-----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, IhyBOVJ/fisNtpwUDtlWEOwY6v3uJT4D2mgOYLpyNlonrB3MEj4yEkbXV2T/QWV/ rTo5jMz7xMwY6Ci0+7GcZw== 0000950133-99-002835.txt : 19990817 0000950133-99-002835.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950133-99-002835 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22967 FILM NUMBER: 99692532 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 10-Q 1 NETWORK SOLUTIONS FORM 10-Q 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ COMMISSION FILE NUMBER: 0-22967 NETWORK SOLUTIONS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 52-1146119 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR IDENTIFICATION NO.) ORGANIZATION)
505 HUNTMAR PARK DRIVE HERNDON, VIRGINIA 20170 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (703)742-0400 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of August 3, 1999, the Registrant had 33,342,342 shares of common stock, $0.001 par value per share, issued and outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2
PAGE ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements Unaudited Condensed Statements of Financial Position as of December 31, 1998 and June 30, 1999....................... 3 Unaudited Condensed Statements of Operations for the three and six months ended June 30, 1998 and 1999............... 4 Unaudited Condensed Statements of Changes in Stockholders' Equity for the six months ended June 30, 1999............. 5 Unaudited Condensed Statements of Cash Flows for the six months ended June 30, 1998 and 1999....................... 6 Notes to Condensed Financial Statements..................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................................... 26 PART II OTHER INFORMATION Item 1. Legal Proceedings........................................... 28 Item 2. Changes in Securities and Use of Proceeds................... 29 Item 4. Submission of Matters to a Vote of Security Holders......... 29 Item 6. Exhibits and Reports on Form 8-K............................ 30 Signature............................................................ 31 Index to Exhibits.................................................... 32
2 3 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. NETWORK SOLUTIONS, INC. CONDENSED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, JUNE 30, 1998 1999 ------------ ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 12,862,000 $ 46,099,000 Short-term investments.................................... 118,808,000 114,215,000 Accounts receivable, net.................................. 22,628,000 47,084,000 Prepaids and other assets................................. 4,001,000 6,453,000 Deferred tax asset........................................ 40,508,000 67,212,000 ------------ ------------ Total current assets........................................ 198,807,000 281,063,000 Furniture and equipment, net................................ 16,005,000 51,112,000 Long-term investments....................................... 13,590,000 42,060,000 Deferred tax asset.......................................... 14,831,000 20,291,000 Goodwill, net............................................... 634,000 362,000 ------------ ------------ Total Assets................................................ $243,867,000 $394,888,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities.................. $ 28,287,000 $ 43,323,000 Due to SAIC............................................... 4,766,000 7,607,000 Income taxes payable...................................... 5,409,000 6,699,000 Current portion of capital lease obligations.............. 834,000 643,000 Deferred revenue, net..................................... 93,720,000 156,906,000 ------------ ------------ Total current liabilities................................... 133,016,000 215,178,000 Capital lease obligations................................... 247,000 -- Long-term deferred revenue, net............................. 35,474,000 65,682,000 ------------ ------------ Total liabilities........................................... 168,737,000 280,860,000 Commitments and contingencies............................... -- -- Stockholders' equity: Preferred stock, $.001 par value, authorized 10,000,000 shares; none issued and outstanding in 1998 and 1999... -- -- Common stock, $.001 par value; authorized 210,000,000 shares; 33,319,000 issued and outstanding in 1999...... -- 33,000 Class A common stock, $.001 par value; authorized 100,000,000 shares in 1998; 9,140,000 issued and outstanding in 1998.................................... 9,000 -- Class B common stock, $.001 par value; authorized 30,000,000 shares in 1998; 23,850,000 issued and outstanding in 1998.................................... 24,000 -- Additional paid-in capital................................ 72,331,000 84,645,000 Retained earnings......................................... 2,407,000 13,000,000 Accumulated other comprehensive income.................... 359,000 16,350,000 ------------ ------------ Total stockholders' equity.................................. 75,130,000 114,028,000 ------------ ------------ Total Liabilities and Stockholders' Equity.................. $243,867,000 $394,888,000 ============ ============
The accompanying notes are an integral part of these financial statements. 3 4 NETWORK SOLUTIONS, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- 1998 1999 1998 1999 ----------- ----------- ----------- ----------- Net revenue............................... $20,476,000 $47,499,000 $36,968,000 $85,631,000 Cost of revenue........................... 8,791,000 17,711,000 16,139,000 32,252,000 ----------- ----------- ----------- ----------- Gross profit.............................. 11,685,000 29,788,000 20,829,000 53,379,000 Research and development expenses......... 815,000 2,460,000 1,540,000 4,495,000 Selling, general and administrative expenses................................ 8,008,000 19,395,000 14,190,000 34,660,000 Interest income........................... (1,416,000) (1,927,000) (2,743,000) (3,857,000) Other expenses............................ 32,000 15,000 67,000 34,000 ----------- ----------- ----------- ----------- Income before income taxes................ 4,246,000 9,845,000 7,775,000 18,047,000 Provision for income taxes................ 1,783,000 4,050,000 3,263,000 7,454,000 ----------- ----------- ----------- ----------- Net income................................ $ 2,463,000 $ 5,795,000 $ 4,512,000 $10,593,000 =========== =========== =========== =========== Earnings per common share: Basic................................... $ 0.08 $ 0.17 $ 0.14 $ 0.32 =========== =========== =========== =========== Diluted................................. $ 0.07 $ 0.17 $ 0.14 $ 0.30 =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 4 5 NETWORK SOLUTIONS, INC. CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
ACCUMULATED ADDITIONAL OTHER COMMON CLASS A CLASS B PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE STOCK COMMON STOCK COMMON STOCK CAPITAL INCOME EARNINGS INCOME ------- ------------ ------------ ----------- ------------- ----------- ------------- Balance, December 31, 1998................. $ -- $ 9,000 $ 24,000 $72,331,000 $ 359,000 $ 2,407,000 $ -- Issuance of common stock pursuant to stock plans.......... -- -- -- 2,988,000 -- -- -- Tax benefit associated with stock plans..... -- -- -- 9,326,000 -- -- -- Conversion of Class B common stock......... -- 24,000 (24,000) -- -- -- -- Reclassification of Class A common stock......... 33,000 (33,000) -- -- -- -- -- Comprehensive income: Net income for the period ended June 30, 1999................. -- -- -- -- -- 10,593,000 10,593,000 Other comprehensive income, net of tax: Unrealized gains on securities........... -- -- -- -- 15,991,000 -- 15,991,000 ----------- Comprehensive income............... -- -- -- -- -- -- $26,584,000 ------- -------- -------- ----------- ----------- ----------- =========== Balance, June 30, 1999................. $33,000 $ -- $ -- $84,645,000 $16,350,000 $13,000,000 ======= ======== ======== =========== =========== =========== TOTAL STOCKHOLDERS' EQUITY ------------- Balance, December 31, 1998................. $ 75,130,000 Issuance of common stock pursuant to stock plans.......... 2,988,000 Tax benefit associated with stock plans..... 9,326,000 Conversion of Class B common stock......... -- Reclassification of Class A common stock......... -- Comprehensive income: Net income for the period ended June 30, 1999................. 10,593,000 Other comprehensive income, net of tax: Unrealized gains on securities........... 15,991,000 Comprehensive income............... -- ------------ Balance, June 30, 1999................. $114,028,000 ============
The accompanying notes are an integral part of these financial statements. 5 6 NETWORK SOLUTIONS, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, --------------------------- 1998 1999 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 4,512,000 $ 10,593,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 1,459,000 3,439,000 Provision for uncollectible accounts receivable........ 2,168,000 -- Deferred income taxes.................................. (7,499,000) (43,743,000) Tax benefit associated with stock plans................ 2,118,000 9,326,000 Change in operating assets and liabilities: Increase in accounts receivable...................... (7,602,000) (24,456,000) Increase in prepaids and other assets................ (1,045,000) (2,452,000) Increase in accounts payable and accrued liabilities....................................... 4,908,000 15,036,000 Increase (decrease) in income taxes payable.......... (4,513,000) 1,290,000 Increase in deferred revenue......................... 27,500,000 93,394,000 ------------ ------------ Net cash provided by operating activities............ 22,006,000 62,427,000 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of furniture and equipment....................... (4,364,000) (38,274,000) Sale (purchase) of short-term investments, net............ (39,316,000) 5,693,000 Purchase of long-term investments......................... (6,007,000) (2,000,000) ------------ ------------ Net cash used in investing activities................ (49,687,000) (34,581,000) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net transactions with SAIC................................ 1,108,000 2,841,000 Repayment of capital lease obligations.................... (412,000) (438,000) Issuance of common stock pursuant to stock plans.......... 3,767,000 2,988,000 ------------ ------------ Net cash provided by financing activities............ 4,463,000 5,391,000 ------------ ------------ Net increase (decrease) in cash and cash equivalents........ (23,218,000) 33,237,000 Cash and cash equivalents, beginning of period.............. 41,146,000 12,862,000 ------------ ------------ Cash and cash equivalents, end of period.................... $ 17,928,000 $ 46,099,000 ============ ============
The accompanying notes are an integral part of these financial statements. 6 7 NETWORK SOLUTIONS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS NOTE 1 -- ORGANIZATION AND BUSINESS Network Solutions, Inc. ("Network Solutions") currently acts as the exclusive registry and as a registrar of Internet domain names within the .com, .org, .net and .edu top level domains pursuant to the Cooperative Agreement with the Department of Commerce. Domain names are used to identify a unique site or presence on the Internet. As registry and a registrar for these top level domains, Network Solutions registers new domain names and is responsible for the maintenance of the master file of domain names through daily updates to the Internet. Network Solutions also provides Internet Technology Services, focusing on architecture, implementation and support services to help large enterprises and Internet service providers improve their operational effectiveness. NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES INTERIM FINANCIAL STATEMENTS The interim financial statements have been prepared by Network Solutions without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). In the opinion of management, financial statements included in this report reflect all normal recurring adjustments which Network Solutions considers necessary for fair presentation of the results of operations for the interim periods covered and of the financial position of Network Solutions at the date of the interim balance sheet. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, Network Solutions believes that the disclosures are adequate for understanding the information presented. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. These interim financial statements should be read in conjunction with Network Solutions' December 31, 1998 audited financial statements and notes thereto included in Network Solutions' Form 10-K annual report for the year ended December 31, 1998. Prior periods have been restated for comparative purposes. NOTE 3 -- COMMON STOCK STOCK SPLIT On December 31, 1998, Network Solutions' board of directors approved a two-for-one stock split of the shares of Class A common stock and Class B common stock, to be effected in the form of a 100% stock dividend on shares of Class A common stock and Class B common stock outstanding on February 26, 1999. The stock dividend was distributed on March 23, 1999. Share and per share information for all periods presented in the accompanying financial statements have been adjusted to reflect the two-for-one stock split. SECONDARY STOCK OFFERING AND STOCK RECLASSIFICATION On February 12, 1999, Network Solutions completed a secondary stock offering in which a total of 9,160,000 shares of Class A common stock were sold. Concurrent with the offering, Science Applications International Corporation, commonly known as "SAIC", converted 9,000,000 shares of Class B common stock into 9,000,000 shares of Class A common stock sold in the offering. The remaining 160,000 shares of Class A common stock were sold by other selling stockholders after they exercised the applicable stock options simultaneously with the closing of the offering. Network Solutions was not a selling stockholder, and, therefore, did not receive any proceeds from the stock offering other than proceeds from options exercised as part of the offering. After the offering, SAIC owned approximately 89% of the combined voting power and approximately 45% of the economic interest of the outstanding common stock. On June 3, 1999, SAIC, the sole Class B common stock shareholder, converted the remaining Class B common stock into an identical number of shares of Class A common stock. As a result, SAIC's voting power 7 8 changed from 89% to 45%, consistent with the number of Class A shares owned after the conversion. On June 17, 1999, Network Solutions filed a Certificate of Amendment of Second Amended and Restated Certificate of Incorporation whereby its Class A common stock, par value $0.001 per share, and Class B common stock, par value $0.001 per share, were reclassified as a single class of common stock, par value $0.001 per share, the "Common Stock". At the time of the reclassification of the Class A common stock and Class B common stock to Common Stock, there were 33,312,594 shares of Class A common stock and no shares of Class B common stock outstanding. The Certificate of Amendment also increased the total number of authorized shares of Network Solutions, Inc. to 220,000,000 of which 210,000,000 shares are authorized shares of Common Stock and 10,000,000 shares are authorized shares of preferred stock, par value $0.001 per share. There are no shares of preferred stock outstanding. NOTE 4 -- COMPUTATION OF EARNINGS PER SHARE The following is a reconciliation of the numerator and denominator used in the basic and diluted earnings per share computations:
INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- THREE MONTHS ENDED JUNE 30, 1999 Basic.................................. $5,795,000 33,281,000 $0.17 ===== Dilutive securities: Outstanding options.................. -- 1,440,000 ---------- ---------- Diluted................................ $5,795,000 34,721,000 $0.17 ========== ========== ===== THREE MONTHS ENDED JUNE 30, 1998 Basic.................................. $2,463,000 31,791,000 $0.08 ===== Dilutive securities: Outstanding options.................. -- 1,696,000 ---------- ---------- Diluted................................ $2,463,000 33,487,000 $0.07 ========== ========== =====
INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- SIX MONTHS ENDED JUNE 30, 1999 Basic................................. $10,593,000 33,202,000 $0.32 ===== Dilutive securities: Outstanding options................. -- 1,558,000 ----------- ---------- Diluted............................... $10,593,000 34,760,000 $0.30 =========== ========== ===== SIX MONTHS ENDED JUNE 30, 1998 Basic................................. $ 4,512,000 31,623,000 $0.14 ===== Dilutive securities: Outstanding options................. -- 1,262,000 ----------- ---------- Diluted............................... $ 4,512,000 32,885,000 $0.14 =========== ========== =====
Common shares issued are weighted for the period the shares were outstanding and incremental shares assumed issued under the treasury stock method for diluted earnings per share are weighted for the period the underlying options were outstanding. 8 9 NOTE 5 -- ACCUMULATED OTHER COMPREHENSIVE INCOME BALANCES The changes in the components of accumulated other comprehensive income, net of income taxes, for the three and six months ended June 30, 1999 and June 30, 1998 are as follows:
UNREALIZED GAINS (LOSSES) UNREALIZED GAINS ON SECURITIES ON SECURITIES THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ----------------------- 1998 1999 1998 1999 -------- ------------- -------- ----------- Pre-tax amount............................. $22,000 $(10,979,000) $367,000 $27,568,000 Income taxes............................... 9,000 (4,612,000) 145,000 11,577,000 ------- ------------ -------- ----------- Net of tax amount.......................... $13,000 $ (6,367,000) $222,000 $15,991,000 ======= ============ ======== ===========
NOTE 6 -- SUBSEQUENT EVENTS LITIGATION On August 17, 1998, we received notice from the Commission of the European Communities, or "EC," of an investigation concerning the Company's Premier Program agreements in Europe. The EC requested production of these agreements and related materials for review and we complied. On June 17, 1999, we received a second inquiry from the EC concerning our registrar licensing agreements with the five newly-accredited testbed registrars and we responded to this inquiry on July 9, 1999. We cannot reasonably estimate the potential impact of the investigation nor can we predict whether an action will ultimately be brought by the EC or the form of relief that might be sought. Any such relief could harm our business. STATUS OF COOPERATIVE AGREEMENT On January 1, 1993, Network Solutions initiated phase-in of a Cooperative Agreement with the National Science Foundation. The three-month phase-in was followed by a five-year operations period, commencing April 1, 1993 and ending March 31, 1998, and a six-month flexibility period through September 1998. Effective in September 1998, the responsibility for the Cooperative Agreement was transferred to the Department of Commerce. In October 1998, the Cooperative Agreement was amended to extend the flexibility period through September 30, 2000 and to transition to a shared registration system. In accordance with the terms of the October 1998 and subsequent amendments to the Cooperative Agreement, Network Solutions has developed a protocol and associated software to support a shared registration system which will permit multiple registrars to provide registration services within the top level domains for which Network Solutions will act as registry. Network Solutions deployed its proprietary shared registration system on schedule by establishing a testbed to support actual registrations by five new registrars. We have entered into license agreements with the five new registrars to provide access to the shared registration system, permitting them to directly register and maintain actual domain names. During the current testbed period, we have agreed to charge the new registrars an interim registry fee of $18 for each new two-year registration. All of the five original new testbed registrars have completed their systems development and testing, are certified and have begun to register actual names within the shared registration system. On August 6, 1999, Network Solutions agreed with the Department of Commerce to extend the testbed period through September 10, 1999, and to consider additional accredited registrars eligible to participate in the testbed. Network Solutions has signed confidentiality agreements with 12 additional testbed registrars and has shipped these new prospective registrars the software and documentation to begin developing their system interfaces with the shared registration system in order to begin providing registration services. These 12 prospective registrars are among the 59 companies accredited, or to be accredited, by the Internet Corporation for Assigned Names and Numbers. All 59 of these companies may be eligible to participate in the testbed. 9 10 Network Solutions continues to work with the U.S. Government toward establishing the post-testbed registry price and toward resolving other issues surrounding the registry operations in a competitive environment. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This quarterly report on Form 10-Q contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Statements regarding the intent, belief or current expectations of Network Solutions are intended to be forward-looking statements which may involve risk and uncertainty. There are a number of factors that could cause Network Solutions' actual results to differ materially from those indicated by such forward- looking statements, including, but not limited to, those discussed in "Part I -- Item 1 -- Business -- Risk Factors" and "Part II -- Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors Affecting Operating Results" contained in Network Solutions' 1998 Form 10-K, as filed with the Securities and Exchange Commission on March 30, 1999. In addition, set forth below under the heading "Factors Affecting Operating Results" is a further discussion of certain of those risks as they relate to the period covered by this report, Network Solutions' near-term outlook with respect thereto, and the forward-looking statements set forth herein; however, the absence in this quarterly report of a complete recitation of or update to all risk factors identified in the 1998 Form 10-K should not be interpreted as modifying or superseding any such risk factors, except to the extent set forth below. Investors should review this quarterly report in combination with Network Solutions' 1998 Form 10-K in order to have a more complete understanding of the principal risks associated with an investment in Network Solutions' common stock. OVERVIEW Network Solutions currently acts as the exclusive registry and as a registrar of Internet domain names within the .com, .net, .org and .edu top level domains pursuant to the Cooperative Agreement with the Department of Commerce. Domain names are used to identify a unique site or presence on the Internet. As registry and a registrar for these top level domains, Network Solutions registers new domain names, maintains the master file of domain names and updates that master file to the Internet daily. Network Solutions also provides Internet Technology Services, focusing on network engineering, network and systems security and network management solutions. Registration Services. In December 1992, Network Solutions entered into the Cooperative Agreement with the National Science Foundation under which Network Solutions was to provide Internet domain name registration services for five top level domains: .com, .org, .net, .edu and .gov. These registration services include the initial two year domain name registration and annual re-registration, and throughout the registration term, maintenance of and unlimited modifications to individual domain name records and updates to the master file of domain names. The Cooperative Agreement became effective January 1, 1993. It included a three-month phase-in period, a five-year operational period, commencing April 1, 1993 and ending March 31, 1998, and a six-month flexibility period through September 30, 1998. Effective September 9, 1998, the Department of Commerce took over the administration of the Cooperative Agreement from the National Science Foundation. In October 1998, the Cooperative Agreement was amended to extend the flexibility period until September 30, 2000 and to transition to a shared registration system. The original terms of the Cooperative Agreement provided for a cost reimbursement plus fixed-fee contract. Effective September 14, 1995, the National Science Foundation and Network Solutions amended the Cooperative Agreement to require Network Solutions to begin charging end users a services fee of $50 per year for each domain name in the .com, .org and .net top level domains. Thus, prior to April 1, 1998, registrants paid a services fee of $100 for two years of domain name services upon each initial registration and an annual re-registration fee of $50 per year thereafter. The National Science Foundation paid the registration fees for domain names within the .edu and .gov top level domains through March 31, 1997. Commencing April 1, 1997, Network Solutions agreed with the National Science Foundation to provide domain name 10 11 services within the .edu and .gov top level domains free of charge. As of October 1, 1997, Network Solutions no longer registers or administers domain names in the .gov top level domain. Under the terms of the September 14, 1995 amendment to the Cooperative Agreement, 30% of the registration fees collected by Network Solutions was required to be set aside for the enhancement of the intellectual infrastructure of the Internet and, as such, was not recognized as revenue by Network Solutions. The set aside funds, plus any interest earned, were disbursed at the direction of the National Science Foundation. As of December 31, 1998, the Company had cumulatively disbursed to the National Science Foundation at its direction all set aside funds collected and associated interest earned for a total of $62.3 million. On March 12, 1998, the National Science Foundation and Network Solutions amended the Cooperative Agreement to eliminate the 30% set aside requirement effective April 1, 1998 and to reduce the registration fees by a corresponding amount. Initial registrations on and after April 1, 1998 are charged $70 for two years of registration services and an annual renewal fee of $35 per year thereafter. This amendment had no effect on the revenue recognized on each registration ($70 for initial registrations and $35 for renewals), since Network Solutions previously did not recognize revenue on the 30% set aside funds. Accordingly, while the revenue to Network Solutions on a per registration basis did not change, the amount charged to customers declined. In order to provide prompt access to new domain names on the Internet, Network Solutions generally invoices customers and permits them to pay their registration fees after their domain names are registered. Network Solutions' experience has been that, for the period from September 1995 through June 1999, approximately 36% of registrations have ultimately been deactivated for non-payment. Network Solutions believes that this level of uncollectible receivables is due to, among other factors, the large number of individuals and corporations that have registered multiple domain names with the apparent intention of reselling such names at a profit. Such speculative resellers have a greater tendency than other customers to default on their registration fees. As a consequence, Network Solutions has recorded a comparable provision for uncollectible accounts in determining net registration revenue. Registration fees charged to end users for registration services, net of any 30% set aside funds, are recognized as revenue evenly over the registration term. Accordingly, Network Solutions recognizes $70 on a straight-line basis over the two-year services period for each basic initial domain name registration, equivalent to $35 per year. Annual re-registrations of basic domain name registrations are recorded as revenue based upon $35 recognized on a straight-line basis over the one-year services period. This subscription-based model defers revenue recognition until Network Solutions provides the registration services, including maintenance of and unlimited modifications to individual domain name records, over the respective registration terms. At June 30, 1999, Network Solutions had net deferred revenue of $222.6 million. Internet Technology Services. Substantially all of Network Solutions' Internet Technology Services revenue is derived from professional services which are generally provided to clients on a time and expense basis and is recognized as services are performed. The majority of Network Solutions' Internet Technology Services are provided to customers in the financial services industry. Bank of America, formerly NationsBanc, is currently Network Solutions' largest Internet Technology Services client, accounting for 38.8% of Network Solutions' Internet Technology Services business net revenue and 2.2% of Network Solutions' total net revenue for the three months ended June 30, 1999. NationsBanc originally contracted with Network Solutions in 1993 and Network Solutions currently provides network design and engineering services as well as a variety of project specific services under the contract. RESULTS OF OPERATIONS Net Revenue. Net revenue increased 132% from $20.5 million for the three months ended June 30, 1998 to $47.5 million for the three months ended June 30, 1999. This increase in net revenue was primarily attributable to the increase in the number of domain name registrations, principally in the .com top level domain. Net revenue from registration services increased 136% from $19.0 million for the three months ended 11 12 June 30, 1998 to $44.8 million for the three months ended June 30, 1999. Net new registrations increased 166% from 443,000 for the three months ended June 30, 1998 to 1,180,000 for the three months ended June 30, 1999. This also represents a 28% increase over the 922,000 net new registrations for the three months ended March 31, 1999. Growth in net registrations continues to be driven by the widespread use and adoption by businesses of the Internet and Intranets on a global basis. Cumulative net registrations as of June 30, 1998 were 2,289,000 as compared to 5,322,000 as of June 30, 1999, for a 133% increase. In addition, this growth in cumulative net registrations represents a 28% increase in Network Solutions' entire customer base since March 31, 1999. Net revenue from Internet Technology Services increased 82% from $1.5 million for the three months ended June 30, 1998 to $2.7 million for the three months ended June 30, 1999. This represents a 20% decrease in net revenue from Internet Technology Services from the three months ended March 31, 1999. Bank of America accounted for $1.0 million or 2.2% of Network Solutions' total net revenue for the three months ended June 30, 1999 and $571,000 or 2.8% for the three months ended June 30, 1998. Net revenue increased 132% from $37.0 million for the six months ended June 30, 1998 to $85.6 million for the six months ended June 30, 1999. This increase in net revenue was primarily attributable to the increase in the number of domain name registrations, principally in the .com top level domain. Net revenue from registration services increased 131% from $34.5 million for the six months ended June 30, 1998 to $79.7 million for the six months ended June 30, 1999. Net new registrations during the six month period ended June 30, 1999 were 2.1 million as compared to 783,000 during the six month period ended June 30, 1998, an increase of 158%. Net revenue from Internet Technology Services increased 143% from $2.5 million for the six months ended June 30, 1998 to $6.0 million for the six months ended June 30, 1999. This was primarily attributable to an increase in business from Bank of America and other financial services customers. Bank of America accounted for $1.8 million or 2.1% of Network Solutions' total net revenue for the six months ended June 30, 1999, and $1.1 million or 3.0% for six months ended June 30, 1998. Cost of Revenue. Cost of revenue consists primarily of salaries and employee benefits, fees paid to subcontractors for work performed in connection with revenue producing projects, depreciation and equipment costs, lease costs of the operations infrastructure and the associated operating overhead. Cost of revenue increased 101% from $8.8 million for the three months ended June 30, 1998 to $17.7 million for the three months ended June 30, 1999. The increase was primarily driven by the growth of Network Solutions' registration business which experienced additional outsourcing costs of $2.8 million in support of invoicing, collection and processing activities, $2.0 million in additional depreciation charges and equipment expenditures and additional direct labor charges of $3.1 million related to systems engineering and operations. As a percentage of net revenue, cost of revenue decreased from 42.9% for the three months ended June 30, 1998 to 37.3% for the three months ended June 30, 1999. This decrease primarily reflects economies of scale that Network Solutions has continued to achieve due to the growth of its subscription-based domain name registration business. In the near term, the continued need for back office investments is expected to partially offset future margin improvements arising from economies of scale. Cost of revenue increased 100% from $16.1 million for the six months ended June 30, 1998 to $32.3 million for the six months ended June 30, 1999. This increase was driven by a $6.3 million increase in outsourcing costs and $3.0 million in additional depreciation charges and equipment expenditures and additional direct labor charges of $4.4 million related to systems engineering and operations primarily associated with supporting the growth of Network Solutions' registration services business. As a percentage of net revenue, cost of revenue decreased from 43.7% for the six months ended June 30, 1998 to 37.7% for the six months ended June 30, 1999 reflecting economies of scale achieved in Network Solutions' registration business. Research and Development Expenses. Research and development expenses consist primarily of compensation expenses to support the creation, development and enhancement of Network Solutions' products 12 13 and technologies. Research and development expenses increased 202% from $815,000 for the three months ended June 30, 1998 to $2,460,000 for the three months ended June 30, 1999. To date, all significant research and development costs have been expensed as incurred. Network Solutions expects that the level of research and development expenses will continue to increase in the near future in absolute dollars as Network Solutions invests in developing new product and service offerings. As a percentage of net revenue, research and development expenses were 4.0% and 5.2% for the three months ended June 30, 1998 and 1999, respectively. Research and development expenses increased 192% from $1.5 million for the six months ended June 30, 1998 to $4.5 million for the six months ended June 30, 1999. As a percentage of net revenue, research and development expenses increased from 4.2% for the six months ended June 30, 1998 to 5.3% for the six months ended June 30, 1999. Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of salaries of business development, general management, administrative and financial personnel, marketing expenses, corporate services from SAIC, legal and other professional costs and amortization of goodwill associated with Network Solutions' 1995 acquisition by SAIC. Selling, general and administrative expenses increased 142% from $8.0 million for the three months ended June 30, 1998 to $19.4 million for the three months ended June 30, 1999. The increase was primarily attributable to a $7.0 million increase in marketing and business development expenses including television, Internet banner advertising and targeted direct mail campaigns, increased staffing expenses of $900,000 and an increase of other professional costs of $2.1 million. As a percentage of net revenue, selling, general and administrative expenses increased from 39.1% for the three months ended June 30, 1998 to 40.8% for the three months ended June 30, 1999. Selling, general and administrative expenses increased 144% from $14.2 million for the six months ended June 30, 1998 to $34.7 million for the six months ended June 30, 1999. This increase was primarily attributable to a $14.3 million increase in marketing and business development expenses including television, Internet banner advertising and targeted direct mail campaigns, increased staffing expenses of $2.0 million and an increase of other professional costs of $2.3 million. As a percentage of net revenue, selling, general and administrative expenses increased from 38.4% for the six months ended June 30, 1998 to 40.5% for the six months ended June 30, 1999. Network Solutions expects that the level of selling, general and administrative expenses will continue to increase significantly in the near future in terms of absolute dollars as operations continue to expand. In particular, sales, marketing and business development expenses will increase as Network Solutions continues to promote the value of a .com web address and other new Internet-based value-added services. Network Solutions also plans to continue to develop and enhance its distribution channels, both domestically and internationally. Interest Income. Network Solutions had net interest income of $1.4 million for the three months ended June 30, 1998 as compared to $1.9 million for the three months ended June 30, 1999. Network Solutions had net interest income of $2.7 million for the six months ended June 30, 1998 as compared to $3.9 million for the six months ended June 30, 1999. The increase for both the three month and six month comparisons is attributable to the investment of the net proceeds of Network Solutions' initial public offering as well as positive cash flow resulting from increasing domain name registrations. Income Taxes. The provision for income taxes was 42% of pretax earnings, or $1.8 million for the three months ended June 30, 1998, and 41%, or $4.1 million for the three months ended June 30, 1999. The provision for income taxes was 42% or $3.3 million for the six months ended June 30, 1998, and 41% or $7.5 million for the six months ended June 30, 1999. The difference between the effective rate for both periods presented and the statutory rate is principally attributable to the relative impact that non-deductible goodwill had on pretax operating income. Goodwill is 13 14 being amortized by Network Solutions over five years and is associated with the acquisition of Network Solutions by SAIC in 1995. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1999, Network Solutions' principal source of liquidity was its cash and cash equivalents of $46.0 million and its short-term investments of $114.2 million, which when combined represent an increase of $28.6 million from its December 31, 1998 balances in those accounts. Network Solutions also has $42.1 million of marketable securities held as long term investments as of June 30, 1999. At June 30, 1999, Network Solutions' cumulative net obligation to SAIC for intercompany activity was $7.6 million. Intercompany activity is primarily comprised of salaries and benefits paid by SAIC on behalf of Network Solutions. Network Solutions currently reimburses SAIC for intercompany activity on a monthly basis. Pursuant to the Tax Sharing Agreement dated September 26, 1997, Network Solutions now generally remits income tax payments directly to tax authorities as it no longer is part of SAIC's consolidated group for federal income tax purposes. Cash provided by operations was $62.4 million for the six months ended June 30, 1999. This amount is principally attributed to net income plus the increase in deferred revenue reflecting cash collected in advance of registration services revenue recognition which occurs ratably over the two-and one-year registration terms. Partially offsetting this amount is an increase in deferred tax assets resulting from accelerated revenue recognition for tax purposes and the associated tax liabilities, generally paid on a quarterly basis. Investing activities totaled $34.6 million for the six months ended June 30, 1999, of which $5.7 million was the net sale of short-term investments. Investments during the period include a $2.0 million investment in a strategic business partner which subsequently consummated its initial public offering during the period. Capital expenditures year to date were $38.3 million, primarily for computer equipment and software to support Network Solutions' registry and registrar efforts, as well as costs related to the opening of Network Solutions' new call center. Network Solutions will continue to invest in the back office infrastructure in advance of continued growth in domain name registrations and as Network Solutions designs, builds, and operates the shared registration system in accordance with the Cooperative Agreement. Network Solutions believes that its existing cash balance, investments and cash flows expected from future operations will be sufficient to meet Network Solutions' capital requirements for at least the next 12 months. FACTORS AFFECTING OPERATING RESULTS INDUSTRY RISKS Ongoing privatization of Internet administration could harm our registration business Within the U.S. Government, leadership for the continued privatization of Internet administration is currently provided by the Department of Commerce. After a series of draft proposals and public comment periods, on June 10, 1998, the Department of Commerce published in the Federal Register a plan referred to as the Statement of Policy or "White Paper," calling for the formation of a not-for-profit corporation to assume certain responsibilities relating to the domain name system, but not to perform actual registration of domain names either as a registrar or registry. The Statement of Policy called for increased competition and invited private sector Internet stakeholders to work together to form a new private, not-for-profit corporation to oversee policy for the Internet name and address system. The Statement of Policy distinguished between the registry and registrar functions of the domain name system. We currently are the exclusive registry in the .com, .org, .net and .edu top level domains and act as the leading registrar in those domains. The technical structure of the Internet only permits one registry for each top level domain. A registrar acts as the interface between the registry and the end-user domain name registrants. Registrars submit to the registry certain limited information for each of their customers that has a second level domain name in that top level domain. A registrar can provide value-added products and services 14 15 in addition to its basic registration service. Numerous registrars will be able to operate within each top level domain. As part of the process initiated by the Statement of Policy, several proposals were put forward to the Department of Commerce on the establishment and governance of the not-for-profit corporation. The proposals differed in several respects including, among others, their approaches to the following issues: place and form of incorporation; method for selection of the interim and permanent board of directors; who should be eligible to become a member and on what questions should the members vote; what authority should be granted to the board of directors and what authority should be reserved to the members, if any; and whether there should be separate supporting organizations and, if so, what authority these organizations should have. A U.S. based private not-for-profit corporation with an international board of directors, denoted the Internet Corporation for Assigned Names and Numbers, or "ICANN," submitted various proposals which formed the basis of discussion at a number of public and private meetings. As a result of these and other meetings and private negotiations, the process initiated by the Statement of Policy has resulted in the entry by the U.S. Government into a Memorandum of Understanding, or "MOU," with ICANN. Under the MOU, the parties will jointly design, develop and test the mechanisms, methods and procedures that should be in place and the steps necessary to transition management responsibility for certain domain name system functions to a private-sector not-for-profit entity. The MOU provides that once testing is successfully completed, it is contemplated that management of certain domain name system functions will be transitioned to the mechanisms, methods and procedures designed and developed in this joint project. The U.S. Government has sent us a letter directing us to treat ICANN as the not-for-profit corporation described in the October amendment to the Cooperative Agreement, in the performance of ICANN's obligations under the MOU and until such time as the MOU is terminated. We have taken the position that ICANN will become such not- for-profit corporation, or "NewCo", only when responsibilities are transferred to it in compliance with the Statement of Policy and that ICANN will be "recognized" by us only pursuant to a mutually agreeable, bilateral, agreement. We are actively negotiating such an agreement. ICANN's bylaws called for the creation of supporting organizations that will select some ICANN board members and provide policy recommendations in particular areas. ICANN called for submission by February 5, 1999 of applications from groups urging "recognition" of a domain name supporting organization that would be charged with developing recommendations for policies ICANN might apply. We submitted comments regarding the structure and function of such a domain name supporting organization. On March 4, 1999, the ICANN Board adopted a domain name supporting organization formation concept statement reflecting some, but not all of our comments. On March 15, 1999, ICANN released a staff draft of amendments to its bylaws based on the formation concept statement to establish a domain name supporting organization. On March 31, 1999, the ICANN Board adopted bylaw changes to govern establishment of the domain name supporting organization. In May 1999, ICANN recognized a provisional Names Council and six constituencies. We organized a global top level domain registry constituency for the domain name supporting organization and may join other constituencies. On August 12, 1999, ICANN further amended its bylaw provisions relating to the domain name supporting organization. We cannot be sure that ICANN will take positions favorable to us in the process of implementing the final bylaws, recognizing domain name supporting constituencies or in its further policy development, contract formation or other actions. The Statement of Policy calls for a phased transition of the Department of Commerce's responsibilities for the domain name system to a not-for-profit corporation by September 30, 2000. We face risks from this transition, including: - failure to achieve consensus on the many issues relating to the functioning and governance of the not-for-profit corporation could result in instability in domain name system administration, - the not-for-profit corporation could fail to gain legitimacy resulting in instability in domain name system administration, 15 16 - the U.S. Government could refuse to transfer certain responsibilities for domain name system administration to the not-for-profit corporation due to security, stability or other reasons resulting in fragmentation or other instability in domain name system administration, and - the not-for-profit corporation could adopt or promote policies, procedures or programs that are unfavorable to our role in the registration of domain names or that are not consistent with our current or future plans. Despite the significant efforts undertaken to date, it is impossible to predict at this time whether or when the process initiated by the Statement of Policy will result in the full transition to the not-for-profit corporation of domain name system responsibilities as and to the extent contemplated in the Statement of Policy and, if it does, the effect on us of such transition. Operations under, changes to or disputes under the Cooperative Agreement could harm our business As the U.S. Government transitions certain responsibilities for domain name system administration to the not-for-profit corporation, corresponding obligations under the Cooperative Agreement may be terminated and, as appropriate, covered in a contract between the not-for-profit corporation and us. The U.S. Government sent us a letter directing us to treat ICANN as the not-for-profit corporation identified in the amended Cooperative Agreement in the performance of ICANN's obligations under the MOU and until such time as the MOU is terminated. We have taken the position that ICANN will become such not-for-profit corporation, or "NewCo", only when responsibilities are transferred to it in compliance with the Statement of Policy and that ICANN will be "recognized" by us only pursuant to a mutually agreeable, bilateral, agreement. We are actively negotiating such an agreement. We have not yet reached agreement with the U.S. Government or ICANN with respect to the terms of the transition. We may not be able to reach agreement and either ICANN or the U.S. Government may take positions that adversely affect us. In the transition to a shared registration system under the Cooperative Agreement, we are operationally separating our registry business from our registrar business. Additional, competing registrars are now able to market registration services in the .com, .net and .org top level domains, with the domain names registered into the registry that we maintain for each of those top level domains. Accordingly, persons registering second level domain names are now able to choose among a number of different registrars, including us. We began this transition on schedule, with the launch of a testbed phase involving the following five registrars accredited by ICANN: America Online, Inc., CORE or "Internet Council of Registrars", France Telecom/ Oleane, Melbourne IT and Register.com. As the registry, we have contracts with each of these registrars allowing them to directly register names into our registry database using our proprietary shared registration system. Registrations of domain names by these five testbed registrars have commenced. On August 6, 1999, we agreed with the Department of Commerce to extend the testbed period through September 10, 1999, and to consider additional accredited registrars eligible to participate in the testbed. We have signed confidentiality agreements with 12 additional testbed registrars and have shipped these new prospective registrars the software and documentation to begin developing their system interfaces with the shared registration system in order to begin providing registration services. These 12 prospective registrars are among the 59 companies accredited, or to be accredited, by the ICANN. All of these companies may be eligible to participate in the testbed. Our registry services under the Cooperative Agreement will be subject to a price cap. During the testbed phase, the cap was set at $18 for a two-year registration and $9 for a one-year re-registration and our Registrar License and Agreement under which we, as the registry, grant a license to use the shared registration system, was approved for use by agreement with the Department of Commerce under Amendment 13 to the Cooperative Agreement. Registrar services, now competitive, are being priced in different ways than we price for such services by resellers for at least one of the competing registrars. Termination, or a change in the terms, of the Cooperative Agreement could harm our business. While the Cooperative Agreement by its terms expires in September 2000, it may be terminated earlier. We are currently in discussions with the U.S. Government regarding adequate testing and full implementation of the shared registration system and a wide range of contractual issues. The Department of Commerce's interpretation of certain provisions of the Cooperative Agreement differs from ours. For example, the 16 17 Department of Commerce has publicly expressed concerns about our use of the WHOIS service, the internic.net website and our access policy to our top level domain name zone file. The Department of Commerce has asserted a right to recompete the Cooperative Agreement in certain circumstances and has claimed government ownership of the intellectual property rights associated with our performance of the Cooperative Agreement to date, including the WHOIS database. We have reached agreements with the U.S. Government concerning the temporary provision of access to the top level domain zone file. We have agreed with the Department of Commerce to provide access to the WHOIS database, including for third-party development of value-added products and services, subject to certain conditions, pending resolution of outstanding issues with the Department of Commerce and ICANN. Congress has held two hearings in which various issues about the domain name system have been raised, including our claim of ownership to the intellectual property associated with our performance under the Cooperative Agreement, including the WHOIS database, and our dot com directory service offering. Additionally, we have received letters from members of Congress regarding these and other subjects, and urging us to promptly resolve issues now in dispute with the Department of Commerce and ICANN. These differences in interpretation or opinion have led to disputes between us and the Department of Commerce and ICANN, which may or may not be resolved in our favor or which may result in unfavorable action by Congress. Certain aspects of implementation of the Cooperative Agreement remain to be fully negotiated, including the maximum price we will charge after the testbed period for registry services in the top level domains for which we now act as registry. If we are unsuccessful in negotiating acceptable terms of implementation, the costs of implementation of the Cooperative Agreement, our relationship with the not-for-profit corporation and other matters affecting our position in a more competitive domain name system environment could be harmed. Challenges to authority over domain name administration could harm our business Withdrawal of or challenges to the U.S. Government's sponsorship or authorization of certain functions that we perform could create a public perception or result in a legal finding that we lack authority to continue in our current role as registry or registrar within the .com, .org, .net and .edu top level domains. The legal authority underlying the roles of the Department of Commerce and the not-for-profit corporation with regard to the domain name system also could be challenged. The impact, if any, of any such public perception or finding is unknown, but it could be harmful to our business. Increased competition could harm our domain name registration business The introduction of additional competition into the domain name registration business could be harmful to our business. This includes, in particular, competition among registrars within a single top level domain, like .com, and competition among registrars and registries of existing and potential new top level domains. We already face competition in the domain name registration business from other registrars in the top level domains for which we act as registry, third level domain name providers such as Internet access providers and registrars and registries of top level domains other than those top level domains for which we act as registry. Our shared registration system is now being used by the five testbed registrars in the .com, .org and .net top level domains to register domain names. More competing registrars are anticipated to offer competing registration services in these top level domains in the near future. Future competition in the domain name registration business as a registry or registrar could come from many different companies, including: - domain name registration resellers, - country code registries, - Internet access providers, and - major telecommunications firms. Many of these entities have core capabilities to deliver registry and/or registrar services, such as help desks, billing services and network management, along with strong name recognition and Internet industry experience. Our revenue could be reduced due to increased competition, pricing pressures or a modification of 17 18 billing practices. Some resellers for at least one competing registrar in the .com, .net and .org top level domains are already charging lower prices for domain name registration services in those domains. In addition, other entities are bundling and may, in the future bundle domain name registrations with other products or services. We depend on future growth of the Internet and Internet infrastructure Our future success substantially depends on the continued growth in the use of the Internet. If the use of and interest in the Internet does not continue to grow, our business would be harmed. Continued growth of the Internet could be slowed by: - inadequate infrastructure, - lack of availability of cost-effective, high speed systems and service, - delays in developing or adopting new standards and protocols to handle increased levels of Internet activity, or - government regulation. We rely on third parties who maintain and control root zone and top level domain zone servers We currently administer and operate only two of the 13 root zone servers and four top level domain zone servers. The others are administered and operated by independent operators on a volunteer basis. Because of the importance to the functioning of the Internet of these root zone servers and top level domain zone servers, our registration business could be harmed if these volunteer operators fail to properly maintain such servers or abandon such servers. Further, our registration business could be harmed if any of these volunteer operators fail to include or provide accessibility to the data that we maintain in the root zone servers and the top level domain zone servers that we control. We rely on Internet service providers Our registration business could be harmed if enough Internet service providers decided not to route Internet communications to or from domain names registered by us or if enough Internet service providers decided to provide routing to a set of domain name servers which did not point to our top level domain zone servers. System failure or interruption, security breaches or our failure to meet increasing demands on our systems could harm our business Any significant problem with our systems or operations could result in lost revenue, customer dissatisfaction or lawsuits against us. A failure in the operation of our registration system or other events could result in deletion of one or more domain names from the Internet for a period of time. A failure in the operation of our shared registration system could result in the inability of one or more other registrars to register and maintain domain names for a period of time. A failure in the operation or update of the master database that we maintain could result in deletion of one or more top level domains from the Internet and the discontinuation of second level domain names in those top level domains for a period of time. The inability of our registration system, including our back office billing and collections infrastructure, and telecommunications systems to meet the demands of the increasing number of domain name registration requests and corresponding customer e-mails and telephone calls could result in substantial degradation in our customer support service and our ability to process, bill and collect registration requests in a timely manner. Our operations depend on our ability to maintain our computer and telecommunications equipment in effective working order and to reasonably protect our systems against interruption and potentially on such maintenance and protection by other registrars in the shared registration system. The root zone servers and top 18 19 level domain zone servers that we operate are critical hardware to our operations. Interruptions could result from: - fire, natural disaster, sabotage, power loss, telecommunication failure, human error or similar events, - computer viruses, hackers or similar disruptive problems caused by employees, customers or other Internet users, and - systems strain caused by the growth of our customer base and our inability to sufficiently maintain or upgrade our systems. We may lose revenue or incur significant costs if Year 2000 compliance issues are not properly addressed Our failure, or the failure of third parties on which we rely, to adequately address Year 2000 compliance issues may cause us to lose revenue or to incur significant costs. The primary risks that we face with regard to Year 2000 failures are those which impact our domain name registration business. These risks include: - significant and protracted interruption of electrical power to data and systems in our engineering and customer service facilities, - significant and protracted interruption of telecommunications and data network services in any of our headquarters, engineering or customer service facilities, - the failure of components of our current back office and domain name registration related systems, - the occurrence of a Year 2000 problem with respect to third-party suppliers', vendors' and outsourcing service providers' products and services, and - the occurrence of a Year 2000 problem with respect to one of the other registrars in the shared registration system. If we fail to solve a Year 2000 compliance problem with our mission critical business systems and processes, including the domain name servers under our control, telecommunications systems, facilities, data-networking infrastructure, commercial-off-the-shelf hardware or software and components used by our employees, the result could be a failure of or interruption to normal business operations. Furthermore, our business depends on the continued operation of, and widespread access to, the Internet. This, in turn, depends to a large extent on the software and systems of third parties on which our systems rely or to which they are connected. These third parties include, among others, Internet-related companies, including Internet web hosting companies, Internet access providers and Internet domain name server operators. We have no responsibility for, nor control over, other Internet domain name server operators that are critical to the efficient operation of the Internet. We do not know whether such domain name server operators have hardware, software or firmware that is Year 2000 compliant. COMPANY RISKS We must attract, integrate, train and retain key personnel knowledgeable about our business Given the relative "newness" and rapid growth of the Internet, there is intense competition for the limited supply of people qualified to work for us. Our future success depends on the continued service of key engineering, sales, marketing, executive and administrative personnel, and our ability to attract, hire, integrate, train and retain such personnel. Competition for engineering, sales, marketing and executive personnel is intense, particularly in the technology and Internet sectors and in the regions where our facilities are located. We cannot be certain that we will be able to retain existing personnel or attract, hire or retain additional qualified personnel. The loss of the services of any of our senior management team or other key employees or our failure to attract, integrate, train and retain additional key employees could harm our business. 19 20 Our near term success depends on the growth of our domain name registration business We may not be able to sustain the revenue growth we have experienced in recent periods. In addition, past revenue growth may not be indicative of future operating results. If we do not successfully maintain our current position as a leading provider of domain name registration services or develop or market additional services, our business could be harmed. Our domain name registration services business generates over 90% of our revenue and is expected to continue to account for a very significant portion of our revenue in at least the near term. Our future success will depend largely on: - the continued increase in domain name registrations, - re-registration rates of our customers, - our ability to maintain our current position as a leading registrar of domain names, - the successful development, introduction and market acceptance of new services that address the demands of Internet users, - our ability to provide a robust domain name registration system, and - our ability to provide a superior customer service infrastructure. We must effectively manage our marketing organization and establish and maintain distribution channels We will need to effectively manage our growing sales and marketing organization if we want to achieve future revenue growth. We do not know if we will be able to identify, attract and retain experienced sales and marketing personnel with relevant experience. Further, our sales and marketing organization may not be able to successfully compete against the significantly more extensive and well-funded sales and marketing operations of our current or potential competitors for registration or consulting services. Our ability to achieve future revenue growth will also depend on our ability to continue to establish direct sales channels and to develop multiple distribution channels. To do this we must maintain relationships with Internet access providers and other third parties. We have a high level of uncollectible receivables Because of our high level of uncollectible receivables, we continually review our billing practices. Any modifications that we may implement as a result of these reviews, including prepayment or pre-approved credit limits for new registration orders, which will occur later during 1999, could have unanticipated harmful consequences to our business. We believe we have experienced a high level of uncollectible receivables due to, among other factors, the large number of individuals and corporations that have registered multiple domain names with the apparent intention of transferring such names at a profit. Our experience has been that such speculative resellers have a greater tendency than other customers to default on their services fees. We have established a provision for uncollectible accounts which we believe to be adequate to cover anticipated uncollectible receivables; however, actual results could differ from our estimates. We are party to several legal proceedings which could have a negative financial impact on us We are involved in several legal proceedings. We cannot reasonably estimate the potential impact of any of these proceedings. An adverse determination in any of these proceedings, however, could harm our business. Legal proceedings in which we are involved are expensive and divert our personnel. See "Part II -- Item 1 -- Legal Proceedings." We may not be able to protect our intellectual property rights and proprietary information We rely on a combination of nondisclosure and other contractual arrangements with the U.S. Government, our employees, and third parties, as well as privacy and trade secret laws, to protect and 20 21 limit the distribution of our proprietary data, computer software, documentation, and processes used in conducting our domain name registration business. If we fail to adequately protect our intellectual property rights and proprietary information, or if we are subject to adverse results in litigation relating to our intellectual property rights and proprietary information, our business could be harmed. Any actions we take may not be adequate to protect our intellectual property rights and proprietary information. Other companies may develop competing technology that is similar or superior to our technology. The U.S. Government has taken positions adverse to our claims regarding proprietary rights over the WHOIS database and other intellectual property associated with our performance under the Cooperative Agreement and could attempt to require us to enter into agreements limiting such claims. In addition, members of Congress during hearings and otherwise have raised similar issues concerning our claims of proprietary rights. If these issues are not resolved in our favor, there could be a material adverse effect on our business. See "-- Operations under, changes to or disputes under the Cooperative Agreement could harm our business." Although we have no reason to believe that our domain name registration business activities infringe on the intellectual property rights of others, and we believe that we have all rights needed to conduct our business, it is possible that we could become subject to claims alleging infringement of third party intellectual property rights. Any such claims could subject us to costly litigation, and any adverse final rulings on any such claims could require us to pay damages, seek to develop alternative technology, and/or seek to acquire licenses to the intellectual property that is the subject of any such alleged infringement, and any such rulings could have a material adverse effect on our business. Unsuccessful future acquisitions and investments could decrease operating income, cause operational problems or otherwise disrupt our business We evaluate potential acquisitions and investments on an ongoing basis for various reasons including, among others, diversification of our domain name registration and Internet Technology Services businesses. Our acquisition and investment strategy poses many risks, including: - we may not be able to compete successfully for available acquisition candidates, complete future acquisitions and investments or accurately estimate the financial effect on our company of any businesses we acquire or investments we make, - future acquisitions and investments may require us to spend significant cash amounts or may decrease our operating income, - we may have trouble integrating the acquired business and retaining personnel, - acquisitions or investments may disrupt our business and distract our management from other responsibilities, and - to the extent that any of the companies which we acquire or in which we invest fail, our business could be harmed. Whether or when pooling of interests accounting for acquisitions might become available to us depends on many factors beyond our control. We face increasing risks associated with our international business While substantially all of our operations, facilities, and personnel are located within the United States, our revenues from sources outside the U.S. have increased significantly and may continue to increase in the future. As a result, we are subject to the risks of conducting business internationally, including unexpected changes in regulatory requirements, competition from foreign companies, fluctuations in the U.S. dollar, tariffs and other barriers and restrictions and the burdens of complying with a variety of foreign laws. We do not know what the impact of such regulatory, geopolitical and other factors will be on our business in the future or if we will have to modify our business practice. In addition, the laws of certain foreign countries may not protect our proprietary rights to the same extent as do the laws of the United States. 21 22 Our quarterly operating results may fluctuate; our future revenue and profitability are uncertain Our quarterly operating results may fluctuate significantly in the future due to a variety of factors, some of which are beyond our control. Factors that may affect our revenue include: - variations in the number of requests for domain name registrations or demand for our services, - successful competition by others, - termination or completion of contracts in our Internet Technology Services business or failure to obtain additional contracts in that business, and - market acceptance of new service offerings. In addition, we expect a significant increase in our operating expenses as we: - increase our sales and marketing operations and activities, and - continue to update our systems and infrastructure. If the increase in our expenses is not followed by an increase in our revenue, our operating results will be harmed. The fact that in the past our revenues have increased and we have been profitable on a quarterly and annual basis is not indicative of whether our revenues will increase or whether we will be profitable on a quarterly or annual basis in the future. INVESTMENT RISKS Our stock price, like that of many Internet companies, is highly volatile The market price of our common stock has been and is likely to continue to be highly volatile and significantly affected by factors such as: - general market and economic conditions and market conditions affecting technology and Internet stocks generally, - actual or anticipated fluctuations in our quarterly or annual registrations or operating results, - announcements of technological innovations, acquisitions or investments, developments in Internet governance or corporate actions such as stock splits, and - industry conditions and trends. The stock market has experienced significant price and volume fluctuations that have particularly affected the market prices of the stocks of technology companies, especially Internet-related companies. These broad market or technology or Internet sector fluctuations may adversely affect the market price of our common stock. Recently, the market price of our common stock, like that of many Internet-related companies, has experienced significant fluctuations. For instance, from January 1, 1999 through August 3, 1999, the reported sales price for our common stock ranged from $51.75 per share to $144 per share. On August 3, 1999, the reported last sale price of our common stock was $57 per share. The market price of our common stock also has been and is likely to continue to be significantly affected by expectations of analysts and investors. Reports and statements of analysts do not necessarily reflect our views. The fact that we have in the past met or exceeded analyst or investor expectations does not necessarily mean that we will do so in the future. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought. Such litigation could result in substantial costs and a diversion of our management's attention and resources. 22 23 Future sales of common stock could affect our stock price SAIC owns 14,850,000 of the outstanding shares of our common stock. A decision by SAIC to sell such stock could depress the market price of the common stock. SAIC may maintain significant influence over us SAIC owns approximately 45% of our common stock and remains our largest shareholder. Matters requiring approval by our stockholders, including the election of members of our board of directors, changes in the size and composition of the board of directors and a change in control, may need SAIC's approval to be effected. We do not have an agreement with SAIC which restricts its rights to convert, distribute or sell its shares of our common stock. Certain directors may have conflicts of interest Certain of our directors currently serve as directors, officers and employees of SAIC. Therefore, there may be various conflicts of interest or conflicting duties for these individuals. Since our directors and officers may also own stock of SAIC, there may be conflicts of interest when directors and officers are faced with decisions that could have different implications for us and SAIC. We rely on SAIC for certain corporate services and employee benefits We currently receive corporate services under an agreement with SAIC. Were SAIC to terminate these services, we may not be able to secure alternative sources for such services or such services may only be available to us at prices higher than those charged by SAIC. Our employees are currently eligible to participate in certain SAIC employee benefit plans through the end of calendar year 1999. However, due to SAIC's sale of some of its shares, SAIC now owns less than 50% of our common stock and as a result we will have to establish certain employee benefit plans of our own which could result in incremental costs to us. Our certificate of incorporation contains provisions relating to SAIC that may adversely affect us or our stockholders Our certificate of incorporation includes provisions relating to competition by SAIC with us, allocations of corporate opportunities, transactions with interested parties and intercompany agreements and provisions limiting the liability of certain people. It is unclear whether such provisions are enforceable under Delaware corporate law. Our certificate of incorporation provides that any person purchasing or acquiring an interest in shares of our capital stock shall be deemed to have consented to the provisions in the certificate of incorporation relating to competition with SAIC, conflicts of interest, corporate opportunities and intercompany agreements, and such consent may restrict such person's ability to challenge transactions carried out in compliance with such provisions. The corporate charter of SAIC does not include similar provisions. Therefore, persons who are directors and/or officers of ours and who are also directors and/or officers of SAIC may choose to take action in reliance on such provisions rather than act in a manner that might be favorable to us but adverse to SAIC. YEAR 2000 COMPLIANCE Network Solutions is continually assessing the potential effects of the "Year 2000" millennium change on Network Solutions' business systems and processes, including the Internet domain name servers under Network Solutions' control, telecommunications systems, facilities, data-networking infrastructure, commercial-off-the-shelf hardware, software and components used by its employees and its outsourcing vendors. Network Solutions' Year 2000 project is proceeding on schedule. The project goal is to ensure that Network Solutions' business is not impacted by the date transitions associated with the Year 2000. Network Solutions' Year 2000 project plan is coordinated by a team that reports directly to senior management. The project team is evaluating the Year 2000 compliance of Network Solutions' business 23 24 systems and processes, including the Internet domain name servers under Network Solutions' control, telecommunications systems, facilities, data-networking infrastructure, commercial-off-the-shelf hardware, software and components used by its employees and its outsourcing vendors whom provide services relating to Network Solutions' domain name registration business. Network Solutions' Year 2000 project is comprised of the following parallel phases: - Phase 1 -- Inventory all of Network Solutions' business systems and processes, including the Internet domain name servers under Network Solutions' control, telecommunications systems, facilities, data- networking infrastructure, commercial-off-the-shelf hardware, software and components used by its employees in order to assign priorities to potentially impacted systems and services. This phase has been completed; - Phase 2 -- Assess the Year 2000 compliance of all inventoried business systems and processes, including the Internet domain name servers under Network Solutions' control, telecommunications systems, facilities, data-networking infrastructure, commercial-off-the-shelf hardware, software and components used by its employees and determine whether to renovate or replace any non-Year 2000 compliant systems and services. The assessment of mission critical systems has been completed; however, assessment continues as a life cycle development activity; - Phase 3 -- Complete remediation of any non-Year 2000 compliant business systems and processes, including the Internet domain name servers under Network Solutions' control, telecommunications systems, facilities, data-networking infrastructure, commercial-off-the-shelf hardware, software and components used by its employees. Conduct procurements to replace any other non-Year 2000 compliant business systems and processes, telecommunications systems, facilities, data-networking infrastructure, commercial-off-the-shelf hardware, software and components used by its employees that will not be remediated. All remediation efforts have been completed; - Phase 4 -- Test and validate remediated systems to ensure inter-system compliance and mission critical system functionality. The testing has begun. As remediated code is successfully tested, it is released into production incrementally, a process which will last until October 30, 1999; - Phase 5 -- Deploy and implement remediated and replacement systems after the completion of successful testing and validation. The deployment and implementation of the remediated or replacement systems are expected to be completed by October 30, 1999; and - Phase 6 -- Design contingency and business continuation plans in the event of the failure of business systems and processes, telecommunications systems, facilities, data-networking infrastructure, commercial-off-the-shelf hardware, software and components used by Network Solutions' employees due to the Year 2000 millennium change. The business continuation plan has been completed and it will be updated throughout the year as appropriate. Based on its inventory and assessment, Network Solutions found that less than one-half of one percent of the software code of its mission critical systems needed to be remediated to be made Year 2000 compliant. However, Network Solutions, in its normal course of business, anticipates replacing or upgrading, prior to the millennium change, portions of these systems with new systems which will also be Year 2000 compliant. Currently, Network Solutions is enhancing its "back-office" and registration-related systems and the software relating to its core domain name registration services business. This enhancement effort is a function of Network Solutions' business growth and not a Year 2000 remediation effort. Based on its inventory and assessment, Network Solutions has found no material Year 2000 problems with its facilities and telecommunications systems. Network Solutions has conducted detailed assessments and tested the components of its telecommunications infrastructure. In addition, Network Solutions is seeking assurances from its facilities' landlords and telecommunications equipment vendors and data circuit providers regarding the Year 2000 compliance of their facilities and equipment. In the event of electrical power interruption outside of Network Solutions' control, Network Solutions has deployed back-up power systems capable of operating its core business indefinitely. 24 25 Network Solutions is now in the testing phase of its project cycle. Network Solutions believes that its incremental remediation costs to make its current business systems and processes, including the Internet domain name servers under Network Solutions' control, telecommunications systems, facilities, data- networking infrastructure, commercial-off-the-shelf hardware, software and components used by its employees Year 2000 compliant are not material. While Network Solutions is incurring some incremental costs directly relating to staff augmentation for the Year 2000 program management and technical assessment, the costs expended by Network Solutions through June 30, 1999 are less than $1,000,000. Network Solutions' expected total costs, including remediation and replacement costs, are estimated to be between $2,000,000 and $2,375,000 over the life of the Year 2000 project. Since portions of the mission critical "back office" and domain name registration-related systems will generally be replaced as a function of business growth, the labor and capital costs associated with such replacement systems are not directly attributed to achieving Year 2000 compliance. Network Solutions will also incur costs for extending its software testing architecture which, in addition to testing remediated systems, will be used as a normal component of Network Solutions' quality assurance infrastructure. As such these costs are not directly categorized as Year 2000 project costs but as normal business development and engineering costs. Network Solutions is contacting its hardware and software vendors, significant suppliers, outsourcing service providers and contracting parties to determine the extent to which Network Solutions is vulnerable to any such third party's failure to achieve Year 2000 compliance for its own systems. At the present time, Network Solutions does not expect Year 2000 issues of any such third parties to materially affect Network Solutions' business. Furthermore, Network Solutions' business depends on the continued operation of, and widespread access to, the Internet. This, in turn, depends to a large extent on the software and systems of third parties on which Network Solutions' systems rely or to which they are connected. These third parties include, among others, Internet-related companies, including Internet web hosting companies, Internet access providers and Internet domain name server operators. Network Solutions can give no assurances that the software or systems of such third parties will be Year 2000 compliant or that the failure of such third parties to achieve Year 2000 compliance will not have a material adverse effect on Network Solutions. To the extent that the normal operation of the Internet is disrupted by the Year 2000 millennium change, Network Solutions' business, financial condition or results of operations could be materially and adversely affected. Should Network Solutions fail to solve a Year 2000 compliance problem related to its mission critical business systems and processes, including the Internet domain name servers under Network Solutions' control, telecommunications systems, facilities, data-networking infrastructure, commercial-off-the-shelf hardware, software and components used by its employees, the result could be a failure or interruption to normal business operations. Network Solutions believes that, with the deployment of the new "back office" and domain name registration related systems in 1999, the potential for significant interruptions to normal operations should be minimized. Network Solutions' primary risks with regard to Year 2000 failures are those which impact its domain name registration business. The reasonably likely worst case risks inherent in Network Solutions' business are as follows: - Significant and protracted interruption of electrical power to data and systems in Network Solutions' engineering and customer support facilities could materially and negatively impact Network Solutions' ability to provide data and call-center operations. To mitigate this risk, Network Solutions has deployed back-up power systems capable of operating indefinitely. However, electrical power interruptions that impact Internet connectivity providers could adversely impact Network Solutions because of Network Solutions' reliance upon Internet-based operations for its day to day business. - Significant and protracted interruption of telecommunications and data network services in any of Network Solutions' headquarters, engineering or customer support facilities could materially and negatively impact Network Solutions' ability to provide data and call-center operations. Network Solutions has conducted detailed assessments of the components of its telecommunications infrastructure and is working to identify appropriate system testing guidelines. As part of its technical assessment, Network Solutions identified the compliance status of its data networking infrastructure and implemented remediation. Finally, Network Solutions has plans to seek additional assurances and 25 26 a better understanding of the compliance programs of its telecommunications and data circuit providers. - The failure of components of Network Solutions' current "back office" and domain name registration related systems could materially and negatively impact Network Solutions' business. However, as a function of business growth, these systems are planned to be retired before the end of 1999. As a contingency planning measure, Network Solutions has conducted a technical assessment of the current systems and their software applications and is currently testing such systems. - Despite the assurances of Network Solutions' third-party suppliers, hardware and software vendors, and outsourcing service providers regarding the Year 2000 compliance of their products and services, the potential exists that a Year 2000 problem relating to such third-party suppliers, vendors and outsourcing service providers' products and services could have a material impact on Network Solutions' business. Network Solutions is conducting monthly discussions with its mission critical outsourcing service providers to determine the progress of their Year 2000 compliance programs. Although Network Solutions found that it only has had to remediate a small portion of its software code in its internal mission critical systems and despite Network Solutions' expectation that its enhancement effort will result in Year 2000 compliant "back-office" and registration-related systems and software relating to its core domain name registration services business, Network Solutions has developed a business continuity plan and is performing a test on the existing core registration-related systems that are being replaced. The final business continuity plan has been completed and will be updated as appropriate throughout the year. Although Network Solutions is taking appropriate steps so that Network Solutions' business is not impacted by the date transitions associated with the Year 2000, Network Solutions has no responsibility for, nor control over other Internet domain name server operators or tens of thousands of lower level domain name system server operators that are critical to the efficient operation of the Internet. Network Solutions has not determined whether such domain name server operators or other server operators have hardware, software or firmware that is Year 2000 compliant. Network Solutions has notified the Department of Commerce of this issue. Forward-Looking Statements The foregoing Year 2000 discussion and the information contained herein is provided as a "Year 2000 Readiness Disclosure" as defined in the Year 2000 Information and Readiness Disclosure Act of 1998 (Public Law 105-271, 112 Stat. 2386) enacted on October 19, 1998 and contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, including without limitation, anticipated costs and the dates by which Network Solutions expects to complete certain actions, are based on management's best current estimates, which were derived utilizing numerous assumptions about future events, including the continued availability of certain resources, representations received from third parties and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the ability to identify and remediate all relevant systems, results of Year 2000 testing, adequate resolution of Year 2000 issues by governmental agencies, businesses and other third parties who are outsourcing service providers, suppliers, and vendors of Network Solutions, unanticipated system costs, the adequacy of and ability to implement contingency plans and similar uncertainties. The "forward-looking statements" made in the foregoing Year 2000 discussion speak only as of the date on which such statements are made, and Network Solutions undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Network Solutions is exposed to the impact of interest rate changes and change in the market values of its investments. 26 27 Interest Rate Risk. Network Solutions' exposure to market rate risk for changes in interest rates relates primarily to the Company's investment portfolio. Network Solutions has not used derivative financial instruments in its investment portfolio. Network Solutions invests its excess cash in debt instruments of the U.S. Government and its agencies, and in high-quality corporate issuers and, by policy, limits the amount of credit exposure to any one issuer. The Company protects and preserves its invested funds by limiting default, market and reinvestment risk. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, the Company's future investment income may fall short of expectations due to changes in interest rates or the Company may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates. Investment Risk. The Company has invested in the equity instruments of a privately-held, information technology company for business and strategic purposes. This investment is included in other long-term assets and is accounted for under the cost method which approximates fair value. Network Solutions is also exposed to equity price risks on the marketable portion of its equity securities. Network Solutions' available-for-sale securities include investments in publicly-held companies in the Internet industry sector, many of which have experienced significant historical volatility in their stock prices. 27 28 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As of August 1, 1999, we were a defendant in four active lawsuits involving domain name disputes between trademark owners and domain name holders. We are drawn into such disputes, in part, as a result of claims by trademark owners that we are legally required, upon request by a trademark owner, to terminate the right we granted to a domain name holder to register a domain name which is alleged to be similar to the trademark in question. The holders of the domain name registrations in dispute have, in turn, questioned our right, absent a court order, to take any action which suspends their use of the domain names in question. Although 51 out of approximately 6,600 of these situations have resulted in suits actually naming us as a defendant, as of August 1, 1999, no adverse judgment has been rendered and no award of damages has ever been made against us. We believe that we have meritorious defenses and vigorously defend ourselves against these claims. On March 20, 1997, PG Media, Inc., a New York-based corporation, filed a lawsuit against us in the United States District Court, Southern District of New York alleging that we had restricted access to the Internet by not adding PG Media's requested top level domains to the Internet root zone system in violation of the Sherman Act. In its complaint, PG Media, in addition to requesting damages, asked that we be ordered to include reference to PG Media's top level domains and name servers in the root zone file administered by us under the Cooperative Agreement. In June 1997, we received written direction from the National Science Foundation not to take any action which would create additional top level domains or to add any new top level domains to the Internet root zone until the National Science Foundation provides further guidance. On September 17, 1997, PG Media filed a Second Amended Complaint adding the National Science Foundation as a defendant. On May 14, 1998, PG Media served us with a motion for a preliminary injunction against both defendants to compel both defendants to add PG Media's top level domains to the Internet root zone within 30 days. In response, both defendants filed cross-motions for summary judgment against PG Media. On July 20, 1998, a hearing on all parties' motions occurred. The basic issue before the court was the National Science Foundation's authority to control the Internet's root zone system. On March 16, 1999, the court granted both our and the National Science Foundation's motions for summary judgment, holding that the National Science Foundation does have authority over the root zone system and that the federal instrumentality immunity doctrine immunizes us against liability under both sections 1 and 2 of the Sherman Act. PG Media noticed its appeal on April 15, 1999. Our brief was filed in the appellate court on July 26, 1999. No oral argument has yet been scheduled. While we cannot reasonably estimate the potential impact of the claims advanced in this lawsuit, a successful claim could harm our business. On October 17, 1997, a group of six plaintiffs filed the Thomas suit against us and the National Science Foundation in the United States District Court, District of Columbia, challenging the legality of fees defendants charge for the registration of domain names on the Internet and seeking restitution of fees collected from domain name registrants in an amount in excess of $100 million, damages, and injunctive and other relief. Plaintiffs alleged violations of the Sherman Act, the U.S. Constitution, the Administrative Procedures Act and the Independent Offices Appropriations Act. On February 10, 1998, the plaintiffs filed a motion for preliminary injunction against us seeking several items of relief. On April 6, 1998, the Court issued its opinion granting summary judgment in favor of the plaintiffs on the Intellectual Infrastructure Fund, ruling it an "unlawful tax." The court also granted our motion to dismiss all other counts (II through X) and simultaneously denied the plaintiffs' preliminary injunction motion against us. On April 30, 1998, Congress passed H.R. 3579 which was signed into law by the President on May 1, 1998. Section 8003 of H.R. 3579 legalized, ratified and confirmed the entire Intellectual Infrastructure Fund and authorized and directed the National Science Foundation to deposit the entire fund into the U.S. Treasury. On August 28, 1998, the District Court dismissed the entire case, issuing a final judgment in the matter. In October 1998, the plaintiffs appealed the court's dismissal of their claims, and oral argument occurred on February 25, 1999. On May 14, 1999, the Court of Appeals ruled in favor of Network Solutions by unanimously affirming the District Court's decision. The Court of Appeals denied the plaintiffs' motion for reconsideration and entered final judgment on July 20, 1999. 28 29 On June 27, 1997, SAIC received a Civil Investigative Demand, or "CID," from the U.S. Department of Justice issued in connection with an investigation to determine whether there is, has been, or may be any antitrust violation under the Sherman Act relating to Internet registration products and services. The CID sought documents and information from SAIC and us relating to our Internet registration business. On April 29, 1999, we received a second CID seeking additional information and documents relating to our ownership rights in, policies relating to access to, and our use of, data that we compile in the course of operating our Internet registration business. We are providing information responsive to the CID. On June 23, 1999, the Department of Justice formally notified us that SAIC had been removed as a subject of the investigation. Because the investigation, as currently focused, is still at a preliminary stage, we cannot reasonably estimate the potential impact of the investigation nor can we predict whether a civil action might ultimately be filed by the Department of Justice or the form of relief that might be sought. Any such relief from such a suit could have a harmful effect on our business. On August 17, 1998, we received notice from the Commission of the European Communities, or "EC," of an investigation concerning the Company's Premier Program agreements in Europe. The EC requested production of these agreements and related materials for review and we complied. On June 17, 1999, we received a second inquiry from the EC concerning our registrar licensing agreements with the five newly-accredited testbed registrars and we responded to this inquiry on July 9, 1999. We cannot reasonably estimate the potential impact of the investigation nor can we predict whether an action will ultimately be brought by the EC or the form of relief that might be sought. Any such relief could harm our business. We are involved in various other investigations, claims and lawsuits arising in the normal conduct of our business, none of which, in our opinion will harm our business. Legal proceedings in which we are involved have resulted and likely will result in, and any future legal proceedings can be expected to result in, substantial legal and other expenses and a diversion of the efforts of our personnel. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. The Company's Registration Statement on Form S-1 (Registration No. 333-30705) was declared effective September 25, 1997 by the Securities and Exchange Commission. The managing underwriters of the Class A common stock offering commencing September 26, 1997 were Hambrecht & Quist, J.P. Morgan & Co. and PaineWebber Incorporated. The Company registered and sold 3,220,000 shares (pre-split) for its own account at an aggregate price of $57,960,000 and the selling stockholder (SAIC) registered and sold 575,000 shares (pre-split) for its account at an aggregate price of $10,350,000, for a combined total of 3,795,000 shares (pre-split) at an aggregate price of $68,310,000. The offering has since terminated. The total amount of expenses incurred for the Company's account in connection with the offering was $5,555,200, which is comprised of $4,057,200 for underwriting discounts and commissions and $1,498,000 of other expenses. No expenses were paid to directors, officers or persons owning more than ten percent of any class of the Company's equity securities. The resultant Company's net offering proceeds were $52,404,800. The net proceeds to SAIC for its account were $9,625,500 after deducting the associated underwriting discounts and commissions of $724,500. On October 1, 1997, the Company received the offering proceeds from which a $10,000,000 dividend was paid to SAIC. SAIC owns ten percent or more of a class of the Company's equity securities and is an affiliate of the Company. The remaining proceeds have been invested in investment grade government discount notes, commercial paper and corporate bonds. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company's Annual Meeting of Stockholders was held on May 18, 1999 (the "Annual Meeting"). At the Annual Meeting, stockholders voted on three matters: (i) the election of eight directors; (ii) the approval of a proposal to amend the Company's Second Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") to reclassify the Company's Class A common stock, par value $0.001 per 29 30 share, and Class B common stock, par value $0.001 per share, as shares of the Company's common stock, par value $0.001 per share (the "Common Stock"); and (iii) the approval of a proposal to amend the Company's Certificate of Incorporation to increase the number of authorized shares of the Company's Common Stock from 130,000,000 to 210,000,000. The stockholders elected management's nominees as the directors in an uncontested election and approved the amendments to the Certificate of Incorporation by the following votes, respectively: (i) Election of directors:
DIRECTOR VOTES FOR VOTES WITHHELD - -------- ---------- -------------- Michael A. Daniels.......................................... 81,911,557 71,776 Donald N. Telage............................................ 81,914,148 69,185 J. Robert Beyster........................................... 81,908,815 74,518 Craig I. Fields............................................. 81,913,130 70,203 John E. Glancy.............................................. 81,911,257 72,076 J. Dennis Heipt............................................. 81,912,656 70,677 William A. Roper, Jr........................................ 81,913,757 69,576 Stratton D. Sclavos......................................... 81,926,509 56,824
(ii) Approval of a proposal to amend the Company's Certificate of Incorporation to reclassify the Company's Class A common stock, par value $0.001 per share, and Class B common stock, par value $0.001 per share, as shares of Common Stock, par value $0.001 per share:
VOTES FOR VOTES AGAINST ABSTENTIONS ---------- ------------- ----------- Amendment to Reclassify Shares................. 81,905,816 69,345 8,172
(iii) Approval of a proposal to amend the Certificate of Incorporation to increase the number of authorized shares of Common Stock from 130,000,000 to 210,000,000:
VOTES FOR VOTES AGAINST ABSTENTIONS ---------- ------------- ----------- Amendment to Increase Authorized Shares........ 81,735,582 241,231 6,520
For further discussion of these matters, see the Company's definitive Proxy Statement for the May 18, 1999 Annual Meeting of Stockholders, which was filed with the Commission on April 16, 1999. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits -- See Exhibit Index (b) Reports on Form 8-K -- None 30 31 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NETWORK SOLUTIONS, INC. By: /s/ ROBERT J. KORZENIEWSKI ------------------------------------ Robert J. Korzeniewski Chief Financial Officer and Authorized Signatory Date: August 16, 1999 31 32 INDEX TO EXHIBITS NETWORK SOLUTIONS, INC. THREE MONTHS ENDED JUNE 30, 1999
EXHIBIT SEQUENTIAL NO. DESCRIPTION OF EXHIBITS PAGE NO. - ------- ----------------------- ---------- 3(iii) Certificate of Amendment of Second Amended and Restated Certificate of Incorporation 10.27 Amendment No. 14 to the Cooperative Agreement dated July 13, 1999 10.28 Amendment No. 15 to the Cooperative Agreement dated July 16, 1999 10.29 Offer Letter between James Rutt and Network Solutions, Inc. dated May 18, 1999 10.30 Separation Agreement between James Rutt and Network Solutions, Inc. dated May 19, 1999 10.31 Non-Statutory Stock Option Agreement Between James Rutt and Network Solutions, Inc. dated June 7, 1999 10.32 Non-Statutory Stock Option Agreement Between James Rutt and Network Solutions, Inc. dated May 21, 1999 27.1 Financial Data Schedule 27.2 Restated Financial Data Schedule
32 EX-3 2 CERTIFICATE OF AMENDMENT 1 EXHIBIT 3(iii) CERTIFICATE OF AMENDMENT OF SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF NETWORK SOLUTIONS, INC. NETWORK SOLUTIONS, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware. DOES HEREBY CERTIFY: FIRST: That the Board of Directors (the "Board") of said corporation, at a meeting of the Board held on February 16, 1999, adopted a resolution proposing and declaring advisable the following amendment to the Second Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") of said corporation: RESOLVED, that upon the approval of the stockholders of this Corporation, the Corporation amend its Certificate of Incorporation by deleting in its entirety Section A of Article IV of the Certificate of Incorporation and substituting in lieu thereof the following: A. The total number of shares of stock that the Corporation shall have authority to issue is two hundred twenty million (220,000,000) of which (i) two hundred ten million (210,000,000) shares shall be shares of common stock, $0.001 par value per share (the "Common Stock"), and (ii) ten million (10,000,000) shares shall be shares of preferred stock, $0.001 par value per share (the "Preferred Stock"). On the effective date of this Amendment, each outstanding share of the Corporation's Class A common stock, par value $0.001 per share, and Class B common stock par value $0.001 per share, shall be automatically reclassified and converted into one share of Common Stock. SECOND: That the stockholders of said corporation have approved said amendment in accordance with the provisions of Section 242 of the Delaware General Corporation Law at a meeting of the stockholders held on May 18, 1999. THIRD: That the aforesaid amendment was duly adopted in accordance with the provisions of Section 242 of the Delaware General Corporation Law. 2 IN WITNESS WHEREOF, said NETWORK SOLUTIONS, INC., has caused this certificate to be signed by James P. Rutt, Chief Executive Officer, this 15th day of June, 1999. /s/ JAMES P. RUTT ----------------------------- James P. Rutt Chief Executive Officer EX-10.27 3 AMENDMENT #14 TO THE COOPERATIVE AGRMT. OF JULY 13 1 - ------------------------------------------------------------------------------------------------------------------------------------ FORM CD-451 U.S. DEPARTMENT OF COMMERCE [ ] GRANT X COOPERATIVE AGREEMENT (REV 10/98) ---------------------------------------------- ACCOUNTING CODE AMENDMENT TO N/A FINANCIAL ASSISTANCE AWARD ---------------------------------------------- AWARD NUMBER NCR 92-18742 - ------------------------------------------------------------------------------------------------------------------------------------ RECIPIENT NAME AMENDMENT NUMBER Network Solutions, Incorporated Fourteen (14) - ------------------------------------------------------------------------------------------------------------------------------------ STREET ADDRESS EFFECTIVE DATE 505 Huntmar Park Drive Upon Execution - ------------------------------------------------------------------------------------------------------------------------------------ CITY, STATE, ZIP CODE EXTEND WORK COMPLETION TO Herndon, Virginia 22070 N/A - ------------------------------------------------------------------------------------------------------------------------------------ CFDA NO. AND PROJECT TITLE 11. National Telecommunications and Information Administration - ------------------------------------------------------------------------------------------------------------------------------------ COSTS ARE REVISED PREVIOUS ADD DEDUCT TOTAL AS FOLLOWS: N/A ESTIMATED COST ESTIMATED COST - ------------------------------------------------------------------------------------------------------------------------------------ FEDERAL SHARE OF COST $ $ $ $ - ------------------------------------------------------------------------------------------------------------------------------------ RECIPIENT SHARE OF COST $ $ $ $ - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ESTIMATED COST $ $ $ $ - ------------------------------------------------------------------------------------------------------------------------------------ REASON(S) FOR AMENDMENT To extend the test bed phase (Phase 2) of Shared Registration System development as stated in the Shared Registry Section of Amendment Number 11, as revised by Amendment 12, until July 16, 1999. - ------------------------------------------------------------------------------------------------------------------------------------ This Amendment approved by the Grants Officer is issued in triplicate and constitutes an obligation of Federal funding. By signing the three documents, the Recipient agrees to comply with the Amendment provisions checked below and attached, as well as previous provisions incorporated into the Award. Upon acceptance by the Recipient, two signed Amendment documents shall be returned to the Grants Officer and the third document shall be retained by the Recipient. If not signed and returned without modification by the Recipient within 30 days of receipt, the Grants Officer may unilaterally terminate this Amendment. X Special Award Conditions [ ] Line Item Budget [ ] Other(s) _____________________________________________________________________________________________________________________ - ------------------------------------------------------------------------------------------------------------------------------------ SIGNATURE OF DEPARTMENT OF COMMERCE GRANTS OFFICER DATE Betty L. Cassidy /s/ BETTY L. CASSIDY Acting Grants Officer, Office of Executive Assistance Management 6/30/99 - ------------------------------------------------------------------------------------------------------------------------------------ TYPED NAME, TYPED TITLE, AND SIGNATURE OF AUTHORIZED RECIPIENT OFFICIAL David M. Graves /s/ D.M. Graves Director, Business Affairs 7/13/99 - ------------------------------------------------------------------------------------------------------------------------------------
2 SPECIAL AWARD CONDITIONS NCR 92-18742 Amendment Number Fourteen (14) 1. Section 4 of the time line for the development of the Shared Registration System stated in Amendment Number 11, Shared Registry Section, as revised in Amendment 12, is revised as follows: 4. BY JULY 16, 1999, the Shared Registration System will be deployed by NSI and available to support multiple licensed Accredited Registrars offering registration services within the gTLDs for which NSI now acts as a registry. (Phase 2) 2. Except as modified by this amendment, the terms and conditions of this Cooperative Agreement, as amended, are unchanged. EX-10.28 4 AMENDMENT #15 TO THE COOPERATIVE AGRMT. OF JULY 16 1 - ------------------------------------------------------------------------------------------------------------------------------------ FORM CD-451 U.S. DEPARTMENT OF COMMERCE [ ] GRANT X COOPERATIVE AGREEMENT (REV 10/98) ---------------------------------------------- ACCOUNTING CODE AMENDMENT TO N/A FINANCIAL ASSISTANCE AWARD ---------------------------------------------- AWARD NUMBER NCR 92-18742 - ------------------------------------------------------------------------------------------------------------------------------------ RECIPIENT NAME AMENDMENT NUMBER Network Solutions, Incorporated Fifteen (15) - ------------------------------------------------------------------------------------------------------------------------------------ STREET ADDRESS EFFECTIVE DATE 505 Huntmar Park Drive Upon Execution - ------------------------------------------------------------------------------------------------------------------------------------ CITY, STATE, ZIP CODE EXTEND WORK COMPLETION TO Herndon, Virginia 22070 N/A - ------------------------------------------------------------------------------------------------------------------------------------ CFDA NO. AND PROJECT TITLE 11. National Telecommunications and Information Administration - ------------------------------------------------------------------------------------------------------------------------------------ COSTS ARE REVISED PREVIOUS ADD DEDUCT TOTAL AS FOLLOWS: N/A ESTIMATED COST ESTIMATED COST - ------------------------------------------------------------------------------------------------------------------------------------ FEDERAL SHARE OF COST $ $ $ $ - ------------------------------------------------------------------------------------------------------------------------------------ RECIPIENT SHARE OF COST $ $ $ $ - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ESTIMATED COST $ $ $ $ - ------------------------------------------------------------------------------------------------------------------------------------ REASON(S) FOR AMENDMENT To extend the test bed phase (Phase 1) of Shared Registration System development as stated in the Shared Registry Section of Amendment Number 11, as revised by Amendment 12 and 14, until August 6, 1999. - ------------------------------------------------------------------------------------------------------------------------------------ This Amendment approved by the Grants Officer is issued in triplicate and constitutes an obligation of Federal funding. By signing the three documents, the Recipient agrees to comply with the Amendment provisions checked below and attached, as well as previous provisions incorporated into the Award. Upon acceptance by the Recipient, two signed Amendment documents shall be returned to the Grants Officer and the third document shall be retained by the Recipient. If not signed and returned without modification by the Recipient within 30 days of receipt, the Grants Officer may unilaterally terminate this Amendment. X Special Award Conditions [ ] Line Item Budget [ ] Other(s) _____________________________________________________________________________________________________________________ - ------------------------------------------------------------------------------------------------------------------------------------ SIGNATURE OF DEPARTMENT OF COMMERCE GRANTS OFFICER DATE Betty L. Cassidy /s/ Gayle Johnson Acting Grants Officer, Office of Executive Assistance Management 7/15/99 - ------------------------------------------------------------------------------------------------------------------------------------ TYPED NAME, TYPED TITLE, AND SIGNATURE OF AUTHORIZED RECIPIENT OFFICIAL David M. Graves /s/ D.M. Graves Director, Business Affairs 7/16/99 - ------------------------------------------------------------------------------------------------------------------------------------
2 SPECIAL AWARD CONDITIONS NCR 92-18742 Amendment Number Fifteen (15) 1. Section 4 of the time line for the development of the Shared Registration System stated in Amendment Number 11, Shared Registry Section, as revised in Amendment 12 and 14, is revised as follows: 4. BY AUGUST 6, 1999, the Shared Registration System will be deployed by NSI and available to support multiple licensed Accredited Registrars offering registration services within the gTLDs for which NSI now acts as a registry. (Phase 2) 2. Except as modified by this amendment, the terms and conditions of this Cooperative Agreement, as amended, are unchanged. EX-10.29 5 OFFER LETTER BETWEEN JAMES RUTT AND NETWORK 1 [NETWORK SOLUTIONS LOGO] May 18, 1999 CONFIDENTIAL Mr. James Rutt 18727 Silcott Springs Road Purcellville, VA 20132 Dear Jim: 1. It is a pleasure to offer you the position of Chief Executive Officer of Network Solutions, Inc., reporting directly to the NSI Board of Directors. It is my 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. 2. We would like to begin your employment on or before May 25, 1999. Your starting salary will be approximately $6,730.77 per week, based on an anticipated workweek of 40 hours, which is equivalent to an annual salary of $350,000. Your salary will be subject to review annually for increases based on NSI's compensation policies and your performance and contributions to our business. In addition to your base salary you will have the following benefits: - - NSI Bonus Plan: You will be eligible to receive a performance bonus with a target of 100% of base salary. Your bonus will be based on objectives to be established and mutually agreed upon by you and the NSI Board of Directors. Your target bonus for 1999 shall be set at 100% of your annualized base salary (i.e., $350,000). - - NSI Options: You will receive 750,000 NSI non-qualified stock options. The stock options will be subject to the terms specified in the attached Nonstatutory Stock Option Agreement. Fifty percent of the options (375,000 options) will be granted and priced on your start date at Fair Market Value (as defined in NSI's 1996 Stock Incentive Plan, as amended) on such date and the remaining fifty percent (375,000 options) will be granted and priced on the tenth business day following your start date at Fair Market Value (as defined in NSI's 1996 Stock Incentive Plan, as amended) on such date. In addition, you will receive yearly stock option grants at least equal to those provided to other NSI senior executives based on any yearly stock option grant program then maintained by NSI. - - NSI Stock Units: You will be granted 7,000 Stock Units on your start date, representing the right to receive 7,000 shares of NSI Common Stock, under NSI's 1996 Stock Incentive Plan, as amended. These Stock Units will vest on the same schedule as the non-qualified stock options set forth above, and upon your death, total disability or the attainment by you of age 65, except that accelerated vesting will occur with respect to 5,000 of these Stock Units in the event the NSI Board acts to 2 remove you for any reason other than Cause or Non-performance or you terminate your employment for Good Reason. Notwithstanding the foregoing, acceleration of vesting will not be forfeited for Non-performance unless you have been given an opportunity to be heard by the Board of Directors after at least 10 days' written notice by the Board. For purposes of this offer letter, 1. "Cause" means (i) your conviction of a felony involving a personal act of willful and intentional misconduct or the entry by you of a plea of nolo contendere in connection with such an alleged felony. 2. "Non-performance" means (i) the repeated and continual failure by you to fulfill the basic duties of your position(s) with NSI; (ii) your gross negligence, dishonesty, willful malfeasance or gross misconduct in connection with your employment with NSI which has had (or is expected to have) a demonstrative and adverse effect on the business or reputation of NSI or its subsidiaries; or (iii) failure by you to follow any lawful directives established for you by the Board of Directors. For purposes of the definition of "Non-performance," any isolated, insubstantial and inadvertent action not taken in bad faith which is remedied by you promptly after receipt of written notice thereof from NSI shall not be deemed to be "Non-performance." 3. "Good Reason" means the occurrence of any of the following without your written consent: (i) assignment to you of any duties materially inconsistent with your position as Chief Executive Officer or any material diminution in your position, authority, duties or responsibilities; (ii) reduction in base salary or target bonus opportunity or failure to provide you with stock option grants on a basis which is at least as favorable as that provided to other executive officers generally (excluding grants to new hires or other extraordinary grants to a particular individual); (iii) relocation of your principal work place to a location that is more than 25 miles from Reston, Virginia; or (iv) failure to be elected or reelected to the NSI Board of Directors or removal from the NSI Board of Directors. For purposes of the definition of "Good Reason," any isolated, insubstantial and inadvertent action not taken in bad faith which is remedied by NSI promptly after receipt of written notice thereof from you shall not be deemed to be "Good Reason." Separation Agreement: On or before your start date, you and NSI will execute the attached separation agreement(the "Separation Agreement") . - - SAIC/NSI Fringe Benefits: The benefits plan currently includes health care, dental, life insurance, income protection, paid absences, and a 401(k) plan to name a few. - - Attorneys' Fees: NSI will reimburse you for all reasonable attorneys' fees up to $10,000 incurred in connection with advising you with respect to this offer, upon submission of copies of bills. - - Board Membership: You will be recommended to be added to the NSI Board of Directors. 3. By and in consideration of the benefits to be provided to you under this offer letter, you agree that: (a) Noncompetition. During the period commencing on the date your employment terminates and ending on the first anniversary thereof (the "Restriction Period"), you shall not provide services to or otherwise become associated with any corporation, partnership, limited liability company or other entity or organization (a 3 "Competitor"), whether as a principal, partner, employee, agent, consultant, shareholder (other than as a holder, or a member of a group which is a holder, of not in excess of 1% of the outstanding voting shares of any such entity) or in any other relationship or capacity, which is engaged in a business or commercial activity in any geographic area where NSI or such subsidiary is engaged in such business or commercial activity on such date which directly competes with any business or activity in which NSI or any of its subsidiaries is engaged (with the exception of any business or activities which provide less than 10% of NSI's net revenue) (a "Business") on the date your employment terminates; provided that, if you are employed by or serve as a consultant to a subsidiary, division or other affiliate of a Competitor (the "Affiliate") and the Affiliate is not itself engaged in a Business, such employment or consultation shall not be in violation of this provision so long as your duties and responsibilities with respect to such employment or consultation are limited to the business of the Affiliate. (b) Confidentiality. Without the prior written consent of NSI, except to the extent required by an order of a court having competent jurisdiction or under subpoena from an appropriate government agency, you shall not disclose any trade secrets, customer lists, designs, information regarding product development, marketing plans, sales plans, projected acquisitions or dispositions of properties or management agreements, management organization information (including data and other information relating to members of the Board and management), operating policies or manuals, business plans, purchasing agreements, financial records, or other financial, commercial, business or technical information relating to NSI or any of its subsidiaries or information designated as confidential or proprietary that NSI or any of its subsidiaries may receive belonging to suppliers, customers or others who do business with NSI or any of its subsidiaries (collectively, "Confidential Information") to any third person unless such Confidential Information has been previously disclosed to the public by NSI or is in the public domain (other than by reason of your breach of this offer letter). (c) Non-Solicitation of Employees and Agents. During the Restriction Period, you shall not directly or indirectly solicit, encourage or induce any employee or agent of NSI or any of its subsidiaries to terminate employment or its services with such entity, and shall not directly or indirectly, either individually or as owner, agent, employee, consultant or otherwise, employ or offer employment to any person who is or was employed by NSI or a subsidiary thereof unless such person shall have ceased to be employed by such entity for a period of at least six months. (d) Injunctive Relief and Other Remedies with Respect to Covenants. You acknowledge and agree that your covenants and obligations with respect to noncompetition, nonsolicitation, and confidentiality relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause NSI irreparable injury for which adequate remedies are not available at law. Therefore, you agree that (i) NSI shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining you from committing any violation of the covenants and obligations contained in this section of the offer letter, and (ii) following any material violation by you of the 4 covenants and obligations contained in this section of the offer letter, NSI shall be entitled to recover from you any compensation and benefits payable to you pursuant to the Separation Agreement. These remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. In connection with the foregoing provisions of this section of the offer letter, you represent that your economic means and circumstances are such that such provisions will not prevent you from providing for yourself and your family on a basis satisfactory to you. 4. As the Chief Executive Officer we would expect you to adhere to the Employee Ownership Guidelines established by the Board of Directors. The guideline is a commitment by the senior management team to maintain a certain level of stock ownership in the company expressed as a multiple of his/her base salary. The level of stock ownership to be maintained is determined by the position held and length of time in that covered position. The employee ownership goal ramps up over a four-year period, after which the Year 4 ownership goal should be maintained. The phased process for the CEO is as follows and represents a multiple of total cash compensation: Years in Position CEO 1 1x 2 2x 3 3x 4 4x Stock ownership levels will be reviewed annually and, due to the historical volatility of public stock, for purposes of determining whether the guidelines have been met, the value of stock or share equivalents will be calculated using the highest of the past four quarters' average price. Ownership that will be counted is: * Stock Units - Share equivalents underlying vested Stock Units held will be counted. * Stock Options - Share equivalents underlying vested stock options will be counted. * Stock - Purchased through the ESPP or other means. Unvested stock options, unvested stock units or other plan holdings do not count towards the achievement of these ownership guidelines. 5. NSI has a strong policy against employee use of illegal drugs and substance abuse. Your start date will be determined after you have successfully completed a drug test. 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 company's compliance with federal laws, regulations, and executive orders or by the terms of contracts entered into by NSI. The use of illegal drugs or substances can be cause for termination should you become employed by NSI. 6. This employment offer is effective for seven (7) days from receipt of this letter. If you have any questions, feel free to call Bill Roper or me. The terms of this offer letter are strictly confidential and are not to be disclosed without the express permission of NSI. This offer is contingent upon receiving favorable references. In addition, it is 5 understood that you or NSI may terminate this employment relationship at any time with or without cause or notice, subject to the financial arrangements discussed above. 7. Upon acceptance of our offer, we will forward to you a package including the standard Science Applications International Corporation Inventions Agreement, the Education Summary and Pre-employment Statement, and the SAIC/NSI Employee Dispute Resolution Guide. We will ask you to review all of the materials carefully. The Employee Dispute Resolution Guide contains an acknowledgment page, which needs to be signed by you. As a condition of employment, all employees of NSI are required to execute these documents. You may do so on your first day of employment. As a further condition of employment, all new employees are required to present documentation that confirms their identity and eligibility for employment in the United States. Additionally, you must have completed NSI/SAIC form G/C 489 that inquires about any personal or substantial participation in the conduct of U.S. Government Agency procurement within the last two years. 8. We are sincerely eager for you to join our executive 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 me and a copy to the Human Resources Department. Please keep a copy for your records. Sincerely, Network Solutions, Inc. /s/ MIKE DANIELS Mike Daniels Chairman of the Board I accept your offer of employment. Signature /s/ J P RUTT Date May 21, 1999 -------------------- -------------- 4:50 P.M. EX-10.30 6 SEPARATION AGRMT. BETWEEN JAMES RUTT & NETWORK 1 SEPARATION AGREEMENT SEPARATION AGREEMENT, dated as of May 19, 1999, by and between Network Solutions, Inc., a Delaware corporation (the "Company"), and James Rutt ("Executive"). WHEREAS, the Company has offered Executive employment as its Chief Executive Officer; WHEREAS, to induce Executive to enter into its employment, the Company is willing to provide Executive with certain severance payments in the event that his employment is terminated by the Company under the circumstances described herein; NOW, THEREFORE, in consideration of their mutual promises, the Company and Executive agree as follows: 1. Definitions. (a) "Cause" means (i) Executive's conviction of a felony involving a personal act of willful and intentional misconduct or the entry by Executive of a plea of nolo contendere in connection with such an alleged felony. (b) "Disability" means the inability of Executive to perform substantially the principal duties of his position as Chief Executive Officer for 180 days in any 12 month period as a result of Executive's physical or mental disability or infirmity. Any question as to whether Executive has a disability or infirmity shall be conclusively determined by a qualified physician selected by the Company. (c) "Good Reason" means the occurrence of any of the following without Executive's written consent: (i) assignment to Executive of any duties materially inconsistent with his position as Chief Executive Officer of the Company or any material diminution in his position, authority, duties or responsibilities; (ii) reduction in his base salary or target bonus opportunity or failure to provide Executive with stock option grants on a basis which is at least as favorable as that provided to other executive officers generally (excluding grants to new hires or other extraordinary grants to a particular individual); (iii) relocation of Executive's principal work place to a location more than 25 miles from Reston, Virginia; or (iv) failure to elect or re-elect Executive to the Company's Board of Directors or removal from the Company's Board of Directors; provided, however, that Good Reason shall not include any isolated, insubstantial and inadvertent action taken without bad faith which is remedied by the Company promptly after receipt of written notice thereof from Executive. (d) "Non-performance" means (i) the repeated and continual failure of Executive to fulfill the basic duties of his position(s) with the Company; (ii) Executive's gross negligence, dishonesty, willful malfeasance or gross misconduct in connection with his employment with the Company which has had (or is expected to have) a demonstrative and 2 adverse effect on the business or reputation of the Company or its subsidiaries; or (iii) failure by Executive to follow any lawful directives established for Executive by the Board of Directors. Notwithstanding the foregoing, NSI shall not have the right to terminate your employment for Non-performance unless you have been given an opportunity to be heard by the Board of Directors after at least 10 days' written notice by the Board. In addition, for purposes of the definition of "Non-performance," any isolated, insubstantial and inadvertent action not taken in bad faith which is remedied by you promptly after receipt of written notice thereof from the Company shall not be deemed to be "Non-performance." 2. Certain Terminations of Employment by the Company. If the Company terminates Executive's employment prior to age 65 for any reason other than Cause, Non-performance, Disability or death, or if Executive terminates his employment for Good Reason, the Company will pay Executive severance benefits (the "Cash Severance") in the amount and at the time determined in accordance with the following: (a) If the amount which Executive could realize or has realized upon the exercise of stock options in respect of the Company's Common Stock ("the Option Gain")is less than $3 million, the Cash Severance shall be equal to the product of (i) one and one-half times (ii) the sum of (1) Executive's annual base salary as in effect immediately prior to the termination of Executive's employment or, if higher, at the highest rate as in effect at any time during the twelve-month period immediately preceding the date of such termination ("Salary"), and (2) an amount equal to the product of Executive's highest target bonus opportunity in effect at any time during the year of termination multiplied by the base salary referred to in subclause (1) or, if Executive's termination occurs after Executive has received a bonus, an amount equal to the last actual bonus paid to Executive ("Bonus"). The amount, if any, payable to Executive under this Section 2(a) shall be paid in thirty-nine approximately equal bi-weekly installments with the first installment payable on the later of (x) the first day of the month beginning after the date of Executive's termination of employment or (y) the expiration of the revocation period, if any, applicable with respect to the release referred to in Section 4 below. (b) If the Option Gain is equal to or greater than $3 million but less than $6 million, the Cash Severance shall be equal to the product of 75% of the sum of (A) Salary and (B) Bonus. The amount, if any, payable to Executive under this Section 2(b) shall be paid in nineteen approximately equal bi-weekly installments with the first installment payable on the later of (x) the first day of the month beginning after the date of Executive's termination of employment or (y) the expiration of the revocation period, if any, applicable with respect to the release referred to in Section 4 below; and 2 3 (c) If the Option Gain is greater than or equal to $6 million, the Cash Severance shall be zero. (d) For purposes of this Agreement, the Option Gain shall be determined as follows: (i) in the case of options that are outstanding on the date of Executive's termination and which are exercisable on or after such date, the amount that could be realized in respect of any such option shall equal the remainder of (A) minus (B), times (C), where (A), (B) and (C) are: (A) the closing price of a share of Common Stock on the date of Executive's termination over (B) the exercise price per share under such option, and (C) the number of shares subject to the option. (ii) in the case of options that have been exercised prior to the date of Executive's termination, the amount of income included in Executive's income for Federal income tax purposes in respect of such option exercise. (e) Notwithstanding anything else contained herein to the contrary, the amount payable to Executive pursuant to the provisions of this Section 2 shall not be subject to any mitigation, offset or any other reduction therein, unless Executive shall have materially breached any of the covenants set forth in the third paragraph of the offer letter dated May 18, 1999 between the Company and Executive. 3. Other Terminations of Employment. In the event Executive's employment (i) terminates due to Executive's death or Disability, (ii) terminates after Executive has attained age 65, (ii) is terminated by the Company for Cause or Non-performance or (iii) is terminated by Executive for any reason other than Good Reason, Executive will only be entitled to receive the compensation and benefits otherwise payable to Executive under the Company's otherwise applicable employee benefit plans or programs. 4. Release. Payment of any benefits under this Separation Agreement shall be subject to and expressly conditioned upon Executive executing a release in favor of the Company substantially in the form attached hereto as Exhibit A, subject to such changes as the Company may require to reflect changes in law or the interpretation of existing laws after the date hereof or such other changes as the parties shall mutually agree in writing. 5. Public Comment. In the event of Executive's termination of employment, Executive and the Company each hereby covenant and agree not to make any public statements to any third party, including, without limitation, to any representative of any 4 news organization, regarding the other party hereto or to otherwise publish, whether in print or through means of any electronic communication, any remarks about the other party hereto which are intended to, or can reasonably be expected to cause such other party's business or professional conduct and/or reputation to be damaged in any material respect. The parties shall use their reasonable best commercial efforts to agree on the terms of any public statements to be made regarding the circumstances surrounding Executive's termination. 6. Withholding. All payments to be made or benefits to be provided to Executive in accordance with this Separation Agreement shall be made net of all applicable income and employment taxes required to be withheld from such payments. 7. Miscellaneous. This Agreement may be amended only by a written instrument signed by the Company and Executive. Except with respect to any other agreement between the Company and Executive that is specifically referenced herein and intended to continue beyond the execution of this Agreement, this Agreement shall constitute the entire agreement between the Company and Executive with respect to the subject matter hereof. This Agreement shall be governed by the laws of the Commonwealth of Virginia, other than the provisions thereof relating to conflict of laws. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, heirs, executors, administrators (in the case of Executive) and assigns. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this SEPARATION AGREEMENT effective as of the day first written above. NETWORK SOLUTIONS INC. By: /s/ MICHAEL A. DANIELS --------------------------- JAMES RUTT /s/ J P RUTT ------------------------------- 5 GENERAL WAIVER AND RELEASE This General Waiver and Release ("Release") is made and entered into by and among James Rutt ("Executive") and Network Solutions, Inc. (the "Company"). In consideration of the following promises, the parties agree to the following: WHEREAS, Executive's active employment ended on ____________________ and Executive wants to begin receiving certain payments set forth in his Separation Agreement ("Agreement") that previously was entered into between the Executive and the Company; and WHEREAS, the Agreement specifically requires Executive to execute this Release in order to receive payments; NOW THEREFORE, for and in consideration of covenants and undertakings herein set forth, and for other good and valuable consideration, which each party hereby acknowledges, it is agreed as follows: I. The Company acknowledges that the Executive's termination of employment with the Company qualifies the Executive to receive the termination payments specified in the Agreement. II. Executive agrees to, and does, release and forever discharge the Company, and each and every one of its affiliates, parents or subsidiary companies and their respective agents, officers, executives, employees, successors, predecessors, attorneys, trustees, directors and assigns (collectively hereinafter included in the term "Company") from and with respect to all matters, claims, charges, demands, damages, causes of action, debts, liabilities, controversies, judgments and suits of every kind and nature whatsoever foreseen or unforeseen, known or unknown, which have arisen or may have arisen between the Executive and the Company in any way related to the Executive's employment and/or termination, provided that, this Release shall not in any way modify or impair (a) Executive's right to be indemnified by the Company in accordance with any practice or policy of the Company in respect of third party claims, (b) Executive's rights under the terms of any of the Company's generally applicable employee or executive benefit plans, programs or agreements, or (C) payments expressly owed to the Executive under the Agreement. III. This Release includes any and all claims, demands and causes of action of any kind whatsoever, including attorneys' fees and costs actually incurred, whether known or unknown, which the Executive now has or ever has had against the Company up to the date of this General Waiver and Release including, but not limited to, claims under the Americans with Disabilities Act, Age Discrimination in Employment Act, the Family and Medical Leave Act, the Equal Pay Act, the Employee Retirement Income Security Act, Title VII of the Civil 6 Rights Act, the Rehabilitation Act of 1973, the Fair Labor Standards Act, or any other federal, state or local statute or ordinance. IV. Executive further agrees that he will not participate or aid in any suit or proceeding (or to execute, seek to impose, collect or recover upon, or otherwise enforce or accept any judgment, decision, award, warrant, or attachment) upon any claim released by him under this General Waiver and Release. Nothing contained in this paragraph is intended to prevent the Executive from responding to a properly issued subpoena. V. Executive agrees to make himself available upon reasonable notice from the Company or its attorneys to be deposed, to testify at a hearing or trial, or to accede to any other reasonable request (involving no more than a reasonable period of time) by the Company in connection with any lawsuit either currently pending against the Company or any lawsuit filed after Executive's separation that involves issues relating to the Executive's job responsibilities or the decisions made by him during his employment with the Company. VI. The Executive represents and agrees that the Executive fully understands Executive's right to discuss all aspects of this General Waiver and Release with a private attorney, and to the extent, if any, that the Executive desires to consult a private attorney, the Executive has availed himself of this right. VII. The Executive also represents and agrees that the Executive has carefully read and fully understands the provisions of this General Waiver and Release; and that the Executive is voluntarily entering into this General Waiver and Release. VIII. The Executive further represents and acknowledges that the Executive has the right to consider the effect of this General Waiver and Release for twenty-one (21) days from the date of the Executive's receipt hereof, but by executing this General Waiver and Release has elected to waive his right to utilize such full 21-day period. IX. The Executive further represents that the Executive understands and agrees that the Executive may revoke this General Waiver and Release within seven (7) days after singing this General Waiver and Release and that this General Waiver and Release is not effective or enforceable until the seven (7) day revocation period has passed. X. In the event that any provision of this General Waiver and Release is adjudicated to be invalid or unenforceable under applicable law, the validity and enforceability of the remaining provisions shall be unaffected to the extent that any provision of this General Waiver and Release is adjudicated to be invalid or unenforceable because it is overbroad, and that provision shall not be void but rather shall be limited only to the extent required by applicable law and enforced as so limited. IN WITNESS WHEREOF, the undersigned has executed this General Waiver and Release. 7 I HAVE READ THIS GENERAL WAIVER AND RELEASE AND UNDERSTAND ALL ITS TERMS AND SIGN IT OF MY OWN FREE WILL ----------------------------- JAMES RUTT Dated: ----------------------- STATE OF ) ----------------------- ) OF ) - ---------- ------------------ On this ___ day of ____________________, in the year 19__, before me, _________________________, a Notary Public in and for said state, personally appeared _________________________, known to me to be the person who executed the within _________________________, and acknowledged to me that _______________ executed the same for the purposes therein stated. IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my official seal in the ____________________ and said State aforesaid, the day and year first above written. ------------------- - ---------------- Notary Public My Commission Expires: - ------------------------------ EX-10.31 7 NON-STATUTORY STOCK OPTION AGREEMENT DATED JUNE 7 1 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 ("Common Shares") to the Optionee named below. The terms and conditions of the Option are set forth in this cover sheet, in the attached Agreement and in the Company's 1996 Stock Incentive Plan (the "Plan"), as amended and restated effective July 7, 1997. Date of Grant: 6/7/99 ------------------------------------------------------------ Name of Optionee: James Rutt ---------------------------------------------------------- Optionee's Social Security Number: ###-##-#### ----------------------------------------- Number of Common Shares Covered by Option: 375,000 --------------------------------- Exercise Price per Common Share: $56.188 ------------------------------------------- Vesting Start Date: 6/7/99 -------------------------------------------------------- Vesting Schedule: Subject to the attached Agreement, during your Service the Option shall vest as to 30%, 30%, 20% and 20% of the Common Shares on the first through fourth anniversaries, respectively, of the Vesting Start Date. In the event your employment terminates due to death or disability, you will receive pro rata vesting credit for each whole month of Service you complete. (For example, the Option will be 15% vested if your employment terminates due to disability 6 months after the Vesting Start Date.) Also, in the event your employment is involuntarily terminated other than for Cause or Non-performance, or you voluntarily terminate your employment for Good Reason, at the time of termination you will be credited with an additional twelve (12) months of Service for purposes of the Vesting Schedule. (For example, the Option will be 30% vested if your employment is terminated by the Company other than for Cause or Non-performance or if you terminate your employment for Good Reason, before the first anniversary of the Vesting Start Date. In addition to the additional twelve (12) months of Service credited above, if applicable, in the event your employment is involuntarily terminated other than for Cause or Non-performance, or you voluntarily terminate your employment for Good Reason, in each case, either immediately before or within eighteen months after a Change of Control occurs, at the time of termination you will be credited with an additional twelve (12) months of Service for purposes of the Vesting Schedule; provided, however, that for this purpose, "Good Reason" shall not exist solely if, as a result of the Change of Control, you become responsible for managing a company, subsidiary or division which is engaged in substantially the same business as the Company was engaged in immediately prior to the Change of Control. For purposes of this Option, the term "Change in Control" shall mean (i) a Change in Control as defined in the Plan, or (ii) approval by the stockholders of the 2 Company of a reorganization, merger, consolidation, in each case, with respect to which persons who were stockholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated company's then outstanding voting securities, or a liquidation or dissolution of the Company or of the sale of all or substantially all of the assets of the Company. 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: /s/ JAMES P. RUTT --------------------------------------------------------------------- (Signature) Company: /s/ ROBERT J. KORZENIEWSKI --------------------------------------------------------------------- (Signature) Title: CFO ------------------------------------------------------------- 2 3 NETWORK SOLUTIONS, INC. 1996 STOCK INCENTIVE PLAN NONSTATUTORY STOCK OPTION AGREEMENT NONSTATUTORY STOCK This Option is not intended to be an OPTION incentive stock option under section 422 of the Internal Revenue Code and will be interpreted accordingly. VESTING Your right to exercise this Option vests during your Service as shown on the cover sheet. The number of vested Common Shares shall be rounded to the next lower whole number. No additional Common Shares will vest after your Service has terminated for any reason, except as provided herein. For purposes of this Option, the term "Cause" shall mean (i) your conviction of a felony involving a personal act of willful and intentional misconduct or the entry by you of a plea of nolo contendere in connection with such an alleged felony. For purposes of this Option, the term "Non-performance" shall mean (i) the repeated and continual failure by you to fulfill the basic duties of your positions(s) with the Company; (ii) your gross negligence, dishonesty, willful malfeasance or gross misconduct in connection with your employment with the Company which has had (or is expected to have) a demonstrative and adverse effect on the business or reputation of the Company or its subsidiaries; or (iii) failure by you to follow any lawful directive established for you by the Board of Directors. Notwithstanding, the foregoing, "Non-performance" shall not be deemed to exist unless you have been given an opportunity to be heard by the Board of Directors after at least 10 days' written notice by the Board. In addition, for purposes of the definition of "Non-performance," any isolated, insubstantial and inadvertent action not taken in bad faith which is remedied by you promptly after receipt of written notice thereof from the Company shall not be deemed to be "Non-performance." For purposes of this Option, the term "Good Reason" shall mean the occurrence of any of the following without your written consent: (i) assignment to you of any duties materially inconsistent with your position as Chief Executive Officer or any material diminution in your position, authority, duties or responsibilities; (ii) reduction in base salary or target bonus opportunity or failure to provide you with stock option grants on a basis which is at least as favorable as that provided to other executive officers generally (excluding grants to new hires or other extraordinary grants to a particular individual); (iii) relocation of your principal work place to a location that is more 3 4 than 25 miles from Reston, Virginia; or (iv) failure to be elected or reelected to the NSI Board of Directors or removal from the NSI Board of Directors. For purposes of the definition of "Good Reason," any isolated, insubstantial and inadvertent action not taken in bad faith which is remedied by NSI promptly after receipt of written notice thereof from you shall not be deemed to be "Good Reason." This Option shall not be reduced as provided in, or be subject to, Article 14 of the Plan. SERVICE Your "Service" continues while you are actively employed by, or serving as a consultant to or director of, the Company or any Parent, Subsidiary or other affiliate of the Company determined in the sole discretion of the Company. 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. Your Service terminates in any event when the approved leave ends, unless you immediately return to active work. The Company determines which leaves shall be credited toward Service, and when your Service terminates, for all purposes under the Plan and this Agreement. 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 of the terminated Option. (It will expire earlier if your Service terminates, as described below.) IMPORTANT: If a properly executed "Notice of Exercise" form, together with payment for the exercise price and tax withholding, are not received by the Company prior to the expiration of the term of this Option, all rights to acquire Common Shares under this Agreement will be forfeited. 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 90th day after your termination date. During such 90-day period, you may exercise that portion of your Option that was vested on your Service termination date. DEATH If you die while in Service, 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 12 months after your Service termination date. During such 12- 4 5 month period, you or your legal guardian 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 which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months, as determined pursuant to Section 22(e)(3) of the Internal Revenue Code of 1986, as amended. 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 together with payment of the Exercise Price and any required tax withholding, as described below. Your Notice of Exercise must specify how many Common Shares you wish to purchase and 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, or in the name of a brokerage firm for your account as designated by you). The Notice of Exercise will be effective when it is received by the Committee. If someone else wants to exercise this Option after your death, or Disability, 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 and tax withholding obligations. - 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 and tax withholding obligations. - 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 5 6 taxes. 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 By signing this Agreement, you agree ON EXERCISE not to sell any Common Shares at a AND RESALE time when prohibited by applicable laws, regulations or Company or underwriter trading policies. 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, 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 Common 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 Common Shares. In the event that the sale of Common Shares under the Plan is not registered under the Securities Act but an exemption is available that requires an investment representation or other representation, you shall represent and agree at the time of exercise that the Common 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. TRANSFER OF OPTION Prior to your death, only you or, in the event of your Disability, your legal guardian, 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 7 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 have endorsed thereon any legends required by applicable law. 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 The text of the Plan is incorporated OTHER AGREEMENTS 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 EX-10.32 8 NON-STATUTORY STOCK OPTION AGREEMENT DATED MAY 21 1 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 ("Common Shares") to the Optionee named below. The terms and conditions of the Option are set forth in this cover sheet, in the attached Agreement and in the Company's 1996 Stock Incentive Plan (the "Plan"), as amended and restated effective July 7, 1997. Date of Grant: 5/21/99 ------------------------------------------------------------ Name of Optionee: James Rutt ---------------------------------------------------------- Optionee's Social Security Number: ###-##-#### ----------------------------------------- Number of Common Shares Covered by Option: 375,000 --------------------------------- Exercise Price per Common Share: $64.00 ------------------------------------------- Vesting Start Date: 5/21/99 -------------------------------------------------------- Vesting Schedule: Subject to the attached Agreement, during your Service the Option shall vest as to 30%, 30%, 20% and 20% of the Common Shares on the first through fourth anniversaries, respectively, of the Vesting Start Date. In the event your employment terminates due to death or disability, you will receive pro rata vesting credit for each whole month of Service you complete. (For example, the Option will be 15% vested if your employment terminates due to disability 6 months after the Vesting Start Date.) Also, in the event your employment is involuntarily terminated other than for Cause or Non-performance, or you voluntarily terminate your employment for Good Reason, at the time of termination you will be credited with an additional twelve (12) months of Service for purposes of the Vesting Schedule. (For example, the Option will be 30% vested if your employment is terminated by the Company other than for Cause or Non-performance or if you terminate your employment for Good Reason, before the first anniversary of the Vesting Start Date. In addition to the additional twelve (12) months of Service credited above, if applicable, in the event your employment is involuntarily terminated other than for Cause or Non-performance, or you voluntarily terminate your employment for Good Reason, in each case, either immediately before or within eighteen months after a Change of Control occurs, at the time of termination you will be credited with an additional twelve (12) months of Service for purposes of the Vesting Schedule; provided, however, that for this purpose, "Good Reason" shall not exist solely if, as a result of the Change of Control, you become responsible for managing a company, subsidiary or division which is engaged in substantially the same business as the Company was engaged in immediately prior to the Change of Control. For purposes of this Option, the term "Change in Control" shall mean (i) a Change in Control as defined in the Plan, or (ii) approval by the stockholders of the 2 Company of a reorganization, merger, consolidation, in each case, with respect to which persons who were stockholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated company's then outstanding voting securities, or a liquidation or dissolution of the Company or of the sale of all or substantially all of the assets of the Company. 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: /s/ JAMES P. RUTT --------------------------------------------------------------------- (Signature) Company: /s/ ROBERT J. KORZENIEWSKI --------------------------------------------------------------------- (Signature) Title: CFO ------------------------------------------------------------- 2 3 NETWORK SOLUTIONS, INC. 1996 STOCK INCENTIVE PLAN NONSTATUTORY STOCK OPTION AGREEMENT NONSTATUTORY STOCK This Option is not intended to be an OPTION incentive stock option under section 422 of the Internal Revenue Code and will be interpreted accordingly. VESTING Your right to exercise this Option vests during your Service as shown on the cover sheet. The number of vested Common Shares shall be rounded to the next lower whole number. No additional Common Shares will vest after your Service has terminated for any reason, except as provided herein. For purposes of this Option, the term "Cause" shall mean (i) your conviction of a felony involving a personal act of willful and intentional misconduct or the entry by you of a plea of nolo contendere in connection with such an alleged felony. For purposes of this Option, the term "Non-performance" shall mean (i) the repeated and continual failure by you to fulfill the basic duties of your positions(s) with the Company; (ii) your gross negligence, dishonesty, willful malfeasance or gross misconduct in connection with your employment with the Company which has had (or is expected to have) a demonstrative and adverse effect on the business or reputation of the Company or its subsidiaries; or (iii) failure by you to follow any lawful directive established for you by the Board of Directors. Notwithstanding, the foregoing, "Non-performance" shall not be deemed to exist unless you have been given an opportunity to be heard by the Board of Directors after at least 10 days' written notice by the Board. In addition, for purposes of the definition of "Non-performance," any isolated, insubstantial and inadvertent action not taken in bad faith which is remedied by you promptly after receipt of written notice thereof from the Company shall not be deemed to be "Non-performance." For purposes of this Option, the term "Good Reason" shall mean the occurrence of any of the following without your written consent: (i) assignment to you of any duties materially inconsistent with your position as Chief Executive Officer or any material diminution in your position, authority, duties or responsibilities; (ii) reduction in base salary or target bonus opportunity or failure to provide you with stock option grants on a basis which is at least as favorable as that provided to other executive officers generally (excluding grants to new hires or other extraordinary grants to a particular individual); (iii) relocation of your principal work place to a location that is more 3 4 than 25 miles from Reston, Virginia; or (iv) failure to be elected or reelected to the NSI Board of Directors or removal from the NSI Board of Directors. For purposes of the definition of "Good Reason," any isolated, insubstantial and inadvertent action not taken in bad faith which is remedied by NSI promptly after receipt of written notice thereof from you shall not be deemed to be "Good Reason." This Option shall not be reduced as provided in, or be subject to, Article 14 of the Plan. SERVICE Your "Service" continues while you are actively employed by, or serving as a consultant to or director of, the Company or any Parent, Subsidiary or other affiliate of the Company determined in the sole discretion of the Company. 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. Your Service terminates in any event when the approved leave ends, unless you immediately return to active work. The Company determines which leaves shall be credited toward Service, and when your Service terminates, for all purposes under the Plan and this Agreement. 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 of the terminated Option. (It will expire earlier if your Service terminates, as described below.) IMPORTANT: If a properly executed "Notice of Exercise" form, together with payment for the exercise price and tax withholding, are not received by the Company prior to the expiration of the term of this Option, all rights to acquire Common Shares under this Agreement will be forfeited. 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 90th day after your termination date. During such 90-day period, you may exercise that portion of your Option that was vested on your Service termination date. DEATH If you die while in Service, 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 12 months after your Service termination date. During such 12- 4 5 month period, you or your legal guardian 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 which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months, as determined pursuant to Section 22(e)(3) of the Internal Revenue Code of 1986, as amended. 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 together with payment of the Exercise Price and any required tax withholding, as described below. Your Notice of Exercise must specify how many Common Shares you wish to purchase and 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, or in the name of a brokerage firm for your account as designated by you). The Notice of Exercise will be effective when it is received by the Committee. If someone else wants to exercise this Option after your death, or Disability, 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 and tax withholding obligations. - 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 and tax withholding obligations. - 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 5 6 taxes. 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 By signing this Agreement, you agree ON EXERCISE not to sell any Common Shares at a AND RESALE time when prohibited by applicable laws, regulations or Company or underwriter trading policies. 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, 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 Common 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 Common Shares. In the event that the sale of Common Shares under the Plan is not registered under the Securities Act but an exemption is available that requires an investment representation or other representation, you shall represent and agree at the time of exercise that the Common 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. TRANSFER OF OPTION Prior to your death, only you or, in the event of your Disability, your legal guardian, 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 7 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 have endorsed thereon any legends required by applicable law. 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 The text of the Plan is incorporated OTHER AGREEMENTS 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 EX-27.1 9 FDS FOR PERIOD ENDING JUNE 30, 1999
5 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 46,099 114,215 140,636 93,552 0 281,063 60,525 9,413 394,888 215,178 0 0 0 33 113,995 394,888 0 85,631 0 32,252 35,298 0 34 18,047 7,454 10,593 0 0 0 10,593 .32 .30
EX-27.2 10 FDS FOR PERIOD ENDING JUNE 30, 1998
5 RESTATED PRIOR PERIOD FINANCIAL DATA SCHEDULE TO REFLECT THE TWO-FOR-ONE STOCK SPLIT EFFECTED FEBRUARY 26, 1999. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 17,928 79,516 26,768 15,542 0 177,018 13,095 4,223 202,585 119,694 0 0 0 16 58,258 202,585 0 36,968 0 16,139 12,987 0 67 7,775 3,263 4,512 0 0 0 4,512 0.14 0.14
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