certain events related to termination of employment. (5) Based on a base price per share equal to the exercise price. The exercise price was equal to 100% of the fair market value on the date of grant as determined in the good faith judgment of the Board of Directors. The 5% and 10% assumed rates of appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of the future Class A Common Stock price. There can be no assurance that any of the values reflected in the table will be achieved. (6) Emmit J. McHenry served as Chief Executive Officer of the Company until January 1996. 61 64 The following table summarizes options to acquire shares of SAIC Class A Common Stock granted during the Company's fiscal year ended December 31, 1996 to the Company's Named Executive Officers. The amounts shown as potential realizable values on the options identified in the table are based on assumed annualized rates of appreciation in the price of SAIC Class A Common Stock of five percent and ten percent over the term of the options, as set forth in the rules of the Securities and Exchange Commission. Actual gains, if any, on stock option exercises are dependent upon the future performance of SAIC Class A Common Stock. There can be no assurance that the potential realizable values reflected in this table will be achieved. No SAIC stock appreciation rights were granted during the Company's 1996 fiscal year. SAIC OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK NUMBER OF PERCENTAGE OF PRICE APPRECIATION SECURITIES TOTAL OPTIONS FOR UNDERLYING GRANTED TO EXERCISE OR OPTION TERM($)(5) OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION --------------------- NAME GRANTED (#)(1) FISCAL YEAR(2) ($/SHARE)(3) DATE(4) 5% 10% - ----------------------- -------------- -------------- ------------ ---------- ------ ------ Gabriel A. Battista.... -- -- -- -- -- -- Chief Executive Officer Donald N. Telage....... 7,000 * 19.33 3/28/01 37,384 82,608 Senior Vice President, Internet Relations and Special Programs Robert J. Korzeniewski........... 5,100 * 19.33 3/28/01 27,237 60,186 Chief Financial Officer Raymond S. Corson...... 810 * 19.33 2/08/01 4,326 9,559 Senior Vice President, 1,000 * 19.33 3/28/01 5,341 11,801 Business Development Emmit J. McHenry(6).... -- -- -- -- -- --
- ------------------------------ * Less than 1% of the total options granted to employees in 1996. (1) Although the following grants of options were made during 1996, such grants relate to the individual's service during 1995. These non-qualified stock options vest as to 20%, 20%, 20% and 40% on the first, second, third and fourth year anniversaries of the date of grant, respectively. Under the terms of SAIC's 1995 Stock Option Plan (the "Stock Plan"), the committee designated by the Board of Directors to administer the Stock Plan retains the discretion, subject to certain limitations within the Stock Plan, to modify, extend or renew outstanding options and to reprice outstanding options. Options may be repriced by canceling outstanding options and reissuing new options with an exercise price equal to the fair market value on the date of reissue, which may be lower than the original exercise price of such canceled options. (2) Based on options to purchase an aggregate of 3,581,132 shares granted to employees, consultants and directors of SAIC and its subsidiaries in 1996, including the Company's Named Executive Officers. (3) The exercise price on the date of grant was equal to the Formula Price of the SAIC Class A Common Stock on the date of grant. (4) The options have a term of 5 years, subject to earlier termination in certain events related to termination of employment. (5) The 5% and 10% assumed rates of appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of the future price of the SAIC Class A Common Stock. There can be no assurance that any of the values reflected in the table will be achieved. (6) Emmit J. McHenry served as Chief Executive Officer of the Company until January 1996. 62 65 The following table summarizes the value realized on the exercise of options to acquire SAIC Class A Common Stock during the fiscal year ended December 31, 1996. No options to acquire shares of the Company's Common Stock were exercised during the Company's 1996 fiscal year. The following table also presents the number and value of unexercised options to acquire SAIC Class A Common Stock and unexercised options to acquire the Company's Common Stock as of December 31, 1996 for the Company's Named Executive Officers. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT DECEMBER 31, 1996 (#) DECEMBER 31, 1996 ($) SHARES ACQUIRED VALUE --------------------------- ------------------------------- NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------- --------------- ------------- ----------- ------------- ------------- ---------------- Gabriel A. Battista --(N) --(N) --(N) 461,250(N) --(N) 1,268,438(N)(2) Chief Executive --( S ) --( S ) --( S ) --( S ) --( S ) --( S ) Officer Donald N. Telage --(N) --(N) --(N) 153,750(N) --(N) --(N)(2) Senior Vice President, 6,100( S ) 60,771( S )(1) 4,580( S ) 14,970( S ) 40,887( S )(3) 89,138( S )(3) Internet Relations and Special Programs Robert J. Korzeniewski --(N) --(N) --(N) 115,300(N) --(N) --(N)(2) Chief Financial --( S ) --( S ) 9,000( S ) 14,100( S ) 91,310( S )(3) 90,530( S )(3) Officer Raymond S. Corson --(N) --(N) --(N) 30,750(N) --(N) --(N)(2) Senior Vice President, --( S ) --( S ) 200( S ) 2,610( S ) 1,284( S )(3) 11,471( S )(3) Business Development Emmit J. McHenry(4) --(N) --(N) --(N) --(N) --(N) --(N)(2) --( S ) ( S ) 2,000( S ) 8,000( S ) 12,840( S )(3) 51,360( S )(3)
- ------------------------------ (N) Options to acquire the Company's Class A Common Stock. (S) Options to acquire SAIC's Class A Common Stock. (1) Calculated by multiplying the difference between the Formula Price of SAIC's Class A Common Stock underlying the option as of the date of exercise and the exercise price of the option by the number of shares of SAIC's Class A Common Stock acquired on exercise of the option. (2) Based on the fair market value of the Company's Class A Common Stock as of such date less the exercise price of such options. (3) Based on the Formula Price of SAIC's Class A Common Stock as of such date less the exercise price of such options. (4) Emmit J. McHenry served as Chief Executive Officer of the Company until January 1996. 1996 STOCK INCENTIVE PLAN The 1996 Stock Incentive Plan (the "Incentive Plan") of the Company was adopted by the Board of Directors and approved by the Company's stockholder on September 18, 1996. The Incentive Plan provides for awards in the form of restricted shares, stock units, options (including incentive stock options ("ISOs") and nonstatutory stock options ("NSOs")) or stock appreciation rights ("SARs"). Employees, Outside Directors, consultants and advisors of the Company are eligible for the grant of restricted shares, stock units, SARs and NSOs. Only employees are eligible for the grant of ISOs. The Outside Directors may elect to receive any director fees in NSOs, stock units or a combination thereof. As of June 30, 1997, a total of 2,556,250 shares of Common Stock has been reserved for issuance under the Incentive Plan. The Incentive Plan will be amended to reflect two classes of Common Stock. The Incentive Plan will be administered by a Compensation Committee and a Non-Insider Option Committee. The Compensation Committee will consist of at least two directors who are "non-employee directors," as defined in Rule 16b-3. The Board of Directors may amend the Incentive Plan as desired without further action by the Company's stockholders except as required by applicable law. The Incentive Plan will continue in effect until terminated by the Board or, with respect to ISOs, for a term of 10 years from its original adoption date, whichever is earlier. 63 66 The consideration for each award under the Incentive Plan will be established by the Compensation Committee, but in no event will the option price for ISOs be less than 100% of the fair market value of the stock on the date of grant. Awards will have such terms and be exercisable in such manner and at such times as the Compensation Committee may determine. However, each ISO must expire within a period of not more than ten (10) years from the date of grant. The Incentive Plan provides that, in the event of a merger or reorganization of the Company, outstanding options, SARs, restricted shares and stock units shall be subject to the terms of the agreement of merger or reorganization. As of July 31, 1997, a total of 100,900 ISOs and 1,438,825 NSOs have been granted under the Incentive Plan. Such options have exercise prices ranging from $11.25 to $14.00 per share and a weighted average per share exercise price of $13.18 and were held by 72 persons. None of such options has been exercised. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS The Company does not currently have any employment contracts in effect with any of the Named Executive Officers other than Gabriel A. Battista, the Company's Chief Executive Officer. The Company and Mr. Battista are parties to a letter agreement dated September 24, 1996 governing his employment with the Company. The agreement sets forth Mr. Battista's compensation level and eligibility for bonuses, benefits and option grants under the 1996 Stock Incentive Plan. Pursuant to the agreement, if Mr. Battista's employment is terminated for other than cause or non-performance, Mr. Battista will be eligible to receive, if terminated during his first year of employment, his first year base salary and an additional $150,000 in bonus, and, if terminated during his second year of employment, his first year base salary and an amount equal to the bonus awarded to him for his first year of employment. If Mr. Battista resigns during this initial two-year period, he will not receive any separation compensation. Mr. Battista's employment under the letter agreement is voluntary and may be terminated by the Company or Mr. Battista at any time with or without cause or notice. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company has adopted provisions in its Certificate of Incorporation that limit the liability of its directors for monetary damages for breach of their fiduciary duty as directors, except for liability that cannot be eliminated under the Delaware General Corporation Law (the "Delaware Law"). The Delaware Law provides that directors of a company will not be personally liable for monetary damages for breach of their fiduciary duty as directors, except for liability (i) for any breach of their duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payment of dividend or unlawful stock repurchase or redemption, as provided in section 174 of the Delaware Law, or (iv) for any transaction from which the director derived an improper personal benefit. Any amendment or repeal of these provisions requires the approval of the holders of shares representing at least 66-2/3% of the shares of the Company entitled to vote in the election of directors, voting as one class. The effect of these provisions will be to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of fiduciary duty as a director (including breaches resulting from grossly negligent behavior), except in the situations described above. The Company's Certificate of Incorporation and Bylaws also provide that the Company shall indemnify its directors and officers to the fullest extent permitted by the Delaware Law. The Company intends to enter into separate indemnification agreements with its directors that could require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. The Company believes that the limitation of liability provision in its Certificate of Incorporation and the indemnification agreements will facilitate 64 67 the Company's ability to continue to attract and retain qualified individuals to serve as directors and officers of the Company. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER INFORMATION Compensation information with respect to the Named Executive Officers for 1996 reflects compensation earned while the Company was a wholly-owned subsidiary of SAIC. During 1996, the Company had no Compensation Committee. Executive compensation levels during 1996 were established by SAIC. The Company has established a Compensation Committee for fiscal 1997, the members of which are Michael A. Daniels, J. Robert Beyster and Stratton D. Sclavos. Dr. Beyster and Mr. Sclavos are independent directors of the Company. See "Management -- Executive Officers and Directors." 65 68 RELATIONSHIP WITH SAIC AND CERTAIN TRANSACTIONS The Company was acquired by SAIC, an employee-owned, diversified professional and technical services company, on March 10, 1995. The Company is currently a wholly-owned subsidiary of SAIC. Upon completion of the offering, SAIC will own 100% of the Company's outstanding Class B Common Stock (12,500,000 shares), which will represent approximately 84.5% of the outstanding Common Stock of the Company (approximately 82.5% if the Underwriters' over-allotment option is exercised in full) and approximately 98.2% of the combined voting power of the Company's outstanding Common Stock (approximately 97.9% if the Underwriters' over-allotment option is exercised in full) and thus will continue to have the ability to elect all of the directors of the Company and otherwise exercise a controlling influence over the business and affairs of the Company. Prior to the acquisition of the Company by SAIC, the Company's business included commercial and government contracts awarded to the Company on a competitive basis, including government contracts that were awarded to the Company based partially upon the Company's then minority-owned status. The contracts which had been awarded to the Company based partially upon the Company's then minority-owned status were transferred into a separately-owned entity prior to the acquisition of the Company by SAIC. In November 1995, SAIC adopted a plan to transfer the Company's remaining government-based business to SAIC in order to enable the Company to focus on the growth of its commercial business, which includes registration services and Intranet services. Such transfer was effective as of February 1996. In connection with such transfer, the Company assigned to SAIC all of its rights and title to certain contracts, accounts and assets, all of which were part of the Company's remaining government-based business. In addition, the Company assigned to SAIC certain liabilities associated with such government-based business. No gain or loss was incurred as a consequence of the transfer of this business. SAIC agreed to indemnify the Company and any director, officer, employee, agent or representative of the Company from any loss or liability associated with such government-based business or the transferred assets. Finally, SAIC agreed to indemnify the same entities against any loss or liability associated with certain other government contracts whose award was based partially upon the Company's then minority-owned status which had been transferred to a separately-owned entity prior to the acquisition of the Company by SAIC. The operating results of both the minority-based government contracts business, and the remaining government-based business are reflected as discontinued operations in the Company's financial statements for all periods presented. For as long as SAIC continues to own shares of Common Stock representing more than 50% of the voting power of the Common Stock of the Company, SAIC will be able, among other things, to determine the outcome of any corporate action requiring approval of holders of Common Stock representing a majority of the voting power of the Common Stock, including the election of the entire Board of Directors of the Company, without the consent of the other stockholders of the Company. In addition, through its control of the Board of Directors and ownership of Common Stock, SAIC will be able to control certain decisions, including decisions with respect to the Company's dividend policy, the Company's access to capital (including borrowing from third party lenders and the issuance of additional equity securities), mergers or other business combinations involving the Company, the acquisition or disposition of assets by the Company and any change in control of the Company. SAIC has advised the Company that its current intent is to continue to hold all of its outstanding shares of Class B Common Stock. Further, pursuant to the Underwriting Agreement, SAIC has agreed, subject to certain exceptions, not to sell or otherwise dispose of any shares of Common Stock (or any security convertible into or exchangeable or exercisable for Common Stock) owned by it for a period of 180 days following the date of this Prospectus without the prior written consent of Hambrecht & Quist LLC. However, after such 180 day period, there can be no assurance concerning the period of time during which time SAIC will maintain its ownership of Class B Common Stock. Beneficial ownership of at least 80% of the total voting power and value of the outstanding Common Stock is required in order for SAIC to continue to include the Company in its consolidated group for federal income tax purposes, and ownership of at least 80% of the total voting power and 80% of each class of 66 69 nonvoting capital stock is required in order for SAIC to be able to effect a tax-free spin-off of the Company under the Code. See "Description of Capital Stock -- Common Stock -- Conversion Rights." The Company's Certificate of Incorporation contains provisions relating to competition by SAIC with the Company, potential conflicts of interest that may arise between the Company and SAIC, the allocation of business opportunities that may be suitable for either SAIC or the Company and the approval of transactions between the Company and SAIC. The Company's Certificate of Incorporation also limits the liability of its directors for monetary damages arising from a breach of their fiduciary duty as directors, except to the extent otherwise required by the Delaware General Corporations Law. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. The Company's Bylaws provide that the Company shall indemnify its directors and officers to the fullest extent permitted by Delaware law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. The Company has also entered into indemnification agreements with its officers and directors containing provisions that may require the Company, among other things, to indemnify such officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from willful misconduct of a culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors' and officers' insurance if available on reasonable terms. The Company's relationship with SAIC will also be governed by the following agreements to be entered into prior to completion of the offering: the Corporate Services Agreement, a noncompetition agreement, a registration rights agreement and the Tax Sharing Agreement, the material terms of which are summarized below. Because the Company is a wholly-owned subsidiary of SAIC, none of these arrangements will result from arm's length negotiations and, therefore, the prices charged to the Company for services provided thereunder may be higher or lower than prices that may be charged by third parties. The descriptions of agreements set forth below are intended to be summaries and, while material terms of the agreements are set forth herein, the descriptions are qualified by reference to the relevant agreements filed as exhibits to the Registration Statement of which this Prospectus forms a part. The Company believes that the transactions contemplated by the following agreements are in its best interests. It is the Company's current policy that all transactions by the Company with its officers, directors, five percent stockholders and their affiliates will be entered into (or amended) only if such transactions are approved by a majority of the disinterested independent directors, are on terms no less favorable to the Company than could be obtained from unaffiliated parties and are reasonably expected to benefit the Company. CORPORATE SERVICES AGREEMENT Subsequent to the acquisition of the Company by SAIC, SAIC has provided to the Company from time to time, upon request of the Company certain routine and ordinary corporate services, including financial, insurance, accounting, employee benefits, payroll, tax and legal services. SAIC has also provided strategic corporate planning services. The Company has also shared certain SAIC systems, including its management information system, accounting system and human resource system. Prior to the completion of the offering, the Company and SAIC will enter into the Corporate Services Agreement pursuant to which SAIC will continue to provide such services to the Company and the Company will continue to share such systems in a manner generally consistent with past practices. The Company's Statements of Operations include revenue and costs directly attributable to the Company, as well as certain allocations from SAIC of indirect costs associated with such services and shared systems. Such allocations include allocations of: (i) costs for administrative functions and services performed on behalf of the Company by centralized staff groups within SAIC; (ii) SAIC's general corporate expenses; (iii) other benefit costs, including, but not limited to, health insurance, disability and retirement costs; and (iv) cost of capital (through December 31, 1996). Through August 9, 1996, 67 70 such allocations were generally based on the proportionate labor costs of the Company to the rest of SAIC and were included in selling, general and administrative expenses and cost of revenue, respectively. Effective August 10, 1996, SAIC stopped allocating costs based upon pro rata labor and began assessing the Company for corporate services provided by SAIC at a fee equal to 2.5% of net revenue with such percentage to be re-evaluated by both parties on an annual basis. This fee is included in its entirety in selling, general and administrative expenses. The Company believes that the charges under the Corporate Services Agreement are reasonable. The initial term of this agreement will be one year. Thereafter, the Corporate Services Agreement will be automatically renewed for successive one-year terms until terminated. After SAIC's ownership of the Company's Common Stock drops below 50% of the Company's issued and outstanding Common Stock, the agreement may be terminated by either party upon 180 days' prior written notice. Certain individual services are also terminable by either party upon 180 days' prior written notice, regardless of SAIC's stockholdings. NONCOMPETITION AGREEMENT Prior to the completion of the offering, the Company and SAIC will enter into a noncompetition agreement (the "Noncompetition Agreement") pursuant to which SAIC agrees that it will not compete with the Company in the domain name registration business within the .com, .org, .net, .edu and .gov TLDs for a period of five years. The Noncompetition Agreement does not restrict SAIC from competing with the Company in the domain name registration business in other TLDs or other lines of business. The initial term of this agreement will be five years but either party will have the right to terminate the agreement if SAIC ceases to beneficially own 20% of the Company's Common Stock. REGISTRATION RIGHTS AGREEMENT Prior to the completion of the offering, the Company and SAIC will execute the Registration Rights Agreement pursuant to which SAIC may, on not more than two occasions, demand registration under the Securities Act of 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 or any other shares of Class A Common Stock acquired by SAIC, subject to its agreement not to sell any shares prior to the expiration of 180 days from the date of this Prospectus. The first such registration will be at the Company's expense and the second such registration will be at SAIC's expense. The Company may postpone such a demand under certain circumstances. In addition, SAIC may request the Company to include shares of the Class A Common Stock held by SAIC in any registration proposed by the Company of such Class A Common Stock under the Securities Act. See "Description of Capital Stock -- Registration Rights." TAX SHARING AGREEMENT The taxable income and losses of the Company will be included in the consolidated federal income tax returns filed by SAIC's consolidated group for so long as SAIC maintains beneficial ownership of at least 80% of the total voting power and value of the outstanding Common Stock of the Company. Prior to the completion of the offering, the Company and SAIC plan to enter into the Tax Sharing Agreement which will require the Company to pay SAIC an amount in respect of federal income taxes generally equal to the amount of the federal income taxes that the Company generally would be required to pay if the Company were to file its own federal income tax return and was never part of SAIC's consolidated group. Effectively, this will result in the Company's annual income tax payable/receivable being computed as if the Company filed a separate tax return. Further, pursuant to the terms of the Tax Sharing Agreement, upon deconsolidation, the Company's ability to recognize a benefit for tax losses it incurs is subject to SAIC's approval. SAIC may choose to contest, compromise or settle any adjustment or deficiency proposed by the relevant taxing authority in a manner that may be beneficial to SAIC and detrimental to the Company. In general, the Company will be included in SAIC's consolidated group for federal income tax purposes for so long as SAIC beneficially owns at least 80% of the total voting power and value of the outstanding Common Stock. Each member of a consolidated group is jointly and severally liable for the federal income tax liability of each other member of the consolidated group. Accordingly, although the 68 71 Tax Sharing Agreement allocates tax liabilities between the Company and SAIC, during the period in which the Company is included in SAIC's consolidated group, the Company could be liable in the event that any federal tax liability is incurred, but not discharged, by any other member of SAIC's consolidated group. See "Risk Factors -- Control by SAIC," "-- Control of Tax Matters; Tax and ERISA Liability" and "-- Potential Conflicts of Interest." OTHER TRANSACTIONS WITH SAIC In fiscal 1996, the Company provided the following services under subcontracts to SAIC: (i) telecommunications design and support services to Kaiser Permanente for which the Company received $155,000; (ii) engineering and network services to Banco de Credito for which the Company received $864,000; (iii) engineering support to KUB/Malaysia for which the Company received $107,000; (iv) engineering services to the Center for Information Processing for which the Company received $103,000 and (v) other subcontracts for which the Company received $276,000. In addition, in fiscal 1996, SAIC provided database, applications and installation services to UUNET Technologies, Inc. under a subcontract to the Company for which SAIC received $133,000 and on other subcontracts to the Company for which SAIC received $95,000. The Company currently subleases from SAIC facilities in Herndon, Virginia and Charlotte, North Carolina. In fiscal 1996, the Company made lease payments of $737,000 to SAIC. For information concerning indemnification of directors and officers, see "Management -- Limitation of Liability and Indemnification Matters." DUE TO PARENT LIABILITY The cumulative result of the transactions and relationship with SAIC outlined above at December 31, 1996 was a liability due SAIC of $15,295,000. The most significant component of this balance was the income taxes payable by the Company that SAIC will report on its consolidated tax return. This balance has subsequently been paid to SAIC. 69 72 PRINCIPAL STOCKHOLDERS OWNERSHIP OF THE COMPANY'S COMMON STOCK As of the date of this Prospectus, no shares of Class A Common Stock are outstanding. Upon completion of this offering, the only shares of Class A Common Stock that will be outstanding are those that will be issued in the offering (including any shares issued if the Underwriters' over-allotment option is exercised) and those issued under the Company's stock incentive plans. See "Management -- Executive Compensation." The only stockholder of the Company is SAIC. The address of SAIC is 10260 Campus Point Drive, San Diego, California 92121. Upon completion of the offering, SAIC will own 100% of the Company's outstanding Class B Common Stock (12,500,000 shares), which will represent approximately 84.5% of the outstanding Common Stock of the Company (approximately 82.5% if the Underwriters' over-allotment option is exercised in full). Under Delaware law, SAIC is able, acting alone, to elect the entire Board of Directors of the Company and to control the vote on all matters submitted to a vote of the Company's stockholders, including extraordinary corporate transactions. Currently, five of the Company's eight directors are also directors and/or officers of SAIC. OWNERSHIP OF SAIC CLASS A COMMON STOCK The following table sets forth, at July 31, 1997, the beneficial ownership of SAIC Class A Common Stock held by the Company's directors, the Named Executive Officers, and all directors and executive officers as a group.
NUMBER OF SHARES OF SAIC PERCENTAGE OF SHARES BENEFICIAL OWNER CLASS A COMMON STOCK(1)(2) OUTSTANDING(3) - -------------------------------------------- -------------------------- --------------------- Gabriel A. Battista......................... -- -- J. Robert Beyster........................... 779,252 1.6%(4) Raymond S. Corson........................... 6,329 * Michael A. Daniels.......................... 52,330 * Craig I. Fields............................. 3,000 * John E. Glancy.............................. 137,546 * Robert J. Korzeniewski...................... 29,820 * Emmit J. McHenry............................ 30,428 * William A. Roper, Jr........................ 43,610 * Stratton D. Sclavos......................... -- -- Donald N. Telage............................ 38,237 * State Street Bank and Trust Company......... 24,204,594(5) 48.8%(6) One Enterprise Drive North Quincy, MA 02171 All directors and executive officers as a group (14 persons)................... 1,092,579 2.2%(7)
- --------------- * Less than 1% of the outstanding shares of SAIC's Class A Common Stock and less than 1% of the voting power of SAIC's Class A Common Stock and Class B Common Stock on a combined basis. (1) Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Except as indicated by footnote, and subject to community property laws where applicable, to the best of the Company's knowledge, the persons named in the table above have sole voting and investment power with respect to all shares of SAIC Class A Common Stock shown as beneficially-owned by them. Options to purchase shares of SAIC Class A Common Stock that are exercisable within 60 days of July 31, 1997 are deemed to be beneficially-owned by the person holding such options for the purpose of computing the percentage ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. (2) The beneficial ownership depicted in the table includes: (i) shares held for the account of the individual by the Trustee of SAIC's Employee Stock Ownership Plan, Profit Sharing Plan and Cash or Deferred Arrangement, as follows: J.R. Beyster (1,005 shares), Raymond S. Corson (2,901 shares), Michael A. Daniels (5,124 shares), John E. Glancy (26,757 shares), Robert J. Korzeniewski (5,675 shares), Emmit J. McHenry (97 shares), William A. Roper, Jr. (4,145 shares), Donald N. Telage (4,461 shares), and all executive officers and directors as a group (50,259 shares); (ii) shares subject to options which are exercisable within 60 days of July 31, 1997, as follows: Raymond S. Corson (762 shares), Michael A. Daniels (12,800 shares), Craig I. Fields (3,000 shares), John E. Glancy (13,800 shares), Robert J. Korzeniewski (12,120 shares), Emmit J. McHenry (4,000 shares), William A. Roper, Jr. (6,200 shares), Donald N. Telage (8,850 shares), and all executive officers and directors as a group (58,032 shares); (iii) shares held by spouses, minor children or other relatives sharing a household with the individuals, as follows: John E. Glancy (2,870 shares) and all executive officers and directors as a group (2,870 shares); and (iv) shares held by certain trusts established by the individual, as follows: J.R. Beyster (778,247 shares) and all executive officers and directors as a group (778,247 shares). (3) Applicable percentage of beneficial ownership is based on 49,568,419 shares of SAIC Class A Common Stock outstanding as of July 31, 1997. (4) Represents 1.5% of the voting power of SAIC's Class A Common Stock and Class B Common Stock on a combined basis. (5) As Trustee of certain retirement and stock benefit plans of SAIC and its subsidiaries. (6) Represents 47.3% of the voting power of SAIC's Class A Common Stock and Class B Common Stock on a combined basis. (7) Represents 2.1% of the voting power of SAIC's Class A Common Stock and Class B Common Stock on a combined basis. 70 73 DESCRIPTION OF CAPITAL STOCK AUTHORIZED CAPITAL STOCK The authorized capital stock of the Company consists of 100,000,000 shares of Class A Common Stock, par value $0.001 per share, 40,000,000 shares of Class B Common Stock, par value $0.001 per share, and 10,000,000 shares of Preferred Stock, par value $0.001 per share. None of the Class A Common Stock and Preferred Stock are outstanding as of the date hereof. Of the 100,000,000 shares of Class A Common Stock authorized, 2,300,000 are being offered hereby (2,645,000 shares if the Underwriters' over-allotment option is exercised in full), 12,500,000 shares will be reserved for issuance upon conversion of Class B Common Stock into Class A Common Stock and 2,556,250 shares have been reserved for issuance pursuant to certain employee benefits plans. See "Management -- Executive Compensation." Of the 40,000,000 shares of Class B Common Stock authorized, 12,500,000 shares, or 100% of the outstanding shares of Class B Common Stock, are held by SAIC. The following summary description of the capital stock of the Company is qualified in its entirety by reference to the form of Certificate of Incorporation of the Company and the Bylaws of the Company, a copy of each of which is filed as an exhibit to the Registration Statement of which this Prospectus forms a part. COMMON STOCK Voting Rights. The holders of Class A Common Stock and Class B Common Stock generally have identical rights except that holders of Class A Common Stock are entitled to one vote per share while holders of Class B Common Stock are entitled to ten votes per share on all matters to be voted on by stockholders. The holders of Common Stock are not entitled to cumulative voting rights. Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all shares of Class A Common Stock and Class B Common Stock present in person or represented by proxy, voting together as a single class, subject to any voting rights granted to holders of any Preferred Stock. In the event of a voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of shares of Common Stock would be entitled to share ratably in all assets remaining after payment of liabilities subject to prior distribution rights and payment of any distributions owing to holders of shares of Preferred Stock then outstanding, if any. Holders of the shares of Common Stock have no preemptive rights, and the shares of Common Stock are not subject to further calls or assessment by the Company. There are no redemption or sinking fund provisions applicable to the shares of Common Stock. Holders of Class A Common Stock and Class B Common Stock will share in an equal amount per share in any dividend declared by the Board of Directors, subject to any preferential rights of any outstanding Preferred Stock. Dividends consisting of shares of Class A Common Stock and Class B Common Stock may be paid only as follows: (i) shares of Class A Common Stock may be paid only to holders of Class A Common Stock and shares of Class B Common Stock may be paid only to holders of Class B Common Stock and (ii) shares shall be paid proportionally with respect to each outstanding share of Class A Common Stock and Class B Common Stock. Conversion Rights. While SAIC does not have a current intention of effecting a Tax-Free Spin-Off (as hereinafter defined), SAIC will continually evaluate its ownership of the Company and there can be no assurances whether SAIC will effect a Tax-Free Spin-Off in the future. Each outstanding share of Class B Common Stock is convertible at the holder's option into one share of Class A Common Stock at any time prior to a Tax-Free Spin-Off. Additionally, each share of Class B Common Stock shall automatically convert into one share of Class A Common Stock if at any time prior to a Tax-Free Spin-Off the number of outstanding shares of Class B Common Stock owned by SAIC or any of its subsidiaries (or a Class B Transferee or any of its subsidiaries) represents less than 30% of the economic ownership represented by the aggregate number of shares of Common Stock then outstanding. If a Tax-Free Spin-Off occurs, shares of Class B Common Stock shall not be convertible into shares of Class A Common Stock at the option of the holder thereof. 71 74 Except as provided below, any shares of Class B Common Stock transferred to a person other than SAIC or any of its subsidiaries shall automatically convert to shares of Class A Common Stock upon such disposition. Prior to a Tax-Free Spin-Off, shares of Class B Common Stock representing more than a 50% economic interest in the Company transferred in a single transaction to one unrelated person (a "Class B Transferee") or among such Class B Transferee and its subsidiaries shall not automatically convert to shares of Class A Common Stock upon such disposition. Any shares of Class B Common Stock retained by SAIC following any such transfer of shares of Class B Common Stock to a Class B Transferee shall automatically convert into shares of Class A Common Stock upon such transfer. Shares of Class B Common Stock transferred to stockholders of SAIC or of a Class B Transferee in a transaction intended to be on a tax-free basis (a "Tax-Free Spin-Off") under the Code shall not convert to shares of Class A Common Stock upon the occurrence of such Tax-Free Spin-Off. Following a Tax-Free Spin-Off, shares of Class B Common Stock shall be transferred as Class B Common Stock; provided, however, that shares of Class B Common Stock shall automatically convert into shares of Class A Common Stock on the fifth anniversary of the Tax-Free Spin-Off, unless prior to such Tax-Free Spin-Off, SAIC, or the Class B Transferee, as the case may be, delivers to the Company written advice of counsel reasonably satisfactory to the Company to the effect that (i) such conversion could adversely affect the ability of SAIC or the Class B Transferee, as the case may be, to obtain a favorable ruling from the Internal Revenue Service that the distribution would be a Tax-Free Spin-Off or (ii) the Internal Revenue Service has adopted a general non-ruling policy on tax-free spinoffs and that such conversion could adversely affect the status of the transaction as a Tax-Free Spin-Off. If such written advice is received, approval of such conversion shall be submitted to a vote of the holders of the Common Stock as soon as practicable after the fifth anniversary of the Tax-Free Spin-Off, unless SAIC or the Class B Transferee, as the case may be, delivers to the Company written advice of counsel reasonably satisfactory to the Company prior to such anniversary that such vote could adversely affect the status of the distribution as a Tax-Free Spin-Off, including the ability to obtain a favorable ruling from the Internal Revenue Service. If such written advice is delivered, such vote shall not be held. Approval of such conversion will require the affirmative vote of the holders of a majority of the shares of both Class A Common Stock and Class B Common Stock present and voting, voting together as a single class, with each share entitled to one vote for such purpose. No assurance can be given that such conversion would be consummated. The foregoing requirements are intended to ensure that tax-free treatment of a Tax-Free Spin-Off is preserved should the Internal Revenue Service challenge such automatic conversion as violating the 80% vote requirement currently required by the Code for a Tax-Free Spin-Off. PREFERRED STOCK There are currently no shares of Preferred Stock outstanding. Under the Company's Certificate of Incorporation, the Board of Directors has the authority, without further action by the stockholders, to issue from time to time up to 10,000,000 shares of the Preferred Stock in one or more series and to fix the number of shares, designations, preferences, powers, and relative, participating, optional or other special rights and the qualifications or restrictions thereof. The preferences, powers, rights and restrictions of different series of Preferred Stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions, and purchase funds and other matters. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could decrease the amount of earnings and assets available for distribution to holders of Common Stock or affect adversely the rights and powers, including voting rights, of the holders of Common Stock, and may have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no present plan to issue any shares of Preferred Stock. 72 75 REGISTRATION RIGHTS Pursuant to the Registration Rights Agreement between the Company and SAIC, which holds 12,500,000 shares of Class B Common Stock, SAIC is entitled to certain rights with respect to the registration under the Securities Act of the shares of Class A Common Stock issuable upon conversion of the Class B Common Stock owned by SAIC. If the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other securityholders, SAIC is entitled to notice of the registration and is entitled to include, at the Company's expense, such shares therein, provided, among other conditions, that the underwriters have the right to limit the number of such shares included in the registration. In addition, SAIC may require the Company on not more than two occasions, to file a registration statement under the Securities Act with respect to its shares of Class A Common Stock, and the Company is required to use its best efforts to effect the registration, subject to certain conditions and limitations. The first such registration will be at the Company's expense and the second such registration will be at SAIC's expense. Further, SAIC may require the Company at its expense to register their shares of Class A Common Stock on Form S-3 when such form becomes available to the Company, subject to certain conditions and limitations. The Company has agreed to indemnify SAIC in connection with any such registration. See "Relationship with SAIC and Certain Transactions -- Registration Rights Agreement." DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS Certificate of Incorporation. The Company's Certificate of Incorporation provides that the Company's Bylaws may be repealed or amended only by a two-thirds vote of the Board of Directors or a two-thirds stockholder vote. In addition, those provisions of the Amended and Restated Certificate of Incorporation may only be amended or repealed by the holders of at least two-thirds of the voting power of all the then-outstanding shares of stock entitled to vote generally for the election of directors voting together as a single class. The provisions described above, together with the ability of the Board of Directors to issue Preferred Stock as described under "Description of Capital Stock -- Preferred Stock," may have the effect of deterring a hostile takeover or delaying a change in control or management of the Company. See "Risk Factors -- Effect of Certain Charter Provisions; Anti-takeover Effects of Certificate of Incorporation and Delaware Law." Delaware Takeover Statute. Section 203 of the Delaware General Corporation Law ("Section 203"), subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that such stockholder became an interested stockholder, unless: (i) prior to such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (x) by persons who are directors and also officers and (y) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines business combination to include: (i) any merger or consolidation involving the corporation and the interested stockholder; (ii) any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; (iii) subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; (iv) any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially-owned by the interested stockholder; or (v) the receipt by the interested stockholder of 73 76 the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by such entity or person. As permitted by Section 203, the Company has elected not to be governed by the provisions of Section 203. CERTAIN CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS The Company's Certificate of Incorporation provides that any person purchasing or acquiring an interest in shares of capital stock of the Company is deemed to have consented to the following provisions relating to intercompany agreements and to transactions with interested parties and corporate opportunities. The corporate charter of SAIC does not include comparable provisions relating to intercompany agreements, transactions with interested parties or corporate opportunities. Transactions with Interested Parties. The Company's Certificate of Incorporation provides that no contract, agreement, arrangement or transaction (or any amendment, modification or termination thereof) between the Company and SAIC or any Related Entity (as such terms are defined below) or between the Company and any director or officer of the Company, SAIC or any Related Entity shall be void or voidable solely for the reason that SAIC, a Related Entity or any one or more of the officers or directors of the Company, SAIC or any Related Entity are parties thereto, or solely because any such directors or officers are present at, participate in or vote with respect to the authorization of such contract, agreement, arrangement or transaction (or any amendment, modification or termination thereof). Further, the Company's Certificate of Incorporation provides that neither SAIC nor any officer or director thereof or of any Related Entity shall be presumed liable to the Company or its stockholders for breach of any fiduciary duty or duty of loyalty or failure to act in (or not opposed to) the best interests of the Company or the derivation of any improper personal benefit by reason of the fact that SAIC or an officer or director thereof or of such Related Entity in good faith takes any action or exercises any rights or gives or withholds any consent in connection with any agreement or contract between SAIC or such Related Entity and the Company. No vote cast or other action taken by any person who is an officer, director or other representative of SAIC or such Related Entity, which vote is cast or action is taken by such person in his capacity as a director of the Company, shall constitute an action of or the exercise of a right by or a consent of SAIC, such subsidiary or Related Entity for the purpose of any such agreement or contract. For purposes of the foregoing, the "Company" and "SAIC" include all corporations and other entities in which the Company or SAIC, as the case may be, owns fifty percent or more of the outstanding voting stock, and "Related Entity" means one or more corporations or other entities in which one or more of the directors of the Company have a direct or indirect financial interest. Competition by SAIC with the Company; Corporate Opportunities. The Company's Certificate of Incorporation provides that except as SAIC may otherwise agree in writing: (i) neither SAIC nor any subsidiary of SAIC (other than the Company) shall have a duty to refrain from engaging directly or indirectly in the same or similar business activities or lines of business as the Company; and (ii) neither SAIC nor any subsidiary (other than the Company), officer or director thereof will be presumed liable to the Company or to its stockholders for breach of any fiduciary duty by reason of any such activities or of such person's participation therein. The Company's Certificate of Incorporation also provides that if SAIC or any subsidiary of SAIC (other than the Company) acquires knowledge of a potential transaction or matter which may be a corporate opportunity both for SAIC or such subsidiary and for the Company, SAIC shall be entitled to offer such corporate opportunity to the Company or SAIC as SAIC deems appropriate under the circumstances in its sole discretion and shall not be presumed liable to the Company or its stockholders for breach of fiduciary duty as a stockholder of the Company or controlling person of a stockholder by reason of the fact that SAIC or such subsidiary pursues or acquires such opportunity for itself, directs such corporate opportunity to another person, or does not communicate information regarding such corporate opportunity to the Company. 74 77 Further, the Company's Certificate of Incorporation provides that in the event that a director, officer or employee of the Company who is also a director, officer or employee of SAIC acquires knowledge of a potential transaction or matter that may be a corporate opportunity both for the Company and SAIC (whether such potential transaction or matter is proposed by a third party or is conceived by such director, officer or employee of the Company), such director, officer or employee shall be entitled to offer such corporate opportunity to the Company or SAIC as such director, officer or employee deems appropriate under the circumstances in his or her sole discretion, and no such director, officer or employee shall be presumed liable to the Company or its stockholders for breach of any fiduciary duty or duty of loyalty or failure to act in (or not opposed to) the best interests of the Company or the derivation of any improper personal benefit by reason of the fact that (i) such director, officer or employee offered such corporate opportunity to SAIC (rather than the Company) or did not communicate information regarding such corporate opportunity to the Company or (ii) SAIC pursues or acquires such corporate opportunity for itself or directs such corporate opportunity to another person or does not communicate information regarding such corporate opportunity to the Company. The enforceability of the provisions discussed above under Delaware corporate law has not been established and, due to the absence of relevant judicial authority, counsel to the Company is not able to deliver an opinion as to the enforceability of such provisions. These provisions of the Company's Certificate of Incorporation eliminate certain rights that might have been available to stockholders under Delaware law had such provisions not been included in the Certificate of Incorporation, although the enforceability of such provisions has not been established. At the time of the consummation of the offering, certain of the directors of the Company will also be directors and/or officers of SAIC. The foregoing provisions of the Company's Certificate of Incorporation shall expire on the date that SAIC ceases to own beneficially Common Stock representing at least 20% of the number of outstanding shares of Common Stock and no person who is a director or officer of the Company is also a director or officer of SAIC or its subsidiaries. Actions Under Intercompany Agreements. The Company's Certificate of Incorporation will also limit the liability of SAIC and its subsidiaries for certain breaches of their fiduciary duties in connection with action that may be taken or not taken in good faith under the intercompany agreements. See "Relationship with SAIC and Certain Transactions." Advance Notice Provision. The Company's Amended and Restated Bylaws provide for an advance notice procedure for the nomination, other than by or at the direction of the Board of Directors, of candidates for election as directors as well as for other stockholder proposals to be considered at annual meetings of stockholders. In general, notice of intent to nominate a director or raise matters at such meetings will have to be received by the Company not less than 120 days prior to any meeting of the stockholders called for the election of directors, and must contain certain information concerning the person to be nominated or the matters to be brought before the meeting and concerning the stockholder submitting the proposal. NASDAQ NATIONAL MARKET LISTING Prior to the date of this Prospectus, there has been no established public trading market for the Class A Common Stock. The Company has applied to have the Class A Common Stock approved for quotation on the Nasdaq National Market under the symbol NSOL. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Class A Common Stock is ChaseMellon Shareholder Services, LLC. 75 78 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering there has been no public market for the Common Stock of the Company, and no predictions can be made regarding the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. As described below, only a limited number of shares will be available for sale shortly after this offering due to certain contractual and legal restrictions on resale. Nevertheless, sales of substantial amounts of Common Stock of the Company in the public market after the restrictions lapse could adversely affect the prevailing market price. Upon completion of this offering, the Company will have 2,300,000 shares of Class A Common Stock outstanding (assuming no exercise of the Underwriters' over-allotment option). In addition, as of July 31, 1997, the Company had granted stock options to certain employees and directors for the purchase of an aggregate of 1,539,725 shares of Class A Common Stock. The 2,300,000 shares of Class A Common Stock being sold hereby will be freely tradable (other than by an "affiliate" of the Company as such term is defined in Rule 144 of the Securities Act) without restriction or registration under the Securities Act. All remaining shares were issued and sold by the Company in a private transaction ("Restricted Shares") and are eligible for public sale if registered under the Securities Act or sold in accordance with Rule 701 thereunder. SAIC, which owns 12,500,000 shares of Class B Common Stock and certain Restricted Persons have agreed they will not sell any shares of Common Stock owned by them without the prior written consent of the Representatives of the Underwriters for a period of 180 days from the effective date of the Registration Statement of which this Prospectus is a part (the "Lockup Period"). Following the expiration of the Lockup Period, SAIC and such Restricted Persons may sell such shares only pursuant to the requirements of Rule 144 or pursuant to an effective registration statement under the Securities Act. Furthermore, the shares held by SAIC and such Restricted Persons are "restricted securities" within the meaning of Rule 144. Following the expiration of the Lockup Period, the 12,500,000 shares of Class B Common Stock held by SAIC will be eligible for sale in the public market subject to compliance with Rule 144. See "Underwriting." Subject to certain limitations on the aggregate offering price of a transaction and other conditions, Rule 701 may be relied upon with respect to the resale of securities originally purchased from the Company by its employees, directors, officers, consultants or advisers prior to the closing of this offering, pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons. In addition, the Commission has indicated that Rule 701 will apply to stock options granted by the Company before this offering, along with the shares acquired upon exercise of such options. Securities issued in reliance on Rule 701 are deemed to be Restricted Shares and, beginning 90 days after the date of this Prospectus (unless subject to the contractual restrictions described above), may be sold by persons other than affiliates subject only to the manner of sale provisions of Rule 144 and by affiliates under Rule 144 without compliance with its one-year minimum holding period requirements. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, an affiliate of the Company, or a holder of Restricted Shares who owns beneficially shares that were not acquired from the Company or an affiliate of the Company within the previous year, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of Common Stock (approximately 125,000 shares immediately after this offering, assuming no exercise of the Underwriters' over-allotment option) or the average weekly trading volume of Class A Common Stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 are subject to certain requirements relating to manner of sale, notice and availability of current public information about the Company. However, a person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the 90 days immediately preceding the sale and who owns beneficially Restricted Shares is entitled to sell such shares under 76 79 Rule 144(k) without regard to the limitations described above, provided that at least two years have elapsed since the later of the date the shares were acquired from the Company or from an affiliate of the Company. The foregoing is a summary of Rule 144 and is not intended to be a complete description of it. The Company intends to file a registration statement on Form S-8 under the Securities Act covering approximately 2,556,250 shares of Class A Common Stock reserved for issuance under the 1996 Stock Incentive Plan. Such registration statement is expected to be filed soon after the date of this Prospectus and will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market, unless such shares are subject to vesting restrictions with the Company or the contractual restrictions described above. In addition, after this offering and the Lockup Period, SAIC will be entitled to certain rights to cause the Company to register the sale of its shares of Common Stock under the Securities Act. Registration of such shares under the Securities Act would result in such shares becoming freely tradable without restriction under the Securities Act (except for shares purchased by affiliates of the Company) immediately upon the effectiveness of such registration. See "Description of Capital Stock -- Registration Rights." 77 80 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below, through their Representatives, Hambrecht & Quist LLC, J.P. Morgan Securities Inc. and PaineWebber Incorporated have severally agreed to purchase from the Company the following respective numbers of shares of Class A Common Stock:
NUMBER OF NAME SHARES --------------------------------------------------------------- --------- Hambrecht & Quist LLC.......................................... J.P. Morgan Securities Inc. ................................... PaineWebber Incorporated....................................... --------- Total.......................................................... 2,300,000 ==========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, including the absence of any material adverse change in the Company's business and the receipt of certain certificates, opinions and letters from the Company and its counsel and independent auditors. The nature of the Underwriters' obligations is such that they are committed to purchase all shares of Class A Common Stock offered hereby if any of such shares are purchased. The Underwriters propose to offer the shares of Class A Common Stock directly to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may re-allow, a concession not in excess of $ per share to certain other dealers. After the initial public offering of the shares, the offering price and other selling terms may by changed by the Representatives of the Underwriters. The Company has granted to the Underwriters an option, exercisable no later than 30 calendar days after the date of this Prospectus, to purchase up to an aggregate of 345,000 additional shares of Class A Common Stock at the initial public offering price, less the underwriting discount, set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise this option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of Class A Common Stock to be purchased by it shown in the above table bears to the total number of shares of Class A Common Stock offered hereby. The Company will be obligated, pursuant to the option, to sell shares to the Underwriters to the extent the option is exercised. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of shares of Class A Common Stock offered hereby. The offering of the shares is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The Underwriters reserve the right to reject an order for the purchase of shares in whole or in part. The Company and SAIC have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. 78 81 The Company, SAIC and certain Restricted Persons have agreed, with certain exceptions, that they will not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into shares of Common Stock during the 180-day period following the date of this Prospectus. The Representatives have informed the Company that the Underwriters do not intend to confirm sales of Class A Common Stock offered hereby to any accounts over which they exercise discretionary authority. Prior to the offering, there has been no public market for the Class A Common Stock. The initial public offering price for the Class A Common Stock will be determined by negotiation among the Company and the Representatives. Among the factors considered in determining the initial public offering price are prevailing market conditions, revenues and earnings of the Company, market valuations of other companies engaged in activities similar to those of the Company, estimates of the business potential and prospects of the Company, the present state of the Company's business operations, the Company's management and other factors deemed relevant. The estimated initial public offering price range set forth on the cover of this preliminary prospectus is subject to change as a result of market conditions and other factors. Certain persons participating in this offering may overallot or effect transactions which stabilize, maintain or otherwise affect the market price of the Common Stock at levels above those which might otherwise prevail in the open market, including by entering stabilizing bids, effecting syndicate covering transactions or imposing penalty bids. A stabilizing bid means the placing of any bid or effecting of any purchase, for the purpose of pegging, fixing or maintaining the price of the Common Stock. A syndicate covering transaction means the placing of any bid on behalf of the underwriting syndicate or the effecting of any purchase to reduce a short position created in connection with the offering. A penalty bid means an arrangement that permits the Underwriters to reclaim a selling concession from a syndicate member in connection with the offering when shares of Common Stock sold by the syndicate member are purchased in syndicate covering transactions. Such transactions may be effected on the Nasdaq National Market, in the over-the-counter market, or otherwise. Such stabilizing, if commenced, may be discontinued at any time. The Underwriters have reserved up to 5% of the shares of Class A Common Stock offered hereby for sale at the initial public offering price to certain employees, officers and directors of SAIC and the Company and other persons designated by the Company. The number of shares available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased on the effectiveness of the offering will be offered by the Underwriters to the general public on the same basis as the other shares offered hereby. In 1997, the Company and Hambrecht & Quist LLC entered into an Intranet services agreement pursuant to which the Company performed certain Intranet services for Hambrecht & Quist LLC. The terms of such agreement were negotiated by the parties at arm's length after the Company's selection of Hambrecht & Quist LLC as a Representative. LEGAL MATTERS Certain legal matters with respect to the validity of the Class A Common Stock offered hereby are being passed upon for the Company by Pillsbury Madison & Sutro LLP, Menlo Park, California and Washington D.C. Certain legal matters in connection with the offering will be passed upon for the Underwriters by Simpson Thacher & Bartlett (a partnership which includes professional corporations), New York, New York. 79 82 EXPERTS The financial statements as of December 31, 1995 and 1996 and for the year ended December 31, 1994, the periods from January 1, 1995 to March 10, 1995 and from March 11, 1995 to December 31, 1995 and for the year ended December 31, 1996 included in this Prospectus have been so included in reliance on the reports of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement under the Securities Act and the rules and regulations promulgated thereunder, with respect to the Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock offered hereby, reference is hereby made to such Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus regarding the contents of any contract or other document are not necessarily complete; with respect to each such contract or document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. A copy of the Registration Statement, including the exhibits and schedules, thereto, may be inspected without charge at the principal office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the Commission at 7 World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may also be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 upon payment of the fees prescribed by the Commission. The Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the Commission's web site is http://www.sec.gov. The Company is not currently subject to the informational requirements of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). As a result of the offering of the Company's Common Stock, the Company will become subject to the informational requirements of the Exchange Act. The Company intends to furnish its stockholders with annual reports containing financial statements audited by independent certified public accountants and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. 80 83 INDEX TO FINANCIAL STATEMENTS
PAGE -------- Report of Independent Accountants................................................. F-2, F-3 Statements of Financial Position as of December 31, 1995 and 1996 and June 30, 1997 (Unaudited)........................ F-4 Statements of Operations for the Year Ended December 31, 1994, for the Periods from January 1, 1995 to March 10, 1995 and March 11, 1995 to December 31, 1995, for the Year Ended December 31, 1996, and for the Six Months Ended June 30, 1996 and 1997 (Unaudited)............................................................ F-5 Statements of Changes in Stockholder's Equity for the Year Ended December 31, 1994, for the Periods from January 1, 1995 to March 10, 1995 and March 11, 1995 to December 31, 1995, for the Year Ended December 31, 1996, and for the Six Months Ended June 30, 1997 (Unaudited).......................................... F-6 Statements of Cash Flows for the Year Ended December 31, 1994, for the Periods from January 1, 1995 to March 10, 1995 and March 11, 1995 to December 31, 1995, for the Year Ended December 31, 1996, and for the Six Months Ended June 30, 1996 and 1997 (Unaudited)............................................................ F-7 Notes to Financial Statements..................................................... F-8
F-1 84 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholder of Network Solutions, Inc. In our opinion, the accompanying statements of financial position and the related statements of operations, of changes in stockholder's equity and of cash flows present fairly, in all material respects, the financial position of Network Solutions, Inc. (a wholly-owned subsidiary of Science Applications International Corporation) at December 31, 1996 and 1995, and the results of its operations and cash flows for the year ended December 31, 1996 and for the period from March 11, 1995 to December 31, 1995 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1 to the financial statements, on March 10, 1995, Science Applications International Corporation acquired the outstanding stock of the Company. The financial statements for the periods subsequent to March 10, 1995 have been prepared on the basis of accounting arising from this acquisition. The financial statements for the period from January 1, 1995 to March 10, 1995 and for the year ended December 31, 1994 are presented on the Company's previous basis of accounting. PRICE WATERHOUSE LLP Falls Church, VA March 17, 1997, except as to Note 13 which is as of June 26, 1997 F-2 85 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholder of Network Solutions, Inc. In our opinion, the accompanying statements of operations, of changes in stockholder's equity and of cash flows present fairly, in all material respects, the results of operations and cash flows for Network Solutions, Inc. ("Predecessor") for the period from January 1, 1995 to March 10, 1995 and for the year ended December 31, 1994 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1 to the financial statements, on March 10, 1995 Science Applications International Corporation acquired the outstanding stock of the Company. The financial statements for the periods subsequent to March 10, 1995 have been prepared on the basis of accounting arising from this acquisition. The financial statements for the period from January 1, 1995 to March 10, 1995 and for the year ended December 31, 1994 are presented on the Company's previous basis of accounting. PRICE WATERHOUSE LLP Falls Church, VA March 17, 1997, except as to Note 13 which is as of June 26, 1997 F-3 86 NETWORK SOLUTIONS, INC. STATEMENTS OF FINANCIAL POSITION
JUNE 30, 1997 DECEMBER 31, ---------------------------- -------------------------- PRO FORMA 1995 1996 ACTUAL (NOTE 2) ----------- ----------- ------------ ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents............. $ 5,000 $15,540,000 $ 25,967,000 $ 25,967,000 Short-term investments................ -- -- 3,625,000 3,625,000 Accounts receivable, net.............. 4,040,000 12,587,000 6,387,000 6,387,000 Prepaids and other assets............. 11,000 936,000 1,361,000 1,361,000 Restricted assets..................... 1,408,000 17,453,000 31,056,000 31,056,000 Deferred tax asset.................... 1,310,000 10,087,000 12,248,000 12,248,000 ----------- ----------- ----------- ------------ Total current assets.................... 6,774,000 56,603,000 80,644,000 80,644,000 Furniture and equipment, net............ 1,067,000 2,266,000 4,461,000 4,461,000 Deferred tax asset...................... 911,000 4,968,000 5,222,000 5,222,000 Goodwill, net........................... 2,996,000 2,281,000 1,923,000 1,923,000 ----------- ----------- ----------- ------------ Total Assets............................ $11,748,000 $66,118,000 $ 92,250,000 $ 92,250,000 =========== =========== =========== ============ LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable and accrued liabilities........................ $ 1,355,000 $ 2,581,000 $ 3,959,000 $ 3,959,000 Deferred revenue, net................. 1,993,000 19,912,000 31,990,000 31,990,000 Net liabilities of discontinued operations......................... 208,000 -- -- -- Due to parent......................... 2,369,000 15,295,000 6,566,000 16,566,000 Internet fund liability............... 1,408,000 17,453,000 31,056,000 31,056,000 Current portion of capital lease obligations........................ -- -- 793,000 793,000 ----------- ----------- ----------- ------------ Total current liabilities............... 7,333,000 55,241,000 74,364,000 84,364,000 Long-term deferred revenue, net......... 1,353,000 9,440,000 13,638,000 13,638,000 Capital lease obligations............... -- -- 1,555,000 1,555,000 ----------- ----------- ----------- ------------ Total liabilities....................... 8,686,000 64,681,000 89,557,000 99,557,000 Stockholder's equity: Preferred stock, $.001 par value, authorized 10,000,000 shares; none issued and outstanding............. -- -- -- -- Class A Common stock, $.001 par value; authorized 100,000,000 shares; none issued and outstanding............. -- -- -- -- Class B Common stock, $.001 par value, authorized 40,000,000 shares; 12,500,000 issued and outstanding........................ 12,000 12,000 12,000 12,000 Additional paid-in capital............ 4,468,000 4,468,000 4,468,000 4,468,000 Accumulated deficit................... (1,418,000) (3,043,000) (1,787,000) (11,787,000) ----------- ----------- ----------- ------------ Total stockholder's equity.............. 3,062,000 1,437,000 2,693,000 (7,307,000) Commitments and contingencies........... -- -- -- -- ----------- ----------- ----------- ------------ Total Liabilities and Stockholder's Equity................................ $11,748,000 $66,118,000 $ 92,250,000 $ 92,250,000 =========== =========== =========== ============
The accompanying notes are an integral part of these financial statements. F-4 87 NETWORK SOLUTIONS, INC. STATEMENTS OF OPERATIONS
COMPANY PREDECESSOR COMPANY -------------------------- -------------------------------- ------------------------------- YEAR ENDED JANUARY 1, 1995 MARCH 11, 1995 YEAR ENDED SIX MONTHS ENDED DECEMBER 31, TO MARCH 10, TO DECEMBER 31, DECEMBER 31, JUNE 30, 1994 1995 1995 1996 1996 1997 ------------ ---------------- --------------- ------------ ----------- ----------- (UNAUDITED) Net revenue................ $ 5,029,000 $ 1,177,000 $ 5,309,000 $18,862,000 $ 6,829,000 $18,724,000 Cost of revenue............ 3,073,000 884,000 4,820,000 14,666,000 6,521,000 11,435,000 ----------- ----------- ----------- ----------- ----------- ---------- Gross profit............... 1,956,000 293,000 489,000 4,196,000 308,000 7,289,000 Research and development expenses................. -- -- -- 680,000 58,000 718,000 Selling, general and administrative expenses................. 1,544,000 280,000 2,114,000 6,280,000 2,370,000 4,788,000 Interest expense (income) (includes related party interest expense of $52,000 for the period March 11, 1995 to December 31, 1995 and interest income of $496,000 for 1996)....... 109,000 9,000 52,000 (496,000) (86,000) (484,000) ----------- ----------- ----------- ----------- ----------- ---------- Income (loss) from continuing operations before income taxes...... 303,000 4,000 (1,677,000) (2,268,000) (2,034,000) 2,267,000 Provision (benefit) for income taxes............. 114,000 48,000 (287,000) (643,000) (576,000) 1,011,000 ----------- ----------- ----------- ----------- ----------- ---------- Income (loss) from continuing operations.... 189,000 (44,000) (1,390,000) (1,625,000) (1,458,000) 1,256,000 Loss from discontinued operations, net of income taxes.................... (1,169,000) (1,375,000) (28,000) -- -- -- ----------- ----------- ----------- ----------- ----------- ---------- Net income (loss).......... $ (980,000) $ (1,419,000) $(1,418,000) $(1,625,000) $(1,458,000) $ 1,256,000 =========== =========== =========== =========== =========== ========== Unaudited pro forma net income (loss) per share.................... $ (0.12) $ (0.11) $ 0.09 =========== =========== ========== Unaudited pro forma shares used in computing net income (loss) per share.................... 13,349,000 13,349,000 13,349,000 =========== =========== ==========
The accompanying notes are an integral part of these financial statements. F-5 88 NETWORK SOLUTIONS, INC. STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
COMMON STOCK TREASURY STOCK ADDITIONAL RETAINED TOTAL -------------------- ------------------ PAID-IN EARNINGS STOCKHOLDER'S SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY ---------- ------- ------- --------- ---------- ----------- ----------- PREDECESSOR Balance, December 31, 1993................. 1,159,000 $12,000 115,000 $(673,000) $1,275,000 $ 607,000 $1,221,000 Purchase of treasury stock............... -- -- 7,000 (25,000) -- -- (25,000) Issuance of treasury stock............... -- -- (12,000) 70,000 (34,000) -- 36,000 Net loss for the year ended December 31, 1994................................... -- -- -- -- -- (980,000) (980,000) ---------- ------- ------- --------- ---------- ---------- ----------- Balance, December 31, 1994................. 1,159,000 12,000 110,000 (628,000) 1,241,000 (373,000) 252,000 Purchase of treasury stock............... -- -- 7,000 (30,000) -- -- (30,000) Net loss for the period from January 1 to March 10, 1995......................... -- -- -- -- -- (1,419,000) (1,419,000) ---------- ------- ------- --------- ---------- ---------- ----------- Balance, March 10, 1995.................... 1,159,000 $12,000 117,000 $(658,000) $1,241,000 $(1,792,000) $(1,197,000) ========== ======= ======= ========= ========== ========== =========== COMPANY Purchase of outstanding common shares by SAIC on March 10, 1995................... 12,500,000 $12,000 $4,468,000 $ -- $4,480,000 Net loss for the period from March 11 to December 31, 1995........................ -- -- -- (1,418,000) (1,418,000) ---------- ------- ---------- ---------- ----------- Balance, December 31, 1995................. 12,500,000 12,000 4,468,000 (1,418,000) 3,062,000 Net loss for the year ended December 31, 1996................................... -- -- -- (1,625,000) (1,625,000) ---------- ------- ---------- ---------- ----------- Balance, December 31, 1996................. 12,500,000 12,000 4,468,000 (3,043,000) 1,437,000 Net income for the six months ended June 30, 1997................................. -- -- -- 1,256,000 1,256,000 ---------- ------- ---------- ---------- ----------- Balance, June 30, 1997 (Unaudited)......... 12,500,000 $12,000 $4,468,000 $(1,787,000) $2,693,000 ========== ======= ========== ========== ===========
The accompanying notes are an integral part of these financial statements. F-6 89 NETWORK SOLUTIONS, INC. STATEMENTS OF CASH FLOWS
PREDECESSOR COMPANY COMPANY -------------------------------- ------------------------------- ---------------------------- YEAR ENDED JANUARY 1, 1995 MARCH 11, 1995 YEAR ENDED SIX MONTHS ENDED DECEMBER 31, TO MARCH 10, TO DECEMBER 31, DECEMBER 31, JUNE 30, 1994 1995 1995 1996 1996 1997 ------------ ---------------- --------------- ------------ ------------ ------------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............ $ (980,000) $ (1,419,000) $(1,418,000) $(1,625,000) $ (1,458,000) $ 1,256,000 Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Net loss from discontinued operations............... 1,169,000 1,376,000 28,000 -- -- -- Depreciation and amortization............. 338,000 68,000 765,000 1,417,000 714,000 1,017,000 Provision for uncollectible accounts receivable...... -- -- 124,000 3,597,000 1,223,000 3,624,000 Deferred income taxes...... -- -- (2,221,000) (12,834,000) (5,770,000) (2,415,000) Change in operating assets and liabilities: Decrease (increase) in accounts receivable.... 322,000 (161,000) (3,385,000) (12,144,000) (6,711,000) 2,576,000 Decrease (increase) in prepaid and other assets................. 22,000 (36,000) 45,000 (925,000) 11,000 (425,000) (Increase) decrease in deposits............... -- (49,000) 1,053,000 -- -- -- Increase in accounts payable and accrued liabilities............ 219,000 233,000 282,000 1,226,000 246,000 1,378,000 (Decrease) increase in other liabilities...... (7,000) 8,000 (89,000) -- -- -- Increase (decrease) in deferred revenue....... 64,000 (30,000) 3,239,000 26,006,000 11,010,000 16,276,000 ----------- ----------- ----------- ----------- ----------- ------------ Net cash provided by (used in) operating activities........... 1,147,000 (10,000) (1,577,000) 4,718,000 (735,000) 23,287,000 ----------- ----------- ----------- ----------- ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of furniture and equipment................ (266,000) (134,000) (518,000) (1,901,000) (1,870,000) (317,000) Purchase of short-term investments.............. -- -- -- -- -- (3,625,000) Net investment in net assets of discontinued operations............... (759,000) 331,000 563,000 (208,000) (208,000) -- ----------- ----------- ----------- ----------- ----------- ------------ Net cash (used in) provided by investing activities........... (1,025,000) 197,000 45,000 (2,109,000) (2,078,000) (3,942,000) ----------- ----------- ----------- ----------- ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from bank borrowings............... 173,000 -- -- -- -- -- Repayment of bank borrowings............... (170,000) (293,000) (834,000) -- -- -- Capital lease obligations.............. -- -- -- -- -- (189,000) Net transactions with SAIC..................... -- -- 2,371,000 12,926,000 2,835,000 (8,729,000) Issuance of treasury stock.................... 36,000 -- -- -- -- -- Purchase of treasury stock.................... (25,000) (30,000) -- -- -- -- ----------- ----------- ----------- ----------- ----------- ------------ Net cash provided by (used in) financing activities........... 14,000 (323,000) 1,537,000 12,926,000 2,835,000 (8,918,000) ----------- ----------- ----------- ----------- ----------- ------------ Net increase (decrease) in cash and cash equivalents.......... 136,000 (136,000) 5,000 15,535,000 22,000 10,427,000 Cash and cash equivalents, beginning of period........ -- 136,000 -- 5,000 5,000 15,540,000 ----------- ----------- ----------- ----------- ----------- ------------ Cash and cash equivalents, end of period.............. $ 136,000 $ -- $ 5,000 $15,540,000 $ 27,000 $ 25,967,000 =========== =========== =========== =========== =========== ============
The accompanying notes are an integral part of these financial statements. F-7 90 NETWORK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION Network Solutions, Inc. (the "Company") was incorporated in the District of Columbia in 1979 and was reincorporated in Delaware in 1996. The Company currently acts as the exclusive registrar for second level domain names within the .com, .org, .net, .edu and .gov top level domains ("TLDs") pursuant to a Cooperative Agreement with the National Science Foundation ("NSF") (Note 2). The Company also provides Intranet consulting services to large companies that desire to establish or enhance their Internet presence or "re-engineer" legacy network infrastructures to accommodate the integration of both Internet connectivity and Intranet network technology into their information technology base. The Company was acquired by Science Applications International Corporation ("SAIC") on March 10, 1995. The Company is currently a wholly-owned subsidiary of SAIC. Prior to the acquisition of the Company by SAIC, the Company's business included commercial and government contracts awarded to the Company on a competitive basis, including government contracts that were awarded to the Company partially upon the Company's then minority-owned status. The contracts which had been awarded to the Company based partially upon the Company's then minority-owned status were transferred into a separately-owned entity prior to the acquisition of the Company by SAIC. In November 1995, SAIC adopted a plan to transfer the Company's remaining government-based business to SAIC in order to enable the Company to focus on the growth of its commercial business, which includes registration services and Intranet services. This transfer was effective as of February 1996. The operating results of both the minority-based government contracts business and the remaining government-based business are reflected as discontinued operations in the Company's financial statements for all periods presented (Note 11). Under the terms of the acquisition agreement, the Company was acquired by SAIC on March 10, 1995 in a stock-for-stock transaction accounted for as a purchase. The fair market value of the SAIC stock exchanged for the outstanding stock of the Company was approximately $3.9 million. The acquisition agreement provided for certain purchase adjustments and related additional stock issuance payments of approximately $600,000. After reflecting certain purchase accounting adjustments, the net assets included on the opening balance sheet were as follows: Current assets.......................................................... $ 929,000 Furniture and equipment................................................. 734,000 Goodwill................................................................ 3,576,000 Other non-current assets................................................ 1,047,000 ---------- 6,286,000 Current liabilities..................................................... 1,625,000 Net liabilities of discontinued operations.............................. 181,000 ---------- Net assets acquired at March 11, 1995.............................. $4,480,000 ==========
The excess of the purchase price over the estimated fair value of net assets acquired has been reflected as goodwill and is being amortized over five years. The financial statements for periods subsequent to March 10, 1995 are presented on the new basis of accounting arising from the acquisition. The financial statements for the period from January 1, 1995 to March 10, 1995 and for the year ended December 31, 1994 are presented on the Company's previous basis of accounting. Subsequent to the acquisition, the results of continuing and discontinued operations include allocations by SAIC of: (i) costs for administrative functions and services per- F-8 91 NETWORK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) formed on behalf of the continuing and discontinued operations of the Company by centralized staff groups within SAIC, (ii) SAIC's general corporate expenses, (iii) pension and other retirement benefit costs, and (iv) cost of capital (Notes 5, 9 and 10). Only costs directly attributable to the Company's government-based business that will not be incurred by the Company subsequent to the transfer of this business to SAIC have been included in discontinued operations. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NSF COOPERATIVE AGREEMENT In January 1993, the Company entered into the Cooperative Agreement with the NSF under which the Company provides Internet registration services for five TLDs: .com, .org, .net, .edu and .gov. 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 Cooperative Agreement by its terms expires in March 1998, although the NSF may, at its option, extend the Cooperative Agreement to September 1998. The NSF has stated that the Cooperative Agreement will not be re-awarded to the Company or awarded to any other entity. Originally, the Cooperative Agreement was structured as 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 authorize the Company to begin charging customers a subscription fee of $50 per year for each second level domain name in the .com, .org, .net, .edu and .gov TLDs. The Company's registration services customers in the .com, .org and .net TLDs are invoiced for a two-year subscription fee of $100 for initial registrations and $50 per year for renewals of initial registrations. Under the terms of the amendment to the Cooperative Agreement, 30% of the new registration or renewal fees collected by the Company is required to be set aside to be reinvested 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 with the appropriate percentage of net accounts receivable (Note 3) 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. Restricted cash at December 31, 1996 and 1995 was approximately $13,049,000 and $122,000, respectively. These funds, plus any interest earned, will be disbursed in a manner approved by the NSF. As of December 31, 1996, none of these funds have been disbursed. Future receipts and disbursements of these funds will not have an effect on the Company's business, net financial position, or results of operations. For purposes of the Statement of Cash Flows, amounts relating to Restricted Assets and the Internet Fund Liability have been excluded in their entirety. REVENUE RECOGNITION Prior to September 14, 1995, net revenue was recognized under the Cooperative Agreement on the basis of direct costs plus allowable indirect costs and the earned portion of the fee. Since September 14, 1995, fees for Internet registration services provided by the Company have been recognized on a straight-line basis over the life of the registration term. The Company records revenue net of an estimated provision for uncollectible accounts receivable (Note 3). Substantially all of the Company's Intranet services revenue is derived from professional services which are generally provided to clients on a "time and expense" basis. Professional services revenue is recognized as services are performed. The Company performs a limited number of fixed-price projects under which revenue is recognized using the percentage-of-completion method, based upon costs incurred in comparison to total anticipated costs. The Company also derives revenue from remote F-9 92 NETWORK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) monitoring and hosting services; however, such revenue has not been significant to date. Remote monitoring and hosting revenue is recognized ratably over the term of the contract. Certain aspects of a number of the Company's contracts are subject to audits at the customer's discretion. Management believes that the results of any such audits will not have a material effect on NSI's financial position or results of operations. DEFERRED REVENUE Deferred revenue primarily represents the unearned portion of revenue related to the unexpired term of Internet registration fees, net of an estimate for uncollectible accounts receivable (Note 3). CASH AND CASH EQUIVALENTS The Company's policy is to include short-term investments with original maturities of ninety days or less within cash and cash equivalents. FINANCIAL INSTRUMENTS The recorded value of the Company's financial instruments, which include accounts receivable and accounts payable, approximates market value. Net revenue from two customers approximated 63% and 22% in 1994, 45% and 21% for the period from January 1, 1995 to March 10, 1995, 40% and 21% for the period from March 11, 1995 to December 31, 1995, and 20% and 0% for the year ended December 31, 1996. One of these customers was the NSF, whose impact on the above percentage of revenues was reflective of activity prior to the September 14, 1995 amendment of the Cooperative Agreement. Concentration of credit risk with respect to registration receivables is limited due to the wide variety and number of customers, as well as their dispersion across geographic areas. The Company has no derivative financial instruments. FURNITURE AND EQUIPMENT Furniture and equipment are stated at cost. Depreciation on furniture, office and computer equipment is calculated principally using a declining-balance method over the useful lives of three to seven years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated lives of the assets, generally six years. The Company periodically reviews the carrying amounts of its furniture and equipment to assess recoverability, and impairments are recognized in the results of operations, as appropriate. The measurement of possible impairment is based primarily on the ability to recover the balance of the furniture and equipment from expected future operating cash flows on an undiscounted basis. At December 31, 1996, management believed that there were no such impairments to the carrying value of its property and equipment. GOODWILL Goodwill represents the excess of the purchase cost over the fair value of net assets acquired in the acquisition and is amortized over five years using the straight-line method. The Company periodically reviews goodwill to assess recoverability, and impairments are recognized in the results of operations, as appropriate. The measurement of possible impairment is based primarily on the ability to recover the balance of the goodwill from expected future operating cash flows on an undiscounted basis. Amortization expense for the period from March 11, 1995 to December 31, 1995 of $580,000 and $715,000 for the year ended December 31, 1996 was included in general and administrative expenses. F-10 93 NETWORK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SOFTWARE DEVELOPMENT COSTS Research and development costs are expensed as incurred. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86 "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," the Company has not capitalized software development costs incurred as of December 31, 1996. Research and development costs incurred for all periods presented prior to December 31, 1995 were reimbursed to the Company by direct charges to contracts and are included in cost of revenue for those periods. INCOME TAXES Deferred taxes are accounted for under SFAS No. 109 "Accounting for Income Taxes," which is an asset and liability method of accounting for income taxes. The liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between carrying amounts and tax bases of assets and liabilities. A valuation allowance is recorded if it is "more likely than not" that some portion of or all of a deferred tax asset will not be realized. Additionally, under the liability method, changes in tax rates and laws will be reflected in income in the period such changes are enacted. For federal income tax purposes, the Company's results will be included in SAIC's consolidated tax return. For periods subsequent to the acquisition, income taxes are determined as if the Company was a separate taxpayer. Income taxes currently payable have been charged by the Company to the due to parent account in the period that the liability arose. Income taxes currently receivable have been charged to the due to parent account in the period that a refund could have been recognized by the Company had the Company been a separate taxpayer. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make reasonable estimates and assumptions, based upon all known facts and circumstances that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. Estimates requiring relatively greater levels of judgment include the allowance for uncollectible accounts receivable, the assessment of the need for a tax valuation allowance and the amortization period for goodwill. STOCK BASED COMPENSATION The Company accounts for stock option and employee stock purchase plans in which its employees participate in accordance with the provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." No compensation cost has been recognized by the Company for such employee stock plans. SFAS No. 123, "Accounting for Stock-Based Compensation," provides an alternative accounting method to APB No. 25 and requires additional pro forma disclosures (Note 10). The Company expects to continue to account for such employee stock plans in accordance with the provisions of APB No. 25. PRO FORMA BALANCE SHEET AND EARNINGS PER SHARE (UNAUDITED) On August 21, 1997, the Company's Board of Directors approved a $10,000,000 dividend payable to SAIC (Note 13). This dividend is to be paid August 31, 1997. Pursuant to Securities and Exchange F-11 94 NETWORK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Commission Staff Accounting Bulletin ("SAB") No. 55, a pro forma balance sheet is presented to reflect this dividend. Additionally, as required by SAB No. 55, historical earnings per share are not presented and pro forma per share data is presented which gives effect to the number of shares from the public offering necessary to fund the amount of the $10,000,000 dividend payable to SAIC in excess of the Company's net income for the 12 months ended June 30, 1997. Pro forma net income (loss) per share of common stock is calculated by dividing the net income (loss) by the sum of (i) the number of shares issued to SAIC in connection with the Company's reincorporation in Delaware, (ii) common stock equivalent shares from common stock options granted within one year of the initial public offering, and (iii) the number of shares whose proceeds will be used to pay the dividend in excess of the prior 12 months' net income as described above. Common stock equivalent shares are calculated using the treasury stock method. Pursuant to Securities and Exchange Commission SAB No. 83, common stock and common stock equivalent shares issued by the Company at prices below the public offering price during the twelve month period prior to the proposed offering date have been included in the calculations as if they were outstanding since January 1, 1996 regardless of whether they are dilutive. INTERIM FINANCIAL INFORMATION (UNAUDITED) Interim financial information for the six months ended June 30, 1996 and 1997 included herein is unaudited. However, in the opinion of the Company, the interim financial information includes all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The results of operations for the six months ended June 30, 1997 are not necessarily indicative of the results to be expected for the full year ending December 31, 1997. NOTE 3 -- RECEIVABLES Receivables consist of the following amounts as of December 31:
1995 1996 ---------- ----------- Billed...................................................... $6,060,000 $27,430,000 Unbilled.................................................... 1,384,000 5,000,000 ---------- ----------- Total accounts receivable before allowances............ 7,444,000 32,430,000 Less -- Allowance for uncollectible accounts................ (2,118,000) (15,439,000) -- Accounts receivable allocable to 30% NSF set-aside........................................... (1,286,000) (4,404,000) ---------- ----------- Accounts receivable, net.................................... $4,040,000 $12,587,000 ========== ===========
Unbilled receivables consist of costs which have been incurred on time and expense contracts and Internet domain name registration fees which have not yet been billed. Under the Cooperative Agreement, thirty percent of collected registration fees is required to be set aside for disbursement at the direction of the NSF. In accounting for registration subscriptions, the Company initially records the gross amount of the registration fees to accounts receivable and deferred revenue. The allowance for estimated uncollectible accounts is recorded against both accounts receivable and deferred revenue balances. (See Note 2 for treatment of the 30% NSF set aside). From the net deferred revenue balance, the Company records revenue on a straight-line basis over the subscription period. F-12 95 NETWORK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 3 -- RECEIVABLES (CONTINUED) The provision for uncollectible accounts receivable, which is recorded on a straight-line basis over the subscription period and deducted from gross registration fees in determining net revenue, was $124,000 and $3,597,000 for the period from March 11, 1995 to December 31, 1995 and for the year ended December 31, 1996, respectively. There was no provision necessary for the year ended December 31, 1994 and for the period from January 1, 1995 to March 10, 1995. The Company's allowance for uncollectible accounts receivable is associated solely with its registration business. The Company believes it has been necessary to establish its provision for uncollectible accounts receivable principally due to the large number of individuals and corporations that have registered multiple domain names with the apparent intention of reselling such names at a profit. The Company's experience has been that, in contrast to other subscribers, such resellers have a higher tendency of default on their subscription fees. NOTE 4 -- FURNITURE AND EQUIPMENT Furniture and equipment consist of the following amounts as of December 31:
1995 1996 ----------- ----------- Furniture and office equipment............................. $ 782,000 $ 879,000 Computer equipment......................................... 2,248,000 4,033,000 Leasehold improvements..................................... 214,000 234,000 ---------- ---------- Furniture and equipment, at cost...................... 3,244,000 5,146,000 Less accumulated depreciation and amortization............. (2,177,000) (2,880,000) ---------- ---------- Furniture and equipment, net.......................... $ 1,067,000 $ 2,266,000 ========== ==========
NOTE 5 -- DEBT Interest expense reflected in continuing operations for the year ended December 31, 1994 and the period January 1, 1995 to March 10, 1995 was $109,000 and $9,000, respectively. Interest expense reflected in discontinued operations for the year ended December 31, 1994 and for the period from January 1, 1995 to March 10, 1995 was $495,000 and $51,000, respectively. Interest charges prior to the acquisition have been reflected in continuing and discontinued operations based on the debt balances associated with each of the continuing and discontinued operations for each of the periods. In addition, interest expense of $52,000 and $164,000 for the period from March 11, 1995 to December 31, 1995 was allocated by SAIC to the Company's continuing operations and discontinued operations, respectively, based upon SAIC's cost of capital calculation. For the year ended December 31, 1996, interest revenue of $496,000 was allocated by SAIC based upon the cost of capital calculation. From its acquisition by SAIC in March 1995 until December 1996, the Company participated in SAIC's centralized cash management system whereby cash received from operations was transferred to SAIC's centralized cash accounts and cash disbursements were funded from such centralized cash accounts. Accordingly, the SAIC cost of capital formula provides for charges and credits to the Company based upon management of certain assets, including accounts receivable and fixed assets. Such amounts are not necessarily indicative of the cost that would have been incurred if the Company had been operated as a separate entity. Effective January 1, 1997, the Company will no longer be subject to SAIC's cost of capital calculation in connection with the Company fulfilling its own treasury function. Interest paid for the year ended December 31, 1994, for the periods from January 1, 1995 to March 10, 1995 and March 11, F-13 96 NETWORK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 5 -- DEBT (CONTINUED) 1995 to December 31, 1995 and for the year ended December 31, 1996 was $74,000, $0, $103,000 and $0, respectively. NOTE 6 -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following amounts as of December 31:
1995 1996 ---------- ---------- Accounts payable............................................. $ 80,000 $1,054,000 Accrued expenses............................................. 565,000 1,412,000 Accrued payroll.............................................. 710,000 115,000 ---------- ---------- Total accounts payable and accrued expenses.................. $1,355,000 $2,581,000 ========== ==========
NOTE 7 -- PROVISION FOR INCOME TAXES The results of the Company subsequent to its acquisition by SAIC were included in SAIC's consolidated tax returns. The tax expense allocation methodology is set forth in Note 2. The provision for (benefit) from income taxes charged to continuing operations consists of the following:
FOR THE PERIOD 1995 YEAR ENDED --------------------------- YEAR ENDED DECEMBER 31, JANUARY 1 TO MARCH 11 TO DECEMBER 31, 1994 MARCH 10 DECEMBER 31 1996 ------------ ------------ ----------- ------------ Current: Federal...................... $ 95,000 $ 40,000 $ 1,521,000 $ 10,171,000 State........................ 19,000 8,000 311,000 2,020,000 ------- ------ ----------- ------------ Total current provision............. 114,000 48,000 1,832,000 12,191,000 ------- ------ ----------- ------------ Deferred: Federal...................... (1,759,000) (10,716,000) State........................ (360,000) (2,118,000) ----------- ------------ Total deferred benefit............... (2,119,000) (12,834,000) ----------- ------------ Provision for (benefit) from income taxes.................... $114,000 $ 48,000 $ (287,000) $ (643,000) ======= ====== =========== ============
Deferred tax assets are comprised of the following temporary differences as of December 31:
1995 1996 ---------- ----------- Deferred revenue............................................ $2,082,000 $13,846,000 Accrued vacation pay........................................ 87,000 118,000 Provision for uncollectible accounts receivable............. 48,000 1,091,000 Other....................................................... 4,000 -- ---------- ----------- Total deferred tax asset.................................... $2,221,000 $15,055,000 ========== ===========
Tax valuation allowances were provided through March 10, 1995 against the net deferred tax assets of both continuing operations and discontinued operations. In connection with the acquisition purchase accounting, a determination was made that tax valuation allowances were no longer required. F-14 97 NETWORK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 7 -- PROVISION FOR INCOME TAXES (CONTINUED) Although the Company has a history of net losses, it has not established a valuation allowance for its deferred tax assets since, in the opinion of management, it is more likely than not that all of the deferred tax assets will be realized. The deferred tax assets relate primarily to registration fee revenues which are taxable upon registration but are recognized in the financial statements over the next 12 to 24 months -- the subscription period. A reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income tax rate to income (loss) before income taxes is provided below. The statutory federal income tax rate used was 34% for all periods presented through December 31, 1995 and 35% for the year ended December 31, 1996.
FOR THE PERIOD 1995 YEAR ENDED YEAR ENDED --------------------------- DECEMBER DECEMBER 31, JANUARY 1 TO MARCH 11 TO 31, 1994 MARCH 10 DECEMBER 31 1996 ------------ ------------ ----------- ----------- Federal tax at statutory rate............... $103,000 $ 1,000 $(570,000) $(794,000) State income taxes, net of Federal tax benefit................................... 13,000 -- (68,000) (96,000) Nondeductible goodwill amortization......... 348,000 281,000 Other....................................... 4,000 1,000 3,000 (34,000) Valuation allowance......................... (6,000) 46,000 -- -- ------- ------ --------- --------- Provision for (benefit) from income taxes... $114,000 $ 48,000 $(287,000) $(643,000) ======= ====== ========= =========
The Company paid taxes of $212,000 and $119,000 for the year ended December 31, 1994 and for the period from January 1, 1995 to March 10, 1995, respectively. NOTE 8 -- COMMITMENTS AND CONTINGENCIES COMMITMENTS Future minimum lease payments under noncancelable operating leases, primarily for facilities, are:
OPERATING YEARS ENDING DECEMBER 31: LEASES ------------------------------------------------------------------------ ---------- 1997............................................................... $1,874,000 1998............................................................... 1,959,000 1999............................................................... 1,832,000 2000............................................................... 1,007,000 2001............................................................... 946,000 Thereafter......................................................... 869,000 ---------- Total future minimum lease payments..................................... $8,487,000 ==========
In December 1992, the Company entered into a lease agreement for the Company's headquarters in Herndon, Virginia that extended the lease term through 2002. Subsequent to the acquisition, SAIC re-negotiated the lease with the landlord whereby SAIC has posted a $1,000,000 letter of credit. The Company historically has not entered directly into leases; leases are generally entered into by SAIC and then SAIC subleases the related assets to the Company under identical terms of the head lease. Lease expense related to the continuing operations based upon space utilized for the year ended December 31, 1994, for the periods from January 1, 1995 to March 10, 1995 and March 11, 1995 to December 31, 1995 and for the year ended December 31,1996 was $194,000, $36,000, $342,000, and F-15 98 NETWORK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 8 -- COMMITMENTS AND CONTINGENCIES (CONTINUED) COMMITMENTS (CONTINUED) $924,000, respectively. Lease expense incurred by the discontinued operations for the year ended December 31, 1994 and for the periods from January 1, 1995 to March 10, 1995 and March 11, 1995 to December 31, 1995 was $1,079,000, $208,000 and $328,000, respectively. Subsequent to March 10, 1995, the Company generated rental income in 1995 of $135,000 and $187,000 for the year ended December 31, 1996, from two subleases, which was recorded on the same basis as rent expense. CONTINGENCIES The Company is involved as plaintiff and defendant in litigation and administrative proceedings primarily arising in the normal course of its business. In the opinion of management, the Company's recovery, if any, or the Company's liability, if any, under any pending litigation or administrative proceeding will not materially affect its financial condition, results of operations or cash flow. As it relates to registration services, the applicability to the Company of existing laws governing issues such as intellectual property ownership is uncertain. Courts have indicated that, under certain circumstances, Internet service providers could be held responsible for the failure to prevent the distribution of material that infringes on others' copyrights and other intellectual property. As further discussed below, there exists the likelihood that the Company will become involved in future actions regarding disputes over domain names. The future interpretation by the courts relating to the obligation of domain name registration providers to prevent trademark infringement and other legal issues is uncertain. Costs incurred or decisions rendered as a result of any future government inquiry or other proceedings relating to any of the foregoing could have a material adverse effect on the Company's business, financial position and results of operations. The Company has been named as a defendant in a number of lawsuits which have generally involved domain name disputes between trademark owners and domain name holders. Through July 31, 1997, no damages have been awarded to the plaintiffs in any of the domain name lawsuits. The Company's domain name dispute policy seeks to take a neutral position between these competing claims and is designed to address claims that a domain name registered by the Company infringes a third party's trademark. The Company is drawn into such disputes, in part, as a result of claims by trademark owners that the Company is legally required to, upon being requested to do so by a trademark holder, terminate the right it granted to an alleged trademark infringer to register the domain name in question. Further, trademark owners have also alleged that the Company should be required to monitor future domain name registrations and reject registrations of domain names which are identical or similar to their registered trademark. The holders of the domain names registrations in dispute have, in turn, questioned the Company's right to, absent a court order, take any action which restricts or terminates their registration of the domain names in question. The Company intends to vigorously defend itself in all such matters. In the opinion of the management, the outcome of the existing lawsuits will not materially affect the Company's financial condition, results of operations or cash flow. However, such litigation has resulted 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. Such future potential expenses cannot be reasonably estimated at this time. See Note 14 "Subsequent Events (Unaudited)." F-16 99 NETWORK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 9 -- TRANSACTIONS WITH SAIC The financial statements as of and for the period from March 11, 1995 to December 31, 1995 and for the year ended December 31, 1996 include significant transactions with other SAIC business units involving functions and services (such as cash management, tax administration, accounting, legal, data processing and employee benefit plans) that were provided to the Company by centralized SAIC organizations. The costs of these functions and services have been directly charged and/or allocated to the Company using methods that management believes are reasonable; primarily a percentage of budgeted administrative and overhead costs. Such charges and allocations are not necessarily indicative of the costs that would have been incurred if the Company had been a separate entity. Through August 9, 1996, the amounts allocated by SAIC to the Company included both administrative and overhead costs which are included in selling, general and administrative expenses and cost of revenue respectively. Effective August 10, 1996, SAIC stopped allocating costs based upon pro rata labor and began assessing the Company for corporate services provided by SAIC at a fee equal to 2.5% of net revenue with such percentage to be re-evaluated by both parties on an annual basis. This fee is included in its entirety in selling, general and administrative expenses. The arrangement will continue indefinitely until terminated by either party upon 180 days' prior written notice. Amounts charged and allocated to the Company for these functions and services for the period from March 11, 1995 to December 31, 1995 and for the year ended December 31, 1996 were $516,000 and $1,196,000, respectively, and are principally included in selling, general and administrative expenses. Additionally, certain interest charges/credits are allocated by SAIC to the Company (Note 5). Sales as a subcontractor to SAIC for the period from March 11, 1995 to December 31, 1995 and for the year ended December 31, 1996 were $509,000 and $1,505,000, respectively. In addition, because the Company is included in SAIC's consolidated tax returns, the Company is obligated to make payment for its current tax liability to SAIC in accordance with the tax sharing arrangement. (See Note 7). Due to parent represents the cumulative net activity of all transactions between the Company and SAIC. NOTE 10 -- EMPLOYEE BENEFIT PLANS SAIC BENEFIT PLANS Employees of the Company participate in various SAIC benefit plans, subject to the applicable eligibility requirements. SAIC charges the Company directly for the costs of such employee benefit plans. Charges related to the administration of the SAIC benefit plans in which employees of the Company participate are included within SAIC general corporate allocations (Notes 1 and 9). In 1995, SAIC merged two of its profit sharing retirement plans into one principal Profit Sharing Retirement Plan in which eligible employees participate. Participants' interests vest 25% per year in the third through sixth year of service. Participants also become fully vested upon reaching age 59 1/2, permanent disability or death. SAIC has an Employee Stock Ownership Plan (the "Plan") in which eligible employees participate. Cash contributions to the Plan are based upon amounts determined annually by the SAIC Board of Directors and are allocated to participants' accounts based on their annual compensation. The vesting requirements for the Plan are the same as for the Profit Sharing Retirement Plan. SAIC has one principal Cash or Deferred Arrangement ("CODA") which allows eligible participants to defer a portion of their income through contributions. Such deferrals are fully vested, are not taxable to the participant until distributed from the CODA upon termination, retirement, permanent disability or death and may be matched by SAIC. F-17 100 NETWORK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 10 -- EMPLOYEE BENEFIT PLANS (CONTINUED) SAIC BENEFIT PLANS (CONTINUED) SAIC has a Bonus Compensation Plan which provides for bonuses to reward outstanding performance. Bonuses are paid in the form of cash, fully vested shares of SAIC Class A common stock or vesting shares of SAIC Class A common stock. Awards of vesting shares of SAIC Class A common stock vest at the rate of 20%, 20%, 20% and 40% after one, two, three and four years, respectively. During the period from March 11, 1995 to December 31, 1995 and during the year ended December 31, 1996 a total of 24,450 and 53,040 SAIC options were granted to the Company's employees, respectively, with exercise prices ranging from $15.72 to $17.79 and $19.33 to $22.83 per share, respectively, with a weighted average price of $16.17 and $20.51, respectively. In 1995, SAIC adopted the Stock Compensation Plan and the Management Stock Compensation Plan, together referred to as the "Stock Compensation Plans." The Stock Compensation Plans provide for awards of share units to eligible employees, which share units generally correspond to shares of SAIC Class A common stock which are held in trust for the benefit of participants. Participants' interests in these share units vest on a seven year schedule at the rate of one-third at the end of each of the fifth, sixth and seventh years following the date of the award. SAIC also has an Employee Stock Purchase Plan which allows eligible employees to purchase shares of SAIC's Class A common stock, with SAIC contributing 5% of the purchase price. PRE-ACQUISITION BENEFIT PLANS Prior to the acquisition, the Company had a plan (the "401(k) Plan") covering substantially all employees which provided for employee savings under Internal Revenue Code Section 401(k). Eligible employees under the 401(k) Plan contributed from one percent to ten percent of gross pay to their plan savings account. The Company matched employee contributions to the 401(k) Plan, up to six percent of base salary. Contributions to the 401(k) Plan for the year ended December 31, 1994 and for the period from January 1, 1995 to March 10, 1995 were not significant. At the time of SAIC's acquisition of the Company, all contributions to the 401(k) Plan ceased and the 401(k) Plan was subsequently terminated. 1996 STOCK INCENTIVE PLAN The 1996 Stock Incentive Plan (the "Incentive Plan") of the Company was adopted by the Board of Directors on September 18, 1996. The Incentive Plan provides for awards in the form of restricted shares, stock units, options (including incentive stock options ("ISOs") and nonstatutory stock options ("NSOs")) or stock appreciation rights ("SARs"). Employees, outside directors, consultants and advisors of the Company are eligible for the grant of restricted shares, stock units, SARs and NSOs. Only employees are eligible for the grant of ISOs. A total of 2,306,250 shares of Common Stock has been initially reserved for issuance under the Incentive Plan. Such number of shares may be increased by up to 2% of the total number of common shares of the Company outstanding at the end of the most recent calendar year, subject to a cumulative increase of 1,000,000 common shares. Consideration for each award under the Incentive Plan will be established by the Compensation Committee of the Board of Directors, but in no event will the option price for ISOs be less than 100% of the fair market value of the stock on the date of grant. Awards will have such terms and be exercisable in such manner and at such times as the Compensation Committee may determine. However, each ISO must expire within a period of not more than ten years from the date of grant. F-18 101 NETWORK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 10 -- EMPLOYEE BENEFIT PLANS (CONTINUED) 1996 STOCK INCENTIVE PLAN (CONTINUED) As of December 31, 1996, a total of 100,900 ISOs and 1,124,825 NSOs have been granted under the Incentive Plan, of which 461,250 will be exercisable at $11.25 per share and 764,475 at $14.00 per share. The stock options become exercisable one year after the date of the grant, vest 30%, 30%, 20% and 20% on each anniversary date of the grant and have a term of five years. No options have been exercised or forfeited. The weighted average contractual life of options outstanding at December 31, 1996 was 4.9 years. No restricted shares, stock units or SARs have been granted to date. PRO FORMA DISCLOSURES The weighted-average fair value of the options granted during the period from March 11, 1995 to December 31, 1995 and during the year ended December 31, 1996 under the SAIC Bonus Compensation Plan were estimated at $3.66 and $4.30, respectively, and $2.76 for the options granted during the year ended December 31, 1996 under the Company's Incentive Plan using the Black-Scholes model. The following weighted average assumptions were used in calculating the option fair values:
COMPANY STOCK SAIC STOCK OPTIONS OPTIONS --------------------------------- ------------ MARCH 11, 1995 YEAR ENDED YEAR ENDED TO DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1996 1996 ----------------- ------------ ------------ Expected life (years).............................. 4.0 4.0 4.0 Risk-free interest rate............................ 6.45% 5.91% 5.98% Volatility......................................... 0.00% 0.00% 0.00% Dividend yield..................................... 0.00% 0.00% 0.00%
Under the above models, the total value of SAIC stock options granted during 1995 and 1996 was approximately $89,000 and $228,000, respectively, and $3,379,000 for the Company stock options granted in 1996, all of which would be amortized ratably on a pro forma basis over the four year option terms. Had the Company recorded compensation costs for these plans in accordance with SFAS No. 123, the Company's pro forma net loss would have been $1,430,000 for the period March 11, 1995 to December 31, 1995 and $1,763,000 for the year ended December 31, 1996. Pro forma (unaudited) net loss per share would have been $(0.13) for the year ended December 31, 1996. NOTE 11 -- DISCONTINUED OPERATIONS As discussed in Note 1, in November 1995 SAIC adopted a plan to transfer the Company's government-based business to SAIC in order for the Company to focus on the growth of the commercial business. Such transfer was substantially completed in February 1996. Prior to SAIC's acquisition of the Company, the portion of the Company's business relating to the minority-based government business had been transferred into a separately-owned entity of the then majority shareholder. The activities of both the minority-based government business and the remaining government-based business are reflected as discontinued operations in the financial statements of the Company for all periods presented. Net income (loss) from discontinued operations exclude general corporate overhead of the Company. No gain or loss was incurred as a consequence of the transfer of these businesses. F-19 102 NETWORK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 11 -- DISCONTINUED OPERATIONS (CONTINUED) The net liabilities for discontinued operations consisted of the following as of December 31, 1995: Assets: Current............................................................ $5,306,000 Non-current........................................................ 249,000 ---------- 5,555,000 ---------- Liabilities: Current............................................................ 5,763,000 Non-current........................................................ -- ---------- 5,763,000 ---------- Net liabilities -- discontinued operations.............................. $ (208,000) ==========
Summary operating results of the discontinued operations were as follows:
FOR THE PERIOD 1995 YEAR ENDED ---------------------------- DECEMBER 31, JANUARY 1 TO MARCH 11 TO 1994 MARCH 10 DECEMBER 31 ------------ ------------ ----------- Revenue............................................. $ 25,264,000 $ 4,270,000 $ 7,882,000 Costs and expenses.................................. (26,338,000) (5,478,000) (7,773,000) ----------- ----------- -------- Income (loss) from discontinued operations before income taxes...................................... (1,074,000) (1,208,000) 109,000 Provision for income taxes.......................... 95,000 167,000 137,000 ----------- ----------- -------- Loss from discontinued operations, net of income taxes............................................. $ (1,169,000) $ (1,375,000) $ (28,000) =========== =========== ========
NOTE 12 -- EFFECT OF NEW ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share." This statement establishes standards for computing and presenting earnings per share, simplifying previous standards for computing earnings per share ("EPS") and making them comparable to international standards. It replaces the presentation of primary EPS with a presentation of basic EPS, and requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. SFAS No. 128 requires restatement of all prior period earnings per share data presented, and is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. Earlier application is not permitted. The Company will adopt this statement during the fourth quarter of 1997, as required. Accordingly, all prior period EPS data will be restated. To illustrate the effect of adoption, the Company has elected to disclose pro forma basic and diluted EPS amounts computed using SFAS 128, as permitted F-20 103 NETWORK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 12 -- EFFECT OF NEW ACCOUNTING PRONOUNCEMENT (CONTINUED) by the standard. The pro forma basic and diluted EPS for the year ended December 31, 1996, and for the six months ended June 30, 1996 and 1997 are set forth below:
SIX MONTHS ENDED JUNE 30, YEAR ENDED ---------------------- DECEMBER 31, 1996 1996 1997 ----------------- ------- ------ Pro forma basic earnings per share................ $ (0.12) $ (0.11) $ 0.09 ============== ====== ===== Pro forma diluted earnings per share.............. $ (0.12) $ (0.11) $ 0.09 ============== ====== =====
NOTE 13 -- RECAPITALIZATION On June 26, 1997, the Board of Directors amended the Certificate of Incorporation to provide for two classes of common stock, designated as Class A and Class B. The accompanying financial statements have been adjusted to reflect this change. NOTE 14 -- SUBSEQUENT EVENTS (UNAUDITED) Stock Incentive Plan On April 18, 1997, the Board of Directors increased the number of shares initially reserved for issuance under the Incentive Plan to 2,556,250. Between January 1, 1997 and July 31, 1997, the Company granted options to purchase 340,000 shares of the Company's Class A common stock at $14.00 per share. In addition, options to purchase 26,000 shares were canceled during that period. Commitments On May 30, 1997, the Company entered into an operating lease for additional office facilities for the period from May 30, 1997 through July 31, 2002. During the period from January 1, 1997 through May 31, 1997, the Company acquired $2,537,000 of equipment under a capital lease. Contingencies On March 20, 1997, PG Media, Inc., a New York-based corporation ("PG Media"), filed a lawsuit against the Company in the United States District Court, Southern District of New York alleging that the Company had restricted access to the Internet by not adding TLDs in violation of antitrust laws under the Sherman Act. In its complaint, PG Media has asked, in addition to requesting damages, that the Company be ordered to amend the root zone configuration file so that the file includes reference to PG Media's TLDs and name servers. The Company has answered the complaint, but no motions are pending and no schedule has yet been set by the court for these proceedings. In addition, the Company recently received written direction from the NSF not to take any action to create additional TLDs or to add any new TLDs to the Internet root servers until further guidance is provided by the NSF. The Company believes that it has meritorious defenses and intends to vigorously defend itself against the claims made by PG Media and cannot reasonably estimate the potential impact of such claims. 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 a violation of antitrust laws 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. Neither SAIC nor the Company is aware of the scope or nature of the F-21 104 NETWORK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 14 -- SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED) investigation. The Company cannot reasonably estimate the potential impact of such investigation, nor can it predict whether a civil action will ultimately be filed by the DOJ or by private litigants as a result of the DOJ investigation or, if filed, what such action would entail. The Company is unable to predict the form of relief that might be sought in such an action or that might be awarded by a court or imposed as a result of any settlement between the Company and the DOJ or private litigants. Any such relief could have a material adverse effect on the Company's financial condition and results of operations. Dividend On August 21, 1997, the Board of Directors declared a $10,000,000 dividend payable on August 31, 1997 to SAIC. F-22 105 [INSIDE BACK COVER OF PROSPECTUS] DEPICTION OF INTRANET SERVICES BUSINESS APPEARS HERE Intranet-Enabled Business Solutions INTRANET SERVICES Intranet Development Network & Systems and Re-Engineering Security
106 - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary................... 3 Risk Factors......................... 7 Use of Proceeds...................... 23 Dividend Policy...................... 23 Capitalization....................... 24 Dilution............................. 25 Selected Financial Data.............. 26 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 28 Business............................. 41 Management........................... 57 Relationship with SAIC and Certain Transactions....................... 66 Principal Stockholders............... 70 Description of Capital Stock......... 71 Shares Eligible for Future Sale...... 76 Underwriting......................... 78 Legal Matters........................ 79 Experts.............................. 80 Additional Information............... 80 Index to Financial Statements........ F-1
------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 2,300,000 SHARES [LOGO] CLASS A COMMON STOCK ----------------------- PROSPECTUS ----------------------- HAMBRECHT & QUIST J. P. MORGAN & CO. PAINEWEBBER INCORPORATED , 1997 - ------------------------------------------------------ - ------------------------------------------------------ 107 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses expected to be incurred by the Registrant in connection with the sale and distribution of the securities being registered hereby, other than underwriting discounts and commissions. All amounts are estimated except the Securities and Exchange Commission registration fee and the National Association of Securities Dealers, Inc. filing fee.
PAYABLE BY REGISTRANT* ----------- SEC registration fee......................................... $ 12,825 National Association of Securities Dealers, Inc. filing fee........................................................ 4,000 Nasdaq Filing Fee............................................ 18,000 Blue Sky fees and expenses................................... 1,000 Accounting fees and expenses................................. 600,000 Legal fees and expenses...................................... 300,000 Printing and engraving expenses.............................. 100,000 Registrar and transfer agent's fees.......................... 11,000 Miscellaneous fees and expenses.............................. 53,175 -------- Total................................................... $ 1,100,000 ========
- --------------- * All expenses listed above are estimates except for the SEC registration fee and the NASD filing fee. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law provides for the indemnification of officers, directors, and other corporate agents in terms sufficiently broad to indemnify such persons under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Act"). Article VIII of the Registrant's Certificate of Incorporation (Exhibit 3(i) hereto) provides for indemnification of the Registrant's directors, officers, employees and other agents to the extent and under the circumstances permitted by the Delaware General Corporation Law. The Registrant has also entered into agreements with its directors and officers that will require the Registrant, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers to the fullest extent not prohibited by law. The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the Underwriters of the Registrant, its directors and officers, and by the Registrant and SAIC of the Underwriters, for certain liabilities, including liabilities arising under the Act, and affords certain rights of contribution with respect thereto. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since January 1, 1994, the Registrant has issued and sold (without payment of any selling commission to any person) the following unregistered securities: 1. From October 14, 1996 to July 31, 1997, the Registrant granted incentive stock options to purchase an aggregate of 100,900 shares of the Registrant's Class A Common Stock to employees, officers and directors of the Registrant under its 1996 Stock Incentive Plan at exercise prices ranging from $11.25 to $14.00 per share. Certain of these options vest over a period of time following their respective dates of grant pursuant to the Registrant's 1996 Stock Incentive Plan. II-1 108 2. From October 14, 1996 to July 31, 1997, the Registrant granted nonstatutory stock options to purchase an aggregate of 1,438,825 shares of the Registrant's Class A Common Stock to employees, officers and directors of the Company under its 1996 Stock Incentive Plan at exercise prices ranging from $11.25 to $14.00 per share. Certain of these options vest over a period of time following their respective dates of grant, pursuant to the Registrant's 1996 Stock Incentive Plan. The sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had access, through their relationship with the Company, to information about the Registrant. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ------------------------------------------------------------------------------------ 1.1* Form of Underwriting Agreement. 3(i)** Second Amended and Restated Certificate of Incorporation. 3(ii)** Bylaws of the Registrant, as amended. 4.1 Form of Common Stock Certificate. 4.2** Reference is made to Exhibits 3(i) and 3(ii). 5.1 Opinion of Pillsbury Madison & Sutro LLP. 10.1** Cooperative Agreement between the National Science Foundation and Network Solutions, Inc., as amended by Amendments Nos. 1, 2, 3 and 5. 10.2** Amendment No. 4 to the Cooperative Agreement dated September 13, 1995. 10.3** Master Services Agreement for System Management Services dated January 21, 1997 by and between NationsBanc Services, Inc. and Network Solutions, Inc. 10.4** 1996 Stock Incentive Plan and forms of agreements thereunder. 10.5 Corporate Services Agreement between Network Solutions, Inc. and Science Applications International Corporation. 10.6* Tax Sharing Agreement between Network Solutions, Inc. and Science Applications International Corporation. 10.7 Registration Rights Agreement between Network Solutions, Inc. and Science Applications International Corporation. 10.8 Noncompetition and Corporate Opportunities Agreement between Network Solutions, Inc. and Science Applications International Corporation. 10.9 Letter Agreement dated September 16, 1996 between the Registrant and Gabriel A. Battista, as amended as of September 23, 1996. 10.10 Science Applications International Corporation Employee Stock Ownership Plan and amendments thereto. 10.11 Science Applications International Corporation 1995 Stock Option Plan. 10.12 Letter dated September 13, 1995 regarding Amendment No. 4 to the Cooperative Agreement. 11.1 Statement of computation of earnings per share. 23.1 Consent of Price Waterhouse LLP (see Page II-5). 23.2 Consent of Pillsbury Madison & Sutro LLP (included in Exhibit 5.1). 24.1** Power of Attorney. 24.2 Power of Attorney of John E. Glancy. 27.1 Financial Data Schedule.
- --------------- * To be filed by amendment. ** Previously filed. II-2 109 (b) FINANCIAL STATEMENT SCHEDULES Schedules other than those referred to above have been omitted because they are not applicable or not required or because the information is included elsewhere in the Financial Statements or the notes thereto. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act"), may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, as amended, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, as amended, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) The Registrant will provide to the underwriters at the closing(s) specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. II-3 110 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Herndon, State of Virginia, on the 27th day of August, 1997. NETWORK SOLUTIONS, INC. BY /s/ GABRIEL A. BATTISTA ------------------------------------ Gabriel A. Battista Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE - ---------------------------------------- ----------------------------------- ---------------- /s/ GABRIEL A. BATTISTA Chief Executive Officer and August 27, 1997 - ---------------------------------------- Director Gabriel A. Battista /s/ ROBERT J. KORZENIEWSKI Chief Financial Officer (Principal August 27, 1997 - ---------------------------------------- Financial Officer) Robert J. Korzeniewski RUSSELL L. HELBERT* Controller (Principal Accounting August 27, 1997 - ---------------------------------------- Officer) Russell L. Helbert MICHAEL A. DANIELS* Chairman of the Board August 27, 1997 - ---------------------------------------- Michael A. Daniels J. ROBERT BEYSTER* Director August 27, 1997 - ---------------------------------------- J. Robert Beyster CRAIG I. FIELDS* Director August 27, 1997 - ---------------------------------------- Craig I. Fields JOHN E. GLANCY* Director August 27, 1997 - ---------------------------------------- John E. Glancy WILLIAM A. ROPER, JR.* Director August 27, 1997 - ---------------------------------------- William A. Roper, Jr. STRATTON D. SCLAVOS* Director August 27, 1997 - ---------------------------------------- Stratton D. Sclavos DONALD N. TELAGE* Director August 27, 1997 - ---------------------------------------- Donald N. Telage *By: /s/ ROBERT J. KORZENIEWSKI - ---------------------------------------- (Robert J. Korzeniewski, Attorney-in-Fact)
II-4 111 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated March 17, 1997, except as to Note 13 which is as of June 26, 1997, relating to the financial statements of Network Solutions, Inc., for the year ended December 31, 1996 and for the period from March 11, 1995 to December 31, 1995 and of our report dated March 17, 1997, except as to Note 13 which is as of June 26, 1997, relating to the financial statements of Network Solutions, Inc., for the period from January 1, 1995 to March 10, 1995 and for the year ended December 31, 1994, which appear in such Prospectus. We also consent to the application of such reports to the Financial Statement Schedule for the year ended December 31, 1996, the period from March 11, 1995 to December 31, 1995, the period from January 1, 1995 to March 10, 1995 and for the year ended December 31, 1994 listed under Item 16(b) of this Registration Statement when such schedule is read in conjunction with the financial statements referred to in our reports. The audits referred to in such reports also included this schedule. We also consent to the reference to us under the heading "Experts" in such Prospectus. PRICE WATERHOUSE LLP Falls Church, VA August 21, 1997 II-5 112 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
================================================================================================================ COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ADDITIONS ------------------------- CHARGED TO BALANCE AT CHARGED TO OTHER BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- BALANCE AT DESCRIPTION OF YEAR EXPENSES DESCRIBE DESCRIBE END OF YEAR - ---------------------------------------------------------------------------------------------------------------- Year ended December 31, 1994 Allowance for uncollectible accounts, included in net assets (liabilities) of discontinued operations...................... $ 345,000 $ 464,000 $ -- $ -- $ 809,000 Deferred tax valuation allowance, continuing operations........... 61,000 (5,000) -- -- 56,000 Deferred tax valuation allowance, discontinued operations......... 377,000 135,000 -- -- 512,000 For the period from January 1, 1995 to March 10, 1995 Allowance for uncollectible accounts, included in net assets (liabilities) of discontinued operations...................... 809,000 344,000 -- -- 1,153,000 Deferred tax valuation allowance, continuing operations........... 56,000 46,000 -- -- 102,000(1) Deferred tax valuation allowance, discontinued operations......... 512,000 276,000 -- -- 788,000(1) - ---------------------------------------------------------------------------------------------------------------- For the period from March 11, 1995 to December 31, 1995 Allowance for uncollectible accounts, continuing operations...................... $ -- $ 124,000 $ 1,994,000(2) $ -- $ 2,118,000 Allowance for uncollectible accounts, included in net assets (liabilities) of discontinued operations...................... 1,153,000 465,000 -- -- 1,618,000 Year ended December 31, 1996 Allowance for uncollectible accounts, continuing operations...................... 2,118,000 3,597,000 19,270,000(2) 9,546,000 (3) 15,439,000 Allowance for uncollectible accounts, included in net assets (liabilities) of discontinued operations...................... 1,618,000 -- -- 1,618,000 (4) --
- --------------- (1) In connection with the acquisition purchase accounting, a determination was made that the tax valuation allowances were no longer required. (See Note 7 of Notes to Financial Statements.) (2) Charged to allowance for deferred revenue (See Notes 2 and 3 of Notes to Financial Statements). (3) Amounts are write-offs of uncollectible accounts receivable. (4) Disposition associated with discontinued operations (See Note 11 of Notes to Financial Statements). 113 EXHIBIT INDEX
EXHIBIT PAGE NUMBER DESCRIPTION OF DOCUMENT NUMBER - ------ ---------------------------------------------------------------------------- ------ 1.1* Form of Underwriting Agreement.............................................. 3(i)** Second Amended and Restated Certificate of Incorporation.................... 3(ii)** Bylaws of the Registrant, as amended........................................ 4.1 Form of Common Stock Certificate............................................ 4.2** Reference is made to Exhibits 3(i) and 3(ii)................................ 5.1 Opinion of Pillsbury Madison & Sutro LLP.................................... 10.1** Cooperative Agreement between the National Science Foundation and Network Solutions, Inc., as amended by Amendments Nos. 1, 2, 3 and 5................ 10.2** Amendment No. 4 to the Cooperative Agreement dated September 13, 1995....... 10.3** Master Services Agreement for System Management Services dated January 21, 1997 by and between NationsBanc Services, Inc. and Network Solutions, Inc......................................................................... 10.4 1996 Stock Incentive Plan and forms of agreements thereunder................ 10.5 Corporate Services Agreement between Network Solutions, Inc. and Science Applications International Corporation...................................... 10.6* Tax Sharing Agreement between Network Solutions, Inc. and Science Applications International Corporation...................................... 10.7 Registration Rights Agreement between Network Solutions, Inc. and Science Applications International Corporation...................................... 10.8 Noncompetition and Corporate Opportunities Agreement between Network Solutions, Inc. and Science Applications International Corporation.......... 10.9 Letter Agreement dated September 16, 1996 between the Registrant and Gabriel A. Battista, as amended as of September 23, 1996............................ 10.10 Science Applications International Corporation Employee Stock Ownership Plan and amendments thereto...................................................... 10.11 Science Applications International Corporation 1995 Stock Option Plan....... 10.12 Letter dated September 13, 1995 regarding Amendment No. 4 to the Cooperative Agreement................................................................... 11.1 Statement of computation of earnings per share.............................. 23.1 Consent of Price Waterhouse LLP (see Page II-5)............................. 23.2 Consent of Pillsbury Madison & Sutro LLP (included in Exhibit 5.1).......... 24.1** Power of Attorney........................................................... 24.2 Power of Attorney for John E. Glancy........................................ 27.1 Financial Data Schedule.
- --------------- * To be filed by amendment. ** Previously filed. EX-4.1 2 FORM OF COMMON STOCK CERTIFICATE 1 EXHIBIT 4.1 COMMON STOCK COMMON STOCK NUMBER SHARES NSOL [NETWORK SOLUTIONS LOGO] INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS AND A STATEMENT AS TO THE RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS ON SHARES CUSIP 64121Q 10 2 THIS CERTIFIES THAT is the record holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $0.001 PAR VALUE PER SHARE, OF NETWORK SOLUTIONS, INC. transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: [NETWORK SOLUTIONS INCORPORATED CORPORATE SEAL 1979] [SIG] [SIG] CHIEF FINANCIAL OFFICER CHIEF EXECUTIVE OFFICER COUNTERSIGNED AND REGISTERED: CHASEMELLON SHAREHOLDER SERVICES, L.L.C. TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE 2 A statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights as established, from time to time, by the Certificate of Incorporation of the Corporation and by any certificate of determination, the number of shares constituting each class and series, and the designations thereof, may be obtained by the holder hereof upon request and without charge from the Secretary of the Corporation at the principal office of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common TEN ENT -- as tenants by the entireties UNIF GIFT MIN ACT ......................... Custodian ......................... JT TEN -- as joint tenants with right of (Cust) (Minor) survivorship and not as tenants under Uniform Gifts to Minors in common Act ........................................................ (State) UNIF TRF MIN ACT ................ Custodian (until age ....................... (Cust) ............................ under Uniform Transfers (Minor) to Minors Act ................................................. (State)
Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, __________________ hereby sell, assign, and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - ------------------------------------------- - ------------------------------------------- _______________________________________________________________________________ (PLEASE TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) _______________________________________________________________________________ _______________________________________________________________________________ _________________________________________________________________________Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint _______________________________________________________________________Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated________________________________ X_______________________________________________ X_______________________________________________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed By_______________________________________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM) PURSUANT TO S.E.C. RULE 17Ad_15. EX-5.1 3 OPINION OF PILLSBURY MADISON & SUTRO LLP 1 Exhibit 5.1 PILLSBURY MADISON & SUTRO LLP 2700 Sand Hill Road Menlo Park, CA 94025 Tel: (650) 233-4500 Fax: (650) 233-4545 August 22, 1997 Network Solutions, Inc. 505 Huntmar Park Drive Herndon, Virginia 20170 Re: Registration Statement on Form S-1 Ladies and Gentlemen: We are acting as counsel for Network Solutions, Inc., a Delaware corporation (the "Company"), in connection with the registration under the Securities Act of 1933, as amended, of 2,645,000 shares of Class A Common Stock, par value $.001 per share (the "Class A Common Stock"), of the Company (including 345,000 shares subject to the underwriters' over-allotment option) to be offered and sold by the Company. In this regard we have participated in the preparation of a Registration Statement on Form S-1 relating to such 2,645,000 shares of Class A Common Stock. (Such Registration Statement, as amended, and including any registration statement related thereto and filed pursuant to Rule 462(b) under the Securities Act (a "Rule 462(b) registration statement") is herein referred to as the "Registration Statement.") We are of the opinion that the shares of Class A Common Stock to be offered and sold by the Company (including any shares of Class A Common Stock registered pursuant to a Rule 462(b) registration statement) have been duly authorized and, when issued and sold by the Company in the manner described in the Registration Statement and in accordance with the resolutions adopted by the Board of Directors of the Company, will be legally issued, fully paid and nonassessable. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and to the use of our name under the caption "Legal Matters" in the Registration Statement and in the Prospectus included therein. Very truly yours, /s/ PILLSBURY MADISON & SUTRO LLP EX-10.4 4 STOCK INCENTIVE PLAN 1 EXHIBIT 10.4 NETWORK SOLUTIONS, INC. 1996 STOCK INCENTIVE PLAN (Amended and Restated Effective July 7, 1997) 2 TABLE OF CONTENTS
Page ---- ARTICLE 1. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 2. ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.1 Committee Composition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.2 Committee Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 3. SHARES AVAILABLE FOR GRANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3.1 Basic Limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3.2 Additional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3.3 Dividend Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE 4. ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4.1 General Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4.2 Incentive Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4.3 Limits on Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE 5. OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.1 Stock Option Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.2 Number of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.3 Exercise Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.4 Exercisability and Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.5 Effect of Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5.6 Modification or Assumption of Options. . . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE 6. PAYMENT FOR OPTION SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6.1 General Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6.2 Surrender of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6.3 Exercise/Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6.4 Exercise/Pledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6.5 Promissory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6.6 Other Forms of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE 7. STOCK APPRECIATION RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 7.1 SAR Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 7.2 Number of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 7.3 Exercise Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 7.4 Exercisability and Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 7.5 Effect of Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 7.6 Exercise of SARs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 7.7 Modification or Assumption of SARs. . . . . . . . . . . . . . . . . . . . . . . . . . 6
-i- 3
Page ---- ARTICLE 8. RESTRICTED SHARES AND STOCK UNITS . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 8.1 Time, Amount and Form of Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 8.2 Payment for Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 8.3 Vesting Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 8.4 Form and Time of Settlement of Stock Units . . . . . . . . . . . . . . . . . . . . . 6 8.5 Death of Recipient . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 8.6 Creditors' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE 9. VOTING AND DIVIDEND RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 9.1 Restricted Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 9.2 Stock Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE 10. PROTECTION AGAINST DILUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 10.1 Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 10.2 Reorganizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE 11. AWARDS UNDER OTHER PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE 12. PAYMENT OF DIRECTOR'S FEES IN SECURITIES . . . . . . . . . . . . . . . . . . . . . . . 8 12.1 Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 12.2 Elections to Receive NSOs or Stock Units . . . . . . . . . . . . . . . . . . . . . . 8 12.3 Number and Terms of NSOs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 12.4 Number and Terms of Stock Units . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE 13. LIMITATION ON RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 13.1 Retention Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 13.2 Stockholders' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 13.3 Regulatory Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE 14. LIMITATION ON PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 14.1 Basic Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 14.2 Reduction of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 14.3 Overpayments and Underpayments . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 14.4 Related Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE 15. WITHHOLDING TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 15.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 15.2 Share Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE 16. ASSIGNMENT OR TRANSFER OF AWARDS . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 16.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
-ii- 4
Page ---- ARTICLE 17. FUTURE OF THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 17.1 Term of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 17.2 Amendment or Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE 18. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE 19. EXECUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
-iii- 5 NETWORK SOLUTIONS, INC. 1996 STOCK INCENTIVE PLAN (Amended and Restated Effective July 7, 1997) ARTICLE 1. INTRODUCTION. The Plan was adopted by the Board on September 18, 1996, subject to approval by the Company's stockholders. The Plan was most recently amended and restated on July 7, 1997 to reflect the recapitalization of the common shares of the Company. The purpose of the Plan is to promote the long-term success of the Company and the creation of stockholder value by (a) encouraging Key Employees to focus on critical long-range objectives, (b) encouraging the attraction and retention of Key Employees with exceptional qualifications and (c) linking Key Employees directly to stockholder interests through increased stock ownership. The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares, Stock Units, Options (which may constitute incentive stock options or nonstatutory stock options) or stock appreciation rights. The Plan shall be governed by, and construed in accordance with, the laws of the State of Delaware (except their choice-of-law provisions). ARTICLE 2. ADMINISTRATION. 2.1 Committee Composition. The Plan shall be administered by the Committee. Effective with the Company's initial public offering, the Committee shall consist of two or more directors of the Company who shall satisfy the requirements of Rule 16b-3 (or its successor) under the Exchange Act with respect to the grant of Awards to persons who are officers or directors of the Company under Section 16 of the Exchange Act or the Board itself. The Board may also appoint one or more separate committees of the Board, each composed of one or more directors of the Company who need not qualify under Rule 16b-3, who may administer the Plan with respect to Key Employees who are not considered officers or directors of the Company under Section 16 of the Exchange Act, may grant Awards under the Plan to such Key Employees and may determine all terms of such Awards. 2.2 Committee Responsibilities. The Committee shall: (a) Select the Key Employees who are to receive Awards under the Plan; (b) Determine the type, number, vesting requirements and other features and conditions of such Awards; -1- 6 (c) Interpret the Plan; and (d) Make all other decisions relating to the operation of the Plan. The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan. The Committee's determinations under the Plan shall be final and binding on all persons. ARTICLE 3. SHARES AVAILABLE FOR GRANTS. 3.1 Basic Limitation. Common Shares issued pursuant to the Plan may be authorized but unissued shares or treasury shares. The aggregate number of Common Shares initially reserved for award under the Plan shall be 2,306,250 shares. Effective January 1, 1997 and on each January 1 thereafter for the remaining term of the Plan, the aggregate number of Common Shares which may be issued under the Plan to individuals shall be increased by a number of Common Shares equal to 2% of the total number of the Class A and Class B shares of common stock of the Company outstanding at the end of the most recently concluded calendar year. Any Common Shares that have been reserved but not issued as Restricted Shares, Share Units, Options or SARs during any calendar year shall remain available for grant during any subsequent calendar year. Notwithstanding the foregoing, no more than 1,000,000 Common Shares shall be available for the grant of ISOs for the remaining term of the Plan. The limitation of this Section 3.1 shall be subject to adjustment pursuant to Article 10. 3.2 Additional Shares. If Stock Units, Options or SARs are forfeited or if Options or SARs terminate for any other reason before being exercised, then the corresponding Common Shares shall again become available for Awards under the Plan. If SARs are exercised, then only the number of Common Shares (if any) actually issued in settlement of such SARs shall reduce the number available under Section 3.1 and the balance shall again become available for Awards under the Plan. If Restricted Shares are forfeited, then such Shares shall again become available for Awards under the Plan. 3.3 Dividend Equivalents. Any dividend equivalents distributed under the Plan shall not be applied against the number of Restricted Shares, Stock Units, Options or SARs available for Awards, whether or not such dividend equivalents are converted into Stock Units. ARTICLE 4. ELIGIBILITY. 4.1 General Rules. Only Key Employees (including, without limitation, independent contractors who are not members of the Board) shall be eligible for designation as Participants by the Committee. All Outside Directors shall be eligible for making an election described in Article 12. 4.2 Incentive Stock Options. Only Key Employees who are common-law employees of the Company, a Parent or a Subsidiary shall be eligible for the grant of ISOs. In addition, a Key Employee who owns more than ten percent (10%) of the total combined voting -2- 7 power of all classes of outstanding stock of the Company or any of its Parents or Subsidiaries shall not be eligible for the grant of an ISO unless the requirements set forth in section 422(c)(5) of the Code are satisfied. 4.3 Limits on Awards. No Key Employee shall receive Options or SARs to purchase Common Shares during any fiscal year covering in excess of 1,000,000 Common Shares; provided, however, a newly hired Key Employee may receive Options or SARs to purchase up to 1,000,000 Common Shares during the portion of the fiscal year remaining after his or her date of hire. ARTICLE 5. OPTIONS. 5.1 Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan, including but not limited to rights of repurchase and rights of first refusal. The Stock Option Agreement shall specify whether the Option is an ISO or an NSO. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. Options may be granted in consideration of a cash payment or in consideration of a reduction in the Optionee's other compensation. A Stock Option Agreement may provide that new Options will be granted automatically to the Optionee when he or she exercises the prior Options. 5.2 Number of Shares. Each Stock Option Agreement shall specify the number of Common Shares subject to the Option and shall provide for the adjustment of such number in accordance with Article 10. 5.3 Exercise Price. Each Stock Option Agreement shall specify the Exercise Price; provided that the Exercise Price of an ISO shall in no event be less than one hundred percent (100%) of the Fair Market Value of a Common Share on the date of grant. In the case of an NSO, a Stock Option Agreement may specify an Exercise Price that varies in accordance with a predetermined formula while the NSO is outstanding. 5.4 Exercisability and Term. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become exercisable. The Stock Option Agreement shall also specify the term of the Option; provided that the term of an ISO shall in no event exceed ten (10) years from the date of grant. A Stock Option Agreement may provide for accelerated exercisability in the event of the Optionee's death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee's service. Options may be awarded in combination with SARs, and such an Award may provide that the Options will not be exercisable unless the related SARs are forfeited. NSOs may also be awarded in combination with Restricted Shares or Stock Units, and such an Award may provide that the NSOs will not be exercisable unless the related Restricted Shares or Stock Units are forfeited. -3- 8 5.5 Effect of Change in Control. The Committee may determine, at the time of granting an Option or thereafter, that such Option shall become fully exercisable as to all Common Shares subject to such Option in the event that a Change in Control occurs with respect to the Company. 5.6 Modification or Assumption of Options. Within the limitations of the Plan, the Committee may modify, extend or assume outstanding options or may accept the cancellation of outstanding options (whether granted by the Company or by another issuer) in return for the grant of new options for the same or a different number of shares and at the same or a different exercise price. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, alter or impair his or her rights or obligations under such Option. ARTICLE 6. PAYMENT FOR OPTION SHARES. 6.1 General Rule. The entire Exercise Price for the Common Shares issued upon exercise of Options shall be payable in cash at the time when such Common Shares are purchased, except as follows: (a) In the case of an ISO granted under the Plan, payment shall be made only pursuant to the express provisions of the applicable Stock Option Agreement. The Stock Option Agreement may specify that payment may be made in any form(s) described in this Article 6. (b) In the case of an NSO, the Committee may at any time accept payment in any form(s) described in this Article 6. 6.2 Surrender of Stock. To the extent that this Section 6.2 is applicable, payment for all or any part of the Exercise Price may be made with Common Shares which have already been owned by the Optionee for such duration as shall be specified by the Committee. Such Common Shares shall be valued at their Fair Market Value on the date when the new Common Shares are purchased under the Plan. 6.3 Exercise/Sale. To the extent that this Section 6.3 is applicable, payment may be made by the delivery (on a form prescribed by the Company) of an irrevocable direction to a securities broker approved by the Company to sell Common Shares and to deliver all or part of the sales proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes. 6.4 Exercise/Pledge. To the extent that this Section 6.4 is applicable, payment may be made by the delivery (on a form prescribed by the Company) of an irrevocable direction to pledge Common Shares to a securities broker or lender approved by the Company, as security for a loan, and to deliver all or part of the loan proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes. -4- 9 6.5 Promissory Note. To the extent that this Section 6.5 is applicable, payment may be made with a full-recourse promissory note; provided that to the extent required by applicable law, the par value of the Common Shares shall be paid in cash. 6.6 Other Forms of Payment. To the extent that this Section 6.6 is applicable, payment may be made in any other form that is consistent with applicable laws, regulations and rules. ARTICLE 7. STOCK APPRECIATION RIGHTS. 7.1 SAR Agreement. Each grant of a SAR under the Plan shall be evidenced by a SAR Agreement between the Optionee and the Company. Such SAR shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various SAR Agreements entered into under the Plan need not be identical. SARs may be granted in consideration of a reduction in the Optionee's other compensation. 7.2 Number of Shares. Each SAR Agreement shall specify the number of Common Shares to which the SAR pertains and shall provide for the adjustment of such number in accordance with Article 10. 7.3 Exercise Price. Each SAR Agreement shall specify the Exercise Price. A SAR Agreement may specify an Exercise Price that varies in accordance with a predetermined formula while the SAR is outstanding. 7.4 Exercisability and Term. Each SAR Agreement shall specify the date when all or any installment of the SAR is to become exercisable. The SAR Agreement shall also specify the term of the SAR. A SAR Agreement may provide for accelerated exercisability in the event of the Optionee's death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee's service. SARs may also be awarded in combination with Options, Restricted Shares or Stock Units, and such an Award may provide that the SARs will not be exercisable unless the related Options, Restricted Shares or Stock Units are forfeited. A SAR may be included in an ISO only at the time of grant but may be included in an NSO at the time of grant or thereafter. A SAR granted under the Plan may provide that it will be exercisable only in the event of a Change in Control. 7.5 Effect of Change in Control. The Committee may determine, at the time of granting a SAR or thereafter, that such SAR shall become fully exercisable as to all Common Shares subject to such SAR in the event that a Change in Control occurs with respect to the Company. 7.6 Exercise of SARs. If, on the date when a SAR expires, the Exercise Price under such SAR is less than the Fair Market Value on such date but any portion of such SAR has not been exercised or surrendered, then such SAR shall automatically be deemed to be exercised as of such date with respect to such portion. Upon exercise of a SAR, the Op- -5- 10 tionee (or any person having the right to exercise the SAR after his or her death) shall receive from the Company (a) Common Shares, (b) cash or (c) a combination of Common Shares and cash, as the Committee shall determine. The amount of cash and/or the Fair Market Value of Common Shares received upon exercise of SARs shall, in the aggregate, be equal to the amount by which the Fair Market Value (on the date of surrender) of the Common Shares subject to the SARs exceeds the Exercise Price. 7.7 Modification or Assumption of SARs. Within the limitations of the Plan, the Committee may modify, extend or assume outstanding SARs or may accept the cancellation of outstanding SARs (whether granted by the Company or by another issuer) in return for the grant of new SARs for the same or a different number of shares and at the same or a different exercise price. The foregoing notwithstanding, no modification of a SAR shall, without the consent of the Optionee, alter or impair his or her rights or obligations under such SAR. ARTICLE 8. RESTRICTED SHARES AND STOCK UNITS. 8.1 Time, Amount and Form of Awards. Awards under the Plan may be granted in the form of Restricted Shares, in the form of Stock Units, or in any combination of both. Restricted Shares or Stock Units may also be awarded in combination with NSOs or SARs, and such an Award may provide that the Restricted Shares or Stock Units will be forfeited in the event that the related NSOs or SARs are exercised. 8.2 Payment for Awards. To the extent that an Award is granted in the form of newly issued Restricted Shares, the Award recipient, as a condition to the grant of such Award, shall be required to pay the Company in cash an amount equal to the par value of such Restricted Shares. To the extent that an Award is granted in the form of Restricted Shares from the Company's treasury or in the form of Stock Units, no cash consideration shall be required of the Award recipients. 8.3 Vesting Conditions. Each Award of Restricted Shares or Stock Units shall become vested, in full or in installments, upon satisfaction of the conditions specified in the Stock Award Agreement which may include performance conditions. A Stock Award Agreement may provide for accelerated vesting in the event of the Participant's death, disability or retirement or other events. The Committee may determine, at the time of making an Award or thereafter, that such Award shall become fully vested in the event that a Change in Control occurs with respect to the Company. 8.4 Form and Time of Settlement of Stock Units. Settlement of vested Stock Units may be made in the form of (a) cash, (b) Common Shares or (c) any combination of both. The actual number of Stock Units eligible for settlement may be larger or smaller than the number included in the original Award, based on predetermined performance factors. Methods of converting Stock Units into cash may include (without limitation) a method based on the average Fair Market Value of Common Shares over a series of trading days. Vested Stock Units may be settled in a lump sum or in installments. The distribution may occur or commence when all vesting conditions applicable to the Stock Units have been -6- 11 satisfied or have lapsed, or it may be deferred to any later date. The amount of a deferred distribution may be increased by an interest factor or by dividend equivalents. Until an Award of Stock Units is settled, the number of such Stock Units shall be subject to adjustment pursuant to Article 10. 8.5 Death of Recipient. Any Stock Units Award that becomes payable after the recipient's death shall be distributed to the recipient's beneficiary or beneficiaries. Each recipient of a Stock Units Award under the Plan shall designate one or more beneficiaries for this purpose by filing the prescribed form with the Company. A beneficiary designation may be changed by filing the prescribed form with the Company at any time before the Award recipient's death. If no beneficiary was designated or if no designated beneficiary survives the Award recipient, then any Stock Units Award that becomes payable after the recipient's death shall be distributed to the recipient's estate. 8.6 Creditors' Rights. A holder of Stock Units shall have no rights other than those of a general creditor of the Company. Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Stock Award Agreement. ARTICLE 9. VOTING AND DIVIDEND RIGHTS. 9.1 Restricted Shares. The holders of Restricted Shares awarded under the Plan shall have the same voting, dividend and other rights as the Company's other stockholders. A Stock Award Agreement, however, may require that the holders of Restricted Shares invest any cash dividends received in additional Restricted Shares. Such additional Restricted Shares shall be subject to the same conditions and restrictions as the Award with respect to which the dividends were paid. Such additional Restricted Shares shall not reduce the number of Common Shares available under Article 3. 9.2 Stock Units. The holders of Stock Units shall have no voting rights. Prior to settlement or forfeiture, any Stock Unit awarded under the Plan may, at the Committee's discretion, carry with it a right to dividend equivalents. Such right entitles the holder to be credited with an amount equal to all cash dividends paid on one Common Share while the Stock Unit is outstanding. Dividend equivalents may be converted into additional Stock Units. Settlement of dividend equivalents may be made in the form of cash, in the form of Common Shares, or in a combination of both. Prior to distribution, any dividend equivalents which are not paid shall be subject to the same conditions and restrictions as the Stock Units to which they attach. ARTICLE 10. PROTECTION AGAINST DILUTION. 10.1 Adjustments. In the event of a subdivision of the outstanding Common Shares, a declaration of a dividend payable in Common Shares, a declaration of a dividend payable in a form other than Common Shares in an amount that has a material effect on the price of Common Shares, a combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a lesser number of Common Shares, a recapitalization, a -7- 12 spinoff or a similar occurrence, the Committee shall make such adjustments as it, in its sole discretion, deems appropriate in one or more of: (a) The number of Options, SARs, Restricted Shares and Stock Units available for future Awards under Article 3; (b) The number of Stock Units included in any prior Award which has not yet been settled; (c) The number of Common Shares covered by each outstanding Option and SAR; or (d) The Exercise Price under each outstanding Option and SAR. Except as provided in this Article 10, a Participant shall have no rights by reason of any issue by the Company of stock of any class or securities convertible into stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock or other dividend or any other increase or decrease in the number of shares of stock of any class. 10.2 Reorganizations. In the event that the Company is a party to a merger or other reorganization, outstanding Options, SARs, Restricted Shares and Stock Units shall be subject to the agreement of merger or reorganization. Such agreement may provide, without limitation, for the assumption of outstanding Awards by the surviving corporation or its parent, for their continuation by the Company (if the Company is a surviving corporation), for accelerated vesting and accelerated expiration, or for settlement in cash. ARTICLE 11. AWARDS UNDER OTHER PLANS. The Company may grant awards under other plans or programs. Such awards may be settled in the form of Common Shares issued under this Plan. Such Common Shares shall be treated for all purposes under the Plan like Common Shares issued in settlement of Stock Units and shall, when issued, reduce the number of Common Shares available under Article 3. ARTICLE 12. PAYMENT OF DIRECTOR'S FEES IN SECURITIES. 12.1 Effective Date. No provision of this Article 12 shall be effective unless and until the Board has determined to implement such provision. 12.2 Elections to Receive NSOs or Stock Units. An Outside Director may elect to receive his or her annual retainer payments and meeting fees from the Company in the form of cash, NSOs, Stock Units, or a combination thereof. Such NSOs and Stock Units shall be issued under the Plan. An election under this Article 12 shall be filed with the Company on the prescribed form and subject to such filing deadlines and election procedures as shall be established by the Committee. -8- 13 12.3 Number and Terms of NSOs. The number of NSOs to be granted to Outside Directors in lieu of annual retainers and meeting fees that would otherwise be paid in cash shall be calculated in a manner determined by the Board. The terms of such NSOs shall also be determined by the Board. 12.4 Number and Terms of Stock Units. The number of Stock Units to be granted to Outside Directors shall be calculated by dividing the amount of the annual retainer or the meeting fee that would otherwise be paid in cash by the arithmetic mean of the Fair Market Values of a Common Share on the ten (10) consecutive trading days ending with the date when such retainer or fee is payable. The terms of such Stock Units shall be determined by the Board. ARTICLE 13. LIMITATION ON RIGHTS. 13.1 Retention Rights. Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right to remain an employee, consultant or director of the Company, a Parent or a Subsidiary. The Company and its Parents and Subsidiaries reserve the right to terminate the service of any employee, consultant or director at any time, and for any reason, subject to applicable laws, the Company's certificate of incorporation and by-laws and a written employment agreement (if any). 13.2 Stockholders' Rights. A Participant shall have no dividend rights, voting rights or other rights as a stockholder with respect to any Common Shares covered by his or her Award prior to the issuance of a stock certificate for such Common Shares. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date when such certificate is issued, except as expressly provided in Articles 8, 9 and 10. 13.3 Regulatory Requirements. Any other provision of the Plan notwithstanding, the obligation of the Company to issue Common Shares under the Plan shall be subject to all applicable laws, rules and regulations and such approval by any regulatory body as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of Common Shares pursuant to any Award prior to the satisfaction of all legal requirements relating to the issuance of such Common Shares, to their registration, qualification or listing or to an exemption from registration, qualification or listing. ARTICLE 14. LIMITATION ON PAYMENTS. 14.1 Basic Rule. Any provision of the Plan to the contrary notwithstanding, in the event that the independent auditors most recently selected by the Board (the "Auditors") determine that any payment or transfer by the Company under the Plan to or for the benefit of a Participant (a "Payment") would be nondeductible by the Company for federal income tax purposes because of the provisions concerning "excess parachute payments" in section 280G of the Code, then the aggregate present value of all Payments shall be reduced (but not below zero) to the Reduced Amount; provided that the Committee, at the time of making an Award under this Plan or at any time thereafter, may specify in writing that such Award shall not be so reduced and shall not be subject to this Article 14. For purposes of this Arti- -9- 14 cle 14, the "Reduced Amount" shall be the amount, expressed as a present value, which maximizes the aggregate present value of the Payments without causing any Payment to be nondeductible by the Company because of section 280G of the Code. 14.2 Reduction of Payments. If the Auditors determine that any Payment would be nondeductible by the Company because of section 280G of the Code, then the Company shall promptly give the Participant notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Participant may then elect, in his or her sole discretion, which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall advise the Company in writing of his or her election within ten (10) days of receipt of notice. If no such election is made by the Participant within such ten (10) day period, then the Company may elect which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall notify the Participant promptly of such election. For purposes of this Article 14, present value shall be determined in accordance with section 280G(d)(4) of the Code. All determinations made by the Auditors under this Article 14 shall be binding upon the Company and the Participant and shall be made within sixty (60) days of the date when a Payment becomes payable or transferable. As promptly as practicable following such determination and the elections hereunder, the Company shall pay or transfer to or for the benefit of the Participant such amounts as are then due to him or her under the Plan and shall promptly pay or transfer to or for the benefit of the Participant in the future such amounts as become due to him or her under the Plan. 14.3 Overpayments and Underpayments. As a result of uncertainty in the application of section 280G of the Code at the time of an initial determination by the Auditors hereunder, it is possible that Payments will have been made by the Company which should not have been made (an "Overpayment") or that additional Payments which will not have been made by the Company could have been made (an "Underpayment"), consistent in each case with the calculation of the Reduced Amount hereunder. In the event that the Auditors, based upon the assertion of a deficiency by the Internal Revenue Service against the Company or the Participant which the Auditors believe has a high probability of success, determine that an Overpayment has been made, such Overpayment shall be treated for all purposes as a loan to the Participant which he or she shall repay to the Company, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code; provided, however, that no amount shall be payable by the Participant to the Company if and to the extent that such payment would not reduce the amount which is subject to taxation under section 4999 of the Code. In the event that the Auditors determine that an Underpayment has occurred, such Underpayment shall promptly be paid or transferred by the Company to or for the benefit of the Participant, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code. 14.4 Related Corporations. For purposes of this Article 14, the term "Company" shall include affiliated corporations to the extent determined by the Auditors in accordance with section 280G(d)(5) of the Code. -10- 15 ARTICLE 15. WITHHOLDING TAXES. 15.1 General. To the extent required by applicable federal, state, local or foreign law, a Participant or his or her successor shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in connection with the Plan. The Company shall not be required to issue any Common Shares or make any cash payment under the Plan until such obligations are satisfied. 15.2 Share Withholding. A Participant may satisfy all or part of his or her withholding or income tax obligations by having the Company withhold all or a portion of any Common Shares that otherwise would be issued to him or her or by surrendering all or a portion of any Common Shares that he or she previously acquired. Such Common Shares shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash. Any payment of taxes by assigning Common Shares to the Company may be subject to restrictions. ARTICLE 16. ASSIGNMENT OR TRANSFER OF AWARDS. 16.1 General. Except as provided in Article 15 or the Award agreement, an Award granted under the Plan shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor's process, whether voluntarily, involuntarily or by operation of law. Except as provided in the Award agreement, an Option or SAR may be exercised during the lifetime of the Optionee only by him or her or by his or her guardian or legal representative. This Article 16 shall not preclude a Participant from designating a beneficiary who will receive any outstanding Awards in the event of the Participant's death, nor shall it preclude a transfer of Awards by will or by the laws of descent and distribution. ARTICLE 17. FUTURE OF THE PLAN. 17.1 Term of the Plan. The Plan, as amended and restated, shall become effective on July 7, 1997. The Plan shall remain in effect until it is terminated under Section 17.2, except that no ISOs shall be granted after September 17, 2006. 17.2 Amendment or Termination. The Board may, at any time and for any reason, amend or terminate the Plan. An amendment of the Plan shall be subject to the approval of the Company's stockholders only to the extent required by applicable laws, regulations or rules. No Awards shall be granted under the Plan after the termination thereof. The termination of the Plan, or any amendment thereof, shall not affect any Award previously granted under the Plan. ARTICLE 18. DEFINITIONS. 18.1 "Award" means any award of an Option, an SAR, a Restricted Share or a Stock Unit under the Plan. -11- 16 18.2 "Board" means the Company's Board of Directors, as constituted from time to time. 18.3 "Change in Control" shall be deemed to occur upon any "person" (as defined in Section 13(d) of the Exchange Act), other than the Company, its Parent or Subsidiary or employee benefit plan or trust maintained by the Company, its Parent or Subsidiary, becoming the "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of more than 50% of the total combined voting power of the Class A and Class B common stock of the Company outstanding at such time, without the prior approval of the Board. 18.4 "Code" means the Internal Revenue Code of 1986, as amended. 18.5 "Committee" means a committee of the Board, as described in Article 2. 18.6 "Common Share" means one share of the Class A common stock of the Company. 18.7 "Company" means Network Solutions, Inc., a Delaware corporation, or its successor. 18.8 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 18.9 "Exercise Price," in the case of an Option, means the amount for which one Common Share may be purchased upon exercise of such Option, as specified in the applicable Stock Option Agreement. "Exercise Price," in the case of an SAR, means an amount, as specified in the applicable SAR Agreement, which is subtracted from the Fair Market Value of one Common Share in determining the amount payable upon exercise of such SAR. 18.10 "Fair Market Value" means the market price of Common Shares, determined by the Committee as follows: (a) If the Common Shares were traded over-the-counter on the date in question but were not classified as a national market issue, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted by the Nasdaq system for such date; (b) If the Common Shares were traded over-the-counter on the date in question and were classified as a national market issue, then the Fair Market Value shall be equal to the last-transaction price quoted by the Nasdaq system for such date; (c) If the Common Shares were traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing -12- 17 price reported by the applicable composite transactions report for such date; and (d) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by independent appraisals or as otherwise determined by the Committee in good faith on such basis as it deems appropriate. Whenever possible, the determination of Fair Market Value by the Committee shall be based on the prices reported in the Western Edition of The Wall Street Journal. Such determination shall be conclusive and binding on all persons. 18.11 "ISO" means an incentive stock option described in section 422(b) of the Code. 18.12 "Key Employee" means (a) a common-law employee of the Company, a Parent or a Subsidiary, (b) an Outside Director and (c) a consultant or adviser who provides services to the Company, a Parent or a Subsidiary as an independent contractor. 18.13 "NSO" means a stock option not described in sections 422 or 423 of the Code. 18.14 "Option" means an ISO or NSO granted under the Plan and entitling the holder to purchase one Common Share. 18.15 "Optionee" means an individual or estate who holds an Option or SAR. 18.16 "Outside Director" shall mean a member of the Board who is not a common-law employee of the Company, a Parent or a Subsidiary. 18.17 "Parent" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Parent on a date after the adoption of the Plan shall be considered a Parent commencing as of such date. 18.18 "Participant" means an individual or estate who holds an Award. 18.19 "Plan" means the Network Solutions, Inc. 1996 Stock Incentive Plan, as amended from time to time. 18.20 "Restricted Share" means a Common Share awarded under the Plan. 18.21 "SAR" means a stock appreciation right granted under the Plan. -13- 18 18.22 "SAR Agreement" means the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her SAR. 18.23 "Stock Award Agreement" means the agreement between the Company and the recipient of a Restricted Share or Stock Unit which contains the terms, conditions and restrictions pertaining to such Restricted Share or Stock Unit. 18.24 "Stock Option Agreement" means the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her Option. 18.25 "Stock Unit" means a bookkeeping entry representing the equivalent of one Common Share, as awarded under the Plan. 18.26 "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. ARTICLE 19. EXECUTION. To record the adoption of the amended and restated Plan by the Board, the Company has caused its duly authorized officer to affix the corporate name and seal hereto. NETWORK SOLUTIONS, INC. By ----------------------------- Its ---------------------------- -14- 19 NETWORK SOLUTIONS, INC. 1996 STOCK INCENTIVE PLAN INCENTIVE STOCK OPTION AGREEMENT Network Solutions, Inc., a Delaware corporation (the "Company"), hereby grants an Option to purchase shares of its Class A Common Stock to the Optionee named below. The terms and conditions of the Option are set forth in this cover sheet, in the attachment and in the Company's 1996 Stock Incentive Plan (the "Plan"), as amended and restated effective July 7, 1997. Date of Grant: _________________________________________________________________ Name of Optionee: ______________________________________________________________ Optionee's Social Security Number: _____________________________________________ Number of Common Shares Covered by Option: _____________________________________ Exercise Price per Common Share: $______________________________________________ Vesting Start Date: ____________________________________________________________ BY SIGNING THIS COVER SHEET, YOU VOLUNTARILY AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED IN THE ATTACHED AGREEMENT AND IN THE PLAN, A COPY OF WHICH IS ALSO ATTACHED. Optionee: ______________________________________________________________________ (Signature) Company: _______________________________________________________________________ (Signature) Title: ________________________________________________________ -1- 20 NETWORK SOLUTIONS, INC. 1996 STOCK INCENTIVE PLAN INCENTIVE STOCK OPTION AGREEMENT INCENTIVE STOCK OPTION This Option is intended to be an incentive stock option under section 422 of the Internal Revenue Code and will be interpreted accordingly . VESTING Your right to exercise this Option vests annually over a four year period beginning one year after the Vesting Start Date as shown on the cover sheet. This Option vests at a rate of 30%, 30%, 20% and 20%, respectively, of the Common Shares covered by the Option at the end of the first, second, third and fourth year, respectively, after the Vesting Start Date. The number of Common Shares which may be purchased under this Option by you at the Exercise Price shall be rounded to the nearest whole number. No additional Common Shares will vest after your service has terminated for any reason. TERM Your Option will expire in any event at the close of business at Company headquarters on the day before the fifth anniversary of the Date of Grant. (It will expire earlier if your service terminates, as described below.) REGULAR TERMINATION If your service terminates for any reason except death or Disability, your Option will expire at the close of business at Company headquarters on the 30th day after your termination date. During that 30-day period, you may exercise that portion of your Option that was vested on your termination date. DEATH If you die while in service with the Company, your Option will expire at the close of business at Company headquarters on the date 12 months after the date of death. During that 12-month period, your beneficiary, estate or heirs may exercise that portion of your Option that was vested on your date death. -2- 21 DISABILITY If your service terminates because of your Disability, your Option will expire at the close of business at Company headquarters on the date 90 days after your termination date. During such 90-day period, you may exercise that portion of your Option that was vested on the date of your Disability. "Disability" means that you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment for an extended period of time. LEAVES OF ABSENCE For purposes of this Option, your service does not terminate when you go on a bona fide leave of absence that was approved by the Company in writing, if the terms of the leave provide for continued service crediting, or when continued service crediting is required by applicable law. However, for purposes of this Option being treated as an ISO, your service will be treated as terminating 90 days after you went on leave, unless your right to return to active work is guaranteed by law or by a contract. Your service terminates in any event when the approved leave ends unless you immediately return to active work. The Committee determines which leaves count for this purpose, and when your service terminates for all purposes under the Plan and this Agreement. The Committee shall also determine the extent to which you may exercise the vested portion of your Option during a leave of absence. NOTICE OF EXERCISE When you wish to exercise this Option, you must notify the Committee by filing the proper "Notice of Exercise" form at the address given on the form. Your Notice must specify how many Common Shares you wish to purchase. Your Notice must also specify how your Common Shares should be registered (in your name only, in your and your spouse's names as community property or as joint tenants with right of survivorship or in a trust for your benefit). The Notice will be effective when it is received by the Committee. If someone else wants to exercise this Option after your death, that person must prove to the Committee's satisfaction that he or she is entitled to do so. FORM OF PAYMENT When you submit your Notice of Exercise, you must include payment of the Exercise Price for the Common Shares you are purchasing. Payment may be made in one (or a combination) of the following forms: - Your personal check, a cashier's check or a money order. -3- 22 - Common Shares which have already been owned by you for more than six months and which are surrendered to the Company. The value of the Common Shares, determined as of the effective date of the option exercise, will be applied to the Exercise Price. - By delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker to sell Common Shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate Exercise Price. WITHHOLDING TAXES You will not be allowed to exercise this Option unless you make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the Option exercise or the sale of Common Shares acquired upon exercise of this Option. RESTRICTIONS ON EXERCISE AND RESALE By signing this Agreement, you agree not to sell any Common Shares at a time when applicable laws, regulations or Company or underwriter trading policies prohibit a sale. For example, prior to an initial public offering, the Company may, in its sole discretion, restrict the transfer of shares for up to 6 months from the date of exercise. In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company's initial public offering, you agree not to sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or agree to engage in any of the foregoing transactions with respect to any shares without the prior written consent of the Company or its underwriters, for such period of time after the effective date of such registration statement as may be requested by the Company or such underwriters. In order to enforce the provisions of this paragraph, the Company may impose stop-transfer instructions with respect to the shares. You represent and agree that the Common Shares to be acquired upon exercising this option will be acquired for investment, and not with a view to the sale or distribution thereof. In the event that the sale of Common Shares under the Plan is not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, you shall represent and agree at the time of exercise that the Shares being acquired upon exercising this option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as -4- 23 are deemed necessary or appropriate by the Company and its counsel. THE COMPANY'S RIGHT OF FIRST REFUSAL In the event that you propose to sell, pledge or otherwise transfer to a third party any Common Shares acquired under this Agreement, or any interest in such Common Shares, the Company shall have the "Right of First Refusal" with respect to all (and not less than all) of such Common Shares. If you desire to transfer Common Shares acquired under this Agreement, you must give a written "Transfer Notice" to the Committee describing fully the proposed transfer, including the number of Shares proposed to be transferred, the proposed transfer price and the name and address of the proposed transferee. The Transfer Notice shall be signed both by you and by the proposed transferee and must constitute a binding commitment of both parties to the transfer of the Common Shares. The Company shall have the right to purchase all, and not less than all, of the Common Shares on the terms described in the Transfer Notice (subject, however, to any change in such terms permitted in the next paragraph) by delivery of a Notice of Exercise of the Right of First Refusal within 30 days after the date when the Transfer Notice was received by the Committee. The Company's rights under this Subsection shall be freely assignable, in whole or in part. If the Company fails to exercise its Right of First Refusal within 30 days after the date when the Committee received the Transfer Notice, you may, not later than 90 days following receipt of the Transfer Notice by the Committee, conclude a transfer of the Common Shares subject to the Transfer Notice on the terms and conditions described in the Transfer Notice. Any proposed transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by you, shall again be subject to the Right of First Refusal and shall require compliance with the procedure described in the paragraph above. If the Company exercises its Right of First Refusal, the parties shall consummate the sale of the Shares on the terms set forth in the Transfer Notice within 60 days after the date the Committee received the Transfer Notice (or within such longer period as may have been specified in the Transfer Notice); provided, however, that in the event the Transfer Notice provided that payment for the Common Shares was to be made in a form other than lawful money paid at the time of transfer, the Company shall have the option of paying for the Common Shares with lawful money equal to the present value of the consideration described in the Transfer Notice. -5- 24 The Company's Right of First Refusal shall inure to the benefit of its successors and assigns and shall be binding upon any transferee of the Common Shares. The Company's Right of First Refusal shall terminate in the event that Common Shares are listed or traded on an established stock exchange. RIGHT OF REPURCHASE Following termination of your service with the Company for any reason, the Company shall have the right to purchase all of those Common Shares that you have or will acquire under this Option. If the Company fails to provide you with written notice of its intention to purchase such Common Shares before or within 30 days of the date the Company receives written notice from you of your termination of service, the Company's right to purchase such Common Shares shall terminate. If the Company exercises its right to purchase such Common Shares, the Company will consummate the purchase of such Common Shares within 60 days of the date of its written notice to you. The purchase price for any Common Shares repurchased shall be the Fair Market Value of such Common Shares on the date of purchase and shall be paid in cash. The Company's right of repurchase shall terminate in the event that Common Shares are listed or traded on an established stock exchange. TRANSFER OF OPTION Prior to your death, only you may exercise this Option. You cannot transfer or assign this Option. For instance, you may not sell this Option or use it as security for a loan. If you attempt to do any of these things, this Option will immediately become invalid. You may, however, dispose of this Option by beneficiary designation or in your will. Regardless of any marital property settlement agreement, the Company is not obligated to honor a Notice of Exercise from your spouse or former spouse, nor is the Company obligated to recognize such individual's interest in your Option in any other way. RETENTION RIGHTS This Agreement does not give you the right to be retained by the Company in any capacity. The Company reserves the right to terminate your service at any time and for any reason. -6- 25 STOCKHOLDER RIGHTS You, or your beneficiary, estate or heirs, have no rights as a stockholder of the Company until a certificate for the Common Shares acquired upon exercise of this Option has been issued. No adjustments are made for dividends or other rights if the applicable record date occurs before your stock certificate is issued, except as described in the Plan. ADJUSTMENTS In the event of a stock split, a stock dividend or a similar change in the Common Shares, the number of Common Shares covered by this Option and the Exercise Price per share may be adjusted pursuant to the Plan. Your Option shall be subject to the terms of the agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity. LEGENDS All certificates representing the Shares issued upon exercise of this Option shall, where applicable, have endorsed thereon the following legends: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND OPTIONS TO PURCHASE SUCH SHARES SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER, OR HIS OR HER PREDECESSOR IN INTEREST. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY AND WILL BE FURNISHED UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY BY THE HOLDER OF RECORD OF THE SHARES REPRESENTED BY THIS CERTIFICATE. APPLICABLE LAW This Agreement will be interpreted and enforced under the laws of the State of Delaware (without regard to their choice of law provisions). THE PLAN AND OTHER AGREEMENTS The text of the Plan is incorporated in this Agreement by reference. Certain capitalized terms used in this Agreement are defined in the Plan. This Agreement and the Plan constitute the entire understanding between you and the Company regarding this Option. Any prior agreements, commitments or negotiations concerning this Option are superseded. BY SIGNING THE COVER SHEET OF THIS AGREEMENT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. -7- 26 NETWORK SOLUTIONS, INC. 1996 STOCK INCENTIVE PLAN NONSTATUTORY STOCK OPTION AGREEMENT Network Solutions, Inc., a Delaware corporation (the "Company"), hereby grants an Option to purchase shares of its Class A Common Stock to the Optionee named below in. The terms and conditions of the Option are set forth in this cover sheet, in the attachment and in the Company's 1996 Stock Incentive Plan (the "Plan"), as amended and restated effective July 7, 1997. Date of Grant: _________________________________________________________________ Name of Optionee: ______________________________________________________________ Optionee's Social Security Number: _____________________________________________ Number of Common Shares Covered by Option: _____________________________________ Exercise Price per Common Share: $______________________________________________ Vesting Start Date: ____________________________________________________________ BY SIGNING THIS COVER SHEET, YOU VOLUNTARILY AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED IN THE ATTACHED AGREEMENT AND IN THE PLAN, A COPY OF WHICH IS ALSO ATTACHED. Optionee: ______________________________________________________________________ (Signature) Company: _______________________________________________________________________ (Signature) Title: ________________________________________________________ -1- 27 NETWORK SOLUTIONS, INC. 1996 STOCK INCENTIVE PLAN NONSTATUTORY STOCK OPTION AGREEMENT NONSTATUTORY STOCK OPTION This Option is not intended to be an incentive stock option under section 422 of the Internal Revenue Code and will be interpreted accordingly. VESTING Your right to exercise this Option vests annually over a four year period beginning one year after the Vesting Start Date as shown on the cover sheet. This Option vests at a rate of 30%, 30%, 20% and 20%, respectively, of the Common Shares covered by the Option at the end of the first, second, third and fourth year, respectively, after the Vesting Start Date. The number of Common Shares which may be purchased under this Option by you at the Exercise Price shall be rounded to the nearest whole number. No additional Common Shares will vest after your service has terminated for any reason. TERM Your Option will expire in any event at the close of business at Company headquarters on the day before the fifth anniversary of the Date of Grant. (It will expire earlier if your service terminates, as described below.) REGULAR TERMINATION If your service terminates for any reason except death or Disability, your Option will expire at the close of business at Company headquarters on the 30th day after your termination date. During such 30-day period, you may exercise that portion of your Option that was vested on your termination date. DEATH If you die while in service with the Company, your Option will expire at the close of business at Company headquarters on the date 12 months after the date of death. During that 12-month period, your beneficiary, estate or heirs may exercise that portion of your Option that was vested on your date of death. DISABILITY If your service terminates because of your Disability, your Option will expire at the close of business at Company headquarters on the date 90 days after your termination date. During such 90-day period, you may exercise that portion of your Option that was vested on your date of Disability. "Disability" means that you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment for an extended period of time. -2- 28 LEAVES OF ABSENCE For purposes of this Option, your service does not terminate when you go on a bona fide leave of absence that was approved by the Company in writing, if the terms of the leave provide for continued service crediting, or when continued service crediting is required by applicable law. The Committee determines which leaves count for this purpose, and when your service terminates for all purposes under the Plan and this Agreement. The Committee shall also determine the extent to which you may exercise the vested portion of your Option during a leave of absence. NOTICE OF EXERCISE When you wish to exercise this Option, you must notify the Committee by filing the proper "Notice of Exercise" form at the address given on the form. Your Notice must specify how many Common Shares you wish to purchase. Your Notice must also specify how your Common Shares should be registered (in your name only, in your and your spouse's names as community property or as joint tenants with right of survivorship or in a trust for your benefit). The Notice will be effective when it is received by the Committee. If someone else wants to exercise this Option after your death, that person must prove to the Committee's satisfaction that he or she is entitled to do so. FORM OF PAYMENT When you submit your Notice of Exercise, you must include payment of the Exercise Price for the Common Shares you are purchasing. Payment may be made in one (or a combination) of the following forms: - Your personal check, a cashier's check or a money order. - Common Shares which have already been owned by you for more than six months and which are surrendered to the Company. The value of the Common Shares, determined as of the effective date of the Option exercise, will be applied to the Exercise Price. - By delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker to sell Common Shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate Exercise Price. WITHHOLDING TAXES You will not be allowed to exercise this Option unless you make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the option exercise or the sale of Common Shares acquired upon exercise of this Option. RESTRICTIONS ON EXERCISE AND RESALE By signing this Agreement, you agree not to sell any Common Shares at a time when applicable laws, regulations or Company or -3- 29 underwriter trading policies prohibit a sale. For example, prior to an initial public offering, the Company may, in its sole discretion, restrict the transfer of shares for up to 6 months from the date of exercise. In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company's initial public offering, you agree not to sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or agree to engage in any of the foregoing transactions with respect to any shares without the prior written consent of the Company or its underwriters, for such period of time after the effective date of such registration statement as may be requested by the Company or such underwriters. In order to enforce the provisions of this paragraph, the Company may impose stop-transfer instructions with respect to the shares. You represent and agree that the Common Shares to be acquired upon exercising this option will be acquired for investment, and not with a view to the sale or distribution thereof. In the event that the sale of Common Shares under the Plan is not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, you shall represent and agree at the time of exercise that the Shares being acquired upon exercising this option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel. THE COMPANY'S RIGHT OF FIRST REFUSAL In the event that you propose to sell, pledge or otherwise transfer to a third party any Common Shares acquired under this Agreement, or any interest in such Common Shares, the Company shall have the "Right of First Refusal" with respect to all (and not less than all) of such Common Shares. If you desire to transfer Common Shares acquired under this Agreement, you must give a written "Transfer Notice" to the Committee describing fully the proposed transfer, including the number of Common Shares proposed to be transferred, the proposed transfer price and the name and address of the proposed transferee. The Transfer Notice shall be signed both by you and by the proposed transferee and must constitute a binding commitment of both parties to the transfer of the Common Shares. The Company shall have the right to purchase all, and not less than all, of the Common Shares on the terms described in the Transfer Notice (subject, however, to -4- 30 any change in such terms permitted in the next paragraph) by delivery of a notice of exercise of the Right of First Refusal within 30 days after the date when the Transfer Notice was received by the Committee. The Company's rights under this Subsection shall be freely assignable, in whole or in part. If the Company fails to exercise its Right of First Refusal within 30 days after the date when the Committee received the Transfer Notice, you may, not later than 90 days following receipt of the Transfer Notice by the Company, conclude a transfer of the Common Shares subject to the Transfer Notice on the terms and conditions described in the Transfer Notice. Any proposed transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by you, shall again be subject to the Right of First Refusal and shall require compliance with the procedure described in the paragraph above. If the Company exercises its Right of First Refusal, the parties shall consummate the sale of the Common Shares on the terms set forth in the Transfer Notice within 60 days after the date when the Committee received the Transfer Notice (or within such longer period as may have been specified in the Transfer Notice); provided, however, that in the event the Transfer Notice provided that payment for the Common Shares was to be made in a form other than lawful money paid at the time of transfer, the Company shall have the option of paying for the Common Shares with lawful money equal to the present value of the consideration described in the Transfer Notice. The Company's Right of First Refusal shall inure to the benefit of its successors and assigns and shall be binding upon any transferee of the Common Shares. The Company's Right of First Refusal shall terminate in the event that Common Shares are listed or traded on an established stock exchange. RIGHT OF REPURCHASE Following termination of your service for any reason, the Company shall have the right to purchase all of those Common Shares that you have or will acquire under this Option. If the Company fails to provide you with written notice of its intention to purchase such Common Shares before or within 30 days of the date the Company receives written notice from you of your termination of service, the Company's right to purchase such Common Shares shall terminate. If the Company exercises its right to purchase such Common Shares, the Company will consummate the purchase of such Common Shares within 60 days of the date of its written notice to you. The purchase price for any -5- 31 Common Shares repurchased shall be the Fair Market Value of such Common Shares on the date of purchase and shall be paid in cash. The Company's right of repurchase shall terminate in the event that Common Shares are issued or traded on an established stock exchange. TRANSFER OF OPTION Prior to your death, only you may exercise this Option. You cannot transfer or assign this Option. For instance, you may not sell this Option or use it as security for a loan. If you attempt to do any of these things, this Option will immediately become invalid. You may, however, dispose of this Option by beneficiary designation or in your will. Regardless of any marital property settlement agreement, the Company is not obligated to honor a Notice of Exercise from your spouse or former spouse, nor is the Company obligated to recognize such individual's interest in your Option in any other way. RETENTION RIGHTS This Agreement does not give you the right to be retained by the Company in any capacity. The Company reserves the right to terminate your service at any time and for any reason. STOCKHOLDERS RIGHTS You, or your estate or heirs, have no rights as a stockholder of the Company until a certificate for the Common Shares acquired upon exercise of this Option has been issued. No adjustments are made for dividends or other rights if the applicable record date occurs before your stock certificate is issued, except as described in the Plan. ADJUSTMENTS In the event of a stock split, a stock dividend or a similar change in the Common Shares, the number of Common Shares covered by this Option and the Exercise Price per share may be adjusted pursuant to the Plan. Your Option shall be subject to the terms of the agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity. LEGENDS All certificates representing the Common Shares issued upon exercise of this Option shall, where applicable, have endorsed thereon the following legends: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND OPTIONS TO PURCHASE SUCH SHARES SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER, OR HIS OR HER PREDECESSOR IN INTEREST. A COPY OF SUCH -6- 32 AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY AND WILL BE FURNISHED UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY BY THE HOLDER OF RECORD OF THE SHARES REPRESENTED BY THIS CERTIFICATE. APPLICABLE LAW This Agreement will be interpreted and enforced under the laws of the State of Delaware (without regard to their choice of law provisions). THE PLAN AND OTHER AGREEMENTS The text of the Plan is incorporated in this Agreement by reference. Certain capitalized terms used in this Agreement are defined in the Plan. This Agreement and the Plan constitute the entire understanding between you and the Company regarding this Option. Any prior agreements, commitments or negotiations concerning this Option are superceded. BY SIGNING THE COVER SHEET OF THIS AGREEMENT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. -7- EX-10.5 5 CORPORATE SERVICES AGREEMENT 1 EXHIBIT 10.5 CORPORATE SERVICES AGREEMENT THIS CORPORATE SERVICES AGREEMENT is entered into as of _______________, 1997 between Science Applications International Corporation, a Delaware corporation ("SAIC"), and Network Solutions, Inc., a Delaware corporation ("Subsidiary"). RECITALS WHEREAS, Subsidiary is currently a wholly-owned subsidiary of SAIC and obtains administrative and other services from SAIC; WHEREAS, Subsidiary is currently considering an initial public offering of _____ percent of its Common Stock; WHEREAS, after such initial public offering, SAIC will own the remaining _____% of the Common Stock of Subsidiary; WHEREAS, after such initial public offering, Subsidiary desires to continue to obtain administrative and other services from SAIC and SAIC is willing to continue to furnish or make such services available to Subsidiary; and WHEREAS, by this Agreement, SAIC and Subsidiary desire to set forth the basis for SAIC's providing services of the type referred to herein. IT IS MUTUALLY agreed by the parties hereto as follows: 1. SERVICES Beginning on the date of this Agreement, SAIC, through its corporate staff, will provide or otherwise make available to Subsidiary certain general corporate services, including, but not limited to, the following: 1.1 Control Group. SAIC shall provide to Subsidiary all services and functions comprised of the "Control Group" as defined by SAIC in its Corporate Home Office Disclosure Statement. The Control Group currently includes the functions of the Chief Executive Officer's Office, Corporate Administration, Internal Audit, Treasury, SAIC Board of Directors, Annual Report, Controller, Chief Financial Officer, Quality Programs and Financial Reporting. 1.2 Central Services. SAIC shall also provide to Subsidiary certain services and functions within the "Central Services" as defined by SAIC in its Corporate Home Office Disclosure Statement and agreed upon by the Subsidiary. Such services and functions currently include the following: (a) Records Retention. SAIC shall provide assistance in the storage and 1 2 retrieval of documentation and backup information. (b) Financial Accounting. SAIC shall provide assistance with internal and external financial reporting, management of general ledger functions and fixed asset and real property accounting. (c) Corporate Project Control. SAIC shall provide assistance, training and coordination of project control activities. (d) Cost Accounting. SAIC shall provide assistance in assigning project account and contract numbers, maintaining organization tables and group receivable analysis. (e) Corporate Development. SAIC shall provide assistance with corporate planning, government relations and corporate quality assurance. (f) Corporate Information Services. SAIC shall be responsible for developing application software for the Corporate Management Information System (MIS), writing program codes and distributing MIS reports. (g) Tax. SAIC shall be responsible for the preparation and filing of Federal, state and local tax returns in accordance with the Tax Sharing Agreement of even date herewith between SAIC and Subsidiary. In addition, SAIC shall provide tax research and planning and assistance on tax audits (Federal, state and local). Subsidiary shall be responsible for the preparation and filing of property, sales and use tax returns. (h) Corporate Contracts. SAIC shall provide assistance on general contracting issues and internal administration procedures and conflicts of interest. (i) Risk Management. Except for employee benefit programs defined in Section 1.2(k) below, SAIC shall include Subsidiary and its property and employees, where applicable, within insurance coverage obtained by SAIC ("SAIC Insurance"), except for Directors and Officers Liability Insurance, which shall be procured with the assistance of SAIC Risk Management at the sole cost of Subsidiary, with coverage limits and terms acceptable to SAIC. Subsidiary shall be responsible for coordinating with SAIC Risk Management for any other insurance policy or coverage it desires and shall be responsible for any expense or settlement which is (i) not within the scope of the SAIC Insurance or (ii) a policy exclusion or limitation under the SAIC Insurance. Any claim expense or settlement amounts that are within any deductible or self-insured retention applicable to any policy shall be charged to Subsidiary. Subsidiary shall not take any action which shall cause a default or limit SAIC's ability to make any claim under any of the SAIC Insurance and Subsidiary agrees to indemnify and hold harmless SAIC for any expenses that are the result of Subsidiary's breach of policy provisions which results in denial of coverage to SAIC. With respect to any claim made under the SAIC Insurance which is applicable to or desired by Subsidiary, Subsidiary shall notify SAIC of such claim, cooperate with SAIC in the presentation and prosecution of such claim, and consult with SAIC on any dispute regarding such claim, provided, however that as between SAIC and Subsidiary, SAIC shall have final decision-making authority over such claim. 2 3 (j) Legal. SAIC shall provide general legal advice, review and guidance in the areas of contracts, intellectual property, labor and corporate matters. SAIC shall provide assistance for SEC compliance, acquisitions and strategic arrangements and will maintain Subsidiary's corporate records, including minutes of meetings of the Boards of Directors and Stockholders. Legal services provided by lawyers other than SAIC's in-house counsel shall be coordinated with and approved by Subsidiary prior to obtaining such services and the cost of such services shall be invoiced to and paid by Subsidiary. (k) Human Resources/Payroll. SAIC shall administer, oversee and maintain SAIC programs and benefits in which Subsidiary participates, provide support and assistance in employee relation matters, interface with governmental agencies including EEOC and maintain and update employee policies and procedures. SAIC, through a third party provider, shall provide payroll and related services for Subsidiary's employees. Subsidiary shall provide to SAIC all necessary information required for participation in such plans by employees and for payroll and other related services. (l) Stock Programs. SAIC shall administer the participation of Subsidiary's employees in certain stock benefit programs and plans maintained by SAIC such as stock options plans, bonus plans and stock purchase plans. (m) Retirement Programs. SAIC shall administer the participation of Subsidiary's employees in the employee benefit plans sponsored by SAIC such as the following: Employee Stock Ownership Plan, Profit Sharing Plan, Cash or Deferred Arrangement and certain bonus and deferral plans. Subsidiary shall provide to SAIC all necessary information required for participation in such plans by its employees. SAIC shall be responsible for filing all required reports under ERISA for employee benefit plans sponsored by SAIC. (n) Real Estate/Facilities. SAIC shall assist Subsidiary in locating facilities and will provide assistance in the negotiation and documentation of leases. 1.3 SAIC shall also provide services in addition to those enumerated in Sections 1.1 and 1.2 above as reasonably requested by Subsidiary. 2. FEES. 2.1 Fixed Fee. For performing general services of the types described above in Section 1, SAIC will charge Subsidiary an annual fixed fee equal to 2.5% of the net revenues of Subsidiary for the fiscal year in which such services are performed (such amount to be prorated on a daily basis for any partial year), which fee is intended to compensate SAIC for Subsidiary's pro rata share of the aggregate costs actually incurred by SAIC in connection with the provision of such services to all recipients thereof. The fee set forth in the preceding sentence may be adjusted on an annual basis by mutual agreement of SAIC and Subsidiary. 2.2 Additional Costs. In addition to the foregoing services, certain specific services will be made available to Subsidiary by SAIC on an as-requested basis. These may include, but are not limited to, services specifically requested by Subsidiary or services which, in SAIC's 3 4 judgment, are not routine administrative services or create unusual burdens or demands on SAIC's resources. In such event, SAIC shall notify Subsidiary of the cost of such services and obtain Subsidiary's consent prior to performing such services. SAIC will charge Subsidiary for the costs actually incurred (including overhead and general administrative expenses) for such services that are requested by Subsidiary and supplied by SAIC. 2.3 The charges for service pursuant to Sections 2.1 and 2.2. above will be determined and payable at the end of each SAIC accounting period. The charges will be due when billed and shall be paid no later than 15 days from the date of billing. When services of the type described above in Section 1 are provided by outside providers to Subsidiary or, if in connection with the provision of such services out-of-pocket costs are incurred such as travel, the cost thereof will be paid by Subsidiary. To the extent that Subsidiary is billed by the provider directly, Subsidiary shall pay the bill directly. If SAIC is billed for such services, SAIC may pay the bill and charge Subsidiary the amount of the bill or forward the bill to Subsidiary for payment by Subsidiary. 3. SUBSIDIARY'S DIRECTORS AND OFFICERS. Nothing contained herein will be construed to relieve the directors or officers of Subsidiary from the performance of their respective duties or to limit the exercise of their powers in accordance with the Certificate of Incorporation or Bylaws of Subsidiary or in accordance with any applicable statute or regulation. 4. NO LIABILITY; NO THIRD PARTY BENEFICIARIES. In furnishing Subsidiary with management advice and other services as herein provided, neither SAIC nor any of its officers, directors, employees or agents shall be liable to Subsidiary or its employees, creditors or shareholders for errors of judgment or for anything except willful malfeasance, bad faith or gross negligence in the performance of their duties or reckless disregard of their obligations and duties under the terms of this Agreement. The provisions of this Agreement are for the sole benefit of SAIC and Subsidiary and will not, except to the extent otherwise expressly stated herein, inure to the benefit of any third party. 5. TERM. 5.1 Term. The initial term of this Agreement shall begin on the date of this Agreement and continue through the end of Subsidiary's current fiscal year. This Agreement shall automatically renew at the end of the initial term for successive one-year terms until terminated in accordance with Section 5.2 below. 5.2 Termination. (a) Entire Agreement. After SAIC no longer owns more than 50% of the issued and outstanding Common Stock of Subsidiary, this Agreement may be terminated in its entirety by either party at any time on one hundred eighty (180) days prior written notice to the other party. 4 5 (b) Central Services. Any or all of the services or functions within the "Central Services" may be terminated by either party at any time on one hundred eighty (180) days prior written notice to the other party. (c) Mutual Agreement. This Agreement may be terminated at any time by the mutual agreement of the parties hereto. 5.3 Termination Fee. In the event of a termination of this Agreement, Subsidiary shall pay to SAIC its pro rata fee through the date of termination pursuant to Section 2.1 for the year in which the termination takes effect. 6. INDEPENDENT CONTRACTORS. SAIC and Subsidiary each hereby declares and represents that each is engaged in an independent business and will perform its obligations under the Agreement as an independent contractor and not as the agent or employee of the other, that each party shall and hereby retains the right to exercise full control of and supervision over the performance of its own obligations hereunder and shall retain full control over the employment, direction, compensation, and discharge of all those of its employees assisting in the performance of such obligations. 7. OTHER ACTIVITIES OF SAIC. Subsidiary recognizes that SAIC now renders and may continue to render services to other companies that may or may not have policies and conduct activities similar to those of Subsidiary. SAIC shall be free to render such advice and other services, and Subsidiary hereby consents thereto. SAIC shall not be required to devote full time and attention to the performance of its duties under this Agreement, but shall devote only so much of its time and attention as it deems reasonable or necessary to perform the services required hereunder. 8. MISCELLANEOUS. 8.1 Notices. All notices, billings, requests, demands, approvals, consents, and other communications which are required or may be given under this Agreement shall be in writing and will be deemed to have been duly given if delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid to the parties at their respective addresses set forth below: 5 6 If to Subsidiary: If to SAIC: Network Solutions, Inc. Science Applications 505 Huntmar Park Drive International Corporation Herndon, VA 20170 10260 Campus Point Drive Attention: Controller San Diego, CA 92121 Attention: Controller 8.2 No Assignment. This Agreement shall not be assignable except with the prior written consent of the other party to this Agreement. 8.3 Applicable Law. This Agreement shall be governed by and construed under the laws of the State of California applicable to contracts made and to be performed therein. 8.4 Headings. The section headings used in this Agreement are for convenience of reference only and will not be considered in the interpretation or construction of any of the provisions thereof. 8.5 Amendments, Waivers. No amendment, waiver of compliance with any provision or condition hereof, or consent pursuant to this Agreement, will be effective unless evidenced by an instrument in writing signed by the parties (which, in the case of NSI, shall require the approval of a majority of its independent directors). 8.6 Severability. If any terms or provisions hereof or the application thereof to any circumstances shall be found by any court having jurisdiction to be invalid or unenforceable to any extent, such term or provision shall be ineffective to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remaining terms and provisions hereof or the application of such term or provision to circumstances other than those as to which it is held invalid or unenforceable. 8.7 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which, together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as a sealed instrument by their duly authorized officers as of the date first above written. SCIENCE APPLICATIONS INTERNATIONAL CORPORATION By: -------------------------- Title: ----------------------- 6 7 SUBSIDIARY NETWORK SOLUTIONS, INC. By: -------------------------- Title: ----------------------- 7 EX-10.7 6 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 10.7 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and entered into as of this ____ day of _______, 1997 by and between SCIENCE APPLICATIONS INTERNATIONAL CORPORATION, a Delaware corporation ("SAIC" or the "Holder") and NETWORK SOLUTIONS, INC., a Delaware corporation (the "Company"). RECITALS A. The Holder. SAIC is an existing corporation duly organized and in good standing under the laws of the State of Delaware with its principal executive offices located in San Diego, California. B. The Company. The Company is an existing corporation, formed under the laws of the State of Delaware, with its principal executive offices located in Herndon, Virginia. All of the outstanding Common Stock of the Company is currently owned by SAIC. C. Corporate Approvals. Each of the parties to this Agreement has obtained all necessary corporate approvals for the execution and delivery of this Agreement. D. Arm's Length Relationship. The parties to this Agreement intend to conduct their relationships hereunder on an arm's length basis. E. The Offering. SAIC currently owns 100% of the outstanding common stock of the Company. The Company is contemplating the issuance of shares of the Company's Class A common stock, $.001 par value per share (the "Class A Common Stock"), in an initial public offering pursuant to a Registration Statement on Form S-1 (Registration No. 333-30705) (the "Offering") and following the Offering, SAIC will be the beneficial and record owner of 12,500,000 shares of the Company's Class B common stock, $.001 par value per share (the "Class B Common Stock"), convertible into 12,500,000 shares of the Class A Common Stock. F. Registration Rights. In conjunction with the Offering, the Holder and the Company desire to enter into this Agreement to provide the Holder with certain registration rights as provided herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and for other good and valuable consideration had and received, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Definitions. As used herein, the following terms shall have the following respective meanings: 2 "Affiliate" shall mean any Person that directly or indirectly controls, is controlled by, or is under common control with such Person. A Person shall be deemed to control another Person if such Person owns 50% or more of any equity interest in the "controlled" Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of stock or partnership interests, by contract, agreement or understanding (whether oral or written), or otherwise. "Class A Common Stock" shall have the meaning set forth in Recital E of this Agreement. "Class B Common Stock" shall have the meaning set forth in Recital E of this Agreement. "Designated Transferee" shall have the meaning set forth in Section 10 hereof. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Holders" shall mean SAIC, any Affiliate of SAIC (other than the Company) and any Designated Transferees who are holders of record of any Registrable Shares, and any combination of one or more such Holders. "NASD" shall mean the National Association of Securities Dealers, Inc. "Other Holders" shall mean Persons who are holders of record of equity securities of the Company who subsequent to the date hereof acquire more than 5% of the outstanding shares of Class A Common Stock pursuant to a transaction with the Company and to whom the Company grants registration rights pursuant to a written agreement in connection with such transaction. "Person" shall mean any individual, corporation, association, partnership, group (as defined in Section 13(d)(3) of the Exchange Act), limited liability company, joint venture, business trust or unincorporated organization, or a government or any agency or political subdivision thereof. "Registrable Shares" shall mean (i) the 12,500,000 shares of Class A Common Stock which would result upon the conversion of the 12,500,000 shares of Class B Common Stock owned by the Holder on the date of this Agreement, and (ii) any shares of Class A Common Stock acquired by a Holder directly or upon exercise of conversion of any equity securities of the Company issued or distributed after the date of this Agreement to a Holder in 2 3 respect of Registrable Shares by way of any stock dividend, stock split or other distribution or any recapitalization or reclassification. As to any particular Registrable Share, such Registrable Share shall cease to be a Registrable Share when (w) it shall have been sold, transferred or otherwise disposed of or exchanged pursuant to a registration statement under the Securities Act; (x) it shall have been distributed to the public pursuant to Rule 144 (or any successor provision) under the Securities Act; (y) it shall have been sold or transferred to a Person other than a Designated Transferee in a private transaction effected other than pursuant to a registration statement; or (z) it shall have been sold, transferred or otherwise disposed of in violation of this Agreement. "Registration Expenses" shall have the meaning set forth in Section 7(a) hereof. "SEC" shall mean the Securities and Exchange Commission or any successor agency thereto. "Securities Act" shall mean the Securities Act of 1933, as amended. 2. Incidental Registrations (a) Right to Include Registrable Shares. Each time the Company shall determine to file a registration statement under the Securities Act in connection with a proposed offer and sale for cash of any equity securities (other than an offering of debt securities which are convertible into equity securities or an offering of equity securities in an amount not in excess of 5% of the number of shares of Class A Common Stock outstanding at such time) either by it or by any holders of its outstanding equity securities, the Company will give prompt written notice of its determination to each Holder and of such Holder's rights under this Section 2, at least 60 days prior to the anticipated filing date of such registration statement. Upon the written request of each Holder made within 30 days after the receipt of any such notice from the Company, (which request shall specify the Registrable Shares intended to be disposed of by such Holder), the Company will use its best efforts to effect the registration under the Securities Act of all Registrable Shares which the Company has been so requested to register by the Holders thereof, to the extent required to permit the disposition of the Registrable Shares so to be registered; provided, however, that (i) if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to proceed with the proposed registration of the securities to be sold by it, the Company may, at its election, give written notice of such determination to each Holder of Registrable Shares and thereupon shall be relieved of its obligation to register any Registrable Shares in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith), and (ii) if such registration involves an underwritten offering, all Holders of Registrable Shares requesting to be included in the Company's registration must sell their Registrable Shares to the underwriters on the same terms and conditions as apply to the Company, with such 3 4 differences, including any with respect to indemnification and liability insurance, as may be customary or appropriate in combined primary and secondary offerings. If a registration requested pursuant to this Section 2(a) involves an underwritten public offering, any Holder of Registrable Shares requesting to be included in such registration may elect, in writing prior to the effective date of the registration statement filed in connection with such registration, not to register such securities in connection with such registration. No registration effected under this Section 2 shall relieve the Company of its obligations to effect registrations upon request under Section 4 hereof. (b) Priority in Incidental Registration. If a registration pursuant to this Section 2 involves an underwritten offering and the managing underwriter(s) in good faith advise(s) the Company in writing that, in its opinion, the number of securities which the Company, the Holders and any other Persons intend to include in such registration exceeds the largest number of securities which can be sold in such offering without having an adverse effect on such offering (including the price at which such securities can be sold), then the Company will include in such registration (i) first, if the registration pursuant to this Section 2 was initiated by Other Holders exercising demand registration rights, 100% of the securities such Other Holders propose to sell (except to the extent the terms of such Other Holders' registration rights provide otherwise); (ii) second, 100% of the securities the Company proposes to sell for its own account; (iii) third, to the extent that the number of securities which such Other Holders exercising demand registration rights and the Company propose to sell is less than the number of securities which the Company has been advised can be sold in such offering without having the adverse effect referred to above, such number of Registrable Shares which the Holders have requested to be included in such registration pursuant to Section 2(a) hereof and which, in the opinion of such managing underwriter(s), can be sold without having the adverse effect referred to above; and (iv) fourth, to the extent that the number of securities which are to be included in such registration pursuant to clauses (i), (ii) and (iii) is, in the aggregate, less than the number of securities which the Company has been advised can be sold in such offering without having the adverse effect referred to above, such number of other securities requested to be included in the offering for the account of any Other Holders which, in the opinion of such managing underwriter(s), can be sold without having the adverse effect referred to above. 3. Holdback Agreements. (a) If any registration of Registrable Shares shall be in connection with an underwritten public offering, the Holders shall not effect any public sale or distribution (except in connection with such public offering), of any equity securities of the Company, or of any security convertible into or exchangeable or exercisable for any equity security of the Company (in each case, other than as part of such underwritten public offering), during the 180-day period (or such lesser period as the managing underwriter(s) beginning on the effective date of such registration, if, and to the extent, the managing underwriter(s) of any such offering determine(s) such action is necessary or desirable to effect such offering; provided, however, that each Holder has received the written notice required by Section 2(a) hereof; provided, however, that each Holder shall not be obligated to comply with such 4 5 restrictions arising as a result of an underwritten public offering subject to Section 2 hereof more than once in any 12-month period. (b) If any registration of Registrable Shares shall be in connection with any underwritten public offering, the Company shall not effect any public sale or distribution (except in connection with such public offering) of any of its equity securities or of any security convertible into or exchangeable or exercisable for any of its equity securities (in each case other than as part of such underwritten public offering) during the 180-day period (or such lesser period as the managing underwriter(s) may permit) beginning on the effective date of such registration, and the Company shall use its best efforts to cause each member of the management of the Company who holds any equity security and each other holder of 5% or more of the outstanding shares of any equity security, or of any security convertible into or exchangeable or exercisable for any equity security, of the Company purchased from the Company (at any time other than in a public offering) to so agree. 4. Registration on Request. (a) Request by Holders. Upon the written request of the Holders of at least 10% of the Registrable Shares (calculated on the based on the number in clause (i) of its definition) that the Company effect the registration under the Securities Act of all or part of such Holders' Registrable Shares, and specifying the amount (which shall not be less than 10% of the Registrable Shares (calculated on the based on the number in clause (i) of its definition) in the aggregate) and the intended method of disposition thereof, the Company will promptly give notice of such requested registration to all other Holders of Registrable Shares and, as expeditiously as possible, use its best efforts to effect the registration under the Securities Act of: (i) the Registrable Shares which the Company has been so requested to register by Holders of at least 10% of the Registrable Shares; and (ii) all other Registrable Shares which the Company has been requested to register by any other Holder thereof by written request received by the Company within 30 days after the giving of such written notice by the Company (which request shall specify the intended method of disposition of such Registrable Shares); provided, however, that the Company shall not be required to effect more than two registrations pursuant to this Section 4; provided, further, that the Company shall not be obligated to file a registration statement relating to a registration request under this Section 4 (x) if the registration request is delivered after delivery of a notice by the Company of an intended registration and prior to the effective date of the registration statement referred to in such notice, or (y) within a period of 90 days after the effective date of any other registration statement of the Company requested by a Holder pursuant to this Section 4 or pursuant to which the Holders included Registrable Shares. The Holders initially requesting a registration pursuant to this Section 4 may, at any time prior to the effective date of the registration statement relating to such registration, revoke such request by providing a written notice to the Company revoking such request; provided, however, that, in the event the Holders shall have made a written request for a demand registration (I) which is subsequently withdrawn by the Holders after the Company has filed a registration statement with the SEC in connection therewith but prior to such demand registration being declared effective by the SEC or (II) which is not declared effective solely as a result of the failure of Holders to take all actions reasonably required in order to have 5 6 the registration and the related registration statement declared effective by the SEC, then, in any such event, such demand registration shall be counted as a demand registration for purposes of this Section 4(a). Promptly after the expiration of the 30-day period referred to in clause (ii) above, the Company will notify all the Holders to be included in the registration of the other Holders and the number of shares of Registrable Shares requested to be included therein. (b) Registration Statement Form. If any registration requested pursuant to this Section 4 which is proposed by the Company to be effected by the filing of a registration statement on Form S-3 (or any successor or similar short-form registration statement) shall be in connection with an underwritten public offering, and if the managing underwriter(s) shall advise the Company in writing that, in its opinion, the use of another form of registration statement is of material importance to the success of such proposed offering, then such registration shall be effected on such other form. (c) Effective Registration Statement. A registration requested pursuant to this Section 4 will not be deemed to have been effected unless it has become effective under the Securities Act and has remained effective for 270 days or such shorter period as all the Registrable Shares included in such registration have actually been sold thereunder. In addition, if within 180 days after it has become effective, the offering of Registrable Shares pursuant to such registration is interfered with by any stop order, injunction or other order or requirement of the SEC or other governmental agency or court, such registration will be deemed not to have been effected for purposes of this Section 4. (d) Priority in Requested Registrations. If a requested registration pursuant to this Section 4 involves an underwritten offering and the managing underwriter(s) in good faith advise(s) the Company in writing that, in its opinion, the number of securities requested to be included in such registration (including securities of the Company which are not Registrable Shares) exceeds the largest number of securities which can be sold in such offering without having an adverse effect on such offering (including the price at which such securities can be sold), then the Company will include in such registration (i) first, 100% of the Registrable Shares requested to be registered pursuant to Section 4(a) hereof (provided that if the number of Registrable Shares requested to be registered pursuant to Section 4(a) hereof exceeds the number which the Company has been advised can be sold in such offering without having the adverse effect referred to above, the number of such Registrable Shares to be included in such registration by the Holders shall be allocated pro rata among such Holders on the basis of the relative number of Registrable Shares each such Holder has requested to be included in such registration); (ii) second, to the extent that the number of Registrable Shares requested to be registered pursuant to Section 4(a) hereof is less than the number of securities which the Company has been advised can be sold in such offering without having the adverse effect referred to above, such number of shares of equity securities the Company requests to be included in such registration, and (iii) third, to the extent that the number of Registrable Shares requested to be included in such registration pursuant to Section 4(a) hereof and the securities which the Company proposes to sell for its own account are, in the aggregate, less than the number of equity securities which the Company has been advised can be sold in such offering without having the adverse effect 6 7 referred to above, such number of other securities proposed to be sold by any Other Holder which, in the opinion of such managing underwriter(s), can be sold without having the adverse effect referred to above (provided that if the number of such securities of such Other Holder requested to be registered exceeds the number which the Company has been advised can be sold in such offering without having the adverse effect referred to above, the number of such securities to be included in such registration pursuant to this Section 4(d) shall be allocated pro rata among all such Other Holders on the basis of the relative number of securities each such Other Holder has requested to be included in such registration). (e) Additional Rights. If the Company at any time grants to any other holders of equity securities of the Company any rights to request the Company to effect the registration of any such shares of equity securities on terms more favorable to such holders than the terms set forth in this Section 4 and in Section 5 hereof, the terms of this Section 4 and of Section 5 hereof shall be deemed amended or supplemented to the extent necessary to provide the Holders such more favorable rights and benefits. In no event shall the Company grant to any person any rights to request the Company to effect the registration of any shares of equity securities of the Company on terms which are adverse to rights of the Holders set forth in Section 2 and this Section 4. 5. Registration Procedures. (a) If and whenever the Company is required by the provisions of Section 2 or 4 hereof to use its best efforts to effect or cause the registration of Registrable Shares, the Company shall as expeditiously as possible: (i) prepare and, in any event within 60 days after the end of the 30-day period within which a request for registration may be given to the Company as specified in Sections 2(a) and 4(a) hereof, file with the SEC a registration statement with respect to such Registrable Shares and use its best efforts to cause such registration statement to become effective; (ii) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period not in excess of 270 days and to comply with the provisions of the Securities Act, the Exchange Act, and the rules and regulations promulgated thereunder with respect to the disposition of all the securities covered by such registration statement during such period in accordance with the intended methods of disposition by the Holders thereof set forth in such registration statement; provided, however, that (A) before filing a registration statement (including an initial filing) or prospectus, or any amendments or supplements thereto, the Company will furnish to one counsel selected by the Holders of a majority of the Registrable Shares covered by such registration statement copies of all documents proposed to be filed, which documents will be subject to the review and comment of such counsel, and (B) the Company will notify each Holder of Registrable Shares covered by such registration statement of any 7 8 stop order issued or threatened by the SEC, any other order suspending the use of any preliminary prospectus or of the suspension of the qualification of the registration statement for offering or sale in any jurisdiction, and take all reasonable actions required to prevent the entry of such stop order, other order or suspension or to remove it if entered; (iii) furnish to each Holder and each underwriter, if applicable, of Registrable Shares covered by such registration statement such number of copies of the registration statement and of each amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and summary prospectus), in conformity with the requirements of the Securities Act, and such other documents as each Holder of Registrable Shares covered by such registration statement may reasonably request in order to facilitate the disposition of the Registrable Shares by such Holder; (iv) use its best efforts to register or qualify such Registrable Shares covered by such registration statement under the state securities or blue sky laws of such jurisdictions as each Holder of Registrable Shares covered by such registration statement and, if applicable, each underwriter, may reasonably request, and do any and all other acts and things which may be reasonably necessary to consummate the disposition in such jurisdictions of the Registrable Shares owned by such Holder, except that the Company shall not for any purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction where, but for the requirements of this clause (iv), it would not be obligated to be so qualified; (v) use its best efforts to cause such Registrable Shares covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the Holders thereof to consummate the disposition of such Registrable Shares; (vi) if at any time when a prospectus relating to the Registrable Shares is required to be delivered under the Securities Act, any event shall have occurred as the result of which any such prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, immediately give written notice thereof to each Holder and the managing underwriter or underwriters, if any, of such Registrable Shares and prepare and furnish to each such Holder a reasonable number of copies of an amended or supplemental prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Shares, such prospectus shall not include an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; 8 9 (vii) use its best efforts to list any portion of such Registrable Shares not already listed on any securities exchange on which similar securities of the Company are then listed, and enter into customary agreements including a listing application and indemnification agreement in customary form, provided that the applicable listing requirements are satisfied, and provide a transfer agent and registrar for such Registrable Shares covered by such registration statement not later than the effective date of such registration statement; (viii) enter into such customary agreements (including an underwriting agreement in customary form) and take such other actions as each Holder of Registrable Shares being sold or the underwriter or underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Shares, including customary indemnification and opinions; (ix) use its best efforts to obtain a "cold comfort" letter or letters from the Company's independent public accountants in customary form and covering matters of the type customarily covered by "cold comfort" letters as the Holders of the Registrable Shares being sold or the underwriters retained by such Holders shall reasonably request; (x) make available for inspection by representatives of any Holder of Registrable Shares covered by such registration statement, by any underwriter participating in any disposition to be effected pursuant to such registration statement and by any attorney, accountant or other agent retained by such Holders or any such underwriter, all financial and other records pertinent corporate documents and properties of the Company and its subsidiaries' officers, directors and employees to supply all information and respond to all inquiries reasonably requested by such Holders or any such representative, underwriter, attorney, accountant or agent in connection with such registration statement; (xi) promptly prior to the filing of any document which is to be incorporated by reference into the registration statement or the prospectus (after initial filing of the registration statement), provide copies of such document to counsel to the Holders of Registrable Shares covered by such registration statement and to the managing underwriter(s), if any, make the Company's representatives available for discussion of such document and make such changes in such document prior to the filing thereof as counsel for such Holders or underwriter(s) may reasonably request; (xii) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable after the effective date of the registration statement, an earning statement which shall satisfy the provisions of Section 11(a) of the Securities Act and the rules and regulations promulgated thereunder; 9 10 (xiii) not later than the effective date of the applicable registration statement, use its best efforts to provide a CUSIP number for any portion of such Registrable Shares not already included in a CUSIP number for similar securities of the Company, and provide the applicable transfer agents with printed certificates for the Registrable Shares which are in a form eligible for deposit with the Depository Trust Company; (xiv) notify counsel for the Holders of Registrable Shares included in such registration statement and the managing underwriter or underwriters, if any, immediately and confirm the notice in writing, (A) when the registration statement, or any post-effective amendment to the registration statement, shall have become effective, or any supplement or amendment to the prospectus shall have been filed, (B) of the receipt of any comments from the SEC and (C) of any request of the SEC to amend the registration statement or amend or supplement the prospectus or for additional information; and (xv) cooperate with each seller of Registrable Shares and each underwriter, if any, participating in the disposition of such Registrable Shares and their respective counsel in connection with any filings required to be made with the NASD. (b) Each Holder of Registrable Shares hereby agrees that, upon receipt of any notice from the Company of the happening of any event of the type described in Section 5(a)(vi) hereof, such Holder shall forthwith discontinue disposition of such Registrable Shares covered by such registration statement or related prospectus until such Holder's receipt of the copies of the supplemental or amended prospectus contemplated by Section 5(a)(vi) hereof, and, if so directed by the Company, such Holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Holder's possession, of the prospectus covering such Registrable Shares at the time of receipt of such notice. In the event the Company shall give any such notice, the period mentioned in Section 5(a)(ii) hereof shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to Section 5(a)(vi) hereof and including the date when such Holder shall have received the copies of the supplemental or amended prospectus contemplated by Section 5(a)(vi) hereof. If for any other reason the effectiveness of any registration statement filed pursuant to Section 4 hereof is suspended or interrupted prior to the expiration of the time period regarding the maintenance of the effectiveness of such Registration Statement required by Section 5(a)(ii) hereof so that Registrable Shares may not be sold pursuant thereto, the applicable time period shall be extended by the number of days equal to the number of days during the period beginning with the date of such suspension or interruption to and ending with the date when the sale of Registrable Shares pursuant to such registration statement may be recommenced. (c) Each Holder hereby agrees to provide the Company, upon receipt of its request, with such information about such Holder to enable the Company to comply with the requirements of the Securities Act and to execute such certificates as the Company may 10 11 reasonably request in connection with such information and otherwise to satisfy any requirements of law. 6. Underwritten Registrations. Subject to the provisions of Sections 2, 3 and 4 hereof, any of the Registrable Shares covered by a registration statement may be sold in an underwritten offering at the discretion of the Holder thereof. In the case of an underwritten offering pursuant to Section 2 hereof, the managing underwriter(s) that will administer the offering shall be selected by the Company; provided, however, that such managing underwriter(s) shall be reasonably satisfactory to the Holders of a majority of the Registrable Shares to be registered. In the case of any underwritten offering pursuant to Section 4 hereof, the managing underwriter(s) that will administer the offering shall be selected by the Holders of a majority of the Registrable Shares to be registered; provided, however, that such underwriter(s) shall be reasonably satisfactory to the Company. 7. Expenses. (a) Subject to Section 7(b), the Company shall pay all fees, costs and expenses of all registrations pursuant to Section 2 hereof and the first registration pursuant to Section 4 hereof, including all SEC and stock exchange or NASD registration and filing fees and expenses, reasonable fees and expenses of any "qualified independent underwriter" and its counsel as may be required by the rules of the NASD, fees and expenses of compliance with securities or blue sky laws (including reasonable fees and disbursements of counsel for the underwriters, if any, in connection with blue sky qualifications of the Registrable Shares), rating agency fees, printing expenses (including expenses of printing certificates for Registrable Shares and prospectuses), messenger, telephone and delivery expenses, the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange or national market system on which similar securities issued by the Company are then listed, fees and disbursements of counsel for the Company and all independent certified public accountants (including the expenses of any annual audit, special audit and "cold comfort" letters required by or incident to such performance and compliance), the fees and disbursements of the underwriters customarily paid by issuers or sellers of securities (including expenses relating to "road shows" and other marketing activities), the reasonable fees and expenses of special experts required to be retained by the Company in connection with such registration, and the reasonable fees and expenses of other Persons required to be retained by the Company (collectively, "Registration Expenses"); provided, however, that Registration Expenses shall not include (i) any allocation of the overhead of the Company, including any allocation of the compensation or benefits of employees of the Company that assist in a registration, (ii) any other expense to the extent it would have been incurred by the Company in the absence of any sale of securities in connection with a registration pursuant to this Agreement (including the cost of the Company's annual audit), or (iii) any expenses for any registration proceeding begun pursuant to Section 4 hereof and subsequently withdrawn by the Holder requesting such registration. (b) The Holders shall pay the following: (i) all fees, costs and expenses of all registrations except the first registration effected pursuant to Section 4 hereof including all 11 12 Registration Expenses, (ii) any underwriting discounts or commissions or transfer taxes, if any, attributable to the sale of Registrable Shares by the Holders pursuant to this Agreement, (iii) all fees, costs and expenses of counsel to the Holders pursuant to this Agreement in connection with any registration pursuant to this Agreement, and (iv) all fees, costs and expenses for any registration proceeding begun pursuant to Section 4 hereto and subsequently withdrawn by the Holders requesting such registration. 8. Indemnification. (a) Indemnification by the Company. In the event of any registration of any securities of the Company under the Securities Act pursuant to Section 2 or 4 hereof, the Company will, and it hereby does, indemnify and hold harmless, to the extent permitted by law, each of the Holders of any Registrable Shares covered by such registration statement, each Affiliate of such Holder (other than the Company) and their respective directors and officers, each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such Holder or any such underwriter within the meaning of the Securities Act (collectively, the "Indemnified Parties"), against any and all losses, claims, damages or liabilities, joint or several, and expenses (including any amounts paid in any settlement effected with the Company's consent, which consent shall not be unreasonably withheld) to which any Indemnified Party may become subject under the Securities Act, state securities or blue sky laws, common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof, whether or not such Indemnified Party is a party thereto) or expenses arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary, final or summary prospectus contained therein, or any amendment or supplement thereof, (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (iii) any violation by the Company of any federal, state or common law rule or regulation applicable to the Company and relating to action required of or inaction by the Company in connection with any such registration, and the Company will reimburse such Indemnified Party for any legal or any other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided, however, that the Company shall not be liable to any Indemnified Party in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement or amendment or supplement thereof or in any such preliminary, final or summary prospectus in reliance upon and in conformity with written information with respect to such Holder furnished to the Company by such Holder specifically for use in the preparation thereof. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Holder or any Indemnified Party and shall survive the transfer of such securities by such Holder. (b) Indemnification by the Holders and the Underwriters. The Company may require, as a condition to including any Registrable Shares in any registration statement filed 12 13 in accordance with Section 2 or 4 hereof, that the Company shall have received an undertaking reasonably satisfactory to it from the Holders of such Registrable Shares or any underwriter to indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 8(a) hereof) the Company with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary, final or summary prospectus contained therein, or any amendment or supplement, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information with respect to the Holders of the Registrable Shares being registered or such underwriter furnished to the Company by such Holders or such underwriter specifically for use in the preparation of such registration statement, preliminary, final or summary prospectus or amendment or supplement, or a document incorporated by reference into any of the foregoing; provided, however, that no such Holder shall be liable for any indemnity claims in excess of the amount of the net proceeds received by such Holder from the sale of Registrable Shares. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any of the Holders, or any of their respective Affiliates (other than the Company), directors, officers or controlling Persons, and shall survive the transfer of such securities by such Holder. (c) Notices of Claims, Etc. Promptly after receipt by an indemnified party hereunder of written notice of the commencement of any action or proceeding with respect to which a claim for indemnification may be made pursuant to this Section 8, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided, however, that the failure of the indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Section 8, except to the extent that the indemnifying party is actually materially prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, the indemnifying party will be entitled to participate in and to assume the defense thereof, with counsel satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation; provided, however, that the indemnified party shall have the right, at the sole cost and expense of the indemnifying party, to employ counsel to represent the indemnified party and its respective controlling persons, directors, officers, employees or agents who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the indemnified party against such indemnifying party under this Section 8 if (i) the employment of such counsel shall have been authorized in writing by such indemnifying party in connection with the defense of such action, (ii) the indemnifying party shall not have promptly employed counsel reasonably satisfactory to the indemnified party to assume the defense of such action or counsel, or (iii) any indemnified party shall have reasonably concluded that there may be defenses available to such indemnified party or its respective controlling persons, directors, officers, employees or agents which are in conflict with or in addition to those available to an indemnifying party; provided, further, that the indemnifying party shall not be obligated to pay for more than the expenses of one firm of separate 13 14 counsel for the indemnified party (in addition to the reasonable fees and expenses of one firm serving as local counsel). No indemnifying party will consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. (d) If the indemnification provided for in this Section 8 shall for any reason be unavailable to any indemnified party under Section 8(a) or 8(b) hereof or is insufficient to hold it harmless in respect of any loss, claim, damage or liability, or any action in respect of any loss, claim, damage or liability, or any action in respect thereof referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the indemnified party and indemnifying party or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the indemnified party and indemnifying party with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. Notwithstanding any other provision of this Section 8(d), no Holder of Registrable Shares shall be required to contribute an amount greater than the dollar amount of the proceeds received by such Holder with respect to the sale of any such Registrable Shares. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (e) Other Indemnification. Indemnification similar to that specified in the preceding subdivisions of this Section 8 (with appropriate modifications) shall be given by the Company and each Holder of Registrable Shares with respect of any required registration or other qualification of securities under any federal or state law or regulation other than the Securities Act. (f) Non-Exclusivity. The obligations of the parties under this Section 8 shall be in addition to any liability which any party may otherwise have to any other party. 9. Rule 144. The Company covenants that it will file in a timely manner the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations promulgated thereunder (or, if the Company is not required to file such reports, it will, upon the request of any Holder of Registrable Shares, make publicly available such information), and it will take such further action as any Holder of Registrable Shares may reasonably request, all to the extent required from time to time to enable such Holder to sell Registrable Shares without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the SEC. Upon the request of any Holder of Registrable Shares, the Company will deliver to such Holder a written statement as to whether it has complied with such requirements. 14 15 10. Assignability. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. Except as provided herein, no party may assign any of its rights or delegate any of its duties under this Agreement without the express consent of the other parties hereto. In addition, and whether or not any express assignment shall have been made, the provisions of this Agreement which are for the benefit of the parties hereto other than the Company shall also be for the benefit of and enforceable by any subsequent Holder of any Registrable Shares, subject to the provisions contained herein. Any Holder may assign any of its rights or delegate any of its duties under this Agreement, in whole or in part, without any prior consent of the Company only to a Person (a "Designated Transferee") (a) who is an Affiliate of SAIC or (b) who is a transferee of Registrable Shares (whether through purchase, share exchange, bequest or otherwise) and who agrees to be bound by the terms of this Agreement. Any purported assignment in violation of this Section 10 shall be void. 11. Limitation on Subsequent Registration Rights. From and after the date hereof, the Company shall not, without the prior written consent of the Holders owning not less than 50% of the Registrable Shares, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder to include such securities in any registration of the Company. 12. Notices. Any and all notices, designations, consents, offers, acceptances or any other communications shall be given in writing by either (a) personal delivery to and receipted for by the addressee or by (b) telecopy or registered or certified mail which shall be addressed, in the case of the Company, to: Network Solutions, Inc., 505 Huntmar Park Drive, Herndon, Virginia 20170, attention: Chief Financial Officer; in the case of Holders, to the address or addresses thereof appearing on the books of the Company or of the transfer agent and registrar for its Class A Common Stock. All such notices and communications shall be deemed to have been duly given and effective: when delivered by hand, if personally delivered; two business days after being deposited in the mail, postage prepaid, if mailed; and when receipt is acknowledged, if telecopied. 13. No Inconsistent Agreements. The Company will not hereafter enter into any agreement with respect to its securities which is inconsistent with the rights granted to the Holders in this Agreement. 14. Specific Performance. The Company acknowledges that the rights granted to the Holders in this Agreement are of a special, unique and extraordinary character, and that any breach of this Agreement by the Company could not be compensated for by damages. Accordingly, if the Company breaches its obligations under this Agreement, the Holders shall be entitled, in addition to any other remedies that they may have, to enforcement of this Agreement by a decree of specific performance requiring the Company to fulfill its obligations under this Agreement. 15. Severability. If any provision of this Agreement or any portion thereof is finally determined by a court of competent jurisdiction to be unlawful or unenforceable, such provision or portion thereof shall in no way affect any other provision of this Agreement, 15 16 the application of any such provision and any other circumstances, and any portion of such invalidated provision that is not invalidated by such a determination shall remain in full force and effect. 16. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which, together, shall constitute one and the same instrument. 17. Defaults. A default by any party to this Agreement in such party's compliance with any of the conditions or covenants hereof or performance of any of the obligations of such party hereunder shall not constitute a default by any other party. 18. Amendments, Waivers. This Agreement may not be amended, modified or supplemented and no waivers of or consents to or departures from the provisions hereof may be given unless consented to in writing by the Company and the holders of a majority of the Registrable Shares; provided, however, that no such amendment, supplement, modification or waiver shall deprive any Holder of any rights under Section 2 or 4 hereof without the consent of such Holder. 19. Construction. The captions contained in this Agreement are for reference purposes only and shall not constitute a part of this Agreement. Unless the context requires otherwise, the use of the masculine shall include the feminine, and the use of the singular shall include the plural. The word "including" shall mean "including, without limitation." 20. Attorneys' Fees. In any action or proceeding brought to enforce any provision of this Agreement, or where any provision hereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy. 21. Third Party Beneficiaries. Except as expressly provided in this Agreement, the parties hereto intend that this Agreement shall not benefit or create any right or cause of action in or on behalf of any person other than the parties hereto. 22. Entire Agreement. This Agreement contains the entire agreement among the parties hereto with respect to the transactions contemplated herein and understandings among the parties relating to the subject matter hereof. Any and all previous agreements and understandings between or among the parties hereto regarding the subject matter hereof are, whether written or oral, superseded by this Agreement. 23. Governing Law. This Agreement is made pursuant to and shall be construed in accordance with the laws of the State of Delaware without regard to that state's conflicts 16 17 of laws principles. The parties hereto submit to the non-exclusive jurisdiction of the Courts of the State of Delaware in any action or proceeding arising out of or relating to this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective authorized officers as of the date first written above. NETWORK SOLUTIONS, INC. By ------------------------------------- Name: --------------------------------- Title: --------------------------------- SCIENCE APPLICATIONS INTERNATIONAL CORPORATION By ------------------------------------- Name: --------------------------------- Title: --------------------------------- 17 EX-10.8 7 NONCOMPETITION & CORPORATE OPPORTUNITIES AGREEMENT 1 EXHIBIT 10.8 NONCOMPETITION AND CORPORATE OPPORTUNITIES ALLOCATION AGREEMENT THIS NONCOMPETITION AND CORPORATE OPPORTUNITIES ALLOCATION AGREEMENT (this "Agreement") is made as of the ___ day of ________ 1997 between SCIENCE APPLICATIONS INTERNATIONAL CORPORATION, a Delaware corporation ("SAIC") and NETWORK SOLUTIONS, INC., a Delaware corporation ("NSI"). RECITALS A. SAIC. SAIC is an existing corporation duly organized and in good standing under the laws of the State of Delaware with its principal executive offices located in San Diego, California. B. NSI. NSI is an existing corporation duly organized and in good standing under the laws of the State of Delaware with its principal executive offices located in Herndon, Virginia. NSI is currently engaged in the Commercial Domain Name Registration Business (as defined herein) on a world-wide basis. C. Corporate Approvals. Each of the parties to this Agreement has obtained all necessary corporate approvals for the execution and delivery of this Agreement. D. SAIC/NSI Transactions. SAIC currently owns 100% of the outstanding common stock of NSI. NSI is currently considering an initial public offering of ________________ shares of its common stock, $.001 par value per share. E. Related Agreements. Concurrently with the execution and delivery of this Agreement, SAIC and NSI have entered into (1) a Tax Sharing Agreement of even date herewith (the "Tax Sharing Agreement") and (2) a Corporate Services Agreement of even date herewith (the "Corporate Services Agreement"). The Tax Sharing Agreement and the Corporate Services Agreement are herein collectively referred to as the "Related Agreements." F. Noncompetition. In anticipation that NSI will cease to be a wholly-owned subsidiary of SAIC, but that SAIC will remain a stockholder of NSI, and in anticipation that NSI and SAIC may engage in the same or similar activities or lines of business and have an interest in the same areas of corporate opportunities, SAIC and NSI are willing to enter into this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in consideration of their mutual promises and obligations herein contained, intending to be legally bound, the parties do hereby agree as follows: -1- 2 ARTICLE 1 - DEFINITIONS 1.1 "Affiliate" means any entity as to which SAIC shall control more than 50% of the outstanding voting power for the election of directors (or similar officials) of any entity, other than NSI. 1.2 "Commercial Domain Name Registration Business" shall mean the Internet registration of domain names within the .com, .org, .net, .gov and .edu top level domains. The Commercial Domain Name Registration Business shall specifically not include the Intranet Services Business, the Directory Services Business or any Internet enabling services, and it shall specifically not include the Internet registration of domain names within other top level domains, whether currently existing or not, such as the .mil top level domain. 1.3 "Directory Services Business" shall mean services for searching for, retrieving, sending, accessing and distributing information through the use of the Internet. 1.4 "Intranet Services Business" shall mean consulting and systems integration services, including IP re-engineering, network design, engineering and integration, network and systems management and network and system security. 1.5 "NSI" shall mean NSI and all corporations, partnerships, joint ventures, associations and other entities in which NSI beneficially owns (directly or indirectly) fifty percent or more of the outstanding voting stock, voting power or similar voting interests. 1.6 "Related Entities" means one or more corporations, partnerships, joint ventures, associations or other organizations in which one or more of the directors of NSI have a direct or indirect financial interest. 1.7 "SAIC" shall mean SAIC and all corporations, partnerships, joint ventures, associations and other entities (other than NSI) in which SAIC beneficially owns (directly or indirectly) fifty percent or more of the outstanding voting stock, voting power or similar voting interests. ARTICLE 2 - COMPETITION AND CORPORATE OPPORTUNITIES 2.1 Noncompetition by SAIC. In anticipation that NSI will cease to be a wholly-owned subsidiary of SAIC, but that SAIC will remain a stockholder of NSI, SAIC agrees that neither SAIC nor any Affiliate will directly or indirectly compete with NSI or otherwise engage in the Commercial Domain Name Registration Business in any jurisdiction in any country worldwide. The parties acknowledge and agree that the time and scope of the covenants set forth in this Section 2.1 are reasonable in light of the nature and operation of the Internet and the business, operations and prospects of the Commercial Domain Name Registration Business. -2- 3 2.2 SAIC Determination Binding. The good faith determination of SAIC as to the scope of the Commercial Domain Name Registration Business shall be conclusive and binding for all purposes. 2.3 Other Corporate Opportunities. As to any other corporate opportunities outside the scope of the Commercial Domain Name Registration Business, including, without limitation, the Intranet Services Business, which may be presented to NSI, SAIC or any Affiliate, each party shall be entitled to pursue such opportunity based upon its evaluation of the best interests of its stockholders and shall have no obligation to offer such opportunity to the other parties. Notwithstanding the foregoing, the parties recognize the benefits derived from their prior cooperation in the Intranet Services Business and other areas and nothing herein is intended to discourage or inhibit such cooperation in the future. ARTICLE 3 - TERM AND TERMINATION 3.1 Term. The term of this Agreement shall commence on the Effective Date and shall continue for five years thereafter, unless terminated earlier pursuant to Section 3.2 or extended by the mutual agreement of the parties. 3.2 Termination. Either party shall have the right to terminate this Agreement if SAIC ceases to beneficially own Common Stock representing at least 20% of the number of outstanding shares of Common Stock of NSI. ARTICLE 4 - RESOLUTION OF DISPUTES 4.1 Arbitration. Any controversy or claim between SAIC and NSI arising out of or relating to this Agreement or any agreements or instruments relating hereto or delivered in connection herewith, will, at the request of any party seeking relief be determined by arbitration conducted in San Diego, California. (a) The arbitration shall be conducted in accordance with the United States Arbitration Act (Title 9, U.S. Code), notwithstanding any choice of law provision in this Agreement, and under the Commercial Rules of the American Arbitration Association. The arbitrator(s) shall give effect to statutes of limitation in determining any claim. Any controversy concerning whether an issue is arbitrable shall be determined by the arbitrator(s). The award rendered by the arbitrator(s) shall set forth findings of facts and conclusions of law and shall be final, and the judgment may be entered in any court having jurisdiction thereof. A failure by the arbitrator(s) to make findings of fact and conclusions of law shall be grounds for overturning the award. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. -3- 4 (b) In any arbitration proceeding, the arbitrator(s) is (are) authorized to apportion costs and expenses, including investigation, legal and other expenses, which will include, if applicable, a reasonable estimate of allocated costs and expenses of in-house legal counsel and legal staff. Such costs and expenses are to be awarded only after the conclusion of the arbitration and will not be advanced during the course of such arbitration. ARTICLE 5 - MISCELLANEOUS PROVISIONS 5.1 Remedies for Breach. Both parties recognize that any breach of this Agreement hereof at any time could result in irreparable damage to NSI in an amount difficult to ascertain. Accordingly, in addition to any other relief to which NSI may be entitled, NSI shall be entitled, if it so elects to institute and prosecute proceedings in any court of competent jurisdiction, either in law or in equity, to obtain damages for such breach of this Agreement, to enforce the specific performance of the terms and conditions of this Agreement by SAIC or an Affiliate. 5.2 Severable Promises. The parties hereto intend that the covenants set forth in Section 2.1 hereof shall be construed as a series of separate promises, each promise for each jurisdiction to which this Agreement may apply. Except for such geographic coverage, each such separate promise shall be deemed identical in terms. It is the desire and intent of the parties that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. If any particular provisions or portion of this Agreement shall be adjudicated to be invalid or unenforceable by a court of competent jurisdiction, this Agreement shall be deemed amended to delete therefrom such provision or portion adjudicated to be invalid or unenforceable, such amendment to apply only with respect to the operation of this paragraph in the particular jurisdiction in which such adjudication is made. 5.3 Governing Law. This Agreement shall be governed by and construed under the laws of the State of Delaware without regard to principles of conflicts of laws. 5.4 Notices. Any notice permitted or required by this Agreement shall be deemed given when sent by personal service, by certified or registered mail return receipt requested, postage prepaid, by facsimile transmission or by overnight delivery by a nationally recognized courier and addressed as follows: if to NSI, to 505 Huntmar Park Drive, Herndon, Virginia 20170, attention: Chief Financial Officer, fax: (703) 742-3386; and, if to SAIC, to 10260 Campus Point Drive, San Diego, California 92121, attention: Douglas E. Scott, Esq., fax: (619) 535-7992. Actual receipt of notice or other communication shall overcome any deficiency in manner of delivery thereof. 5.5 Counterparts. This Agreement may be executed in any number of counterparts, each of which, when executed by both parties to this Agreement, shall be deemed to be an original, and all of which counterparts together shall constitute one and the same instrument. -4- 5 5.6 Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to its subject matter, superseding all prior oral and written communications, proposals, negotiations, representations, understandings, courses of dealing, agreements, contracts, and the like between the parties. 5.7 Amendments. This Agreement may be changed, amended, modified, or rescinded only by an instrument in writing signed by the party (which, in the case of NSI, shall require the approval of a majority of the independent directors) against which enforcement of such change, amendment, modification or rescission is sought. 5.8 Waivers. The provisions of this Agreement may be waived only by a written instrument executed by the party so waiving (which, in the case of NSI, shall require the approval of a majority of the independent directors). Except as expressly set forth the failure of any party at any time or times to require performance of any provision of this Agreement shall in no manner affect such party's right at a later time to enforce the same. No waiver by any party of any condition, or breach of any provision of this Agreement, in any one or more instances, shall be deemed to be or construed as a waiver of any other condition or of the breach of any other provision of this Agreement. 5.9 Relationship. Nothing in this Agreement shall be deemed to create a partnership, joint venture or agency relationship between the parties. Both parties are independent contractors and neither party is to be considered the agent or legal representative of the other for any purpose whatsoever. 5.10 Successors and Assigns. This Agreement shall bind and inure to the benefit of the parties and their respective successors and assigns, except that no obligation under this Agreement may be delegated, nor may this Agreement be assigned, without the prior written consent of SAIC. Any such purported assignment of this Agreement without the prior written consent of SAIC shall be void and without effect. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. SCIENCE APPLICATIONS INTERNATIONAL CORPORATION By: --------------------------------- Its: -------------------------------- NETWORK SOLUTIONS, INC. By: --------------------------------- Its: -------------------------------- -5- EX-10.9 8 LETTER AGREEMENT DATED SEPTEMBER 16, 1996 1 EXHIBIT 10.9 September 16, 1996 Mr. Gabriel Battista 12428 Bacall Lane Potomac, MD 20854 Dear Gabe: Based on your interview and discussions with SAIC and NSI staff members, it is a pleasure to offer you a position as the Chief Executive Officer of Network Solutions Inc. reporting directly to the NSI Board of Directors, in the 505 Huntmar Park Drive, Herndon, VA office of NSI. It is our hope that in this capacity you will extend the professional capabilities of our organization, and that you will personally find the association to be both challenging and rewarding. We would like you to begin your employment on or about October 21-28, 1996. Your starting salary will be $6,730.77 per week, based on an anticipated work week of 40 hours, which is equivalent to an annual salary of $350,000. You will be eligible to receive a performance bonus of up to $150,000 based on objectives to be established and mutually agreed upon. You will also receive a pro-rated bonus based upon agreed performance objectives for the current NSI fiscal year, in consideration of you joining NSI at this point in the fiscal year. You will receive options for 3% of Network Solutions Stock at the time of an initial public offering. These will be 4 year vesting options with a vesting schedule of 30%/30%/20%/20% at the end of years 1-4. It is agreed and understood that you will work with the Board to establish a stock option pool for existing and future senior staff members. This option pool will be 15% of the stock at the time of an initial public offering, which will include your 3%. It is agreed that we will execute a separation agreement with you which provides the following: if at any time during the first 2 years of your employment, the NSI Board of Directors acts to remove you, for other than cause or non-performance, you will receive in year 1, your first year's base salary plus $150,000 in bonus; if removed in year 2, you will receive your first year's base salary plus an amount equal to the bonus awarded to you in year 1. If you resign during this two (2) year's period you will receive no separation compensation. After the initial two (2) 2 Mr. Gabriel Battista September 16, 1996 Page 2 of 3 year period of employment, no separation agreement will be in force with you. As an employee of NSI, you will be eligible to receive the fringe benefit package described in the enclosed videotape and New Hire Guidebook. Please view the videotape and complete the enclosed forms to the extent possible. We will arrange an executive orientation briefing for you at your time of hire. Enclosed in your package are the standard Science Application International Corporation Inventions Agreement, the Education summary and Pre-employment statement, the Standards of Business Ethics and Conduct Handbook and the SAIC Employee Dispute Resolution Guide. Both the ethics handbook and the Employee dispute Resolution Guide contain acknowledgement pages which need to be signed by you. As a condition of employment, all employees of SAIC and NSI are required to execute these four attached documents. You may do so at this time or on your first day of employment should you decide to accept this offer. We will assign one of our executive human resource senior managers to work with you on completion of this information. As a further condition of employment, all new employees are required to present documentation which confirms their identity and eligibility for employment in the United States. The enclosed Employment Eligibility Certification describes acceptable documentation and should be presented to the company with the required documents on or before your first day of employment. Additionally, you must have competed SAIC'S form G/C 489, that inquires about any personal or substantial participation in the conduct of a U.S. Government Agency procurement within the last two years. Please be advised that this offer is contingent upon your ability to provide proof of your legal eligibility for employment in the United States. As discussed, NSI has a strong policy against employee use of illegal drug and substance abuse. This is to foster a drug free work environment within the company. All offers of employment, including yours, are contingent upon successfully passing a medical laboratory screen for illegal drugs. You may also be subject to such a screen as an employee in accordance with the companies compliance with federal laws, regulations, executive orders or by the terms of contracts entered into by NSI. Please refer to the enclosed sheets, for details and instructions for 3 Mr. Gabriel Battista September 16, 1996 Page 3 of 3 making the necessary arrangements. Since a minimum of five business days is needed for your test results to be received by SAIC, please schedule your appointment sufficiently in advance of your start date. Although the use of illegal drugs or substances can be cause for termination should you become employed by NSI, it is understood that you or the Company may terminate this employment relationship at any time with or without cause or notice. If you have any questions, feel free to call Mr. Ivan Yopp at (703) 742-4823. The terms of this offer letter are, of course, to be considered strictly confidential and are not to be discussed with others without the express permission of Science Applications International Corporation/Network Solutions, Incorporated. We are sincerely eager for you to join our staff and look forward to your early acceptance of our offer and a mutually rewarding association. Your acceptance can be acknowledged by signing the enclosed copies of this letter and returning the original to my attention and a copy to the Human Resources Department in the envelopes provided. Please keep a copy for your records. Very truly yours, NETWORK SOLUTIONS, INCORPORATED /s/ Michael A. Daniels Michael A. Daniels Chairman of the Board Enclosure: Drug Screening Instructions Consent and Release Form Standard of Business Ethics and Conduct Handbook SAIC Employee Dispute Resolution Guide New Hire Orientation Kit (Video, Guidebook, Forms) - Package 2 I accept~decline (please circle one) your offer of employment and expect to report to work on or about November 1, 1996 /s/ Gabriel A. Battista 9/24/96 - ----------------------- --------------------------- Signature Date 4 ADDENDUM TO OFFER LETTER TO GABE BATTISTA DATED SEPTEMBER 16, 1996 1. You will be issued options for 3% of Network Solutions, Inc. stock, based upon SAIC shares owned plus the estimated number of shares sold by NSI in the initial public offering. Our current schedule is to have the options issued by October 15, 1996. 2. We are currently working with legal counsel, our accountants and our investment bankers to determine the final option price. Our current position that we are working toward is a discount off of the anticipated middle of the stock offering price range. We will also look at a variety of other factors in determining the fair market value at the time of issuance. This will be finalized in consultation with counsel, our accountants, our bankers and our internal team, including yourself. 3. With respect to options, there will be both qualified (ISO's) and non-qualified options. NSI's intent is to maximize the benefits to optionee's while balancing the tax impact to the corporation. The final determination will be made in conjunction with our internal team, our advisors and you. 4. In regard to your separation agreement, non-performance specifically refers to, a) illegal activities, and/or b) your materially not meeting performance goals mutually set and agreed by the NSI Board of Directors and you. Network Solutions, Inc. /s/ Michael A. Daniels Michael A. Daniels Chairman of the Board September 23, 1996 EX-10.10 9 EMPLOYEE STOCK OWNERSHIP PLAN AND AMENDMENTS 1 EXHIBIT 10.10 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN ARTICLE I NAME, EFFECTIVE DATE AND PURPOSES 1.1 NAME AND EFFECTIVE DATE. Effective February 1, 1973, Science Applications, Inc. established the Science Applications, Inc. Stock Bonus Retirement Plan ("Predecessor Plan"). In connection with the reorganization between Science Applications, Inc. and Science Applications International Corporation effected October 1, 1981, Science Applications International Corporation adopted the Predecessor Plan and the name of Predecessor Plan was changed to Science Applications International Corporation Stock Bonus Retirement Plan. The Predecessor Plan was amended and restated in its entirety effective as of January 1, 1985, and has been amended in several respects and has undergone restatement subsequent to that date, the most recent restatement being effective January 1, 1994. The plan established and adopted hereunder shall be known as the Science Applications International Corporation Employee Stock Ownership Plan ("Plan"). 1.2 PLAN PURPOSES. This Plan is designed to constitute a tax-qualified stock bonus plan within the meaning of Code section 401(a) as well as an employee stock ownership plan within the meaning of Code section 4975(e)(7). - 1 - 2 ARTICLE II DEFINITIONS 2.1 ACCOUNTS. The term "Accounts" shall include the following Accounts that are maintained pursuant to the terms of this Plan: (a) The Plan Account opened and maintained for each Participant pursuant to the provisions of Section 6.1; (b) The TRASOP Account, if any, opened and maintained for each affected Participant under Article VI for purposes of holding and accounting for Company Stock and other assets held in the TRASOP Fund and allocated to Participants whose TRASOP Accounts were transferred to this Plan from the Science Applications International Corporation Cash or Deferred Arrangement; (c) The Alternate Payee account, if any, maintained for each Alternate Payee who is awarded an interest in a Participant's benefits under the Plan pursuant to the provisions of Sections 6.11 and 14.2; (d) The CODA Account, if any, opened and maintained for each affected Participant under Article VI for purposes of holding and accounting for Company Stock and other assets transferred from the Deferred Fund of the Science Applications International Corporation Cash or Deferred Arrangement. Such CODA Account shall be 100% vested at all times; and (e) The Profit Sharing Account, if any, opened and maintained for each affected Participant under Article VI for purposes of holding and accounting for Company Stock and other assets transferred from the Science Applications International Corporation Profit Sharing Retirement Plan. 2.2 ADJUSTMENT FACTOR. Adjustment Factor" shall mean the cost of living adjustment factor prescribed by the Secretary of the Treasury under Code section 415(d) for years beginning after December 31, 1987, as applied to the items and in the manner prescribed by the Secretary of the Treasury. - 2 - 3 2.3 AFFILIATED COMPANY. "Affiliated Company" shall mean: (a) Any corporation that is included in a controlled group of corporations, within the meaning of Code section 414(b), that includes the Company; (b) Any trade or business that is under common control with the Company within the meaning of Code section 414(c); (c) Any member of an affiliated service group, within the meaning of Code section 414(m), that includes the Company; and (d) Any entity required to be included under Code section 414(o). 2.4 ALTERNATE PAYEE. "Alternate Payee" shall mean an individual awarded a portion of a Participant's benefits under the Plan pursuant to a qualified domestic relations order, as defined in Code section 414(p) and 14.2 of the Plan. Any limitation or condition imposed by the Plan upon a Participant or his rights hereunder shall, unless expressly indicated otherwise, also serve to limit or condition the rights of an Alternate Payee of the Participant's Account(s). 2.5 ALTERNATE PAYEE ACCOUNT. "Alternate Payee Account" shall mean the Account opened up and maintained to reflect the interest of an Alternate Payee under the Plan. 2.6 ANNIVERSARY DATE. "Anniversary Date" shall mean the last day of each Plan Year. 2.7 APPLICABLE VALUATION DATE. "Applicable Valuation Date" shall mean the most recent date on which the Trust assets were valued in accordance with the rules of Article VI. 2.8 ANNUAL ADDITION. "Annual Addition" shall mean "annual addition" as defined in Code section 415(c)(2). - 3 - 4 2.9 BENEFICIARY. "Beneficiary" or "Beneficiaries" means the person or persons designated in Section 8.9 to receive the interest of a deceased Participant. 2.10 BOARD OF DIRECTORS. "Board of Directors" shall mean the Board of Directors (or its delegate, to the extent the duties of the Board of Directors are delegated to such person) of Science Applications international Corporation as it may from time to time be constituted. 2.11 BREAK IN SERVICE. "Break in Service" shall mean, with respect to an Employee, a computation period (as defined in Section 2.52(b)) in which the Employee completes no more than 425 Hours of Service. 2.11A CODA ACCOUNT. "CODA Account" shall mean the Account published to hold assets transferred to this Plan in February 1990 from the Science Applications International Corporation Cash or Deferred Arrangement. 2.12 CODE. "Code" shall mean the Internal Revenue Code of 1986, as in effect on the date of execution of this Plan document and as thereafter amended from time to time. 2.13 COMMITTEE. "Committee" shall mean the Science Applications International Corporation Retirement Plans Committee described in Article IX. 2.14 COMPANY. "Company" shall mean Science Applications International Corporation, or any successor thereof, if its successor shall adopt this Plan. In addition, unless the context indicates otherwise, as used in this Plan the term Company shall also mean and include any Affiliated Company (or similar entity) that has been granted permission by the Board of Directors to participate in this Plan. This permission shall be granted upon such terms and conditions as the Board of Directors deems appropriate. 2.15 COMPANY CONTRIBUTIONS. "Company Contributions" shall mean all amounts (whether in cash or other property, including Company Stock) paid by the Company into the Trust Fund established and maintained under the provisions of this Plan for - 4 - 5 the purpose of providing benefits for Participants and their Beneficiaries. 2.16 COMPANY STOCK. "Company Stock" shall mean Class A Common Stock par value $.01 per share ("Class A Common Stock"), and to the extent accounted for pursuant to Section 4.2 of the Plan and solely for such purpose, shall also mean Class B Common Stock, par value $.05 per share ("Class B Common Stock"), of the Company. 2.17 COMPENSATION. "Compensation" shall mean: (a) For purposes of determining the allocation of Company Contributions pursuant to Section 6.5 and forfeitures pursuant to Section 6.7, "Compensation" shall mean the amount of compensation paid by the Company during a calendar year by reason of services performed by an Employee reflected as "wages, tips, other compensation" on the Employee's Form(s) W-2 for such year; plus (i) Contributions or payments by the Company for, or on account of, an Employee under the Company's FlexComp Plan (except for the supplemental amount provided under such FlexComp Plan); plus (ii) Any Compensation which, but for Code section 3401(a)(8)(A) (dealing with the section 911 exclusion and income subject to foreign withholding) would be required to be reflected as "wages, tips, other compensation" on the Employee's Form(s) W-2; less (iii) Any Compensation paid by reason of services performed during any period in which the Employee is not a Participant under this Plan or is not an Eligible Employee; overtime pay (which shall be deemed to include base pay and premium pay for time worked in excess of a normal day or week); bonuses (including any supplemental amount provided under the Company's FlexComp Plan which is included on Form(s) W-2); commission; and amounts reflecting reimbursed expenses or fringe benefits (including any amount relating to the grant or exercise of stock options or disposition of shares through exercise of - 5 - 6 options) which have been included as "wages, tips, compensation" on the Employee's Form(s) W-2. (b) For purposes of applying the limitation on Annual Additions pursuant to Article XIII of the Plan and determining whether the Plan is "top heavy" (within the meaning of Code section 416), "Compensation" shall include all of the following: (i) An Employee's wages, salaries, fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Company to the extent that the amounts are includible in gross income [including, but not limited to, commissions paid salespersons, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a nonaccountable plan, as described in Income Tax Regulations, section 1.62-2(c)]; (ii) In the case of an Employee who is an Employee within the meaning of Code section 401(c)(1) and the regulations thereunder, the Employee's earned income (as described in section 401(c)(2) and the regulations thereunder); (iii) Amounts described in Code sections 104(a)(3), 105(a) and 105(h), but only to the extent that these amounts are includible in the gross income of the Employee; (iv) Amounts paid or reimbursed by the Company for moving expenses incurred by an Employee, but only to the extent that at the time of payment it is reasonable to believe that these amounts are not deductible by the Employee under Code section 217; (v) The value of a nonqualified stock option granted to an Employee by the Company, but only to the extent that the value of the option is includible in the gross income of the Employee for the taxable year in which granted; and - 6 - 7 (vi) The amount includible in the gross income of the Employee upon making the election described in Code section 83(b). Subsections (i) and (ii) above shall include foreign earned income [as defined in Code section 911(b)], whether or not excludible from gross income under section 911. Compensation described in subsection (i) above is to be determined without regard to the exclusions from gross income in Code sections 931 and 933. Similar principles will be applied with respect to income subject to Code sections 931 and 933 in determining Compensation described in subsection (ii) above. For purposes of this subsection 2.17(b), "Compensation" shall not include items such as: (i) Company Contributions to a plan of deferred compensation that are not includible in the Employee's gross income for the taxable year in which contributed, or Company Contributions under a simplified employee pension [within the meaning of Code section 408(k)] to the extent such Contributions are excludible from gross income by the Employee, or any distributions from a plan of deferred compensation; however, any amounts received by an Employee pursuant to an unfunded nonqualified plan of deferred compensation are permitted to be considered as Compensation for Code section 415 purposes in the year the amounts are includible in the gross income of the Employee; (ii) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferrable or is no longer subject to a substantial risk of forfeiture; (iii) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified or incentive stock option; and (iv) Other amounts that received special tax benefits, such as premiums for group-term life insurance (but only to the extent that the premiums are includible in the gross income of the Employee) or Company Contributions (whether or not - 7 - 8 under a salary reduction agreement) towards the purchase of an annuity described in Code section 403(b) (whether or not the amounts are actually excludible from the gross income of the Employee). (c) For purposes of determining who is a Highly Compensated Employee, "Compensation" shall be "Compensation" as defined in subsection (b) above, but determined without regard to Code sections 125, 402(e)(3) and 402(h)(1)(B) and, in the case of Company Contributions made pursuant to a salary reduction agreement, without regard to Code section 403(b). Thus, Compensation for purposes of this subsection 2.17(c) includes elective or salary reduction Contributions to the Company's FlexComp Plan, the Cash or Deferred Arrangement or any tax-sheltered annuity. (d) Notwithstanding subsection (a) above, effective January 1, 1993, for purposes of determining the allocation of Company Contributions pursuant to Section 6.5 and forfeitures pursuant to Section 6.7 with respect to any Employee who is on assignment away from the normal work location(s) and entitled to receive one or more taxable allowances or adjustments to Compensation based on such assignment, "Compensation" shall mean the amount of Compensation paid by the Company during a calendar year by reason of services performed by such Employee which constitutes base salary (including comprehensive leave, vacation and holiday pay) less any amounts deferred pursuant to an Employee's election under Section 5.1 of the Science Applications International Corporation Cash or Deferred Arrangement and unadjusted for any taxable assignment allowances. For Plan Years after 1988, the amount considered as Compensation for any purpose hereunder shall be limited to $200,000, multiplied by the Adjustment Factor. For purposes of applying the foregoing $200,000 (as adjusted) limit, a Highly Compensated Employee and his family shall be treated as a single Employee with a single amount of Compensation subject to the $200,000 (as adjusted) limit, with the $200,000 (as adjusted) limit allocated among the members of the family in proportion to each member's Compensation, determined before application of the limit (except for purposes of determining Compensation below the Plan's integration level, i.e., the Contribution and benefit base - 8 - 9 under section 230 of the Social Security Act in effect at the beginning of the Plan Year). For this purpose, "family" shall consist solely of the Highly Compensated Employee, the spouse of such Highly Compensated Employee, and such Highly Compensated Employee's lineal descendants who have not attained the age of 19 before the close of the Plan Year. For purposes of applying the $200,000 (as adjusted) limit under this Section 2.17, Highly Compensated Employees shall be limited to 5% Owners of the Company and the 10 Highly Compensated Employees having the greatest Compensation during the Plan Year. For Plan Years after 1993, "$150,000" shall be substituted for "$200,000," and the adjustment in the $150,000 limit for the Adjustment Factor in Plan Years after 1994 shall be determined as follows: (i) The Adjustment Factor shall be determined using as a base period the calendar quarter beginning October 1, 1993; and (ii) The increase, if any, in the limit for a particular Plan Year as compared with the next preceding Plan Year shall be rounded to the next lowest multiple of $10,000. 2.18 DISABILITY. "Disability" or "Disabled" shall mean the status of disability determined conclusively by the Committee based on certification of disability by the Social Security Administration, effective upon receipt of such certification by the Committee. 2.19 DISTRIBUTABLE BENEFIT. "Distributable Benefit" shall mean the interest of a Participant in this Plan, represented by his Vested Interest in his Plan Account and Profit Sharing Account, if any, and his entire interest in his TRASOP Account, if any, and his CODA Account, if any, which is determined and distributable to him upon termination of his employment in accordance with the provisions of Article VIII. In the case of an Alternate Payee, the Distributable Benefit shall mean the balance in the Alternate Payee Account. 2.19A DIVERSIFICATION AMOUNT. "Diversification Amount" shall mean 25% (50% in the last Plan year of the Qualified - 9 - 10 Election Period) of that portion of a Participant's Account balance attributable to Company stock acquired by the Plan after December 31, 1986; provided, however, that shares acquired by this Plan in a plan-to-plan transfer from another qualified retirement plan maintained by the Company shall take the acquisition date of the transferor plan and shall not be deemed acquired after December 31, 1986 merely because the plan-to-plan transfer occurred after that date. 2.20 EFFECTIVE DATE. The original effective date of this Plan was February 1, 1973. The effective date of this amendment and restatement of the Plan is January 1, 1988. The effective date of any prior or subsequent amendments is the date specified therein or in any accompanying resolutions adopting such amendment. The rights of an Employee who terminates employment shall be governed by the terms of the Plan in effect at the time of such termination, unless otherwise specified in any subsequent amendment. 2.21 ELIGIBLE EMPLOYEE. "Eligible Employee" shall include any Employee except the following: (a) Any Employee who is covered by a collective bargaining agreement to which the Company or an Affiliated Company is a party if there is evidence that retirement benefits were the subject of good faith bargaining between the Company (or an Affiliated Company) and the collective bargaining representative, unless the collective bargaining agreement provides for coverage under this Plan. (b) Any Employee who is an "Eligible Employee" as defined in the Science Applications International Corporation Profit Sharing Retirement Plan II. (c) Any Employee of an Affiliated Company which has not been granted permission by the Board of Directors to participate in this Plan. (d) Any Employee within a group or classification within the Company designated by the Chief Operating Officer, Chief Financial Officer, Controller or Treasurer of the Company as ineligible for participation in this Plan. The designation of - 10 - 11 any such group or classification and the effective date of its ineligibility shall be communicated in writing to the Committee. (e) Any Employee who becomes an Employee on or after January 1, 1988 and who is hired or becomes an Employee as part of a division, operating unit, geographical location or other identified unit of the Company, unless such new division, unit or location has been determined by the President, Chief Operating Officer or Senior Vice President for Administration of the Company to be eligible for participation in this Plan. (f) Any Employee who is a nonresident alien and who receives no earned income (within the meaning of Code section 911(d)(2)) from the Company which constitutes income from sources within the United States (within the meaning of Code section 861(a)(3)), unless the Employee is within a group or classification of nonresident alien Employees designated as eligible to participate in the Plan by the Board of Directors or its delegate. (g) Any Employee who is a leased Employee within the meaning of Code section 414(n)(2). (h) Any individual who is not treated as an Employee on the Company's payroll records during the applicable Plan Year or other applicable computation or eligibility period, notwithstanding the fact that such individual is subsequently classified as a common-law employee of the Company. 2.22 EMPLOYEE. "Employee" shall mean each person currently employed in any capacity by the Company or Affiliated Company any portion of whose income is subject to withholding of income tax and/or for whom Social Security contributions are made by the Company, as well as any other person qualifying as a common-law employee of the Company or Affiliated Company. For services performed after December 31, 1986 for purposes of determining the number or identity of Highly Compensated Employees and for purposes of the requirements of Code sections 414(n)(3)(A) and (B), the term "Employee" shall include any person who is a leased employee within the meaning of Code section 414(n)(2) unless (i) such leased employees constitute less than 20% of the Company's nonhighly compensated workforce within the meaning of - 11 - 12 Code section 414(n)(5)(C)(ii) and (ii) such person is covered by a plan meeting the requirements of Code section 414(n)(5)(B). 2.23 EMPLOYMENT COMMENCEMENT DATE. "Employment Commencement Date" shall mean each of the following: (a) The date on which an Employee first performs an Hour of Service in any capacity for the Company or an Affiliated Company with respect to which the Employee is compensated or is entitled to compensation by the Company or the Affiliated Company. (b) In the case of an Employee whose employment is terminated and who is subsequently reemployed by the Company or an Affiliated Company, the term "Employment Commencement Date" shall also mean the first day following the termination of employment on which the Employee performs an Hour of Service for the Company or an Affiliated Company with respect to which he is compensated or entitled to compensation by the Company or Affiliated Company. Unless the Board of Directors or its delegate shall expressly determine otherwise, and except as is expressly provided otherwise in this Plan, an Employee shall not, for the purposes of determining his Employment Commencement Date, be deemed to have commenced employment with an Affiliated Company prior to the effective date on which the entity became an Affiliated Company. 2.23A ENTRY DATE. "Entry Date" shall mean January 1 and July 1 of each Plan Year. 2.24 ERISA. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. 2.25 RESERVED FOR PLAN MODIFICATIONS. 2.26 5% OWNER. "5% Owner" shall mean an individual who owns (or is considered as owning, within the meaning of Code section 318) more than 5% of the outstanding stock of the Company or stock possessing more than 5% of the total combined voting power of all stock of the Company. - 12 - 13 2.27 HIGHLY COMPENSATED EMPLOYEE. "Highly Compensated Employee" shall mean any Employee who, during the Plan Year or the preceding Plan Year-- (a) Was at any time a 5% Owner; (b) Received Compensation from the Company in excess of $75,000 (adjusted by the Adjustment Factor); (c) Received Compensation from the Company in excess of $50,000 (adjusted by the Adjustment Factor) and was in the top-paid group of Employees (i.e., group consisting of the top 20% of Employees when ranked on the basis of Compensation paid during such Plan Year); or (d) Was at any time an officer and received Compensation greater than 50% of the amount in effect under Code section 415(b)(1)(A) for such Plan Year. For purposes of determining Highly Compensated Employees in the current Plan Year, an Employee not described in subsection 2.27(b), (c) or (d) above for the preceding Plan Year shall not be considered a Highly Compensated Employee for the current Plan Year unless such Employee is a member of the group consisting of the 100 Employees paid the greatest Compensation during the current Plan Year. If the Company makes the election specified in Code section 414(q)(12) to apply the simplified method of determining Highly Compensated Employees, then for any Plan Year governed by the election, in determining whether an Employee is a Highly Compensated Employee for such Plan Year, (i) subsection 2.27(b) above shall be applied by substituting "$50,000" for "$75,000," and (ii) subsection 2.27(c) shall not apply. The election by the Company under Section 414(q)(12) shall not apply for any Plan Year unless, at all times during the Plan Year, (i) the Company maintained significant business activities (and employed Employees) in at least two significantly separate geographic areas, and (ii) the Company satisfies such other conditions as the Secretary of Treasury has prescribed. - 13 - 14 For purposes of determining who is a Highly Compensated Employee and (except as provided in applicable regulations) in determining the Compensation of (or any Contributions or benefits on behalf of) an Employee for purposes of any Code section with respect to which a Highly Compensated Employee is defined by reference to Code section 414(q), an individual who is a member of the family of a 5% Owner of the Company or in the group of 10 Highly Compensated Employees having the greatest Compensation during the Plan Year, such individual shall not be considered a separate Employee and any Compensation paid to such individual (and any applicable Contribution or benefit on behalf of such individual) shall be treated as if it were paid to (or on behalf of) the 5% Owner or Highly Compensated Employee. For this purpose, and except as provided in Section 2.17, the term "family" means, with respect to any Employee, such Employee's spouse and lineal ascendants or descendants and the spouses of such lineal ascendants or descendants. 2.28 HOUR OF SERVICE. (a) "Hour of Service" of an Employee shall mean the following: (i) Each hour for which the Employee is paid by the Company or an Affiliated Company or entitled to payment for the performance of services as an Employee. An Employee will not be considered as being entitled to payment, for purposes of determining the computation period to which hours are to be credited, until the date the Company or Affiliated Company, as applicable, would normally make payment to the Employee for such hour based on normal payroll practices. (ii) Each hour in or attributable to a period of time during which the Employee performs no duties (irrespective of whether he has terminated his Employment) due to a vacation, holiday, illness, incapacity (including pregnancy or disability), layoff, jury duty, military duty or a leave of absence, for which he is so paid or so entitled to payment, whether direct or indirect. However, no such hours shall be credited to an Employee if such Employee is directly or indirectly paid or entitled to payment for such hours and if such payment or - 14 - 15 entitlement is made or due under a plan maintained solely for the purpose of complying with applicable workmen's compensation, unemployment compensation or disability insurance laws or is a payment which solely reimburses the Employee for medical or medically related expenses incurred by him. (iii) Each hour for which an Employee is entitled to back pay, irrespective of mitigation of damages, whether awarded or agreed to by the Company or an Affiliated Company, provided that such Employee has not previously been credited with an Hour of Service with respect to such hour under paragraphs (i) or (ii) above. (iv) The term "Hour of Service" shall also include periods during which an Employee who was on an authorized noncompensated leave of absence, as of December 31, 1987 continues on such noncompensated leave of absence, provided the Employee returns to the employ of the Company or an Affiliated Company immediately upon the termination of such leave of absence and provided that, for purposes of Section 7.2 (relating to vesting) no hours shall be credited pursuant to this paragraph (iv) until the Employee completes 850 Hours of Service (excluding any additional leaves of absence) in the twelve-month period beginning with the Employee's Employment Commencement Date immediately following such leave of absence. (v) The term "Hour of Service" shall also include (for those purposes designated by the applicable officer specified below) hours credited to an Employee for service with a predecessor employer provided that such service has been approved by the President, Chief Operating Officer or Senior Vice President for Administration of the Company for recognition under this Plan, which approval shall apply on a nondiscriminatory basis to all Employees with service during the recognition period for such predecessor employer. (b) Hours of Service under subsections (a)(ii), (a)(iii), and (a)(iv) shall be calculated in accordance with Department of Labor Regulation 29 C.F.R. Section 2530.200b-2(b). Hours of Service shall be credited to the appropriate computation period (under Section 2.52) according to the Department of Labor Regulation 29 C.F.R. Section 2530.200b-2(c). - 15 - 16 (c) In the event that an Employee receives credit for Hours of Service for a period during which no duties are performed (including sick leave, vacations or an authorized leave of absence), the Employee shall be deemed to have completed eight (8) Hours of Service for each day or portion thereof during that period. (d) To the extent not otherwise credited under this Section 2.28, Hours of Service determined with respect to a Maternity or Paternity Absence shall be credited as follows: the Employee shall be credited (solely for purposes of Section 2.11) with those Hours of Service that otherwise would normally have been credited to such Employee but for such absence, except that (i) the total number of Hours of Service so credited shall not exceed 426 and (ii) such Hours of Service shall be credited as Hours of Service in the Plan Year in which the absence from work commences only if the Employee would be prevented from incurring a Break in Service in such Plan Year solely by virtue of such crediting, and shall otherwise be credited in the Plan Year immediately following the Plan Year in which the absence from work commences. (e) All Hours of Service and Years of Service relating to periods prior to January 1, 1990 shall be determined under the provisions of this Plan as in effect prior to January 1, 1990. 2.29 INVESTMENT MANAGER. "Investment Manager" shall mean the one or more Investment Managers, if any, that are appointed pursuant to Section 9.3. 2.30 LOAN. "Loan" means a loan described in Code section 4975(d)(3) and which otherwise satisfies the requirements of Section 4.10 hereof. 2.31 LIMITATION YEAR. "Limitation Year" shall mean the calendar year. 2.32 MATERNITY OR PATERNITY ABSENCE. "Maternity or Paternity Absence" shall mean an absence from work for any period by reason of (a) an Employee's pregnancy, (b) the birth of a child of such Employee, (c) the placement of a child with the - 16 - 17 Employee in connection with the adoption of such child by such Employee, or (d) the caring for a natural or adopted child for a period beginning immediately following such birth or placement. 2.33 NORMAL RETIREMENT. "Normal Retirement" shall mean a Participant's termination of employment with the Company as a result of such Participant attaining his Normal Retirement Date. 2.34 NORMAL RETIREMENT DATE. "Normal Retirement Date" shall be the day on which a Participant attains age 59-1/2. 2.35 PARTICIPANT. "Participant" shall mean any Eligible Employee who has satisfied the participation eligibility requirements set forth in Section 3.1 and has been enrolled in this Plan in accordance with the provisions of Section 3.2. 2.36 PARTICIPATION COMMENCEMENT DATE. "Participation Commencement Date" shall mean the day on which an Employee's participation in this Plan commences in accordance with the provisions of Article III. 2.37 PLAN. "Plan" shall mean the Science Applications International Corporation Employee Stock Ownership Plan herein set forth, and as it may be amended from time to time. 2.38 PLAN ACCOUNT. "Plan Account" shall mean the Account opened and maintained for each Participant pursuant to the provisions of Section 6.1. 2.39 PLAN ADMINISTRATOR. "Plan Administrator" shall mean the administrator of the Plan, within the meaning of Section 3(16)(A) of ERISA. The Plan Administrator shall be Science Applications International Corporation. 2.40 PLAN YEAR. "Plan Year" shall mean the calendar year. 2.40A PROFIT SHARING ACCOUNT. "Profit Sharing Account" shall mean the Account established to hold the assets transferred to this Plan from the Science Applications International Corporation Profit Sharing Retirement Plan in February 1990. - 17 - 18 2.40B QUALIFIED ELECTION PERIOD. "Qualified Election Period" shall mean the six Plan Year period beginning with the later of (i) the first Plan Year in which the individual first became a qualified Participant, or (ii) the first Plan Year beginning after December 31, 1986. 2.41 QUALIFIED HOLDER. "Qualified Holder" shall mean: (i) The Participant, Beneficiary or Alternate Payee receiving a distribution of Company Stock under this Plan; (ii) Any other party to whom the distributed Company Stock is transferred by gift or by reason of death; and (iii) Any trustee of an Individual Retirement Account (as defined under Code section 408) to which all or any portion of the distributed Company Stock is transferred pursuant to a tax-free "rollover" transaction satisfying the requirements of Code section 402. 2.41A QUALIFIED PARTICIPANT. "Qualified Participant" shall mean a Participant who has attained age 55 and who has completed at least 10 full years of participation in the Plan. 2.41B READILY TRADEABLE STOCK. "Readily Tradeable Stock" shall mean Company Stock that, at the time of reference: (a) Is "publicly traded" as that term is defined under Treasury Regulation Section 54.4975-7(b)(1)(iv) or any successor regulation thereto; and (b) Is not subject to a "trading limitation" as that term is defined under Treasury Regulation Section 54.4975-(b)(10) or any successor regulation thereto. 2.42 REQUIRED PAYMENT COMMENCEMENT DATE. "Required Payment Commencement Date" in the case of a Participant other than a 5% Owner, shall be the sixtieth day after the close of the latest Plan Year in which occurs: (a) The Participant's Normal Retirement Date; - 18 - 19 (b) the tenth anniversary of the date the Participant commenced participation in the Plan; or (c) the Participant's termination of employment with the Company or an Affiliated Company, unless a Participant who retires on or after his Normal Retirement Date elects, pursuant to Section 8.2(b) to defer distribution for a period of up to five years following his Normal Retirement Date; but in no event beyond April 1 following the calendar year in which the Participant attains age 70-1/2. In the case of a 5% Owner (and in all cases after December 31, 1988), the Required Payment Commencement Date shall be the earlier of the date specified in the preceding sentence and April 1 following the calendar year in which the Participant attains age 70-1/2, whether or not the Participant has retired. If a Participant becomes a 5% Owner after attaining age 70-1/2, the Required Payment Commencement Date shall not be later than the last day of the calendar year in which the Participant becomes a 5% Owner. 2.43 RESERVED FOR PLAN MODIFICATIONS. 2.44 RESERVED FOR PLAN MODIFICATIONS. 2.45 SUSPENDED PARTICIPANT. "Suspended Participant" shall mean any Participant who remains an Employee but who ceases to be eligible to participate in this Plan by virtue of ceasing to be an Eligible Employee. Status as a Suspended Participant shall commence as of the date such Participant ceases to be an Eligible Employee. A Suspended Participant shall not be deemed a Participant except for those purposes specified in the Plan or as required by law. 2.45A TRASOP ACCOUNT. "TRASOP Account" shall mean the "TRASOP Fund Account" (as defined in the Science Applications International Corporation Cash or Deferred Arrangement ("CODA") prior to February, 1990) transferred to this Plan in February, 1990. - 19 - 20 2.45B TRASOP FUND. "TRASOP Fund" shall mean the fund within the Trust containing all of the assets allocated to TRASOP Accounts. 2.46 TRUST AND TRUST FUND. "Trust" or "Trust Fund" shall mean the one or more trusts created for funding purposes under the Plan. The Trust Fund may be commingled for investment purposes with the assets of other qualified retirement plans maintained by the Company by investing through a master trust fund operated pursuant to a master trust agreement between the Company and the Trustee. 2.47 TRUSTEE. "Trustee" shall mean State Street Bank & Trust Company, or any successor or other corporation acting as a trustee of the Trust Fund. 2.48 VALUATION DATE. "Valuation Date" shall mean the date as of which the Trustee shall determine the value of the assets in the Trust Fund for purposes of determining the value of each Account, which shall be the last day of each Plan Year and such other dates as may be determined in rules prescribed by the Committee. 2.49 VESTED INTEREST. "Vested Interest" shall mean the interest of a Participant in his Plan Account that has become vested in accordance with the rules of Article VII. The Vested Interest of an Alternate Payee shall be determined as set forth in Section 7.5. 2.50 RESERVED FOR PLAN MODIFICATIONS. 2.51 RESERVED FOR PLAN MODIFICATIONS. 2.52 YEAR OF SERVICE. (a) "Year of Service" shall mean a computation period during which the Employee completes 850 or more Hours of Service. In no instance will an Employee receive more than one Year of Service with respect to services performed in a single computation period. - 20 - 21 (b) For purposes of determining eligibility to participate, the relevant computation period shall be determined in accordance with the following rules. (i) An Employee's initial computation period shall be the twelve consecutive month period beginning on the Employee's Employment Commencement Date. (ii) An Employee's second (and all subsequent) computation periods shall be the calendar year that includes (or starts on the same day as) the first anniversary of the Employee's Employment Commencement Date. (c) For purposes of vesting, the relevant computation period in all cases shall be the calendar year. - 21 - 22 ARTICLE III ELIGIBILITY AND PARTICIPATION 3.1 ELIGIBILITY TO PARTICIPATE. (a) Every Eligible Employee shall satisfy the eligibility requirements to participate in the Plan upon the later of the date specified in (i) or (ii) below provided that he is an Eligible Employee on such date: (i) The Eligible Employee's twenty-first (21st) birthday; or (ii) The later of: (A) The date that is twelve (12) months after the Eligible Employee's Employment Commencement Date; or (B) The date as of which the Eligible Employee completes 850 or more Hours of Service within a single computation period (determined under the rules of Section 2.52). 3.2 AUTOMATIC COMMENCEMENT OF PARTICIPATION. (a) Each Eligible Employee shall be entitled to commence participation in the Plan as of his applicable Participation Commencement Date, which shall be the first Entry Date following his satisfaction of the eligibility requirements of Section 3.1. - 22 - 23 ARTICLE IV TRUST FUND AND COMPANY CONTRIBUTIONS 4.1 TRUST FUND. The Company has established the Trust pursuant to a Trust agreement under which the Trustee has agreed to hold and administer in trust all amounts previously accumulated under the Plan together with the additional funds deposited with the Trustee pursuant to the terms of this Plan. The Company shall have the authority to select the Trustee to act under the Trust Agreement and to enter into new or amended Trust agreements as it deems advisable. 4.2 PERMISSIBLE TYPES OF PLAN INVESTMENTS. The assets of the Plan shall be invested primarily in Class A Common Stock, except to the extent that the Participant has instructed the Trustee to make, and the Trustee has made, a valid election to receive Class B Common Stock pursuant to the terms of the Plan of Reorganization and Agreement of Merger (the "1984 Plan of Reorganization") dated as of June 1, 1984 between the Company and the wholly owned subsidiary, Science Applications, Inc., in which event the Committee or its delegate shall keep records to reflect the number of shares of Class B Common Stock allocated to each Participant's Plan Account. No further allocation of Class B Common Stock shall be made by the Company to any such Class B Common Stock Account after the number of shares acquired to be allocated thereto pursuant to such election have been allocated in accordance with the terms of the 1984 Plan of Reorganization. Subject to the foregoing, the assets of the Plan may also be invested in the following types of assets as determined by the Committee: (a) Other "Qualifying Employer Securities" (as that term is defined in ERISA Section 407(d)(5); (b) "Qualifying Employer Real Property," as that term is defined in ERISA Section 407(d)(4); (c) Cash; or - 23 - 24 (d) Any other property that is a permissible plan investment under applicable law. 4.3 COMPANY CONTRIBUTIONS. (a) Subject to the requirements and restrictions of this Section 4.3, and subject also to the right of the Company to amend or terminate this Plan or to suspend or discontinue contributions to this Plan, as hereinafter provided, for each Plan Year the Company shall contribute to the Trust Fund an amount equal to the greater of (i) an amount to be determined by the Board of Directors in its discretion, and/or (ii) such amount as may be required to repay the principal amount of and interest on a Loan incurred for the purpose of acquiring shares of Company Stock. (b) If an error has been made in calculating the amount of the required Company Contributions or because of any other error there was a mistake which resulted in the Company contributing the incorrect amount of contributions for a particular Plan Year or Plan Years, the Company may adjust the amount of its contributions to the extent necessary to correct his mistake. The Company may make these corrections prospectively or retrospectively, in its discretion. (c) The Company Contributions to the Trust Fund shall be made no later than the due date for filing the federal income tax return (including extensions) of the Company for its taxable year with respect to which the Contribution is made. 4.4 FORM OF COMPANY CONTRIBUTIONS. The Company's contributions to the Trust Fund shall be paid in cash, Company Stock, or such other property as the Board of Directors may from time to time determine, provided, however, that amounts contributed for the purpose of repaying a Loan shall be made in cash. 4.5 VALUATION OF COMPANY CONTRIBUTIONS IN THE FORM OF COMPANY STOCK. (a) Company Stock contributed by the Company to the Trust Fund shall be valued as of the date of contribution using - 24 - 25 the rules set forth in Section 6.6(b)(ii), treating the date of contribution as the Valuation Date. 4.6 DIVERSIFICATION REQUIREMENT; INVESTMENT DIRECTION BY PARTICIPANTS. (a) Except as provided in this Section 4.6, a Participant shall not be entitled to direct the investment of amounts allocated to his Plan Account or TRASOP Account, even though the Participant may be 100% vested in his Account balance. (b) Unless the Committee has authorized distribution of the Diversification Amount to the Participant, pursuant to Section 4.6(c), or to another qualified plan of the Company, pursuant to Section 4.6(d), each Qualified Participant shall be permitted to elect to direct the Plan as to the investment (within three or more investment alternatives made available by the Committee) of the Diversification Amount, reduced by any amount as to which a prior election under this Section 4.6(b) has been made, within 90 days after the last day of each Plan Year during the Participant's Qualified Election Period. (c) In lieu of the diversification election provided in Section 4.6(b), the Committee may authorize distribution directly to the Participant, at the Participant's election, of the amounts which would otherwise be subject to the diversification election provided in Section 4.6(b). (d) In lieu of the diversification election provided in Section 4.6(b) or the distribution election provided in Section 4.6(c), the Committee may authorize the Participant to elect to direct the Plan to transfer amounts otherwise subject to the diversification election of Section 4.6(b) to another qualified retirement plan maintained by the Company, provided that such plan permits Employee-directed investment in at least three investment alternatives and provided that the Participant is precluded from investing such transferred funds in Company Stock in such transferee plan. (e) The election provided to a Participant pursuant to Section 4.6(b), (c) or (d), as applicable, shall be implemented (i.e., diversification, distribution or transfer completed) no - 25 - 26 later than 90 days after the last day of the period during which such election may be made. (f) The Committee shall prescribe such procedures and rules as may be required or desirable to implement the requirements of this Section 4.6 consistent with the requirements of Code section 401(a)(28)(B). 4.7 IRREVOCABILITY. The Company shall have no right or title to, nor interest in, the contributions made to the Trust Fund, and no part of the Trust Fund shall revert to the Company except that on and after the Effective Date funds may be returned to the Company as follows: (a) In the case of a Company Contribution which is made by a mistake of fact, that contribution may be returned to the Company within one (1) year after it is made. (b) All Company Contributions to the Plan are conditioned upon the deductibility of those contributions under Code section 404. To the extent a deduction is disallowed, the contribution may be returned to the Company within one year after the disallowance. 4.8 COMPANY, COMMITTEE AND TRUSTEE NOT RESPONSIBLE FOR ADEQUACY OF TRUST FUND. (a) Neither the Company, Committee nor Trustee shall be liable or responsible for the adequacy of the Trust Fund to meet and discharge any or all payments and liabilities hereunder. All Plan benefits will be paid only from the Trust assets, and neither the Company, the Committee nor the Trustee shall have any duty or liability to furnish the Trust with any funds, securities or other assets except as expressly provided in the Plan. (b) Except as required under the Plan or Trust or under Part 4 of Title I of ERISA, the Company shall not be responsible for any decision, act or omission of the Trustee, the Committee, or the Investment Manager (if applicable), and shall not be responsible for the application of any moneys, securities, investments or other property paid or delivered to the Trustee. - 26 - 27 (c) The Company expressly disavows any contractual obligation, implied or explicit, to make any contribution to the Plan or to contribute any specified amount. 4.9 COMPANY STOCK TRANSACTIONS WITH DISQUALIFIED PERSONS. Acquisition or sale by the Plan of Company stock or other qualifying employer securities (as defined in Section 407(a)(5) of ERISA) from or to a "disqualified person," as defined in Code section 4975(e)(2), shall be at a price which represents "adequate consideration," as defined in Section 3(18) of ERISA or, in the event such Company stock or other qualifying employer security is a marketable obligation, as defined in Section 407(e) of ERISA, at a price not less favorable to the Plan than the price determined under Section 407(e)(1) of ERISA. No commission shall be charged to the Plan in connection with any such sale or acquisition. The determination as to whether or not such a sale or acquisition satisfies the requirements of this Section 4.9 shall be made by the Committee. 4.10 TRUSTEE MAY BORROW FUNDS. The Trustee is specifically authorized to borrow funds (including a borrowing from the Company) to (i) acquire Company Stock or (ii) repay a prior Loan incurred to acquire Company Stock, subject to the following conditions: (a) Any Loan to the Trust and acquisition of Company stock with the proceeds thereof must be made pursuant to directions of the Committee; (b) The interest rate on such Loan must not be in excess of a reasonable rate of interest; (c) Any collateral pledged to a lender by the Trust shall consist only of the Company Stock purchased with the borrowed funds or the Stock used as collateral on a prior Loan under this Section which is being repaid with the proceeds of the current Loan; (d) Under the terms of the Loan, a lender shall have no recourse against the Trust except with respect to such collateral, Company Contributions (other than contributions of - 27 - 28 Company Stock), and earnings attributable to such collateral and the investment of such Company Contributions; (e) The Loan shall be repaid only from amounts loaned to the Trust and the proceeds of such Loans, from amounts contributed in cash by the Company to the Trust and earnings attributable thereto, from any collateral given for the Loan and from dividends paid on the shares of Stock acquired with the borrowed funds; (f) Upon the payment of any portion of the balance due on such Loan, a pro rata portion, as determined pursuant to Section 6.12(b) hereof and regulations promulgated under ERISA and the Code, of the Company Stock originally acquired with the proceeds of the Loan shall be released from encumbrance; and (g) In the event of default under the Loan, the value of the assets of the Trust transferred in satisfaction of the Loan may not exceed the amount of the default. - 28 - 29 ARTICLE V PARTICIPANT CONTRIBUTIONS 5.1 NO PARTICIPANT CONTRIBUTIONS. Participants may not make contributions to the Plan. - 29 - 30 ARTICLE VI ACCOUNTING AND ALLOCATION PROCEDURES 6.1 PLAN ACCOUNTS. The Committee shall open and maintain a separate Plan Account for each Participant in the Plan. 6.2 TRASOP ACCOUNT. The Committee shall maintain a TRASOP Account for each Participant in the Plan who has an interest in the TRASOP Fund. 6.3 CODA ACCOUNT. The Committee shall maintain a CODA Account for each Participant who had assets transferred to this Plan from the Science Applications International Corporation Cash or Deferred Arrangement. 6.4 ALTERNATE PAYEE ACCOUNT. The Committee shall open and maintain an Alternate Payee Account for each Alternate Payee awarded benefits under this Plan pursuant to a qualified domestic relations order. 6.4A PROFIT SHARING ACCOUNT. The Committee shall maintain a Profit Sharing Account for each Participant who had assets transferred to this Plan from the Science Applications International Corporation Profit Sharing Retirement Plan. 6.5 ALLOCATION OF COMPANY CONTRIBUTIONS. (a) All Company Contributions to the Trust Fund shall be held on an unallocated basis until allocated to Participants' Plan Accounts as of an Anniversary Date as provided under this Plan or otherwise used or applied in accordance with the provisions of this Plan. Pending such allocation, Company Contributions shall be invested under rules prescribed by the Committee. All gains and losses on such investments shall be allocated as provided in Section 6.8 and may be used for the payment of Plan expenses. (b) Except as provided in Section 6.6 (relating to Company Stock dividends, splits, recapitalizations and other similar stock transitions with respect to Company stock that previously has been allocated to Participants' accounts), all - 30 - 31 gains, losses, dividends and other property acquisitions and/or transfers that occur shall be held, charged, credited, debited or otherwise accounted for on an unallocated basis until allocated to Participants' Accounts as specified in Section 6.8 or as otherwise used or applied in accordance with the provisions of this Plan. (c) Company Contributions for a particular Plan Year (as well as shares of Company Stock released from the Suspense Account, as described in Section 6.12 hereof, by reason of such Company Contributions), unadjusted for income, gain or loss, which shall be allocated separately pursuant to Section 6.8, shall be allocated to the Plan Accounts of those Participants who completed 850 or more Hours of Service during the Plan Year ("Eligible Participants") as follows: (i) The Company Contribution shall be allocated to Eligible Participants, pro rata, according to each Eligible Participant's Compensation for the relevant Plan Year. (ii) Company Contributions in the form of Company Stock shall be allocated in the same manner as cash Contributions in subsection (i) above, based on the fair market dollar value of such contributed Company Stock as determined under the provisions of Section 6.6(b)(ii), unless a different valuation method shall be required under applicable Treasury Regulations. (iii) In no event shall amounts be allocated which would cause the limitation on Annual Additions set forth in Article XIII to be exceeded. (iv) Allocations of Company Contributions for a Plan Year shall be made on or before September 15 of the following Plan Year, or on a more frequent basis, as may be determined by the Committee in its discretion. 6.6 VALUATION OF ACCOUNTS. (a) Within sixty days after each Anniversary Date, within sixty days after the removal or resignation of the Trustee, and at such other times as determined by the Committee, the Trustee shall value the assets of the Trust on the basis of - 31 - 32 fair market values. If the assets cannot be valued within the sixty day period specified in the preceding sentence, the assets shall be valued as soon thereafter as is practicable. (b) As soon as is reasonably possible after receipt of these valuations from the Trustee, the Committee shall value the Accounts of each Participant, Suspended Participant and Alternate Payee as of the applicable Valuation Date so as to reflect the current fair market value of each Account as of such Valuation Date. The valuation provisions of this Section 6.6 shall be applied and implemented in accordance with the following rules: (i) If separate subaccounts have been established for separate investment alternatives pursuant to Section 4.6(b), each subaccount shall be valued separately and the total value of a Participant's Account(s) shall equal the total value of his interest in each of the respective subaccounts in which his Account(s) have been invested. (ii) Company stock allocated and credited to an Account or subaccount, or to a separate fund within the Trust Fund in which Participants' Accounts or subaccounts are invested as provided in Section 4.6, as well as Company stock held on an unallocated basis in the Trust Fund, shall be valued as of the applicable Valuation Date, according to the following rules: (A) Company stock acquired by the Trust Fund with cash shall initially be valued at the purchase price paid for such stock. On any subsequent Valuation Date, such Company stock, as well as all other Company stock held in, or contributed to, the Trust Fund, shall be valued in accordance with Section 6.6(b)(ii)(B), 6.6(b)(ii)(C) or 6.6(b)(ii)(D) below, as applicable. (B) If any Company Stock does not consist of securities listed on a national securities exchange, or traded on a regular basis, as determined by the Company, in the over-the-counter market, the fair market value of such stock shall be determined using the Formula Price for such stock, as described in the August 24, 1987 Prospectus for Science Applications International Corporation (or the most recent prospectus that supersedes that prospectus), on the applicable - 32 - 33 Valuation Date. The Committee may at any time, and from time to time, change the method of determining the fair market value of Company Stock, provided that the replacement method is consistent with applicable provisions of ERISA and the Code. A Participant, Beneficiary or Alternate Payee shall have no right to have a particular valuation method applied (or continue to be applied) to his Account(s). (C) If any Company Stock consists of securities listed on a national securities exchange, fair market value of such Company Stock shall be considered to be equal to the closing price of such Company Stock (as reported in the consolidated transaction reporting system, or if not so reported, as reported on the principal exchange market for such Company Stock by such exchange or on any system sponsored by such exchange) on the trading day immediately preceding the applicable Valuation Date. If any Company Stock consists of securities traded on a regular basis, as determined by the Company, in the over-the-counter market, the fair market value of such Company Stock shall be considered to be equal to the average between the high bid price and the low asked price quoted by the automatic quotation system of a securities association registered under the federal securities laws for the trading day immediately preceding the applicable Valuation Date. (D) Notwithstanding the foregoing, valuations of shares of Company Stock acquired by the Plan after December 31, 1986, which are not readily tradeable on an established securities market with respect to activities carried on by the Plan shall be made by an independent appraiser meeting requirements similar to those contained in Treasury regulations under Code section 170(a)(1) in a manner consistent with Code section 401(a)(28)(C). (iii) The fair market value of any guaranteed interest contract, trust or fund holding such a contract, or similar program entered into between an insurance company and the Plan shall be determined based on the principal amount of such contract or program, plus the amount of the guaranteed interest or other increase in value which is paid or credited to the Plan pursuant to such contract or program. The provisions of this subparagraph (iii) shall apply to an investment alternative - 33 - 34 established under Section 4.6 which is invested in such a contract or program. (iv) To the extent that a Participant's Account is invested in a regulated investment company offered as an investment alternative under the Trust, the value of that portion of the Account shall be valued, pursuant to rules prescribed by the Committee, based on the unit or share value of the regulated investment company on the applicable Valuation Date. (c) The Company, the Committee and Trustee do not in any manner or to any extent whatsoever warrant, guarantee or represent that the value of a Participant's Account shall at any time equal or exceed the amount previously contributed thereto, or that any valuation or accounting method or practice will continue to be applied. (d) Allocation of Company Stock Received Pursuant to Stock Dividends, Splits, Recapitalizations, Etc. Any Company Stock received by the Trustee as a stock split, dividend, or as a result of a reorganization or other recapitalization of the Company shall be allocated as of the day on which the stock is received by the Trustee in the same manner as the Company Stock to which it is attributable is then allocated. (e) Allocation of Stock Rights, Warrants or Options. (i) In the event any rights, warrants or options are issued on Company stock held in the Trust Fund, the Trustee shall exercise them for the acquisition of additional Company Stock as directed by the Committee and to the extent that cash is then available in the Trust Fund. (ii) Any Company Stock acquired in this fashion shall be treated as Company Stock purchased by the Trustee for the net price paid and shall be allocated in the same manner as the funds used to purchase the Company Stock were or would be allocated under the provisions of this Plan, pursuant to directions of the Committee. (iii) Any rights, warrants, or options on Company Stock which cannot be exercised for lack of cash may, as directed - 34 - 35 by the Committee, be sold by the Trustee and the proceeds allocated in accordance with the source of the Company Stock with respect to which the rights, warrants or options were issued. (f) Allocation of Cash Dividends and Other Distributions Received in the Trust Fund. (i) All cash dividends paid to the Trustee with respect to Company stock that has been allocated to an Account, if any, as of the date the dividend is received by the Trustee shall be allocated to such Account, except as provided in Section 6.13. If the Company stock in the Trust Fund is held in a Company Stock fund within the Trust Fund, such that Participants have an interest in such Company stock only indirectly through an interest in such fund held in an Account or subaccount, the cash dividends shall be allocated to such fund and shall thereafter be invested in accordance with the investment practices of such fund, and shall not be allocated directly to a Participant's Account or subaccount. (ii) All cash dividends paid to the Trustee with respect to unallocated Company Stock shall be allocated as provided in Section 6.8. (iii) Other distributions received by the Trustee with respect to investments of the Trust shall be allocated to the applicable fund(s) established pursuant to Section 4.6, as prescribed by the Committee. 6.6A NOTICE OF VALUE. In the event that any Company Stock held by the Trust is not Readily Tradeable Stock, the Company annually shall furnish to the committee and to the Trustee a certificate of value setting forth the value of the various classes or types of such Company Stock held by the Trust. Pursuant to the provisions of Section 8.8, this annual certificate of value shall be furnished to Qualified Holders of such Company Stock that as been distributed to terminated Participants or their Beneficiaries. 6.7 ALLOCATION OF FORFEITURES. The treatment of all amounts that are forfeited pursuant to Section 8.5(d) or 8.6(b) shall be governed by the following rules: - 35 - 36 (a) Forfeitures shall be allocated to the Plan Accounts of those Participants who are entitled to receive an allocation of Company Contributions for the Plan Year preceding the Plan Year in which the forfeitures are allocated according to the rules of Section 6.5 in the proportion that the Compensation of each such Participant bears to the total Compensation of all Participants entitled to share in an allocation of those forfeitures for the Plan Year ending immediately prior to the date on which the forfeitures are allocated. (b) No forfeitures shall be allocated to the Excess Contributions Account, if any, or to any Alternate Payee Account. (c) The forfeitures to be allocated shall be the amount of forfeitures occurring since the next preceding allocation under this Section 6.7 and prior to the date prescribed by the Committee as the cutoff date for such allocation, which shall be a date falling between Anniversary Date and the actual date in which the allocations are made. (d) Pending allocation, forfeitures shall be accounted for in the same manner as unallocated Company Contributions and shall not be adjusted for income, gain or loss on such forfeitures. Such income, gain or loss shall be considered and accounted for in the same fashion as income, gain or loss on unallocated Company Contributions. (e) In the event that amounts are forfeited by reason of the termination of employment of a Participant, shares of Class B Common Stock, if any, which may be held in such Participant's Plan Account (or, indirectly, through a Participant's interest in a Company Stock fund in which his Account is invested) shall be sold by the Trustee to the Company for cash equal to its fair market value, determined as of the date of such sale, and the cash proceeds thereof shall be allocated with the other assets held in such Participant's Plan Account pursuant to the provisions of this Section 6.7. Alternatively, as determined by the Committee, such shares shall be retained in the Trust and allocated pursuant to this Section 6.7. In determining whether Common Stock to be forfeited - 36 - 37 is Class A or Class B Common Stock, the first-in, first-out method shall be applied. (f) If a portion of a Participant's Plan Account is forfeited, Company Stock acquired pursuant to Section 4.10 and allocated pursuant to Treasury Regulations Section 54.4975-11(d)(2) and Section 6.12 shall be forfeited only after other assets. 6.8 ALLOCATION OF INCOME OR LOSS ON UNALLOCATED COMPANY CONTRIBUTIONS AND FORFEITURES. At the time Company Contributions and forfeitures are allocated to the Plan Accounts, the income, gain or loss on unallocated Company Contributions and forfeitures, adjusted for any Plan expenses paid since the next preceding allocation date under this Section 6.8 (which expenses shall first be applied against earnings on forfeitures), shall be allocated to those Participants eligible to receive an allocation of Company Contribution for such Plan Year, pro rata, according to each such Participant's Compensation for the Plan Year ending on such Anniversary Date. 6.9 ACCOUNTING PROCEDURES. The Committee shall establish accounting procedures for the purpose of making the allocations, valuations and adjustments to Accounts provided for in this Article VI, as well as the implementation of investment direction by Participants pursuant to Section 4.6 and transfers between or distributions from subaccounts established pursuant to Section 4.6(b). From time to time the Committee may modify such accounting procedures for the purpose of achieving equitable, nondiscriminatory, and administratively feasible allocations among the Accounts in accordance with the general concepts of the Plan and the provisions of this Article VI. A Participant, Beneficiary or Alternate Payee shall have no contractual or other right to have a particular accounting procedure or convention apply, or continue to apply, and the Committee shall be free to alter any such procedure or convention without obligation to any Participant, Beneficiary or Alternate Payee, consistent with the requirements of Code section 411(d)(6). - 37 - 38 6.10 SUSPENDED PARTICIPANTS. The Plan Account of each Suspended participant shall be held intact and shall be valued on each Valuation Date as provided in Section 6.6, but shall not receive any allocation of Company contributions or forfeitures; provided, however, that if the Participant completes, during the Plan Year in which he becomes a Suspended Participant, 850 or more Hours of Service during such Plan Year, his Plan Account shall participate in the allocation of company Contributions and forfeitures for such Plan Year. 6.11 ACCOUNTING FOR INTEREST OF AN ALTERNATE PAYEE. In the event an Alternate Payee is awarded an interest in the Plan benefits of a Participant pursuant to a qualified domestic relations order, as defined in Section 14.2, such interest shall be separated into one or more separate Accounts and accounted for under rules prescribed by the Committee, pending distribution to the Alternate Payee. 6.12 SUSPENSE ACCOUNT. (a) Any Company Stock which is acquired with the proceeds of a Loan shall be credited to a Suspense Account and shall not be allocated to the Accounts of Participants until its release from such Suspense Account. (b) Release of Company Stock from the Suspense Account shall be effected as follows: Upon the payment of each installment of principal and interest on a Loan, a number of shares of such Company Stock so acquired shall be released from the Suspense Account. For each Plan Year during the duration of the relevant Loan, the number of shares so acquired to be released from the Suspense Account will equal the number of shares so acquired and held immediately before release from the Suspense Account multiplied by a fraction, the numerator of which is the amount of principal and interest paid with respect to the relevant Loan for the year and the denominator of which is the principal and interest to be paid in respect of the relevant Loan for the current and all future years; provided, however, that the number of future years under the relevant Loan must be definitely ascertainable, determined without taking into account any possible extension or renewal periods. Notwithstanding anything in this Section 6.12(b) to the contrary, if the number of shares - 38 - 39 of Company Stock to be released from the Suspense Account is to be determined solely by reference to the amount of principal paid with respect to the relevant Loan for the year, then the relevant Loan must provide for annual payments of principal and interest at a cumulative rate that is no less rapid at any time than level annual payments of such amounts for ten years. For purposes of the preceding sentence, interest included in any payment shall be disregarded to the extent that it would be determined to be interest under standard loan amortization tables. Cash dividends on Company Stock held in the Suspense Account which are received by the Trustee during a Plan Year shall be used first to repay the interest and principal on any outstanding Loan. 6.13 DIVIDENDS ON ALLOCATED COMPANY STOCK. Notwithstanding anything to the contrary contained in Section 6.6, cash dividends, if any, attributable to shares of Company Stock allocated to the Accounts of Participants may be immediately distributed to such Participants or, in the discretion of the Committee, may be distributed to such Participants within 90 days of the end of the Plan Year in which such dividends are payable. 6.14 ALLOCATION OF CERTAIN SHARES PROHIBITED. (a) Notwithstanding anything to the contrary in this Article VI, if the Plan purchases Company Stock in a sale with respect to which the seller makes an election under Code section 1042(a), none of the Company Stock so purchased shall be allocated, directly or indirectly, (1) during the "nonallocation period," (A) to the seller; (B) to any individual related (within the meaning of Code section 267(b)) to the seller; or (2) to any other person who owns (after application of Code section 318(a) without regard to paragraph (2)(B)(i) thereof) twenty-five percent (25%) of any class of Company Stock or of the total value of any class of Company Stock. - 39 - 40 (b) The "nonallocation period" in subsection 6.14(a)(1) above is the period beginning on the date of the sale of such Company Stock and ending on the later of the date which is ten (10) years after the date of the sale or the date on which the last of the purchased shares of Company Stock are allocated. (c) Subsection 6.14(a)(1)(B) above shall not apply to an individual if the individual is a lineal descendant of the seller and the total amount of Company Stock allocated to all such lineal descendants of the seller does not exceed five percent (5%) of the Company Stock held by the Plan which was purchased in a sale with respect to which the seller made a Section 1042 election. (d) For purposes of subsection 6.14(a)(2) above a person shall be treated as a twenty-five percent (25%) owner if he or she was such an owner at any time during the one-year period ending on the date of the sale described in subsection (a) or on the date as of which the Company Stock so purchased is allocated. - 40 - 41 ARTICLE VII VESTING IN PLAN ACCOUNTS 7.1 NO VESTED RIGHTS EXCEPT AS HEREIN SPECIFIED. No Participant, Beneficiary or Alternate Payee shall have any vested right or interest to, or any right of payment of, any assets of the Trust Fund, except as provided in this Plan. Neither the making of any allocations nor the crediting of any amounts to the Account of a Participant, Beneficiary or Alternate Payee shall vest in any Participant, Beneficiary or Alternate Payee any right, title, or interest in or to any assets of the Trust Fund. 7.2 PARTICIPANT'S VESTED INTEREST--GENERAL RULE. Subject to the provisions of Section 7.3, the Vested Interest of each Participant or Suspended Participant in his Plan Account established pursuant to Section 6.1 shall be determined by multiplying the balance in his Plan Account as of the applicable date by the Vested Percentage determined in accordance with the rules of Section 7.3 and the following schedule:
Years of Service Vested Percentage ---------------- ----------------- Less than three years 0 Three years but less than four years 25% Four years but less than five years 50% Five years but less than six years 75% Six years or more 100%
A Participant will always be 100% vested in his TRASOP Account and CODA Account, if any. Vesting in a Participant's Profit Sharing Account, if any, shall be governed by the provisions of the Science Applications International Corporation Profit Sharing Retirement Plan in effect on February 1, 1990. 7.3 VESTED PERCENTAGE--SPECIAL RULES. The determination of a Participant's or Suspended Participant's Vested Percentage in his Plan Account shall be subject to the following special rules: (a) During an Employee's period of employment with the Company or an Affiliated Company (including periods while on an approved leave of absence or a Maternity or Paternity Absence), - 41 - 42 in the event of his death, Disability, attainment of Normal Retirement Date, or a judicial declaration of his mental incompetence, the Employee's Vested Percentage shall become one hundred percent (100%), regardless of his number of Years of Service. (b) A former Employee who is reemployed by the Company or an Affiliated Company prior to incurring five consecutive Breaks in Service shall have his Vested Percentage determined as if he had not terminated employment (subject to the provisions of Section 8.6). If a former Employee incurs five consecutive Breaks in Service, amounts forfeited from his Plan Account shall remain forfeited and shall not be restored, and his Years of Service prior to such period of five consecutive Breaks in Service shall (subject to subparagraph (c) below) count only towards his Vested Percentage applicable to allocations to his Plan Account credited after such period of five consecutive Breaks in Service. (c) If an Employee whose Vested Percentage is zero upon his initial Break in Service incurs five or more consecutive Breaks in Service, his Years of Service accumulated before the commencement of any such period of consecutive Breaks in Service shall not be taken into account for purposes of determining the Vested Percentage in his Plan Account at any time or for any purpose. An Employee's aggregate Years of Service shall not include any Years of Service not required to be taken into account under this Section 7.3(c) by reason of any prior Break in Service. (d) No Employee shall be credited with any Years of Service performed prior to February 1, 1976, if the period of service would have been disregarded under the provisions of the Predecessor Plan in existence on the relevant date relating to continuity and interruptions of service and those rules requiring full time service as a condition for participation in the Plan. (e) No Employee shall be given credit for any Years of Service performed before the computation period (as determined in accordance with Section 2.52) during which the Employee attained the age of 18. - 42 - 43 (f) No Employee shall be given credit for any period of service performed prior to February 1, 1973 (the date the Plan was established). (g) An Employee's Vested Percentage as of January 1, 1988 shall be equal to his Vested Percentage as of December 31, 1987 under the terms of the Amended and Restated Plan as in effect on December 31, 1987. (h) In the event of a divestiture of an operating group or division, the Operating Committee or the Operating Committee's designee may, in their sole discretion, determine, with respect to Eligible Employees whose employment with the Company terminates as a result of such divestiture and in lieu of the otherwise applicable determination of Vested Percentage specified in this Article VII, (1) treat the Eligible Employees' Vested Percentage as 100%, notwithstanding their Years of Service prior to termination; or (2) treat such Eligible Employees as Suspended Participants but credit Years of Service with the new employer to whom such group is divested for purposes of determining such Eligible Employees' Vested Percentage. Any such determination for a particular group or division shall not bind the Company in any way with respect to any subsequent determination relating to a different group or division. In the event of a subsequent divestiture from the new employer, the Operating Committee or the Operating Committee designee may make a similar determination regarding vesting acceleration. (i) In the event the Plan is amended to change any vesting schedule under the Plan, each Participant having no less than three Years of Service shall be permitted to elect, within a reasonable period after the adoption of such amendment, to have his vested percentage determined under the Plan without regard to such amendment. 7.4 RESERVED FOR PLAN MODIFICATIONS. 7.5 ALTERNATE PAYEE ACCOUNTS. In the event that an Alternate Payee is awarded an interest in the Plan Account of a Participant whose Vested Percentage in such Account is less than 100%, the Vested Percentage at any time of the Alternate Payee in that portion of the Alternate Payee Account attributable to such - 43 - 44 awarded interest shall be the same percentage as the Participant's Vested Percentage in his Plan Account at that time, determined in accordance with Sections 7.1 through 7.3. - 44 - 45 ARTICLE VIII PAYMENT OF PLAN BENEFITS; DESIGNATION OF BENEFICIARY; TRANSFER OF DISTRIBUTED COMPANY STOCK 8.1 RETIREMENT. (a) A Participant may retire from the employment of the Company on or after his Normal Retirement Date, consistent with Company policies. (b) If the Participant continues in the service of the Company beyond his Normal Retirement Date with the consent of the Company consistent with applicable legal requirements, he shall continue to participate in the Plan in the same manner as Participants who have not reached their Normal Retirement Dates. At the subsequent termination of the Participant's employment, his Distributable Benefit shall be based upon the value of his Plan Account as of the Applicable Valuation Date determined with reference to his date of termination of employment as though that were his Normal Retirement Date. 8.2 METHOD OF DISTRIBUTION UPON RETIREMENT. (a) Upon retirement a Participant shall be entitled to a lump-sum distribution of his entire Distributable Benefit. (b) Payment of the lump-sum distribution shall be made as soon as practicable following his Normal Retirement Date provided the Participant consents to any distribution prior to the Participant attaining age 62. Failure to consent to any such distribution shall be deemed on election to defer such distribution until the date the Participant attains age 62. A Participant may elect to defer the distribution for a period of up to five years following his Normal Retirement Date, provided payment is made on or before the Required Payment Commencement Date determined under Section 2.42 (which shall take into account the election made under this Section 8.2(b)). 8.3 DEATH OR DISABILITY PRIOR TO TERMINATION OF EMPLOYMENT. - 45 - 46 (a) Upon the death of a Participant during his employment, or in the event that the Committee shall determine that a Participant has suffered a permanent Disability while an Employee of the Company, the Committee shall direct the Trustee to make a distribution of the Participant's entire interest in the Trust Fund to the Participant's Beneficiary determined under Section 8.9 (in the event of death) or to the disabled Participant (in the event of Disability). (b) The form of the Distributable Benefit shall be a lump-sum distribution, payable within one hundred twenty (120) days after the close of the Plan Year in which the death of the Participant occurs, or in which he is determined to be Disabled, as the case may be, subject to proof of death or Disability satisfactory to the Committee. 8.4 DEATH AFTER TERMINATION OF EMPLOYMENT. Upon the death of a former Participant after his retirement, Disability or other termination of employment, but prior to the distribution of his Distributable Benefit to which he is entitled, the Committee shall direct the Trustee to make a distribution of the balance to which the deceased Participant was entitled, to the Participant's Beneficiary determined under Section 8.9, such payment to be made within one hundred twenty (120) days after the close of the Plan Year in which the death of the Participant occurs, notwithstanding any elections previously made by the Participant. 8.5 TERMINATION OF EMPLOYMENT PRIOR TO NORMAL RETIREMENT DATE--DEFERRED DISTRIBUTION. Except as otherwise provided in Section 8.3 or 8.6, the following rules of this Section 8.5 shall apply in the case of a Participant whose employment with the Company terminates prior to his Normal Retirement Date: (a) The Participant's Plan Account and TRASOP Account, CODA Account and Profit Sharing Account, as applicable, shall continue to be credited with the interest or other net income earned thereon, but no further allocations of Company Contributions pursuant to the provisions of Article VI shall be made to such Plan Account, except for an allocation for the Plan Year in which the Participant terminated employment if he completed 850 or more Hours of Service in such Plan Year. - 46 - 47 (b) The Participant's Distributable Benefit shall be distributed to him in a lump sum not later than one hundred twenty (120) days after the close of the Plan Year in which occurs his fifth consecutive Break in Service, except as provided in Sections 8.5(c), 8.5(e), 8.5(f) or 8.6. (c) A Participant who so requests, may elect to have his Distributable Benefit distributed to him as a deferred Company Stock Distributable Benefit calculated under the provisions of Section 8.7(c). In such event, distribution shall be made within 120 days of such Participant's Normal Retirement Date; provided, however, that with respect to any portion of the Participant's Account attributable to Company Stock acquired by the Plan after December 31, 1986 (as determined under Section 2.19A and applicable Treasury Regulations), unless the Participant otherwise elects to have payment made as indicated above (following Normal Retirement Date), such portion shall be distributed in substantially equal annual payments over a period of five years, with the first such annual payment made not later than one year after the close of the Plan Year which is the fifth Plan Year following the Plan Year in which the Participant separated from service with the Company. For purposes of the preceding sentence requiring distribution of a Participant's Company Stock Distributable Benefit, such Benefit shall not be deemed to include any Company Stock acquired with the proceeds of a Loan until the close of the Plan Year in which the Loan is repaid in full. Notwithstanding the foregoing, a Participant who elects such a Company Stock Distributable Benefit may, at any time prior to his Normal Retirement Date, request that the Committee pay him the Vested Interest in his Plan Account in a cash lump sum and, in such event, the distribution shall be made not later than one hundred twenty (120) days after the close of the Plan Year in which such request is made. (d) In the case of a distribution described in Section 8.5(b) or (c), the nonvested portion of the Participant's Plan Account and Profit Sharing Account, if applicable, shall be forfeited as of the time of distribution. (e) If the Participant is reemployed by the Company or an Affiliated Company on (or before) the Anniversary Date of the Plan Year in which his fifth consecutive Break in Service - 47 - 48 occurs, and does not incur five consecutive Breaks in Service, no distribution and no forfeiture shall occur. (f) Distribution of benefits under Section 8.5(b) to a Participant whose Distributable Benefit exceeds (or at the time of any prior distribution exceeded) $3,500 may be made only with the consent of the Participant. Failure to consent shall be deemed an election to defer distribution of the Distributable Benefit until the date the Participant attains age 62, in which case the investment of the Participant's Distributable Benefit in the Trust Fund shall be pursuant to rules prescribed by the Committee. Such subsequent distribution of the benefit shall be made in a lump sum not later than one hundred and twenty (120) days after the close of the Plan Year in which the Participant attains age 62. 8.6 TERMINATION OF EMPLOYMENT PRIOR TO NORMAL RETIREMENT DATE--IMMEDIATE DISTRIBUTION. (a) A Participant whose employment with the Company terminates prior to his Normal Retirement Date shall have his Distributable Benefit, if any, paid to him within twelve months of the date of his termination of employment if: (i) His Distributable Interest, if any, is $3,500 or less, or (ii) He consents to such distribution (pursuant to rules prescribed by the Committee). Failure to consent shall be deemed an election to defer distribution of the Distributable Benefit until the date the Participant attains age 62, unless distribution is made pursuant to Section 8.5(b). (b) In the above-described cases, the following rules shall apply: (i) The nonvested portion of his Plan Account and Profit Sharing Account, if applicable, shall be forfeited as of the date that his Vested Interest is distributed to him. In the case of a Participant with no Vested Interest in his Plan Account or Profit Sharing Account, if applicable, the forfeiture shall occur within the period commencing on the date of his - 48 - 49 termination of employment and ending ninety (90) days following the end of the Plan Year in which his termination of employment occurs. (ii) If the Participant is reemployed by the Company or an Affiliated Company prior to his incurring his fifth consecutive Break in Service or on (or before) the Anniversary Date of the Plan Year in which his fifth consecutive Break in Service occurs, the Participant shall be entitled to have the entire portion of his Plan Account and Profit Sharing Account, if applicable, (including the nonvested portion of such Accounts) reinstated by repaying the total amount distributed to him from such Accounts. Such reinstatement shall be made from current forfeitures and, if necessary, from Company Contributions, and shall not be treated as an Annual Addition. However, this repayment must be made prior to the earlier of (i) five years from the date of reemployment or (ii) five consecutive Breaks in Service after the distribution of the Vested Interest in his Account(s) following such termination of employment, provided he is an Eligible Employee during that period. If such repayment is not made, then the previously forfeited amounts shall not be restored to the Participant's Account(s). (iii) In the case of a repayment made pursuant to the rules of Section 8.6(b)(ii) above, (A) The Participant shall not be required to pay any interest charge upon the amounts repaid by him, and (B) The nonvested portion of his Account(s) (which was not distributed to him) shall not be adjusted for gains or losses during the period between the forfeiture and the repayment of the distributed amount. (iv) In the case of a Participant with no Vested Interest in his Plan Account or Profit Sharing Account, if applicable, who is reemployed prior to incurring five consecutive Breaks in Service, his entire nonvested interest in such Account(s) (unadjusted for gains or losses during the period between the date of his forfeiture and the date of his reemployment) shall be reinstated upon his reemployment, without regard to the repayment requirement of subsection (iii) above. - 49 - 50 8.7 DISTRIBUTABLE BENEFIT. (a) Subject to the Participant's right under Section 8.5(c) or Section 8.7(b) to elect to receive a Company Stock distribution calculated under the provisions of Section 8.7(c), a Participant's Distributable Benefit shall be distributed in cash or, if elected in accordance with Section 8.15, by trustee-to-trustee transfer. (b) The Committee shall notify the Participant in advance of making the distribution of his right to elect distribution in the form of Company stock. Upon being so notified the Participant shall have a reasonable period of time (at least fourteen days) in which to elect to receive his Distributable Benefit in the form of Company Stock distribution as calculated under Section 8.7(c). This election by the Participant shall be made in writing, shall be irrevocable when made unless the Committee shall approve a revocation thereof, and shall operate to require the Committee to cause the Participant's Distributable Benefit to be made in the form of a Company Stock distribution as calculated under Section 8.7(c). The election to receive a Company stock distribution with respect to shares of Company stock acquired with the proceeds of a Loan shall not be terminable should the Loan be repaid or should the Plan cease to be an employee stock ownership plan within the meaning of Code section 4975(e)(7). (c) A Company Stock Distributable Benefit shall be governed by the following rules: (i) The amount of such a distribution shall be the number of whole shares of Company Stock that can be purchased with the dollar value of the Participant's Account(s) (determined as of the Applicable Valuation Date), with the remainder of the value of the Participant's Account(s) distributable in the form of cash. (ii) If more than one class of Company Stock is available for distribution to a Participant, the Participant must receive substantially the same proportion of each such class of stock ("Pro Rata Distribution"). The rule in the preceding - 50 - 51 sentence shall not apply to the extent that the Participant elects, pursuant to rules to be prescribed by the Committee, to receive the distribution in a form other than the Pro Rata Distribution. The rules of this Section 8.7(c)(ii) shall be applied by the Committee in a manner not inconsistent with the provisions of Code section 409(h). (d) The amount of a Participant's Distributable Benefit shall be based on the value of his Accounts determined in accordance with the rules prescribed by the Committee. However, the value of the Participant's Account shall be increased or decreased (as appropriate) by any contributions, forfeitures, or distributions properly allocable under the terms of this Plan to his Account that occurred on or after the Applicable Valuation Date or for any other reason were not otherwise properly reflected in the valuation of his Account on the Applicable Valuation Date. (e) Neither the Committee, the Company, nor the Trustee shall have any responsibility for any increase or decrease in the value of a Participant's Account as a result of any valuation made under the terms of this Plan after the date of his termination of employment and before the date of the distribution of his Account to him or his Beneficiary. Also, neither the Committee, the Company, nor the Trustee shall have any responsibility for failing to make any interim valuation of a Participant's Account between the date of distribution to the Participant of his Account and the immediately preceding Valuation Date, even though the Plan Assets may have been revalued in that interim for a purpose other than to revalue the Accounts under this Plan. 8.8 LIMITED PUT OPTION TO SELL COMPANY STOCK. Solely in the event that a Participant receives a distribution from the Plan consisting in whole or in part of Company Stock that at the time of distribution thereof is not Readily Tradeable Stock, the distributed Company Stock shall be made subject to a put option in the hands of a Qualified Holder. This put option shall be subject to the following provisions: (a) (i) During the sixty-day period following any distribution of such Company Stock, a Qualified Holder shall have - 51 - 52 the right to require the Company to purchase all or a portion of the distributed Company Stock held by the Qualified Holder. A Qualified Holder shall exercise this right by giving written notice to the Company within the previously mentioned sixty-day period of the number of shares of distributed Company Stock that the Qualified Holder intends to sell to the Company. (ii) The purchase price to be paid for any such Company Stock shall be its fair market value determined as of the Applicable Valuation Date determined in accordance with the valuation rules specified in Section 4.5. However, in the case of a transfer between a Qualified Holder who is a "disqualified person" (within the meaning of Code section 4975(e)(2)) and the Plan, the value of the stock shall be determined as of the date the Qualified Holder gives written notice to the Company of his exercise of the put option under this Section 8.8. (b) (i) If a Qualified Holder shall fail to exercise his put option right under this Section 8.8(b), the option right shall temporarily lapse upon the expiration of the sixty day period. (ii) Pursuant to the rules of Section 6.6A, as soon as is reasonably practicable following the Anniversary Date of the Plan Year in which the sixty-day option period expires, the Company shall notify the non-electing Qualified Holder (if he is then a shareholder of record) of the valuation of the Company Stock as of that Anniversary Date. During the sixty-day period following receipt of such valuation notice, the Qualified Holder shall have the right to require the Company to purchase all or any portion of the distributed Company Stock. (iii) The purchase price to be paid therefor shall be based on the Anniversary Date valuation of the Company Stock. However, in the case of a transfer between a Qualified Holder who is a "disqualified person" (within the meaning of Code section 4975(e)(2)) and the Plan, the value of the stock shall be determined as of the date the Qualified Holder gives written notice to the Company of his exercise of the put option under this Section 8.8. - 52 - 53 (iv) If a Qualified Holder fails to exercise his option right under this Section 8.8(b) with respect to any portion of the distributed Company Stock, no further options shall be applicable under this Plan and the Company shall have no further purchase obligations hereunder. (c) In the event that a Qualified Holder shall exercise a put option under this Section 8.8, then the Company shall have the option of paying the purchase price of the Company Stock which is subject to the put option ("Option Stock") under either of the following methods: (i) A lump-sum payment of the purchase price within ninety days after the date upon which the put option is exercised ("Exercise Date") or (ii) A series of six equal installment payments, with the first payment to be made within thirty days following the Exercise Date and the five remaining payments to be made on the five anniversary dates of the Exercise Date, so that the full amount shall be paid as of the fifth anniversary of such Exercise Date. If the Company elects to pay the purchase price of the Option Stock under the installment method provided in this subparagraph (ii), then the Company shall, within thirty days after the Exercise Date, give the Qualified Holder who is exercising the put option the Company's promissory note for the full unpaid balance of the option price. This note shall, at a minimum, provide adequate security, state a rate of interest reasonable under the circumstances but at least equal to the imputed compound rate in effect as of the Exercise Date pursuant to the Treasury Regulations promulgated under Code section 483, and provide that the full amount of the note shall accelerate and become due immediately in the event that the Company defaults in the payment of a scheduled installment payment. (d) The foregoing put options under Sections 8.8(a) and (b) shall be effective solely against the Company and shall not obligate the Plan in any manner. However, the Plan may elect to purchase any Company Stock that otherwise must be purchased by the Company pursuant to a Qualified Holder's exercise of any such option. Should both the Plan and the Company elect to purchase he stock, the Plan's election shall take precedence. - 53 - 54 (e) In the event that a Qualified Holder is unable to exercise the put option provided hereunder because the Company or other entity bound by the put option is prohibited from honoring it by reason of any applicable Federal or State law, then the sixty-day option periods during which the put option is exercisable under Sections 8.8(a) and (b) shall not include any such time during which the put option may not be exercised due to this reason. (f) Except as is expressly provided above with respect to any distributed Company Stock that is not Readily Tradeable Stock (as defined in Section 2.41B), no Participant shall have any put option rights with respect to Company Stock distributed under this Plan, and neither the Company nor this Plan shall have any obligation whatsoever to purchase any distributed Company Stock from any Participant or other Qualified Holder. (g) At the time of distribution of Company Stock that is not Readily Tradeable Stock to a Participant or Beneficiary, the Company shall furnish to the Participant or Beneficiary the most recent annual certificate of value prepared by the Company with respect to such Stock in accordance with the provisions of Section 6.6A. In addition, the Company shall furnish to the Participant or Beneficiary a copy of each subsequent annual certificate of value until the put options provided for in this Section 8.8 with respect to the distributed Company Stock shall expire. (h) The put option provided under this Section 8.8 shall not be terminable with respect to shares of Company Stock acquired with the proceeds of a Loan should the Loan be repaid or should the Plan cease to be an employee stock ownership plan within the meaning of Code section 4975(e)(7). - 54 - 55 8.9 DESIGNATION OF BENEFICIARY. (a) Subject to the provisions of Section 8.9(e), each Participant shall have the right to designate a Beneficiary or Beneficiaries to receive his Distributable Benefit in the Trust Fund in the event of his death before receipt of his entire interest in the Trust Fund. This designation is to be made on the form prescribed by and delivered to the Committee. (b) Subject to the provisions of Section 8.9(e), a Participant shall have the right to change or revoke any such designation by filing a new designation or notice of revocation with the Committee. Subject to the provisions of Section 8.9(e), no notice to any Beneficiary nor consent by any Beneficiary shall be required to effect any such change or revocation. (c) If a deceased Participant shall have failed to designate a Beneficiary, if the Committee shall be unable to locate a designated Beneficiary after reasonable efforts have been made, if for any reason the designation shall be legally ineffective, or if the Beneficiary shall have predeceased the Participant (and no legally effective Contingent Beneficiary shall have been named), any distribution required to be made under the provisions of this Plan shall be payable to the Participant's estate (except as provided in Section 8.9(e)), and the estate shall be considered the Beneficiary under this Plan. (d) In the event that the deceased Participant was not a resident of California at the date of his death, the Committee, in its discretion, may require the establishment of ancillary administration in California. In the event that a Participant shall predecease his Beneficiary and on the subsequent death of the Beneficiary a remaining distribution is payable under the applicable provisions of this Plan, the distribution shall be payable to the Beneficiary's estate. (e) If a Participant shall be married at the time of his death, the designation by the Participant under Section 8.9 of a person other than the current Spouse as his Beneficiary shall not take effect (and the entire Distributable Benefit shall be paid to such Spouse) (i) unless the Spouse of the Participant consents in writing to such designation, and the Spouse's consent - 55 - 56 acknowledges the effect of such designation and is witnessed by a Member of the Committee (or its delegate), a notary, or (ii) unless it is established to the satisfaction of the Committee that such consent is not required because there is no Spouse, because the Spouse cannot be located, or because of such other circumstances as the Secretary of the Treasury may by regulations prescribe. A spouse's consent to a designation of a particular Beneficiary shall be valid only as to that Beneficiary and as to the form of payment prescribed by the Plan in Section 8.3(b) or 8.4, as applicable. (f) The Company, the Committee and the Trustee shall have no duty to determine whether a Beneficiary designation or spousal consent made pursuant to this Section 8.9 was an informed designation or consent or was freely given, and shall be entitled to rely upon the Beneficiary form filed with the Committee, as well as such other documents as may be required pursuant to Section 8.12, and shall be under no duty or obligation to protect the rights of a spouse or former spouse of a Participant, except as may be required by law. A spouse's consent to a designation of a particular Beneficiary shall be valid only as to that Beneficiary and as to the form of payment prescribed by the Plan in Section 8.3(b) or 8.4, as applicable. 8.10 FACILITY OF PAYMENT. If any payee under the Plan is a minor or if the Committee reasonably believes that any payee is legally incapable of giving a valid receipt and discharge for any payment due him, the Committee may have the payment, or any part thereof, made to the person (or persons or institution) whom it reasonably believes is caring for or supporting the payee, unless it has received due notice of claim therefor from a duly appointed guardian or committee of the payee. Any payment shall be a payment from the Account of the payee and shall, to the extent thereof, be a complete discharge of any liability under the Plan to the payee. 8.11 DISTRIBUTION TO ALTERNATE PAYEES. If an Alternate Payee is entitled to a distribution of benefits from this Plan pursuant to a qualified domestic relations order, as defined in Section 14.2, the benefits payable to such Alternate Payee shall - 56 - 57 be distributed pursuant to such qualified domestic relations order under rules or procedures described by the Committee. If permitted by applicable law and regulations, the Committee may require or permit immediate distribution of such benefits to an Alternate Payee at any time following the determination by the Committee that such an order is a qualified domestic relations order. In the event that an Alternate Payee dies prior to receipt of the amounts due him from an Alternate Payee Account, such amounts shall be distributed to the estate of the Alternate Payee as soon as practicable following the date such amounts would have been distributed to such Alternate Payee. 8.12 ADDITIONAL DOCUMENTS. (a) The Committee or Trustee, or both, may require (and rely upon) the execution and delivery of such documents, papers and receipts as the Committee or Trustee may determine necessary or appropriate in order to establish the fact of death of the deceased Participant and of the right and identity of any Beneficiary or other person or persons claiming any benefits under this Article VIII. (b) The Committee or the Trustee, or both, may, as a condition precedent to the payment of death benefits hereunder, require an inheritance tax release and/or such security as the committee or Trustee, or both, may deem appropriate as protection against possible liability for state or federal death taxes attributable to any death benefits. 8.13 RIGHT OF FIRST REFUSAL FOR THE COMPANY AND THE PLAN. (a) Any Company stock distributed from the Plan which is Class B Common stock shall be subject to a right of first refusal by the Company. The terms and conditions of the right of first refusal shall be those applied to Class A Common Stock by the Company's Certificate of Incorporation, as in effect from time to time. (b) Any Company stock (whether Class A or Class B) distributed from the Plan, in addition to the right of first - 57 - 58 refusal imposed by the Company's Certificate of Incorporation or by Section 8.13(a), shall also be subject to a right of first refusal in favor of the Plan, subordinate to that of the Company, the terms and conditions of which (except for the right being in favor of the Plan) shall be the same as the Company's right of first refusal, modified as necessary to comply with applicable Treasury regulations. (c) Any Company stock held by or distributed from the Plan (whether Class A Common Stock or Class B Common Stock) which was acquired by the Plan with the proceeds of a Loan, shall not be subject to a put, call, other option or buy-sell or similar arrangement, within the meaning of Treasury Regulations, Section 54.4975-7(b)(4), whether or not this Plan is then an ESOP, except for the put option provided in Section 8.8 and except for the rights of first refusal provided in this Section 8.13 or by the Company's Certificate of Incorporation. Further, in administering the rights of first refusal with respect to such Company Stock acquired with the proceeds of a Loan, the rights shall be modified, as necessary, to comply with applicable Treasury regulations. 8.14 RESTRICTION ON DISTRIBUTION OF TRASOP ACCOUNT BALANCE. Notwithstanding any other provision of this Plan, no Company Stock allocated to a Participant's TRASOP Account may be distributed from such Account before the end of the eighty-fourth (84th) month beginning after the month in which the Company Stock is allocated to that Account. However, such Company Stock may be distributed on an earlier date pursuant to the provisions of this Plan in the event of: (a) The Participant's death, Disability or other termination of employment; (b) The Participant's transfer to the employment of an acquiring employer, other than the Company, in the case of: (i) A sale to the acquiring employer of substantially all of the assets used by the Company in a trade or business conducted by the Company, or (ii) The sale of substantially all of the stock of a subsidiary of the Company to the employer, or - 58 - 59 (c) With respect to the stock of the Company, a disposition of the Company's interest in a subsidiary when the Participant continues employment with the subsidiary. 8.15 DIRECT ROLLOVERS. (a) This applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Section 8.15, a distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an eligible rollover distribution made payable directly to an eligible retirement plan specified by the distributee in a direct rollover. (i) Eligible Rollover Distribution. An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated Beneficiary, or for a specified period of 10 years or more; any distribution to the extent such distribution is required under Code section 401(a)(9); and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (ii) Eligible Retirement Plan. An eligible retirement plan is a retirement plan that accepts the distributee's eligible rollover distribution and is an individual retirement account described in Code section 408(a), an individual retirement annuity described in Code section 408(b), an annuity plan described in Code section 403(a), or a qualified trust described in Code section 401(a). However in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. - 59 - 60 (iii) Distributee. A distributee includes an employee or former employee. In addition, the employee's or former employee's surviving spouse and the employee's or former employee's spouse or former spouse who is the alternative payee under a qualified domestic relations order, as defined in Code section, are distributees with regard to the interest of the spouse or former spouse. (iv) Direct rollover. A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. - 60 - 61 ARTICLE IX OPERATION AND ADMINISTRATION OF THE PLAN; VOTING AND OTHER RIGHTS OF COMPANY STOCK 9.1 PLAN ADMINISTRATION. (a) Authority to control and manage the operation and administration of the Plan is hereby allocated to the Committee. (b) The members of the Committee shall be appointed by the Board of Directors and shall hold office until resignation, death or removal by the Board of Directors. (c) For purposes of ERISA Section 402(a), the Committee, the Trustee and any Investment Manager appointed pursuant to Section 9.3 shall be Named Fiduciaries of this Plan. (d) The Secretary of the Committee shall cause to be maintained in the office of the Committee for the purpose of inspection an accurate schedule listing the names of all persons from time to time serving as members of the Committee and all Named Fiduciaries of the Plan. 9.2 COMMITTEE POWERS. The Committee shall have all powers necessary to supervise the administration of the Plan and control its operations. In addition to any powers and authority conferred on the Committee elsewhere in the Plan or by law, the Committee shall have, by way of illustration but not by way of limitation, the following powers and authority: (a) To allocate fiduciary responsibilities (other than trustee responsibilities) among the Named Fiduciaries and to designate one or more other persons to carry out fiduciary responsibilities (other than trustee responsibilities). However, no allocation or delegation under this Section 9.2(a) shall be effective until the person or persons to whom the responsibilities have been allocated or delegated agree to assume the responsibilities. The term "trustee responsibilities" as used herein shall have the meaning set forth in Section 405(c) of ERISA. The preceding provisions of this Section 9.2(a) shall not - 61 - 62 limit the authority of the Committee to appoint one or more Investment Managers in accordance with Section 9.3. (b) To designate agents to carry out responsibilities relating to the Plan, other than fiduciary responsibilities. (c) To employ such legal, actuarial, medical, accounting, clerical, administrative and ministerial and other assistance as it may deem appropriate in carrying out the provisions of this Plan, including one or more persons to render advice with regard to any responsibility any Named Fiduciary or any other fiduciary may have under the Plan. (d) To establish rules and regulations from time to time for the conduct of the Committee's business and the administration and effectuation of this Plan. (e) To administer, interpret, construe and apply this Plan and the Plan's claims procedure and to decide all questions which may arise or which may be raised under this Plan by any employee, Participant, former Participant, Beneficiary, Alternate Payee or other person whatsoever, including but not limited to all questions relating to eligibility to participate in the Plan, the amount of service of any Participant, and the amount of benefits to which any Participant or his Beneficiary may be entitled on or after the Effective Date hereof. (f) To determine the manner in which the assets of this Plan, or any part thereof, shall be distributed. (g) To direct the Trustee, in writing, from time to time, to invest and reinvest the Trust Fund, or any part thereof, or to purchase, exchange, or lease any property, real or personal, which the Committee may designate. This shall include the right to direct the investment of all or any part of the Trust in any one security or any one type of securities permitted hereunder. Among the securities which the Committee may direct the Trustee to purchase are "employer securities" as defined in Code section 409(1) or any successor statute thereto. (h) To select alternative investment options from which Participants may select from in determining investment of - 62 - 63 their Accounts pursuant to Section 4.6(b), and to establish rules and procedures regarding such investment options. (i) To satisfy accounting, auditing, record keeping, insurance, bonding and reporting and disclosure requirements. (j) To perform or cause to be performed such further acts as it may deem to be necessary, appropriate or convenient in the efficient administration of the Plan. Any action taken in good faith by the Committee in the exercise of authority conferred upon it by this Plan shall be conclusive and binding upon the Participants and their Beneficiaries and any Alternate Payees. All discretionary powers conferred upon the Committee shall be absolute, but shall be exercised in a uniform and nondiscriminatory manner. 9.3 INVESTMENT MANAGER. (a) The Committee, by action reflected in the minutes thereof, may appoint one or more Investment Managers, as defined in Section 3(38) of ERISA, to manage all or a portion of the assets of the Plan. (b) An Investment Manager shall discharge its duties in accordance with applicable law and in particular in accordance with Section 404(a)(1) of ERISA. (c) An Investment Manager, when appointed, shall have full power to manage the assets of the Plan for which it has responsibility, and neither the Company nor the Committee shall thereafter have any responsibility for the management of those assets, except to the extent such power or responsibility shall have been reserved to the Company or Committee in the documents governing the relationship between or among the Plan, the Company and the Investment Manager. 9.4 PERIODIC REVIEW. (a) At periodic intervals, not less frequently than annually, the Committee shall review the long-run and short-run financial needs of the Plan and shall determine a funding policy - 63 - 64 for the Plan consistent with the objectives of the Plan and the minimum funding standards of ERISA, if applicable. In determining the funding policy the Committee shall take into account, at a minimum, not only the long-term investment objectives of the Trust Fund consistent with the prudent management of the assets thereof, but also the short-run needs of the Plan to pay benefits. (b) All actions taken by the Committee with respect to the funding policy of the Plan, including the reasons therefor, shall be fully reflected in the minutes of the Committee. 9.5 COMMITTEE PROCEDURE. (a) A majority of the members of the Committee as constituted at any time shall constitute a quorum, and any action by a majority of the members present at any meeting, or authorized by a majority of the members in writing without a meeting, shall constitute the action of the Committee. (b) The Committee may designate certain of its members as authorized to execute any document or documents on behalf of the Committee, in which event the Committee shall notify the Trustee of this action and the name or names of the designated members. The Trustee, Company, Participants, Beneficiaries, and any other party dealing with the Committee may accept and rely upon any document executed by the designated members as representing action by the Committee until the Committee shall file with the Trustee a written revocation of the authorization of the designated members. 9.6 COMPENSATION OF COMMITTEE. (a) Members of the Committee shall serve without compensation unless the Board of Directors shall otherwise determine. However, in no event shall any member of the Committee who is an Employee receive compensation from the Plan for his services as a member of the Committee. (b) All members shall be reimbursed for any necessary or appropriate expenditures incurred in the discharge of duties as members of the Committee. - 64 - 65 (c) The compensation or fees, as the case may be, of all officers, agents, counsel, the Trustee, or other persons retained or employed by the Committee shall be fixed by the Committee. 9.7 RESIGNATION AND REMOVAL OF MEMBERS. Any member of the Committee may resign at any time by giving written notice to the other members and to the Board of Directors effective as therein stated. Any member of the Committee may, at any time, be removed by the Board of Directors. 9.8 APPOINTMENT OF SUCCESSORS. (a) Upon the death, resignation, or removal of any Committee member, the Board of Directors may appoint a successor. (b) Notice of appointment of a successor member shall be given by the Secretary of the Company in writing to the Trustee and to the members of the Committee. (c) Upon termination, for any reason, of a Committee member's status as a member of the Committee, the member's status as a Named Fiduciary shall concurrently be terminated, and upon the appointment of a successor Committee member the successor shall assume the status of a Named Fiduciary as provided in Section 9.1. 9.9 RECORDS. The Committee shall keep a record of all its proceedings and shall keep, or cause to be kept, all such books, accounts, records or other data as may be necessary or advisable in its judgment for the administration of the Plan and to properly reflect the affairs thereof. - 65 - 66 9.10 RELIANCE UPON DOCUMENTS AND OPINIONS. (a) The members of the Committee, the Board of Directors, the Company and any Employee of the Company delegated under the provisions hereof to carry out any fiduciary responsible under the Plan ("Delegated Fiduciary"), shall be entitled to rely upon any tables, valuations, computations, estimates, certificates and reports furnished by any consultant, or firm or corporation which employs one or more consultants, upon any opinions furnished by legal counsel, and upon any reports furnished by the Trustee. The members of the Committee, the Board of Directors, the Company and any Delegated Fiduciary shall not be liable in any manner whatsoever for anything done or action taken or suffered in reliance from any such consultant or firm or corporation which employs one or more consultants, trustee, or counsel. (b) Any and all such things done or actions taken or suffered by the Committee, the Board of Directors, the Company and any Delegated Fiduciary shall be conclusive and binding on all Employees, Participants, Beneficiaries, Alternate Payees and any other persons whomsoever, except as otherwise provided by law. (c) The Committee and any Delegated Fiduciary may, but are not required to, rely upon all records of the Company with respect to any matter or thing whatsoever, and may likewise treat those records as conclusive with respect to all Employees, Participants, Beneficiaries, and any other persons whomsoever, except as otherwise provided by law. 9.11 REQUIREMENT OF PROOF. The Committee or the Company may, in its (or their) sole discretion, require satisfactory proof of any matter under this Plan from or with respect to any Employee, Participant, Beneficiary or Alternate Payee, and no benefits under this Plan need be paid until the required proof shall be furnished. 9.12 RESERVED FOR PLAN NOTIFICATIONS. - 66 - 67 9.13 MULTIPLE FIDUCIARY CAPACITY. Any person or group of persons may serve in more than one fiduciary capacity with respect to the Plan. 9.14 LIMITATION ON LIABILITY. (a) Except as provided in Part 4 of Title I of ERISA, neither the Company, the Board of Directors (or any member thereof), nor the Committee (or any member thereof) shall be subject to any liability with respect to his duties under the Plan unless he or it acts fraudulently or in bad faith. (b) Neither the Company, the Board of Directors (or any member thereof) nor the Committee (or any member thereof) shall be liable for any breach of fiduciary responsibility resulting from the act or omission of any other fiduciary or any person to whom fiduciary responsibilities have been allocated or delegated, except as provided in Part 4 of Title I of ERISA. (c) Neither the Company, the Board of Directors (or any member thereof), the Committee (or any member thereof), nor the Trustee or any Investment Manager shall be liable to the extent relief from liability is provided pursuant to Section 404(c) of ERISA. (d) The Company in this Plan document does not intend to create additional fiduciary liability, or to characterize actions or responsibilities as fiduciary in nature, beyond that required by ERISA or other applicable law. 9.15 INDEMNIFICATION. (a) To the extent permitted by law, the Company hereby indemnifies each member of the Board of Directors and the Committee, and any other Employee of the Company with duties under the Plan, against expenses (including any amount paid in settlement) reasonably incurred by him in connection with any claims against him by reason of his conduct in the performance of his duties under the Plan, except in relation to matters as to which he acted fraudulently or in bad faith in the performance of such duties. The preceding right of indemnification shall pass to the estate of such a person. - 67 - 68 (b) The preceding right of indemnification shall be in addition to any other right to which the Board of Directors or Committee member or other person may be entitled as a matter of law or otherwise. 9.16 ALLOCATION OF FIDUCIARY RESPONSIBILITY. (a) Section 405(c) of ERISA permits the division, allocation and delegation among Plan fiduciaries of the fiduciary responsibilities owed to the Plan Participants and Beneficiaries. Under this concept, each fiduciary, including a Named Fiduciary, is accountable only for its own functions, except to the extent of his co-fiduciary liability under Section 405 of ERISA. It is the intent of the Company in establishing this Plan to comply with Section 405(c) and to have the limitation on liability set forth in Section 405(c)(2) of ERISA apply to the maximum extent allowed by law. (b) Pursuant to Section 405(c) of ERISA, the authority to control and manage the operation and administration of the Plan is allocated to the Committee. Except to the extent expressly provided to the contrary in this Plan document, and the Trust Agreement, the responsibilities allocated to the Committee include: (i) responsibilities identified as Committee authority and powers in Section 9.2(a) - (j); and (ii) responsibilities identified elsewhere in this Plan document as applicable to the Committee. (c) The Board of Directors is allocated the following responsibilities, acting with the advice and assistance of the Committee: (i) Appointing the Trustee; (ii) Adopting Plan amendments; (iii) Determining the amount of Company Contributions; - 68 - 69 (iv) Determining whether to terminate the Plan or suspend contributions thereto; (v) Determining which Affiliated Companies shall participate in the Plan, and the conditions on which any such Affiliated Company shall participate; (vi) Appointing members of the Committee; (vii) Determining the form of Company Contributions; and (viii) Performing those duties specifically allocated to it elsewhere in this Plan document. (d) The Trustee shall have only those responsibilities which have been specifically allocated to it under this Plan document and related Trust Agreement, plus any "trustee responsibilities", under Section 405(c) of ERISA, which may not legally be allocated to another person or fiduciary. Any Investment Manager appointed pursuant to Section 9.3 may be granted exclusive authority and discretion to manage and control all or any portion of the assets of the Plan, subject to such limitations as may be provided in the documents governing the relationship between or among the Plan, the Company (if applicable) and the Trustee or Investment Manager. 9.17 PROHIBITION AGAINST CERTAIN ACTIONS. (a) To the extent prohibited by law, in administering this Plan the Committee shall not discriminate in favor of any class of employees and particularly it shall not discriminate in favor of Highly Compensated Employees. (b) The Committee shall not cause the Plan to engage in any transaction that constitutes a nonexempt Prohibited Transaction under Code section 4975(c) or Section 406(a) of ERISA. (c) All individuals who are fiduciaries with respect to the Plan (as defined in Section 3(21) of ERISA) shall - 69 - 70 discharge their fiduciary duties in accordance with applicable law, and in particular, in accordance with the standards of conduct contained in Section 404 of ERISA. 9.18 BONDING AND INSURANCE. (a) Except as provided in Section 412 of ERISA, as may be required under any other applicable law, or as may be required by the Committee in its sole discretion, no bond or other security shall be required by any member of the Committee, or any other fiduciary under this Plan. (b) For purposes of satisfying its indemnity obligations under Section 9.15, the Company may (but need not) purchase and pay premiums for one or more policies of insurance. However, this insurance shall not release the Company of its liability under the indemnification provisions. 9.19 VOTING AND OTHER RIGHTS OF COMPANY STOCK. (a) All voting rights of Company Stock held in the Trust Fund shall be exercised in accordance with the following provisions: (i) Each Participant (which term shall include, for purposes of this Section 9.19, Beneficiaries and Alternate Payees having an interest in an Account or fund holding Company Stock) shall be given the opportunity to instruct the Trustee confidentially on a form prescribed and provided by the Company as to how to vote those shares (including fractional shares) of Company Stock allocated to his Account(s) under the Plan (directly or indirectly through an interest in a Company Stock fund) on the date immediately preceding the record date for the meeting of shareholders of the Company. The Trustee shall not divulge to the Company the instructions of any Participant. The Company may require verification of the Trustee's compliance with such confidential voting instructions by an independent auditor elected by the Company. The voting rights procedures set forth in this Section 9.19 shall be construed and implemented in accordance with the provisions of Code section 409(e). - 70 - 71 (ii) All Participants entitled to direct such voting shall be notified by the Committee (or the Company, pursuant to its normal communications with shareholders) of each occasion for the exercise of these voting rights within a reasonable time (but not less than the time period that may be required by any applicable state of federal law) before these rights are to be exercised. The notification shall include all information distributed by the Company to other shareholders regarding the exercise of such rights. (iii) The Participants shall be so entitled to direct the voting of fractional shares (or fractional rights to shares). However, the Committee may, to the extent possible, direct the Trustee to vote the combined fractional shares (or fractional rights to shares) so as to reflect the aggregate direction of all Participants giving directions with respect to fractional shares (or fractional rights to shares). (iv) In the event that a Participant shall fail to direct the Trustee, in whole or in part, as to the exercise of voting rights arising under any Company Stock allocated to his Account, then these voting rights, together with voting rights as to shares of Company Stock which have not been allocated, shall be exercised by the Trustee in the same proportion as the number of Shares of Company Stock for which the Trustee has received direction in such matter (e.g., to vote for, against or abstain from voting on a proposal, or to grant or withhold authority to vote for a director or directors), and the Trustee shall have no discretion in such matter; provided, however, that any shares allocated to Participants' TRASOP Accounts as to which Participants fail to direct the Trustee shall not be voted, and the Trustee shall have no discretion in such matter. (v) Except as provided in paragraph (b) below, all rights (other than voting rights) of Company Stock held in the Trust Fund shall be exercised in the same manner and to the same extent as provided above with respect to the voting rights of the Company Stock, subject to the rules prescribed by the Committee, which rules, among other matters, may prescribe that no action shall be taken with respect to shares as to which no direction is received from Participants. The Trustee shall have no discretion with respect to the exercise of any such rights. - 71 - 72 (vi) Neither the Committee nor the Trustee shall make any recommendation to any Participant regarding the exercise of the Participant's voting rights or any other rights under the provisions of this Section 9.19, nor shall the Committee or Trustee make any recommendation as to whether any such rights should or should not be exercised by the Participant. (b) All responses to tender and exchange for Company Stock offers shall be made in accordance with the following provisions: (i) Each Participant shall be given the opportunity, to the extent that shares of Company Stock are allocated to his Account, to direct the Trustee in writing as to the manner in which to respond to a tender or exchange offer with respect to Company Stock, and the Trustee shall respond in accordance with the instructions so received. The Trustee shall not divulge to the Company the instructions of any Participant. The Committee shall utilize its best efforts to timely distribute or cause to be distributed to each Participant such information as will be distributed to shareholders of the Company in connection with any such tender or exchange offer, together with a form addressed to the Trustee requesting confidential instructions on whether or not such shares will be tendered or exchanged. If the Trustee shall not receive timely direction from a Participant as to the manner in which to respond to such a tender or exchange offer, the Trustee shall not tender or exchange any shares of Company Stock with respect to which such Participant has the right of direction, and the Trustee shall have no discretion in such matter. (ii) Unallocated shares of Company Stock and shares of Company Stock held by the Trustee pending allocation to Participants' Accounts shall be tendered or exchanged (or not tendered or exchanged) by the Trustee in the same proportion as shares with respect to which Participants have been given the opportunity to direct the Trustee pursuant to paragraph (i) above are tendered or exchanged, and the Trustee shall have no discretion in such matter. 9.20 PLAN EXPENSES. - 72 - 73 (a) Except as provided in Section 9.20(b), all expenses incurred in the establishment, administration and operation of the Plan, including but not limited to the expenses incurred by the members of the Committee in exercising their duties, to the extent these expenses are not paid by the Company, shall be charged to the Trust Fund and accounted for pursuant to the provisions of Article VI. (b) Costs or expenses which are particular to a specific asset or group of assets in the Trust Fund, such as interest and brokerage charges which are included in the cost of securities purchased by the Trustee (or charged to proceeds in the case of sales), as determined by the Committee, shall be charged or allocated in a fair and equitable manner to the Accounts, subaccounts or funds to which those assets are allocated pursuant to rules prescribed by the Committee. - 73 - 74 ARTICLE X MERGER OF COMPANY: MERGER OF PLAN 10.1 EFFECT OF REORGANIZATION OR TRANSFER OF ASSETS. In the event of a consolidation, merger, sale, liquidation, or other transfer of the operating assets of the Company to any other company, the ultimate successor or successors to the business of the Company shall automatically be deemed to have elected to continue this Plan in full force and effect, in the same manner as if the Plan had been adopted by resolution of its board of directors, unless the successor(s), by resolution of its board of directors, shall elect not to so continue this Plan in effect, in which case the Plan shall automatically be deemed terminated as of the applicable effective date set forth in the board resolution. 10.2 MERGER RESTRICTION. Notwithstanding any other provision in this Article, this Plan shall not in whole or in part merge or consolidate with, or transfer its assets or liabilities to any other plan unless each affected Participant in this Plan would receive a benefit immediately after the merger, consolidation, or transfer (if the Plan then terminated) which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation, or transfer (if the Plan had then terminated). Subject to the foregoing, merger of this Plan and its related Trust with, transfer of some or all of the assets of this Plan to, or receipt by this Plan or Trust of assets from another qualified plan or trust, including another plan or trust maintained by the Company or an Affiliated Company, is expressly authorized. 10.3 ACCOUNTING FOR ASSETS TRANSFERRED FROM OTHER PLANS. In the event that assets are transferred to this Plan from another qualified plan in a plan-to-plan transfer, such assets will be accounted for separately to the extent required to preserve optional forms of benefits or other attributes of the transferor plan as may be required by law or as may be determined by the Committee to be desirable. - 74 - 75 ARTICLE XI PLAN TERMINATION AND DISCONTINUANCE OF CONTRIBUTIONS 11.1 PLAN TERMINATION. (a) Subject to the following provisions of this Section 11.1, the Company may terminate the Plan and the Trust Agreements at any time by an instrument in writing executed in the name of the Company by an officer or officers duly authorized to execute such an instrument, and delivered to the Trustee. The Company expressly disavows any contractual obligation, implied or otherwise, to continue this Plan. (b) The Plan and Trust Agreements may terminate if the Company merges into any other corporation, if as the result of the merger the entity of the Company ceases, and the Plan is terminated pursuant to the rules of Section 10.1. (c) Upon and after the effective date of the termination, the Company shall not make any further contributions under the Plan and no contributions need be made by the Company applicable to the Plan Year in which the termination occurs, except as may otherwise be required by law. (d) The Vested Percentage of all affected Participants in the balances in their Accounts accrued to the date of termination of the Plan, to the extent funded as of the date of termination, shall automatically become one hundred percent (100%) as of that date. 11.2 DISCONTINUANCE OF CONTRIBUTIONS. (a) The Company by resolution of its Board of Directors may discontinue contributions to the Plan at any time and for any reason in the Board's sole discretion. Upon and after the effective date of this discontinuance, the Company shall make no further Company contributions under the Plan and no Company contributions need be made by the Company with respect to the Plan Year in which the discontinuance occurs, except as may otherwise be required by law. - 75 - 76 (b) The discontinuance of Company contributions on the part of the Company shall not terminate the Plan as to the funds and assets then held by the Trustee, or operate to accelerate any payments of distributions to or for the benefit of Participants, Beneficiaries or Alternate Payees, and the Trustee shall continue to administer the Trust Fund in accordance with the provisions of the Plan until all of the obligations under the Plan shall have been discharged and satisfied. (c) However, if this discontinuance of Company contributions shall cause the Plan to lose its status as a qualified plan under Code section 401(a), the Plan shall be terminated in accordance with the provisions of this Article XI. (d) On and after the effective date of a complete discontinuance of Company contributions, as defined in Treasury Regulation Section 1.411(d), the Vested Percentage of all affected Participants in the balances in their Accounts accrued to that date, to the extent funded as of that date, shall automatically become one hundred percent (100%) as of that date. 11.3 RIGHTS OF PARTICIPANTS. In the event of the termination of the Plan, for any cause whatsoever, all assets of the Plan, after payment of expenses, shall be used for the exclusive benefit of Participants and their Beneficiaries and no part thereof shall be returned to the Company, except as provided in Section 4.7 of this Plan or as otherwise permitted by law. 11.4 TRUSTEE'S DUTIES ON TERMINATION. (a) Upon termination of the Plan, the Committee shall determine whether to continue the Trust, to distribute the assets of the Trust to Participants, Beneficiaries and Alternate Payees to transfer the assets in the Trust to another qualified plan maintained by the Company, or to take other action consistent with applicable law. (b) If so directed by the Committee upon termination of this Plan, the Trustee shall proceed as soon as possible to reduce all of the assets of the Trust Fund to cash and/or common stock and other securities in such proportions as the Committee - 76 - 77 shall determine (after approval by the Internal Revenue Service, if necessary or desirable, with respect to any portion of the assets of the Trust Fund held in common stock or securities of the Company). After first deducting the estimated expenses for liquidation and distribution chargeable to the Trust Fund, and after setting aside a reasonable reserve for expenses and liabilities (absolute or contingent) of the Trust, the Committee shall make the allocations required under Article VI, where applicable, with the same effect as though the date of completion of liquidation were an Anniversary Date of the Plan. Following these allocations, the Trustee shall promptly, after receipt of appropriate instructions from the Committee, distribute in accordance with such instructions to each former Participant, or Beneficiary or Alternate Payee, a benefit equal to the amount credited to his Accounts as of the date of completion of the liquidation. (c) The Trustee and the Committee shall continue to function as such for such period of time as may be necessary for the winding up of this Plan and for the making of distributions in accordance with the provisions of this Plan. 11.5 PARTIAL TERMINATION. (a) In the event of a partial termination of the Plan within the meaning of Code section 411(d)(3), the Vested Percentage of affected Participants in the balances in their Accounts, as of the date of the partial termination, shall become one hundred percent (100%) as of that date. (b) That portion of the assets of the Plan affected by the partial termination shall be used exclusively for the benefit of the affected Participants and their Beneficiaries, and no part thereof shall otherwise be applied. (c) With respect to Plan assets and Participants affected by a partial termination, the Committee and the Trustee shall follow the same procedures and take the same actions prescribed in this Article XI in the case of a total termination of the Plan. - 77 - 78 11.6 FAILURE TO CONTRIBUTE. The failure of the Company to contribute to the Trust in any year, if contributions are not required under the Plan for that year, shall not constitute a complete discontinuance of contributions to the Plan. - 78 - 79 ARTICLE XII APPLICATION FOR BENEFITS 12.1 APPLICATION FOR BENEFITS; CLAIMS PROCEDURE. The Committee may require any person claiming benefits under the Plan to submit an application therefor, together with such documents and information as the Committee may require. In the case of any person suffering from a disability which prevents the claimant from making personal application for benefits, the Committee may, in its discretion, permit another person acting on his behalf to submit the application. 12.2 ACTION ON APPLICATION. (a) Within ninety (90) days following receipt of an application and all necessary documents and information, the Committee's authorized delegate reviewing the claim shall furnish the claimant with written notice of the decision rendered with respect to the application. (b) In the case of a denial of the claimant's application, the written notice shall set forth: (i) The specific reasons for the denial, with reference to the Plan provisions upon which the denial is based; (ii) A description of any additional information or material necessary for perfection of the application (together with an explanation why the material or information is necessary); and (iii) An explanation of the Plan's claim review procedure. (c) A claimant who wishes to contest the denial of his application for benefits or to contest the amount of benefits payable to him shall follow the procedures for an appeal of benefits as set forth in Section 12.3 below, and shall exhaust such administrative procedures prior to seeking any other form of relief. - 79 - 80 12.3 APPEALS. (a) (i) A claimant who does not agree with the decision rendered with respect to his application may appeal the decision to the Committee. (ii) The appeal shall be made, in writing, within sixty-five (65) days after the date of notice of the decision with respect to the application. (iii) If the application has neither been approved nor denied within the ninety (90) day period provided in Section 12.2 above, then the appeal shall be made within sixty- five (65) days after the expiration of the ninety (90) day period. (b) The claimant may request that his application be given full and fair review by the Committee. The claimant may review all pertinent documents and submit issues and comments in writing in connection with the appeal. (c) The decision of the Committee shall be made promptly, and not later than sixty (60) days after the Committee's receipt of a request for review, unless special circumstances require an extension of time for processing, in which case a decision shall be rendered as soon as possible, but not later than one hundred twenty (120) days after receipt of a request for review. (d) The decision on review shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant with specific reference to the pertinent Plan provisions upon which the decision is based. - 80 - 81 ARTICLE XIII LIMITATIONS ON ANNUAL ADDITIONS 13.1 MAXIMUM ANNUAL ADDITIONS. The Annual Additions of a Participant shall not exceed the maximum permissible amount specified in Code section 415(c)(1). 13.2 EFFECT OF PARTICIPATION IN OTHER COMPANY PLANS. (a) If a Participant in this Plan is also a Participant in another defined contribution plan maintained by the Company, the aggregate Annual Additions of the Participant under this Plan and such other plan(s) shall not exceed the maximum permissible amount specified in Code section 415(c)(1). In order to avoid having the aggregate Annual Additions exceed the limit, the Participant's Elective Deferrals under the Science Applications International Corporation Cash or Deferred Arrangement ("CODA") shall be limited. If limitation (down to zero) of such Elective Deferrals does not sufficiently reduce the Annual Additions to come within the limit, allocations of the Company Contributions to the Participant under Company retirement plans shall be reduced in the following order: (i) Additional Company Contributions under the CODA; (ii) Forfeitures under the Company's Employee Stock Ownership Plan ("ESOP"); (iii) Company Contributions under the ESOP; (iv) Forfeitures under the Company's Profit Sharing Retirement Plan (Profit Sharing Plan); (v) Company Contributions under the Profit Sharing Plan; (vi) Forfeitures under the Company's Profit Sharing Retirement Plan II (Profit Sharing Plan II); and - 81 - 82 (vii) Company Contributions under the Profit Sharing Retirement Plan II. To the extent allocations to a Participant are reduced under subsections (i)-(vii) above, such reduced amounts shall be allocated and reallocated to other Participants in the applicable Plan. If as a result of (i) forfeitures, (ii) a reasonable error in estimating a Participant's Annual Compensation, (iii) a reasonable error in determining the amount of Elective Deferrals [within the meaning of Code section 402(g)(3)] that may be made with respect to any individual under the limits of Code section 415, or (iv) under other limited facts and circumstances that the Commissioner of Internal Revenue finds justify the rules set forth in this subsection 13.2(a), the Annual Additions under the terms of this Plan and other retirement plans of the Company would cause the limitations of Code section 415 applicable to that Participant to be exceeded, the excess amounts shall not be deemed Annual Additions if Elective Deferrals within the meaning of Code section 402(g)(3) are distributed to the Participant under the terms of the CODA. Such distributed amounts shall be disregarded for purposes of Code section 402(g) and the average deferral percentage test of Code section 401(k)(3). (b) If a Participant in this Plan is also a Participant in a defined benefit plan maintained by the Company, the sum of the Defined Contribution Plan Fraction (as defined in Code section 415(e)(3)) and the Defined Benefit Plan Fraction (as defined in Code section 415(e)(2)) shall not exceed 1.0. The Participant's benefit under such defined plan shall be reduced, as necessary to satisfy the requirement of the preceding sentence. 13.3 INCORPORATION BY REFERENCE OF CODE SECTION 415. In order to ensure compliance with Code section 415, the Plan hereby incorporates said Section by reference as though it were set out as part of this Plan. In applying Section 415 to this Plan, the Plan shall include each grandfather or transition rule provided by such Section or any law amending such Section, in order to allow the largest benefit otherwise payable hereunder, or under other plans maintained by the Company, to be paid. - 82 - 83 13.4 NO CONTRACTUAL RIGHT TO EXCESS CONTRIBUTIONS. If, in order to comply with the limitations of this Article XIII, it becomes necessary to reduce a Participant's Account, to reduce or reallocate amounts previously allocated to such Account, or otherwise, such action(s) may be taken by the Committee and Trustee free of any contractual obligation to the Participant (or Beneficiary) affected based on prior Account balances or allocations. - 83 - 84 ARTICLE XIV RESTRICTION ON ALIENATION; PARTICIPANT LOANS 14.1 GENERAL RESTRICTIONS AGAINST ALIENATION. Except as otherwise provided by law and as otherwise provided by Section 14.2: (a) The interest of any Participant, Beneficiary or Alternate Payee in the income, benefits, payments, claims or rights hereunder, or in the Trust Fund shall not in any event be subject to sale, assignment, hypothecation, or transfer. Each Participant, Beneficiary or Alternate Payee is prohibited from anticipating, encumbering, assigning, or in any manner alienating his or her interest under the Trust Fund, and is without power to do so, except as may otherwise be provided for in the Trust Agreement. The interest of any Participant, Beneficiary or Alternate Payee shall not be liable or subject to his debts, liabilities, or obligations, now contracted, or which may be subsequently contracted. The interest of any Participant, Beneficiary or Alternate Payee shall be free from all claims, liabilities, bankruptcy proceedings, or other legal process now or hereafter incurred or arising; and the interest or any part hereof, shall not be subject to any judgment rendered against the Participant, Beneficiary or Alternate Payee. (b) In the event any person attempts to take any action contrary to this Article XIV, that action shall be void and the Company, the Committee, the Trustees and all Participants, their Beneficiaries and Alternate Payees, may disregard that action and are not in any manner bound thereby, and they, and each of them separately, shall suffer no liability for any disregard of that action, and shall be reimbursed on demand out of the Trust Fund for the amount of any loss, cost or expense incurred as a result of disregarding or of acting in disregard of that action. (c) The preceding provisions of this Section 14.1 shall be interpreted and applied by the Committee in accordance with the requirements of Code section 401(a)(13) as construed and interpreted by authoritative judicial and administrative rulings and regulations. - 84 - 85 14.2 NONCONFORMING DISTRIBUTIONS UNDER COURT ORDER. Benefits may be paid to an Alternate Payee pursuant to a qualified domestic relations order, as defined in Code sections 401(a)(13) and 414(p). In the event that the Plan receives a domestic relations order, the Committee or its delegate shall promptly notify the Participant and any Alternate Payee (i.e., spouse, former spouse, child or other dependent of a Participant who is recognized by a domestic relations order as having a right to receive all, or a portion of, the benefits payable under the Plan with respect to such participant) of the receipt of such order and the Plan's procedures for determining the qualified status of such orders, and within a reasonable period of time after receipt of such order, the Committee shall determine whether such order is a qualified domestic relations order and notify the Participant and each Alternate Payee of such determination. In determining the qualified status of a domestic relations order and in administering distributions under such qualified orders, the committee shall follow the following procedures: (a) When the Plan receives a domestic relations order affecting Plan benefits, the Secretary of the Committee shall promptly notify each person specified in the order as entitled to benefits under the Plan (using the address(es) included in the domestic relations order) of the Plan procedure as set forth herein (and as supplemented, if necessary, by Committee procedures). (b) The Plan shall permit an alternate payee to designate a representative for receipt of copies of notices that are sent to the Alternate Payee with respect to a domestic relations order. (c) The Committee shall review any domestic relations order to determine if it satisfies the requirements of being a qualified domestic relations order. In making such determination, the Committee may seek the advice of legal counsel to the Plan and may rely upon the legal opinion of such counsel in determining the qualified status of domestic relations orders and appropriate measures to resist or implement such orders. The - 85 - 86 Committee may, but need not, enter an appearance on behalf of the Plan in the domestic relations lawsuit, if any, and may pursue such legal remedies as may be desirable for resisting unqualified orders or in modifying proposed orders. (d) During any period in which the issue of whether a domestic relations order is a qualified domestic relations order is being determined by the Committee, by a court of competent jurisdiction, or otherwise, the Committee shall segregate in a separate account in the Plan or in an escrow account the amounts, if any, which would have been payable to the alternate payee during such period if the order had been determined to be a qualified domestic relations order. If, within eighteen (18) months it is determined that the order is not a qualified domestic relations order or the issue as to whether such order is a qualified domestic relations order is not resolved, then the Committee shall pay the segregated amounts (plus any interest thereon) to the person or persons who would have been entitled to such amounts if there had been no order. Any determination that an order is a qualified domestic relations order which is made after the close of the aforementioned eighteen (18) month period shall be applied prospectively only, should there be any undistributed benefits of the Participant to which the order related. (e) If the Committee or other fiduciary of the Plan acts in accordance with the foregoing procedures in treating a domestic relations order as being (or not being) a qualified domestic relations order or taking action to segregate an account and ultimately make payment thereof in accordance with subparagraph (d) above, then the Plan's obligations to the Participant and each alternate payee shall be discharged to the extent of any payment made pursuant to such act. 14.3 AUTHORIZED PARTICIPANT LOANS. The Committee may authorize a loan from the Trust Fund to Participants (including, for this purpose, Suspended Participants) pursuant to rules prescribed by the Committee. These rules shall be designed to ensure that these Participant loans satisfy the requirements of Code sections 4975(d)(1), 72(p), and any other provision of law that is, or may become applicable. These rules shall provide that: - 86 - 87 (a) The loans are available to all Participants on a reasonably equivalent basis. (b) The loans are not made available to Highly Compensated Employees in amounts greater than the amounts made available for other Employees. For this purpose, the rules prescribed by the Committee may restrict the amount of the loan to a percentage of the Participant's Vested Interest or to use different percentages depending upon the amount of the loan, provided the percentages are applicable to all Participants. The Committee may also prescribe rules pursuant to which an individual's Vested Interest that is invested in Company Stock (or a fund within the Trust to which Company Stock is allocated) may (or may not) be taken into account in determining the maximum loan he may obtain. (c) The loans bear a reasonable rate of interest. (d) The loans are adequately secured. For this purpose, the amount of the security must be at least equal to the amount of the loan. The rules to be prescribed by the Committee may permit a Participant to use up to fifty percent (50%) of his Vested Interest under the Plan or other qualified employer plans (as such term is defined in Code section 72(p)(3)) as security for the loan. (e) If the loan, or a loan from another qualified retirement plan maintained by the Company, is to be secured by a portion of the Participant's Vested Interest under the Plan, the Participant and his spouse, if any, must consent to the loan and the possible reduction in the Vested Interest in the event of a setoff of the loan against the Vested interest as a result of nonpayment of the loan. Such consent must be given in writing within a ninety-day period before the Committee makes the loan. In the event the Participant defaults on the loan and Participant's Vested Interest is security for the loan, the Vested Interest will not be used to satisfy the loan obligation prior to the earlier of the Participant's termination of employment with the Company or an event resulting in a permissible distribution of his Vested Interest under the Plan. In the event of default, the Company shall offset the amount owed - 87 - 88 by the Participant against any amounts owed by the Company to the Participant. (f) The loan must state the date upon which the loan must be repaid, which may not exceed five (5) years (except in the case of loans used to acquire a dwelling unit which, within a reasonable time after the loan is made, is to be used as the principal residence of the Participant), and the loan must be repayable in substantially level payments, with payments not less frequently than quarterly. (g) In connection with the making of any loan to a Participant pursuant to the provisions of this Section 14.3, the Participant receiving such a loan may be required to execute such documents as may be required by the Committee and/or Trustee. (h) The amount of the loan may not exceed the lesser of: (i) $50,000 (reduced by the excess of the highest outstanding balance of loans from the Plan during the one-year period ending on the date preceding the date on which such loan is made); or (ii) One-half of the present value of the Participant's Vested Interest in his Accounts. For purposes of this Section 14.3(h), the Participant's Vested Interest and outstanding loan balances in all qualified employer plans (as such term is defined in Code section 72(p)(3)) of the Company shall be aggregated to determine whether a loan shall be permissible hereunder and the maximum permissible amount thereof. The decision as to whether or not any Participant Loans shall be made under this Section 14.3 shall be made in the sole discretion of the Committee, and the Participant shall not have a contractual right to obtain a loan hereunder. (i) In the event the Participant dies prior to distribution of his Distributable Benefit, the amount payable to his Beneficiary or spouse, as applicable, shall be reduced by the amount of the security interest in the Participant's Vested - 88 - 89 Interest held by the Plan by reason of a loan outstanding to such Participant. (j) In addition to the foregoing, the loan rules promulgated by the Committee shall include the following: (i) The identify of the person or positions authorized to administer the Participant loan program; (ii) The procedures for applying for a loan; (iii) The basis on which loans will be approved or denied; (iv) Limitations on the types and amounts of loans offered; (v) The procedure for determining a reasonable rate of interest; (iv) The types of collateral which may secure a Participant loan; and (vii) The events constituting default and the steps that will be taken to preserve Plan assets in the event of such default. - 89 - 90 ARTICLE XV PLAN AMENDMENTS 15.1 AMENDMENTS. The Board of Directors may at any time, and from time to time, amend the Plan by an instrument in writing executed in the name of the Company by an officer or officers duly authorized to execute such instrument, and delivered to the applicable Trustee. However, no amendment shall be made at any time, the effect of which would be: (a) To cause any assets of the Trust Fund to be used for or diverted to purposes other than providing benefits to the Participants and their Beneficiaries, and defraying reasonable expenses of administering the Plan, except as provided in Section 4.7 or as otherwise permitted by law; (b) To have any retroactive effect so as to deprive any Participant or Beneficiary of any benefit to which he would be entitled under this Plan if his employment were terminated immediately before the amendment; or (c) To increase the responsibilities or liabilities of a Trustee or an Investment Manager without his written consent. 15.2 RETROACTIVE AMENDMENTS. Notwithstanding any provisions of this Article XV to the contrary, the Plan may be amended prospectively or retroactively (as provided in Code section 401(b)) to make the Plan conform to any provision of ERISA, any code provisions dealing with tax-qualified employees' trusts, or any regulation under either. - 90 - 91 ARTICLE XVI TOP-HEAVY PROVISIONS 16.1 APPLICATION. If the Plan is or becomes top heavy in any Plan Year, the provisions of this Article XVI will supersede any conflicting provisions in the Plan. 16.2 CRITERIA. The Plan shall be top heavy for any Plan Year if any of the following conditions exist: (a) The Top-Heavy Ratio for the Plan exceeds 60% and this Plan is not part of any Required Aggregation Group or Permissive Aggregation Group of Plans. (b) This Plan is part of a Required Aggregation Group of plans, but not part of a Permissive Aggregation Group, and the Top-Heavy Ratio for the group of plans exceeds 60%. (c) This Plan is a part of a Required Aggregation Group and part of a Permissive Aggregation Group of plans and the Top-Heavy Ratio for the Permissive Aggregation Group exceeds 60%. 16.3 DEFINITIONS. For purposes of this Article XVI, the following terms shall have the following meanings: (a) Determination Date: With respect to any Plan Year, (i) the Determination Date shall be the last day of the preceding Plan Year, or (ii) in the case of the first Plan year of the Plan, the last day of such Plan Year. (b) Key Employee: Any Employee or former Employee (and the Beneficiaries of such Employees) who, pursuant to the rules of Code section 416(i) and the Regulations thereunder, is or was: (i) An officer of the Company having an annual Compensation greater than 150% of the dollar limitation under Code section 415(c)(1)(A); - 91 - 92 (ii) One of the ten Employees having annual Compensation from the Company of more than the dollar limitation under Code section 415(c)(1)(A), and owning (or considered as owning) under Code section 318 the largest interest in the Company; (iii) A 5% Owner of the Company; (iv) A 1% Owner of the company having Annual Compensation from the Company of more than $150,000. The determination period is the Plan Year containing the Determination Date and the four preceding Plan Years. (c) Permissive Aggregate Group: The Required Aggregation Group of plans plus any other plan or plans of the Company that, when considered as a group with the Required Aggregation Group, would continue to satisfy the requirements of Code sections 401(a)(4) and 410, and which are designated by the Company to constitute a Permissive Aggregate Group. (d) Required Aggregation Group: (1) Each plan of the Company in which a Key Employee is a Participant or was a Participant at any time during the determination period (regardless of whether the Plan has terminated) and (2) any other qualified plan of the Company that enables a plan described in (1) to meet the requirements of Code sections 401(a)(4) or 410. (e) Top-Heavy Ratio: (i) If the Company maintains one or more defined contribution plans (including any Simplified Employee Pension) and the Company has not maintained any defined benefit plan that during the five-year period ending on the Determination Date has or has had accrued benefits, the Top-Heavy Ratio for this Plan alone or for the Required Aggregation Group or Permissive Aggregation Group, as appropriate, is a fraction, the numerator of which is the sum of the account balances of Key Employees as of the Determination Date (including any part of any account balance distributed in the five-year period ending on the Determination Date), and the denominator of which is the sum of all account balances (including any part of any account balance - 92 - 93 distributed in the five-year period ending on the Determination Date), both computed in accordance with Code section 416 and regulations thereunder. Both the numerator and denominator of the Top-Heavy Ratio are adjusted to reflect any contributions not actually made as of the Determination Date, but which is to be taken into account on that date under Code section 416 and regulations thereunder. (ii) If the Company maintains one or more defined contribution plans (including any Simplified Employee Pension) and the Company maintains or has maintained one or more defined benefit plans that during the five-year period ending on the Determination Date has or has had any accrued benefits, the Top-Heavy Ratio for any Required or Permissive Aggregation Group, as appropriate, is a fraction, the numerator of which is the sum of account balances under the aggregated defined contribution plan or plans for all Key Employees determined in accordance with (1) above and the present value of accrued benefits under the aggregated defined benefit plan or plans for all Key Employees as of the Determination Date, and the denominator of which is the sum of the account balances under the aggregated defined contribution plan or plans for all Participants determined in accordance with (1) above, and the present value of accrued benefits under the defined benefit plan or plans for all Participants as of the Determination Date, all determined in accordance with Code section 416 and the regulations thereunder. The accrued benefits under a defined benefit plan in both the numerator and denominator of the Top-Heavy Ratio are adjusted for any distribution of an accrued benefit made in the five-year period ending on the Determination Date. Solely for the purpose of determining if the Plan, or any other plan included in a Required Aggregation Group is top-heavy (within the meaning of Code section 416(g)), the accrued benefit of an Employee other than a Key Employee shall be determined under (i) the method, if any, that uniformly applies for accrual purposes under all plans maintained by the Company and any Affiliated Companies or (ii) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional accrual rate of Code section 411(b)(1)(C). - 93 - 94 (iii) For purposes of (1) and (2) above, the value of account balances and the present value of accrued benefits will be determined as of the most recent Valuation Date that falls within or ends with the twelve-month period ending on the Determination Date, except as provided in Code section 416 and regulations thereunder for the first and second Plan Years of a defined benefit plan. The account balances and accrued benefits of a Participant (A) who is not a Key Employee but who was a Key Employee in a prior year or (B) who has not been credited with at least one Hour of Service with any Company maintaining the Plan at any time during the five-year period ending on the Determination Date will be disregarded. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollovers and transfers are taken into account, will be made in accordance with Code section 416 and regulations thereunder. Voluntary deductible contributions will not be taken into account in computing the Top-Heavy Ratio. When aggregating plans, the value of account balances and accrued benefits will be calculated with reference to the Determination Dates that fall within the same calendar year. (iv) For purposes of establishing the present value in order to compute the Top-Heavy Ratio any benefit shall be discounted only for mortality and interest based on the interest rate that would be used as of the date of distribution by the Pension Benefit Guaranty Corporation to determine the present value of a lump-sum distribution on plan termination. (f) Valuation Date: The date described in Section 16.2 as of which Account balances or accrued benefits are valued for purposes of calculating the Top-Heavy Ratio. 16.4 ADJUSTMENT TO FRACTIONS. In any Plan Year in which the Plan is Top-Heavy, in applying the limitations of Code section 415, the denominator of the Defined Benefit Fraction shall be computed using 100% of the dollar limitation instead of 125%, and the maximum aggregate amount used with respect to the denominator of the Defined Contribution Fraction shall be computed by using 100% of the dollar limitation instead of 125%. 16.5 VESTING REQUIREMENTS. If the Plan is determined to be a Top-Heavy Plan in any Plan Year, then a Participant's right to - 94 - 95 his Accounts derived from Company Contributions, determined as of the end of such Plan Year, shall vest in accordance with the following schedule, unless a more rapid vesting schedule is then in effect under the terms of the Plan:
Years of Vesting Service Vesting Percentage ------------------------ ------------------ 2 20% 3 40% 4 60% 5 80% 6 or more 100%
If the Plan ceases to be a Top-Heavy Plan in any Plan Year, then the vesting schedule set forth in Article VII shall apply for such Plan Year with respect to any portion of a Participant's Accounts that is forfeitable as of the beginning of such Plan Year; provided, however, that a Participant with five or more years of vesting service shall be given the option of remaining under the vesting schedule set forth above. 16.6 MINIMUM CONTRIBUTION. If this Plan is a Top-Heavy Plan in any Plan Year, the Company Contributions for such year for each "participant" (as defined for the purpose of providing mandatory minimum contributions under regulations) who is not a Key Employee shall not be less than three percent (3%) of such participant's compensation. If, however, the Plan does not enable a defined benefit plan to meet the requirements of Section 401(a)(4) or 410, the Company Contributions shall not exceed that percentage of each participant's compensation which is equal to the highest percentage of compensation at which Company Contributions are made for the Plan Year for any Key Employee (a) under the Plan or (b) if the Plan is part of an Aggregation Group, under any defined contribution plan in such Group. The percentage of compensation at which Company Contributions are made for a Key Employee shall be computed without regard to compensation in excess of the ceiling on includible compensation set forth in Section 16.7 of this Article XVI. For Plan Years beginning before January 1, 1989, for purposes of this Section 16.6, Company Contributions attributable to a salary reduction or similar arrangement and contributions made pursuant to Chapter 21 of Title II of the Social Security Act shall be disregarded. For - 95 - 96 Plan Years beginning after December 31, 1988, Company Contributions attributable to a salary reduction or similar arrangement made by Key Employees shall be taken into account and those made by Employees other than Key Employees shall be disregarded under this Section 16.6. 16.7 CEILING ON INCLUDIBLE COMPENSATION. If this Plan is determined to be a Top-Heavy Plan in any Plan Year, then only the first $200,000 of a Participant's Compensation shall be taken into account in determining the allocation to the Accounts of such Participant for the Plan Year. The $200,000 limit shall automatically be adjusted for such Plan Years and to such extent as is permitted by the Secretary of the Treasury. - 96 - 97 ARTICLE XVII MISCELLANEOUS 17.1 NO ENLARGEMENT OF EMPLOYEE RIGHTS. (a) This Plan is strictly a voluntary undertaking on the part of the Company and shall not be deemed to constitute a contract between the Company and any Employee, or to be consideration for, or an inducement to, or a condition of, the employment of any Employee. (b) Nothing contained in this Plan or the Trust shall be deemed to give any Employee the right to be retained in the employ of the Company or to interfere with the right of the Company to discharge or retire any Employee at any time. (c) No Employee, or any other person, shall have any right to or interest in any portion of the Trust Fund other than as specifically provided in this Plan, and no Employee or any other person shall be entitled to rely upon any representations, whether oral or in writing, including representations made in the summary plan description, any prospectus or other document, which is inconsistent with this Plan document. 17.2 MAILING OF PAYMENTS; LAPSED BENEFITS. (a) All payments under the Plan shall be delivered in person or mailed to the last address of the Participant or Beneficiary furnished pursuant to Section 17.3 below. (b) In the event that a benefit is payable under this Plan to a Participant or Beneficiary and after reasonable efforts such individual cannot be located for the purpose of paying the benefit during a period of three consecutive years following the date payment would otherwise have been made, the benefit shall be forfeited and treated like other forfeitures pursuant to the provisions of Section 6.7. If the Participant or Participant's beneficiary later makes a claim for the benefit, the Committee may decide, in its sole discretion, whether and how to pay such claim. - 97 - 98 (c) For purposes of this Section 17.2, the term "Beneficiary" shall include any person entitled under Section 8.9 to receive the interest of a deceased Participant or deceased designated Beneficiary and shall also include an Alternate Payee. (d) The Account of a Participant shall continue to be maintained until the amounts in the Account are paid to the participant or his Beneficiary. Notwithstanding the foregoing, in the event that the Plan is terminated, the following rules shall apply: (i) All Participants and Beneficiaries (including Participants and Beneficiaries who have not previously claimed their benefits under the Plan) shall be notified of their right to receive a distribution of their interests in the Plan; (ii) All Participants and Beneficiaries shall be given a reasonable length of time, which shall be specified in the notice, in which to claim their benefits; (iii) All Participants (and their Beneficiaries) who do not claim their benefits within the designated time period shall be presumed to be dead. The Accounts of such Participants shall be forfeited at such time. These forfeitures shall be disposed of according to rules prescribed by the Committee, which rules shall be consistent with applicable law. Alternatively the Committee may, but shall not be required to, deposit such funds in an applicable state unclaimed property or similar fund, pursuant to applicable state law. (iv) The Committee shall prescribe such rules as it may deem necessary or appropriate with respect to the notice deposit or forfeiture rules stated above. (e) Should it be determined that the preceding rules relating to forfeiture of benefits upon Plan termination are inconsistent with any of the provisions of the Code and/or ERISA, these provisions shall become inoperative without the need for a Plan amendment and the Committee shall prescribe rules that are consistent with the applicable provisions of the Code and/or ERISA. - 98 - 99 17.3 ADDRESSES. Each Participant shall be responsible for furnishing the Committee with his correct current address and the correct current name and address of his Beneficiary or beneficiaries. 17.4 NOTICES AND COMMUNICATIONS. (a) All applications, notices, designations, elections, and other communications from Participants shall be in writing, on forms prescribed by the Committee and shall be mailed or delivered to the office designated by the Committee, and shall be deemed to have been given when received by that office. (b) Each notice, report, remittance, statement and other communication directed to a Participant, Beneficiary or Alternate Payee shall be in writing and may be delivered in person or by mail. An item shall be deemed to have been delivered and received by the Participant, Beneficiary or Alternate Payee when it is deposited in the United States Mail with postage prepaid, addressed to the Participant, Beneficiary or Alternate Payee at his last address of record with the Committee. 17.5 REPORTING AND DISCLOSURE. The Plan Administrator shall be responsible for the reporting and disclosure of information required to be reported or disclosed by the Plan Administrator pursuant to ERISA or any other applicable law. 17.6 GOVERNING LAW. All legal questions pertaining to the plan shall be determined in accordance with the provisions of ERISA and the laws of the State of California. All contributions made hereunder shall be deemed to have been made in California. 17.7 INTERPRETATION. (a) Article and Section headings are for convenient reference only and shall not be deemed to be part of the substance of this instrument or in any way to enlarge or limit the contents of any Article or Section. Unless the context clearly indicates otherwise, masculine gender shall include the feminine, and the singular shall include the plural and the plural the singular. - 99 - 100 (b) The provisions of this Plan shall in all cases be interpreted in a manner that is consistent with this Plan satisfying the requirements of Code section 401(a). 17.8 WITHHOLDING FOR TAXES. Any payments out of the Trust Fund may be subject to withholding for taxes as may be required by any applicable federal or state law. 17.9 LIMITATION ON COMPANY, COMMITTEE AND TRUSTEE LIABILITY. Any benefits payable under this Plan shall be paid or provided for solely from the Trust Fund and neither the Company, the Committee nor the Trustee assume any responsibility for the sufficiency of the assets of the Trust to provide the benefits payable hereunder. 17.10 SUCCESSORS AND ASSIGNS. This Plan and the Trust established hereunder shall inure to the benefit of, and be binding upon, the parties hereto and their successors and assigns. 17.11 COUNTERPARTS. This Plan document may be executed in any number of identical counterparts, each of which shall be deemed a complete original in itself and may be introduced in evidence or used for any other purpose without the production of any other counterparts. 17.12 NO IMPLIED RIGHTS OR OBLIGATIONS. The Company, in establishing and maintaining this Plan as a voluntary and unilateral undertaking, expressly disavows the creation of any rights in Employees, Beneficiaries or Alternate Payees or any obligations on the part of the Company or the Committee, except as expressly provided herein. IN WITNESS WHEREOF, in order to record the adoption of this document, SCIENCE APPLICATIONS INTERNATIONAL CORPORATION has caused this instrument to be executed by its duly authorized officer this ______ day of_____________, 19__. SCIENCE APPLICATIONS INTERNATIONAL CORPORATION a Delaware Corporation - 100 - 101 By: ------------------------------------------ J. Dennis Heipt Senior Vice President for Administration - 101 - 102 Amendments to Employee Stock Ownership Plan, as approved by the SAIC Operating Committee of the Board of Directors on: November 3, 1994 1. Section 2.21 is hereby amended by deleting subsection (b) thereof and relettering subsections (c) - (h) as (b) - (g), respectively. 2. Section 6.5 is hereby amended by deleting subsection (c) thereof and substituting therefor the following: "(c) Company contributions for a particular Plan Year (as well as shares of Company Stock released from the Suspense Account, as described in Section 6.12 hereof, by reason of such Company contributions), unadjusted for income, gain or loss, which shall be allocated separately pursuant to Section 6.8, shall be allocated to the Plan Accounts of those Participants who (A) complete 850 or more Hours of Service during the Plan Year; and (B) either are employed by the Company on the last day of the Plan Year or whose employment terminated during the Plan Year as a result of death, retirement on or after the Normal Retirement Date, Disability or involuntary lay-off (other than for cause, as determined by the Committee in its sole discretion) ("Eligible Participants") as follows: (i) The Company in making each Company Contribution shall indicate to which Fringe Rate Group the Contribution is to be allocated. The Company Contribution for each Fringe Rate Group shall be allocated to Eligible Participants in that Fringe Rate Group, pro rata, according to each such Eligible Participant's Compensation for the relevant Plan Year. (ii) Company Contributions in the form of Company Stock shall be allocated in the same manner as cash Contributions in subsection (i) above, based on the fair market dollar value of such contributed Company Stock as determined under the provisions of Section 6.6(b)(ii), unless a different valuation method shall be required under applicable Treasury Regulations. (iii) In no event shall amounts be allocated which would cause the limitation on Annual Additions set forth in Article XIII to be executed. 1 103 (iv) Allocations of Company Contributions for a Plan Year shall be made on or before September 15 of the following Plan Year, or on a more frequent basis, as may be determined by the Committee in its discretion. (v) The determination of which Fringe Rate Group a particular Employee or group of Employees is in shall be based on a designation made by the Chief Operating Officer, Chief Financial Officer, Controller or Treasurer of the Company. Such designation of any such Employee or group, and the effective date of such designation shall be communicated in writing to the Committee." 3. Section 6.7 is amended by deleting subsection (a) thereof and substituting therefor the following: "(a) Forfeitures shall be allocated to the Plan Accounts of all Eligible Participants (as defined in Section 6.5) for the Plan Year preceding the Plan Year in which the forfeitures are allocated in the proportion that the Compensation of each such Eligible Participant (regardless of Fringe Rate Group) bears to the total Compensation of all such Eligible Participants for the Plan Year ending immediately prior to the date on which the forfeitures are allocated." 4. Section 8.5 is amended by adding the following phrase at the end of subsection (a) thereof: "and is an Eligible Participant (as defined in Section 6.5 (c))." 5. A new Section 8.16 is added to read as follows: "8.16 In-Service Withdrawal. A Participant may, under rules established by the Committee, withdraw all or a part of his Distributable Benefit after attaining age sixty-two (62), subject to the following conditions: (a) Only one such withdrawal (whether a partial or complete withdrawal) shall be permitted. (b) The Participant may receive the withdrawal in cash or as a Company Stock distribution (as described in Section 8.7(c)), as elected by the Participant." 6. Section 13.2 is hereby amended by deleting subsections (a)(vi) and (a)(vii). 2 104 July 3, 1996 1. Section 9.19(a)(iv) is amended in its entirety to read as follows: (iv) In the event that a Participant shall fail to direct the Trustee, in whole or in part, as to the exercise of voting rights arising under any Company Stock allocated to his Account, then these voting rights, together with voting rights as to shares of Company Stock which have not been allocated, shall be exercised by the Trustee in the same proportion as the number of Shares of Company Stock for which the Trustee has received direction in such matter (e.g., to vote for, against or abstain from voting on a proposal, or to grant or withhold authority to vote for a director or directors), and the Trustee shall have no discretion in such matter, except as may be required by applicable law. 2. Section 9.19(a)(v) is amended by deleting the last sentence thereof and substituting therefor the following: "The Trustee shall have no discretion with respect to the exercise of any such rights, except as may be required by applicable law." 3. Sections 9.19(b)(I) and 9.19(b)(ii) are amended by substituting a comma for a period at the end of each such section and adding the following phrase at the end of each such section: "except as may be required by applicable law." October 2, 1996 1. Section 1.1 is amended by deleting the phrase "Science Applications International Corporation Employee Stock Ownership Plan" and substituting therefor the phrase "Science Applications International Corporation Employee Stock Retirement Plan." 2. Section 1.2 is amended in its entirety to read as follows: "Plan Purpose. This Plan is designed to constitute a tax-qualified stock bonus plan within the meaning of Code section 401(a)." 3 105 3. Section 2.16 is amended in its entirety to read as follows: "Company Stock. "Company Stock" shall mean Class A Common Stock, par value $.01 per share ("Class A Common Stock"), Class B Common Stock, par value $.05 per share ("Class B Common Stock"), and, unless the context provides otherwise, other classes of stock issued by the Company which constitute "qualifying employer securities" (as that term is defined in ERISA section 407(d)(5))." 4. Section 2.30 is amended by deleting the first sentence thereof and substituting therefor the following: "Reserved for Future Modifications." 5. Section 4.2 is amended by deleting the first sentence thereof and substituting therefor the following: "The assets of the Plan shall be invested primarily in (a) Class A Common Stock, except to the extent that the Participant has instructed the Trustee to make, and the Trustee has made, a valid election to receive Class B Common Stock pursuant to the terms of the Plan of Reorganization and Agreement of Merger (the "1984 Plan of Reorganization") dated as of June 1, 1984, between the Company and the wholly-owned subsidiary, Science Applications, Inc., in which event the Committee or its delegate shall keep records to reflect the number of shares of Class B Common Stock allocated to each Participant's Plan Account, and/or (b) other class(es) of Company Stock." 6. Section 4.3(a) is amended in its entirety to read as follows: "Subject to the requirements and restrictions of this Section 4.3, and subject also to the right of the Company to amend or terminate this Plan or to suspend or discontinue contributions to this Plan, as hereinafter provided, for each Plan Year the Company shall contribute to the Trust Fund an amount to be determined by the Board of Directors in its discretion." 7. Section 4.4 is amended in its entirety to read as follows: "The Company's contribution to the Trust Fund shall be paid in cash, Company Stock, or such other property as the Board of Directors may from time to time determine." 4 106 8. Section 4.9 is amended by deleting the first sentence thereof and substituting therefor the following: "Acquisition or sale by the Plan of Company Stock or other qualifying employer securities (as defined in ERISA section 407(d)(5)) from or to a "disqualified person," as defined in Code section 4975(e)(2), shall be at a price which represents "adequate consideration," as defined in ERISA section 3(18) or, in the event such Company Stock or other qualifying employer security is a marketable obligation, as defined in ERISA section 407(e), at a price not less favorable to the Plan than the price determined under ERISA section 407(e)(1)." 9. Section 4.10 is deleted in its entirety. 10. Section 6.5(c) is amended by deleting the parenthetical in the first sentence thereof. 11. Section 6.6(b)(ii)(B) is amended by deleting the first sentence thereof and substituting therefor the following: "(B) If any Company Stock does not consist of securities listed on a national securities exchange, or traded on a regular basis, as determined by the Company, in the over-the-counter market, the fair market value of such stock shall be determined using the Formula Price for such stock, if applicable, as set forth in the Company's Certificate of Incorporation (or, if no such Formula Price is applicable, by a method established by the Company consistent with applicable law) on the applicable Valuation Date." 12. Section 6.6(b)(ii)(D) is deleted. 13. Section 6.7(b) is amended in its entirety to read as follows: "No forfeitures shall be allocated to any Alternate Payee Account." 14. Section 6.7(f) is deleted. 15. Sections 6.12, 6.13, and 6.14 are deleted. 16. Section 8.5(c) is amended by deleting the third sentence thereof. 17. Section 8.7(b) is amended by deleting the last sentence thereof. 18. Section 8.8(h) is deleted. 5 107 19. Section 8.13(c) is amended by deleting the entire provision. 20. Section 13.2 is amended by deleting subsections (a)(ii) and (a)(iii) and substituting therefor the following: "(ii) Forfeitures under the Company's Stock Bonus Retirement Plan. (iii) Company Contributions under the Company's Stock Bonus Retirement Plan." April 22, 1997 1. Section 6.7(b) is hereby amended in its entirety to read as follows: (b) No forfeitures shall be allocated to any Alternate Payee Account. 2. Section 8.15(a)(iii) is hereby amended by substituting the phrase "Code section 414(p)" for the phrase "Code section" in the second sentence thereof. 6 EX-10.11 10 STOCK OPTION PLAN 1 EXHIBIT 10.11 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION 1995 STOCK OPTION PLAN 1. PURPOSE Science Applications International Corporation (the "Company") hereby establishes the Science Applications International Corporation 1995 Stock Option Plan (the "Plan"). The purpose of the Plan is to advance the interests of the Company and its stockholders by providing a means by which the Company and its Subsidiaries can attract and retain qualified key employees, directors and consultants and provide such personnel with an opportunity to participate in the increased value of the Company which their effort, initiative and skill have helped produce. 2. DEFINITIONS (a) "Board" shall mean the Board of Directors of the Company. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. (c) "Common Stock" shall mean the Class A Common Stock of the Company, par value $.01. (d) "Committee" shall mean the Company's Stock Option Committee responsible for administering the Plan. (e) "Employee/Optionee" shall mean an Optionee who is an employee of the Company or any Subsidiary. (f) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (g) "Exercise Price" shall mean the price per share at which an Option may be exercised, as determined by the Committee and as specified in the Optionee's option agreement. (h) "Formula Price" shall mean the price per share of Common Stock as established by the Board from time to time. (i) "Option" shall mean an option to purchase Common Stock granted pursuant to the Plan. (j) "Optionee" shall mean any person who holds an Option pursuant to the Plan. 1 2 (k) "Plan" shall mean this Science Applications International Corporation 1995 Stock Option Plan, as it may be amended from time to time. (l) "Purchase Price" shall mean at any particular time the Exercise Price times the number of shares for which an Option is being exercised. (m) "Subsidiary" as used in the Plan means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations, other than the last corporation in such chain, owns at least fifty percent (50%) of the total voting power in one of the other corporations in such chain. 3. ADMINISTRATION (a) The Committee. The Plan shall be administered by the Committee which shall consist of not less than two directors appointed by the Board, each of whom shall satisfy the requirements of Rule 16b-3, as amended, of the Exchange Act. No member of the Committee shall be liable for any action or determination in respect thereto, if made in good faith. The Committee may appoint a separate committee with respect to Optionees who are not subject to Section 16 of the Exchange Act. (b) Powers of the Committee. Subject to the provisions of the Plan, the Committee shall have the authority, in its discretion and on behalf of the Company: (i) to grant Options; (ii) to determine whether the Options granted are intended to be incentive stock options or non-qualified stock options; (iii) to determine the Exercise Price per share of Options to be granted; (iv) to determine the individuals to whom, and the time or times at which, Options shall be granted and the number of shares for which an Option will be exercisable; (v) to interpret the Plan; (vi) to prescribe, amend, and rescind rules and regulations relating to the Plan; (vii) to determine the terms and provisions of each Option granted and, with the consent of the Optionee, to modify or amend each Option; (viii) to accelerate or defer, with the consent of the Optionee, the exercise date of any Option; 2 3 (ix) with the consent of the Optionee, to reprice, cancel and regrant, or otherwise adjust the Exercise Price of an Option previously granted by the Committee; and (x) to make all other determinations deemed necessary or advisable for the administration of the Plan. (c) Committee Discretion. In exercising its authority, the Committee shall have the broadest possible discretion and the Committee's determinations under the Plan made in good faith shall be binding and conclusive on Optionees and other persons claiming entitlements under the Plan. In no event shall a Committee determination with respect to a particular Optionee or provision of the Plan be binding with respect to any other Optionee (even if similarly situated) nor with respect to any future determinations regarding the same or other provisions of the Plan. 4. ELIGIBILITY (a) General. The individuals who shall be eligible to participate in the Plan and to receive Options hereunder shall be such key employees, directors and consultants of the Company and its Subsidiaries as the Committee shall from time to time determine. The Committee may designate one or more directors who are not eligible for participation in the Plan for a specified period of time. No Option shall be granted to any person who, at the time the Option is granted, owns (including stock owned by application of the constructive ownership rules of Section 425(d) of the Code) stock possessing more than 10% of the total combined voting power or value of all classes of stock of the Company or any Subsidiary. (b) Incentive Stock Options. No Option which is designated as an incentive stock option shall be granted to any person who, at the time the Option is granted, is not an employee of the Company or a Subsidiary. The aggregate fair market value (determined as of the time the Option is granted) of the Common Stock with respect to which Options designated as incentive stock options are exercisable for the first time by an employee shall not exceed $100,000 during any calendar year (under all plans of the Company or any Subsidiary which provide for the granting of an incentive stock option). 5. STOCK SUBJECT TO THE PLAN Options may be granted permitting the purchase of the aggregate of not more than 12,000,000 shares of the Company's Common Stock, subject to adjustment pursuant to Section 10 hereof. These shares may consist either in whole or in part of shares of the Company's authorized but unissued Common Stock or shares of the Company's authorized and issued Common Stock reacquired by the Company and held in its treasury. If an Option granted under this Plan is surrendered, expires or for any other reason ceases to be exercisable in whole or in part, the shares which were subject to any such Option but as to which the Option ceases to be exercisable shall be available for Options to be granted under the Plan. 3 4 6. STOCK OPTIONS (a) Options. The Options granted pursuant to the Plan may be "incentive stock options" within the meaning of Section 422 of the Code or non-qualified stock options. Options designated to be incentive stock options shall be designated as such in the option agreements evidencing such Options. (b) Option Agreements. Options shall be evidenced by written option agreements between the Optionee and the Company in such form as the Committee shall from time to time determine. No Option or purported Option shall be a valid and binding obligation of the Company unless previously granted by the Committee and evidenced in writing by such an option agreement. If an option agreement is not executed by the Optionee and returned to the Company within the time prescribed in the option agreement, the Option evidenced thereby will be forfeited and the option agreement will be null and void. Appropriate officers of the Company are hereby authorized to execute and deliver option agreements in the name of the Company, as directed from time to time by the Committee. (c) Exercise Price. The Exercise Price at which Options may be granted under the Plan shall be not less than one hundred percent (100%) of the fair market value of the Common Stock on the day the Option is granted, but may be less than the Exercise Price or Prices of previously granted Options, whether in effect, canceled or expired. As long as the Company's Common Stock is not listed on any national securities exchange or traded on a regular basis (as determined by the Company's Board or a Committee of the Board to which the Board has delegated the authority to make such determination) on the over-the-counter market, fair market value may be taken as the Formula Price as in effect at the date of grant. (d) Date of Grant. The Committee shall, after it approves the granting of an Option to a participant, cause the participant to be notified of such action. The date on which the Committee approves the granting of an Option shall be considered the date on which such Option is granted. (e) Terms of Exercise. The right to purchase shares covered by any Option or Options under the Plan shall be exercisable only in accordance with the terms and conditions of the grant to such Optionee. The Committee may, in its discretion, provide that such Option or Options may be exercised in whole or in part, in installments, cumulative or otherwise, for any period or periods of time specified by the Committee of not more than ten years from the date of the grant of the Option. Subject to the provisions of Paragraph 9, that portion of an Option which is exercisable on an installment basis may not be exercised prior to the expiration of the applicable installment period. (f) Non-Transferability. An Option granted under the Plan may not be transferred except by will or the laws of descent and distribution and, during the lifetime of the Optionee to whom granted, may be exercised only by such Optionee or his conservator or other legal representative. 4 5 (g) Limit on Option Grants. In no event may any single Optionee receive Option grants for more than 500,000 shares of Common Stock in the aggregate. 7. EXPIRATION AND TERMINATION (a) Expiration of Option. Each Option and all rights and obligations thereunder shall, subject to the provisions of Paragraph 9, expire on a date to be determined by the Committee, such date, however, in no event to be later than ten (10) years from the date an Option is granted. (b) Termination of Employment or Affiliation. Subject to the provisions of Paragraph 9, that portion of an Option which is exercisable on an installment basis may not be exercised unless the Optionee shall continue in the employ or affiliation of the Company or any of its Subsidiaries during the entire period to which such installment relates. Except as set forth below in Paragraphs 7(c) through (e) or otherwise set forth in an option agreement, all Options granted to an Optionee under this Plan shall terminate and no longer be exercisable as of the date such Optionee ceases to be employed or affiliated with the Company or any Subsidiary; provided, however, the Committee in its discretion may extend the period of time that such Optionee may exercise such Optionee's Options, but in no event may the Committee extend such period of time beyond the expiration date of the Options or beyond ten (10) years from the date of grant of such Options. (c) Termination Due to Retirement or Permanent Total Disability. In the event an Employee/Optionee's employment with the Company or any Subsidiary shall terminate as the result of normal retirement, permanent total disability or early retirement under the terms of a retirement or pension plan maintained by the Company and in which such Employee/Optionee is a participant, such Employee/Optionee may, at any time within ninety (90) days after such termination of employment, exercise such Employee/Optionee's Options to the extent that the Employee/Optionee was entitled to exercise them on the date of such termination of employment, unless such Options would expire pursuant to their terms at an earlier date, in which case such Options shall remain exercisable only until the earlier expiration date. (d) Death. If an Optionee dies while in the employ or affiliation of the Company or of a Subsidiary without having fully exercised such Optionee's Options, such Options may, within one (1) year of the Optionee's death (or within such shorter period as may be specified in the Option by the Committee), be exercised by the beneficiary designated pursuant to Paragraph 8(c), or if there is no such surviving beneficiary, by the person or persons to whom the Optionee's rights under the Option shall pass by will or by the applicable laws of descent and distribution to the extent that such deceased Optionee was entitled to exercise the Options on the date of death, unless such Options would expire pursuant to their terms at an earlier date, in which case such Options shall remain exercisable only until the earlier expiration date. (e) Leaves of Absence. An Employee/Optionee who is on a leave of absence pursuant to the terms of the Company's Administrative Policy No. B-11 "Unpaid Personal Leave of Absence" or any amended or replacement policy thereof, shall not, during the period of any such absence be 5 6 deemed, by virtue of such absence alone, to have terminated such Employee/Optionee's employment with the Company or any Subsidiary except as the Committee may otherwise expressly provide. Except as otherwise determined by the Committee, or unless otherwise required by applicable law, unless such Employee/Optionee is on a Medical Leave (as hereinafter defined), all rights which such Employee/Optionee would have had to exercise Options granted hereunder will be suspended during the period of such leave of absence. Upon such Employee/Optionee's return to the Company or any Subsidiary, all rights to exercise Options shall be restored to the extent such Options are exercisable at that time. The Committee in its discretion may permit the exercise, while on a leave of absence, of Options which would otherwise expire or may defer the expiration date of such Options, but not beyond ten (10) years from their date of grant. An Employee/Optionee who is on a Medical Leave shall have all rights to exercise such Employee/Optionee's Options that such Employee/Optionee would have had if such Employee/Optionee were not on a Medical Leave. For purposes of this Paragraph 7(e), "Medical Leave" shall be defined as a leave of absence for medical reasons which shall begin after ninety-one (91) consecutive calendar days of total disability leave and shall remain in effect until the earlier of a release by the attending physician for the Employee/Optionee to return to work or until the termination of employment. In the case of incentive stock options which would otherwise cease to be incentive stock options during a leave of absence by virtue of the operation of Treasury Regulations Section 1.421(7)(h)(2), the Committee, in its sole discretion, may permit exercise of the incentive stock option while on such a leave of absence or may permit conversion of such incentive stock option to a non-qualified stock option with otherwise identical terms. 8. EXERCISE OF OPTIONS (a) The Purchase Price shall be paid in full when the Option is exercised. The Purchase Price may be paid in whole or in part in (i) cash or (ii) whole shares of Common Stock of the Company evidenced by negotiable certificates, valued at the Formula Price in effect on the date of exercise; provided, however, that unless an exception is granted by the Secretary of this Corporation, shares of Common Stock of the Company acquired through the exercise of a stock option must have been owned by the Optionee for at least six months before such shares of Common Stock may be used to pay the Purchase Price. The Company or any Subsidiary shall be entitled to deduct from other compensation payable to each Optionee any sums required by federal, state or local tax law to be withheld with respect to the exercise of an Option but, in the alternative, may require the Optionee or other person exercising the Option to pay, or the Optionee or such other persons may pay, such sums to the employer corporation at the time of such exercise. The Committee shall have the authority in its discretion to allow withholding on exercise of an Option to be satisfied by withholding from the shares to be issued upon the exercise of the Option a number of shares, valued at the Formula Price in effect on the date of exercise of the Option, equal in value to the withholding requirement. (b) An Optionee shall have no rights as a shareholder of the Company with respect to any shares for which his or her Option is exercisable until the date of exercise of such Option and the issuance of a stock certificate for such shares. No adjustment shall be made for dividends, ordinary 6 7 or extraordinary or whether in currency, securities or other property, distributions, or other rights for which the record date is prior to the date such stock certificate is issued. (c) Each Optionee may name a beneficiary or beneficiaries (who may be named contingently or successively) to whom the right to exercise Options following the Optionee's death (as provided in Paragraph 7(d)) shall pass. Each designation will revoke any prior designations by the same Optionee, shall be on a form prescribed by the Committee, and shall be effective only when filed by the Optionee in writing with the Committee during the lifetime of the Optionee. In the absence of any such designation, the right to exercise any unexercised Options following the death of the Optionee shall pass to the person or persons to whom the Optionee's rights under the Option pass by will or by the applicable laws of descent and distribution. 9. CHANGE IN CONTROL Notwithstanding any provision of Paragraph 7 above to the contrary but subject to the provisions of Paragraph 4(b) above, any Option granted pursuant to the Plan shall, in the case of a Change In Control (as hereinafter defined) of the Company, become fully exercisable as to all shares of Common Stock to which it relates from and after the date of such Change In Control. For purposes of this Paragraph 9, the term "Change in Control" shall be deemed to occur upon any "person" (as defined in Section 13(d) of the Exchange Act), other than the Company or any Subsidiary or employee benefit plan or trust maintained by the Company or any Subsidiary, becoming the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 25% of the Common Stock of the Company outstanding at such time, without the prior approval of the Board. If the provisions of this Paragraph 9 are limited by the $100,000 limit of Paragraph 4(b) above, the acceleration of exercisability provided under this Paragraph 9 shall be first applied to those incentive stock options having the lowest Exercise Price. Any remaining Options which would have become exercisable but for the $100,000 limit shall become exercisable on the first date on which they may become exercisable without exceeding the $100,000 limit. 10. LOANS The Company may, but shall not be obligated to, provide to any Optionee a loan or guarantee on behalf of any Optionee a loan to facilitate the exercise of Options on such terms and conditions as agreed to by the Committee. 11. CAPITAL ADJUSTMENTS The aggregate number of shares of the Company's Common Stock subject to this Plan, the maximum number of shares as to which Options may be granted to any one Optionee hereunder, and the number of shares and the Exercise Price shall be appropriately adjusted, as determined by the Committee in its discretion, for any increase or decrease in the number of shares of Common Stock which the Company has issued resulting from any stock split, stock dividend, combination of shares 7 8 or any other change, or any exchange for other securities or any reclassification, reorganization, redesignation, recapitalization, or otherwise. 12. NO EMPLOYMENT OBLIGATION An Employee/Optionee's employment with the Company or a Subsidiary is not for any specified term and may be terminated by such Employee/Optionee or by the Company or a Subsidiary at any time, for any reason, with or without cause. Nothing in this Plan or in any option agreement pursuant to this Plan shall confer upon any Optionee any right to continue in the employ of, or affiliation with, the Company or a Subsidiary nor constitute any promise or commitment by the Company or a Subsidiary regarding future positions, future work assignments, future compensation or any other term or condition of employment or affiliation. 13. GOVERNMENT AND STOCK EXCHANGE REGULATIONS The Company shall not be required to issue any shares upon the exercise of any Option unless and until the Company has fully complied with any then applicable requirements by the Securities and Exchange Commission, the California Corporations Commissioner, or other regulatory agencies having jurisdiction, and of any exchanges upon which Common Stock of the Company may be listed. Upon the exercise of an Option at a time when there is not in effect a registration statement under the Securities Act of 1933 or a similar statute (the "Act") relating to the stock issuable upon exercise thereof and available for delivery a prospectus meeting the requirements of Section 10(a)(3) of said Act, or if the rules or interpretations of the Securities and Exchange Commission so require, the stock may be issued only if the holder represents and warrants in writing to the Company that the shares purchased are being acquired for investment and not with a view to distribution thereof. 14. AMENDMENT, SUSPENSION OR TERMINATION OF PLAN The Board or the Operating Committee of the Board may at any time suspend or terminate the Plan and may amend it from time to time in such respects as the Board or the Operating Committee may deem advisable in order that Options granted thereunder shall conform to any change in the law, or in any other respect which the Board or the Operating Committee may deem to be in the best interests of the Company; provided, however, that no such amendment shall, without the approval of a majority of the voting power of the capital stock of the Company present or represented and entitled to vote at a duly constituted meeting of the stockholders, (i) increase the maximum number of shares for which Options may be granted under the Plan, except as specified in Paragraph 11, (ii) change the provisions of Paragraph 6(c) relating to the establishment of the Exercise Price other than to change the manner of determination the fair market value of the Company's Common Stock to conform with any then applicable provisions of the Code or regulations issued thereunder, or (iii) permit the granting of Options to members of the Committee. No Option may be granted during any suspension, or after termination of the Plan. 8 9 15. NO IMPLIED RIGHTS OR OBLIGATIONS The Company, in establishing and maintaining this Plan as a voluntary and unilateral undertaking, expressly disavows the creation of any rights in Optionees or others claiming entitlements under the Plan or any obligations on the part of the Company, any Subsidiary or the Committee, except as expressly provided herein. 16. EMPLOYEES BASED OUTSIDE OF THE UNITED STATES Notwithstanding any provision of the Plan to the contrary, in order to foster and promote achievement of the purposes of the Plan or to comply with provisions of laws or regulations in other countries in which the Company and its subsidiaries operate or have employees, the Committee, in its sole discretion, shall have the power and authority to (i) determine which employees employed outside the United States are eligible to participate in the Plan, (ii) modify the terms and conditions of any Options granted to employees who are employed outside the United States and (iii) establish subplans, modified option exercise procedures and other terms and procedures to the extent such actions may be necessary or advisable. 17. EFFECTIVE DATE The effective date of the Plan shall be July 14, 1995. 18. TERMINATION DATE Unless the Plan shall have been previously terminated by the Board or the Operating Committee of the Board, the Plan shall terminate on July 31, 1998, except as to Options theretofore granted and outstanding under the Plan at that date, and no Option shall be granted after that date. 19. GOVERNING LAW The Plan and all option agreements shall be construed in accordance with and governed by the laws of the State of Delaware. 9 EX-10.12 11 9/13/95 LETTER RE: AMEND #4 TO COOPERATIVE AGRMT 1 EXHIBIT 10.12 Letter dated September 13, 1995 regarding Amendment No. 4 to the Cooperative Agreement - -------------------------------------------------------------------------------- 134-DMG-95 September 13, 1995 Mr. Donald R. Mitchell National Science Foundation Division of Networking and Communications Research, Room 1175 4201 Wilson Boulevard Arlington, VA 22230 SUBJBCT: Imposition of Fees for Second Level Domain Name Registrations REFERENCE: Cooperative Agreement No. NCR-9218742 Dear Mr. Mitchell: Network Solutions Incorporated request National Science Foundation approval to begin charging a $50 per year fee for the registration and maintenance of second level domain names in the "COM", "ORG", "NET", "EDU", and "GOV" domains currently funded through the referenced Cooperative Agreement. As described in the enclosed policy statement, registration charges for new domain names will apply to domain name applications received on and after 12:01 A.M., Thursday, September 14, 1995. Renewal charges will apply to all registered domain names as described in the enclosed Fee for Registration of Domain Name policy statement. If approved, effective 12:01 A.M., September 14, 1994, and subject to the terms and conditions of both letter and the Cooperative Agreement, as modified, Network Solutions will accept all responsibility for the management and administration of Registration Services/Information Services. Network Solutions' responsibilities include: - Provide the necessary staffing to continue, and improve, Registration Services - Provide the necessary staffing to provide Information Services to the academic and R&E communities - Provide the necessary staffing to collect and process the fees associated with Registrations and Renewals - Provide all required facilities, hardware, software, training, and other support required of the Registration Services staff - Fully fund the Scout Headquarters through a subcontract with the University of Wisconsin 2 - Fund the support services of Gleason Sackman through a subcontract directly with him - Fund the services of Jon Postel, as the IANA. Support for Jon Postel will require modifications to his current subcontract with Network Solutions, and to his financial relationship with ARPA. - Fund the continued development and refinement of RWhois If approved, effective 12:01 AM., September 14, 1994, Network Solutions proposes that the cost-plus-fixed-fee financial relationship between Network Solutions and the Foundation will end. From that date forward, Network Solutions will support, with the fees collected, the services described in this letter and the elements of the Third Year Plan previously approved, and will not seek additional financial support from the Foundation, except for payment of the "EDU" and "GOV" domain names as described in the enclosed policy, so long as fee collecting continues. Network Solutions understands that all funds collected constitute "program income" under the terms of the Cooperative Agreement. Of the funds collected, Network Solutions will retain 70 percent as consideration for the services provided. The remaining 30 percent will be available as an Internet Support Fund. The Internet Support Fund will be used to offset the costs which the Foundation and other agencies are incurring for the intellectual infrastructure which underlies the operation of the Internet. Because the requirements for program income expenditures will probably be dynamic and, in some cases unpredictable, those expenditures will be subject to the direction of an advisory panel consisting of representatives of the Internet community. As stated in the enclosed policy statement, Network Solutions understands any changes to the fee structure will require the Foundation's approval. In recognition of, and consideration for, the long term investments required in connection with this proposal, Network Solutions Incorporated request the Foundation's approval of registration fees and application of 30% of collected revenue toward support of the intellectual infrastructure underpinning the Internet to be effective for the balance of the Cooperative Agreement period of performance, or March 31 1998, whichever is longer. If you have any questions of a technical nature, please contact Mark Kosters at (703) 742-4795 (Internet: markk@netsol.com). For matters related to the Cooperative Agreement, please contact David Graves at (703) 742-4884 (Internet: daveg@netsol.com). Sincerely, David M. Graves Contracts Administrator cc: Albert Wilson (w/one copy of enclosure) Encl: Fee for Registration of Domain Names Return to the table of contents. - -------------------------------------------------------------------------------- 3 FEE FOR REGISTRATION OF DOMAIN NAMES - -------------------------------------------------------------------------------- 1. INTRODUCTION 1.1 SUMMARY Since March 1, 1993, the National Science Foundation has funded the administration of the "COM", "ORG", "NET", "EDU", and "GOV" and root domains through a Cooperative Agreement with Network Solutions, the InterNIC Registrar. Beginning not later than September 13, 1995, the Registrar will require direct payment from domain name applicants and holders for registration and maintenance of the domain names at the second level of the five listed top-level domains. The funds received from those fees will replace the funding provided by the National Science Foundation, and will provide "program income" which will offset costs related to the intellectual infrastructure of the Internet. 1.2 BACKGROUND Originally, the Internet began as a research experiment and network known as the ARPANET, which supported the exchange of files and data among government contractors and researchers. As the TCP/IP suite was developed in the early 1980s, the Domain Name System (DNS) emerged as the replacement system to the original ARPANET hosts.txt mechanism. The high-level structure of names used by DNS eventually evolved into five world-wide generic domains ("COM", "ORG", "NET", "EDU", and "INT"), two U.S. only generic domains ("MIL" and "GOV"), and country code domains (e.g., "US" for the United States, "AU" for Australia, etc.) The exponential growth of the Internet, due mostly to the connecting of commercial organizations to the Internet over the past couple years, has had a directly proportional affect on the registration activity of the Registrar. The increased activity, with the corresponding growth of operating costs, have resulted in funding requirements exceeding the National Science Foundation's budget. In addition, it is appropriate that Internet users, instead of the U.S. Federal Government, pay the costs of domain name registration services. Accordingly, the Registrar will begin charging a fee for the registration and maintenance of domain names in the "COM", "ORG", "NET", "EDU", and "GOV" domains. 1.3 GUIDELINES, PROCEDURES, AND POLICIES The guidelines, procedures, and policies that are currently operative with regard to the Domain Name System will not change (RFCs 1031 through 1035, RFC 1480, and RFC 1591). 2. DEFINITIONS 4 Applicant The party or organization, such as a company or service provider, that is applying for a new domain name. Domain Any root-level domain (i.e. . within the "COM", "ORG", "NET", "EDU", and "GOV" root domains. (Note: This does not include domains "COM", "ORG", "NET", "EDU", and "GOV" which exist under a country domain. For example, "COM.AU" is the commercial subdomain in Australia) Contact The person responsible for a particular domain or aspect of a particular domain. There are four types of contacts: administrative, technical, zone, and billing contacts. These contacts are listed in the InterNIC's WHOIS database. Communication with contacts is via the email address that is listed in this database. Domain Name The operational name used by TCP/IP applications that identifies an organization connected to the Internet. DNS The Domain Name System handles mapping from hostnames to Internet addresses. Configuration information from the InterNIC Registration Services database is released into DNS three times a week (Monday, Wednesday, and Friday at 5 p.m. EST) WHOIS A database utility that allows queries of domain records which include company, contact, and operational information from the InterNIC Registration Services database. New Domain Name Names that have not yet been entered into the InterNIC Registration Services database, or names that have expired and have been removed from the InterNIC database and made available for reissue to an applicant at a later time. Existing Domain Name Names that are registered within the InterNIC Registration Services database and accessible through WHOIS. Internet Service Provider Commercial companies that provide connectivity between the domain name holder and the Internet, and that assist with domain name registrations. 3. CHARGES The Registrar will apply two types of charges with respect to domain names. The first is a "Registration Fee" (or initial fee) for new domain names; the other is a "Maintenance Fee" (or recurring fee) for existing domain names that are already registered. These initial and recurring fees for each domain name cover the costs for an unlimited number of update requests, including changes 5 in domain name, for each domain name. The Registrar requires that all applications continue to be sent electronically, and that the payments are made by any of the methods outlined below. Payment must be in U.S. dollars. (Please note that "IN-ADDR.ARPA" domains are not subject to Registration Fees.) The Registrar will announce any future price changes, which are subject to National Science Foundation approval, by notice on "rs-info@internic.net." 3.1 NEW DOMAIN NAMES 3.1.1 REGISTRATION FEE The Registration Fee for a new domain name is $100.00. New domain names are valid for two years from the date that the Registrar activates the domain name. The Registrar will remove domain names from the database upon the request of the domain name holder; however, the Registration Fee is non-refundable. Domain Names deleted from the database will be available for reuse as described in Section 3.3. 3.1.2 PAYMENT OF FEE The Registrar will activate domain names upon request, on a first-come, first-serve basis. Payment of the Registration Fee is due by 12:00 PM (Eastern Time) on the 30th day after the activation date, or on the last work day preceding the due date if the 30th day falls on a weekend or holiday. The Registrar will delete the domain name from the database on the day after the due date if payment is not received. Domain Names deleted from the database will be available for reuse as described in Section 3.3. 3.2 EXISTING DOMAINS 3.2.1 MAINTENANCE FEE For all registered domain names, there will be an Maintenance Fee of $50.00 per year per domain name, due upon the anniversary date of the domain name activation. This annual fee will keep the domain name valid for one year. Payment must be made in advance on an annual basis. The payment is non-refundable 3.2.2 PAYMENT OF FEE Payment of the Maintenance Fee is due by 12:00 PM (Eastern Time) on the anniversary of the activation date, or the last workday preceding the anniversary date if the anniversary date falls on a weekend or holiday. The Registrar will delete the domain name from the database on the day after the due date if payment is not received. Domain Names deleted from the database will be available for reuse as described in Section 3.3. 3.2.3 NOTIFICATION OF MAINTENANCE FEE DUE The Registrar will provide 60 days advance notice, by email, to the domain name billing contact (or administrative contact, in the absence of a separately identified billing contact), with a copy to the administrative, technical, and zone contacts, that the Maintenance Fee is due on the anniversary of the activation date. In addition, email notification will also be sent to the address that is advertised via DNS within the Start of 6 Authority (SOA) record. The Registrar will send reminder notices 30 days and 15 days prior to the activation anniversary date, unless it receives payment. If the Registrar does not receive payment by the due date, it will remove the name from the DNS and notify the contacts that such action is being taken. Domain Names deleted from the database will be available for reuse as described in Section 3.3. The Registrar will not attempt to notify the contacts by any means other than email. It is the responsibility of the administrative, billing, technical, and zone contacts to keep their records up to date in the InterNIC Registration Services' database. 3.3 DOMAIN NAME DELETIONS Domain names deleted from the database will become available for reuse after a 60 day "hold" period. The purpose of the 60 day period is to minimize the probability the next holder of that domain name will receive messages intended for the previous holder. 3.4 SPECIAL INITIAL GRACE PERIOD To allow domain name applicants and holders time to prepare for the new billing procedures, the Registrar will grant an initial grace period of 90 days on all domain name registration transactions. All new applications during the three calendar months following the implementation of fees will have 90 days to pay for their domain names. All domain names with annual maintenance fees due during the three calendar months following implementation of fees will have 90 days to pay for their domain names. All new domain name applications received before the implementation date will be exempt from the initial domain name Registration Fee; however, they will be charged the Maintenance Fee on each activation anniversary date. 4. INVOICING AND PAYMENT The Registrar requires that all applications be submitted electronically to hostmaster@internic.net, and that the payment be made by any of the methods described in this section. All fees are to be paid in U.S. currency. Facsimile numbers and U.S. postal addresses are: FAX: (703) 742-4811 (InterNIC Registration Services) U. S. Mail: InterNIC Registration Services P.O. Box 1656 Herndon, VA 22070 USA 4.1 SPECIAL PAYMENTS 4.1.1 "EDU" AND "GOV" DOMAINS 7 The National Science Foundation will pay the fees associated with domain name registrations and maintenance for the academic institutions registered in the "EDU" domain. The National Science Foundation will pay the fees, on an interim basis, associated with domain name registrations and maintenance for the U. S. Federal Government agencies registered in the "GOV" domain.. 4.1.2 INTERNET SERVICE PROVIDERS As an alternative to domain name by domain name billing, the Registrar will allow Internet Service Providers to establish and maintain special accounts against which each registration and maintenance action will be debited. The Registrar will require each Internet Service Provider using this optional payment method to maintain a positive balance in their account. The Registrar will not process domain name applications and renewals if there is an insufficient balance in the respective account. 4.2 INVOICES Except as set forth in Section 4.1, the Registrar will batch process and electronically send invoices each night. The invoices will include domain names registered the preceding day. 4.3. CHECKS AND MONEY ORDERS All checks and money orders should be made out to "InterNIC Registration Services." For single domain registrations, the applicant must list the domain name on the check. For multiple domain registrations, except in the special cases described in Section 4.1 above, the applicant must list on the payment template the domain names for which payment is being made. Insufficient payments or failure to indicate the domain name(s) associated with the payment will result in a returned check. Returned checks will not change the due date for payment. Failure to resubmit proper payment by the due date will result in the loss of the domain name. 4.4 CREDIT CARDS Except in the special cases described in Section 4.1 above, organizations may pay the Registration and Maintenance Fees by American Express, MasterCard, or VISA. The Card Number, Expiration Date, and Name, as it appears on the card, must be supplied with each charge on the hardcopy InterNIC Registration Services payment form which will be attached to the electronic domain name application acknowledgment. The payment form is also available from the InterNIC Registration Services Help Desk, or electronically at ftp://rs.internic.net/templates/pmt-template.txt. For security reasons, InterNIC will not accept credit card information submitted by email. For single domain registrations, the applicant must list the domain name on the form. For multiple domain registrations, except in the special cases described in Section 4.1 above, the applicant must indicate on the payment template the domain names for which payment is being made. The Registrar can not process payments unless the domain names are identified, and will not process payments which are insufficient to pay for the cost of domain name registration or renewal. The Registrar will return improperly submitted payments to the domain name holder. 8 Payments returned because of improper submission will not change the due date for payment. Failure to resubmit proper payment by the due date will result in the loss of the domain name. Credit card payments for domain name applications and renewals may be faxed to the number listed above. 4.5 SUBMISSION BY U.S. POSTAL MAIL Checks, money orders, and credit card information may be sent to InterNIC Registration Services by U.S. Postal Mail to the address listed in Section 4 above. 4.6 FUTURE METHODS OF PAYMENT The Registrar is considering other payment methods, such as submission by electronic means. Of particular concern is the security associated with electronic traffic over the Internet. The Registrar plans to phase electronic payment implementation after security analyses are complete. 4.7 FORM OF PAYMENT NOT ACCEPTED The Registrar will not accept currency, coin, purchase orders, or stamps as payment. The Registrar will not accept credit card information over the telephone or sent by email. 4.8 TAXES Because the InterNIC is selling a service from the Commonwealth of Virginia, Registration Fees and Maintenance Fees are exempt from sales tax. 5. DOMAIN NAME REGISTRATION FUNDS All funds collected as the result of charging a fee for domain name registration are "program income." The Registrar will use 70 percent of the income to offset the costs of providing InterNIC Registration Services. The Registrar will dedicate 30 percent of the funds to offset the costs which are associated with the intellectual infrastructure which underlies the operation of the Internet. Areas of the infrastructure to be supported will be discussed in the InterNIC Registrar's Annual Report and Project Plan to the National Science Foundation, and will be subject to oversight by an advisory panel. The panel will consist of representatives from the Internet community. A public accounting will be made of the expenditures toward the Internet infrastructure. 6. SUGGESTIONS AND COMPLAINTS Billing questions should be sent to billing@internic.net. Comments should be addressed to comments@internic.net. EX-11.1 12 STATEMENT OF COMPUTATION OF EARNINGS PER SHARE 1 Exhibit 11.1 Network Solutions, Inc. Computation of Net Income Per Common and Common Equivalent Share
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, 1996 1996 1997 ------------------ ------------------ ------------------ Weighted average common shares outstanding 12,500,000 12,500,000 12,500,000 ------------------ ------------------ ------------------ Common stock options, as if converted(1) 187,000 187,000 187,000 Dividend to SAIC (2) 662,000 662,000 662,000 ------------------ ------------------ ------------------ Total common equivalent shares 849,000 849,000 849,000 ------------------ ------------------ ------------------ Pro forma common and common equivalent shares 13,349,000 13,349,000 13,349,000 ================== ================== ================== Pro forma Net income $ (1,625,000) $ (1,458,000) $ 1,256,000 ================== ================== ================== Pro forma Net income per common and common equivalent share $ (0.12) $ (0.11) $ 0.09 ================== ================== ==================
(1) Common stock options, as if converted issued at prices below the public offering price during the 12 months immediately preceding the filing of this intitial Registration Statement and through the effective date of such Registration Statement have been calculated using the treasury stock method based upon the estimated initial public offering price and have been included in all years regardless of whether they are dilutive. (2) Dividend to SAIC has been calculated as the number of shares the proceeds from the sale of which will effectively be calculated as used to pay this dividend in excess of the prior 12 months' net income. EX-24.2 13 POWER OF ATTORNEY FOR JOHN E. GLANCY 1 EXHIBIT 24.2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that John E. Glancy, a Director of Network Solutions, Inc., whose signature appears below, constitutes and appoints Gabriel A. Battista and Robert J. Korzeniewski, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to the Registration Statement on Form S-1, No. 333-30705, filed by Network Solutions, Inc. and any registration statement relating to the offering covered by such Registration Statement and filed pursuant to Rule 462(b) under the Securities Act of 1933 and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. /s/ John E. Glancy --------------------- John E. Glancy 8/20/97 --------------------- Date EX-27.1 14 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 31, 1996 FINANCIAL STATEMENTS 1,000 YEAR 6-MOS DEC-31-1996 DEC-31-1997 JAN-01-1996 JAN-01-1997 DEC-31-1996 JUN-30-1997 15,540 25,967 0 3,625 32,430 20,421 (15,439) (11,871) 0 0 56,603 80,644 5,146 8,000 (2,880) (3,539) 66,118 92,250 55,241 74,364 0 0 0 0 0 0 12 12 1,425 2,681 66,118 92,250 0 0 18,862 18,724 0 0 14,666 11,435 6,464 5,022 3,597 3,818 0 0 (2,268) 2,267 (643) 1,011 (1,625) 1,256 0 0 0 0 0 0 (1,625) 1,256 0 0 0 0
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