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 FORM 10-Q FOR THE PERIOD ENDING 30 SEPTEMBER 1999


  
 
 
  
   
  UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
  
 
  
 FORM 10-Q
  
 (Mark One)
  
  
For the quarterly period ended September 30, 1999
   
 
OR
 

  
   
     x
     
   
    
     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   

   SECURITIES EXCHANGE ACT OF 1934
   
  
 
 
 
 
 
 
 
 
For the transition period from   
              
              
    to          
              
       
 
Commission File Number: 000-23593
 
 
VERISIGN, INC.
(Exact name of registrant as specified in its
   charter)
 

  
   
     
     ¨
   
    
     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934
   
  
 
 
 
 
 
 
 
 
 
 
 
 
 

  
    Delaware
     
   (State or other jurisdiction of
   incorporation or organization)
   
   
    
     
     94-3221585
   (I.R.S. Employer
   Identification No.)
   
   
  
 
 
 
 
Registrant’s telephone number, including area
   code: (650) 961-7500
 
 
         
    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 
    ¨
     
 
         
    Indicate the number of shares outstanding of each of the issuer
   ’s classes of common stock, as of the latest practicable date:
   
 

  
    1350 Charleston
     Road, Mountain View, CA
   (Address of principal executive offices)
     
   
   
    
     
     94043-1331
   (Zip Code)
   
   
  
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 TABLE OF CONTENTS

  
   Class
     
     
   Shares 
     Outstanding
   

   October 31, 1999
  
  
    Common
     stock, $.001 par value
   
     
    51,254,868
     
   
  
 
 
   
 
 
 
 
 PART I—FINANCIAL INFORMATION
      
 
ITEM 1.    FINANCIAL
      STATEMENTS
 
        
        The consolidated financial statements included under
      this item are as follows:
 

  
   
      
     
   Page
     
 
  
   
  

   PART I—FINANCIAL
     INFORMATION
    
   

    Item 1. 
         Financial Statements
      
    3
   
    
   

    Item 2. 
         Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
      
    10
   
    
   

    Item 3. 
         Quantitative and Qualitative Disclosures About
      Market Risk
      
    23
   
    
   

    PART II—OTHER INFORMATION
      
     
    

      
      
      
    
    
     Item 2. 
          Changes in Securities and Use of Proceeds
       
       
     24
    
     
    

     Item 6. 
          Exhibits and Reports on Form 8-K
       
     24
    
     
    

     Signatures
       
       
     25
    
     
    

     Summary of
       Trademarks
       
     26
    
     
    

     EXHIBIT
      
     

       
       
      
     
     
      Exhibit 27.01
            Financial Data Schedule (available in
        EDGAR format only)
        
      
     
    
    
    
    
    
    
    
    
    
 
 VERISIGN, INC. AND SUBSIDIARIES
      
 
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
      
 

     
      Financial
        Statement Description 
 
        
      Sequentially
      

      Numbered
      

      Page 
        
     
     
      Consolidated
        Balance Sheets
        
       
      
     
     
      As of September
        30, 1999 and December 31, 1998
        
       
        4
        
      
     
      
     

      Consolidated
        Statements of Operations
        
       
      
     
     
      For the Three
        and Nine Months Ended September 30, 1999 and 1998
        
       
        5
        
      
     
      
     

      Consolidated
        Statements of Cash Flows
        
       
      
     
     
      For the Nine
        Months Ended September 30, 1999 and 1998
        
       
        6
        
      
     
      
     

      Notes to
        Consolidated Financial Statements
        
       
        7
        
      
     
    
    
    
    
    
    
    
    
 
See accompanying Notes to Consolidated Financial
      Statements
 
 VERISIGN, INC. AND SUBSIDIARIES
      
 
CONSOLIDATED STATEMENTS OF OPERATIONS
      
(In thousands, except per share data)
      
 

     
       
        
      
        September 30,
      

      1999
        
      
        December 31,
      

      1998
     
     
      Assets
        
        
      
      
        
      
      
     
     
      Current assets:
        
        
      
      
        
      
      
     
     
        
           Cash and cash equivalents
        
      $  
          69,458
       
        
      $  
        22,786
       
     
     
        
           Short-term investments
        
      90,634
        
       
        
      18,959
        
       
     
     
        
           Accounts receivable, net
        
      20,033
        
       
        
      9,769
        
       
     
     
        
           Prepaid expenses and other current assets
        
        
      4,807
        
       
        
      2,174
        
       
     
     
        
        
      
        
        
      
        
     
     
        
                  
                Total current
        assets
        
      184,932
        
       
        
      53,688
        
       
     
     
      Property and
        equipment, net
        
      9,810
        
       
        
      9,234
        
       
     
     
      Long-term
        investments
        
      45,576
        
       
        
      436
       
     
     
      Other assets,
        net
        
      2,703
        
       
        
      937
       
     
     
        
        
      
        
        
      
        
     
     
       
        
      $ 243,021
        
       
        
      $  
        64,295
       
     
     
        
        
      
        
        
      
        
     
     
      Liabilities
        and Stockholders’ Equity
        
      
      
        
      
      
     
     
      Current
        liabilities:
        
      
      
        
      
      
     
     
        
           Accounts payable
        
      $  
            6,369
       
        
      $  
          5,472
       
     
     
        
           Accrued liabilities
        
      4,379
        
       
        
      4,035
        
       
     
     
        
           Deferred revenue
        
      25,273
        
       
        
      13,096
        
       
     
     
        
        
      
        
        
      
        
     
     
        
                  
                Total current
        liabilities
        
      36,021
        
       
        
      22,603
        
       
     
     
        
        
      
        
        
      
        
     
     
      Minority
        interest in subsidiary
        
      242
       
        
      964
       
     
     
        
        
      
        
        
      
        
     
     
      Commitments
        
        
      
      
        
      
      
     
     
      Stockholders
        ’ equity:
        
      
      
        
      
      
     
     
        
           Preferred stock, $.001 par value;
      

                
        5,000,000 shares authorized; none issued
        
      — 
         
       
        
      — 
         
       
     
     
        
           Common stock, $.001 par value;
        
      
      
        
      
      
     
     
        
                Authorized:
        200,000,000 shares;
        
      
      
        
      
      
     
     
        
                Issued and
        outstanding: 51,210,758 shares in 1999 and
      

                 
            46,173,384 shares in 1998
        
      51
       
        
      46
       
     
     
        
           Additional paid-in capital
        
      223,870
        
       
        
      92,774
        
       
     
     
        
           Notes receivable from stockholders
        
      — 
         
       
        
      (409
      )
     
     
        
           Deferred compensation
        
      (199
      )
        
      (276
      )
     
     
        
           Accumulated other comprehensive income
        
        
      35,021
        
       
        
      — 
         
       
     
     
        
           Accumulated deficit
        
      (51,985
        
      )
        
       (51,407
        
      )
     
     
        
        
      
        
        
      
        
     
     
        
                  
                Total
        stockholders’ equity
        
      206,758
        
       
        
      40,728
        
       
     
     
        
        
      
        
        
      
        
     
     
       
        
      $ 243,021
        
       
        
      $  
        64,295
       
     
     
        
        
      
        
        
      
        
     
    
    
    
    
    
    
    
    
    
    
 
See accompanying Notes to Consolidated Financial
      Statements
 
 VERISIGN, INC. AND SUBSIDIARIES
      
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
      
(In thousands)
 

     
       
        
      
        Three Months Ended
      

      September 30,
        
      
        Nine Months Ended
      

      September 30,
     
     
       
        
      1999
        
        
      
        1998
        
        
      
        1999
        
      
        1998
     
     
      Revenues
        
        
      $22,782
        
        
      $10,505
        
       
        
      $57,100
        
       
        
      $  
        25,719
       
     
     
        
        
      
        
      
        
        
      
        
        
      
        
     
     
      Costs and
        expenses:
     
     
        
           Cost of revenues
        
      8,405
        
        
      5,190
        
       
        
      22,379
        
       
        
      13,467
        
       
     
     
        
           Sales and marketing
        
      8,829
        
        
      6,117
        
       
        
      24,492
        
       
        
      16,449
        
       
     
     
        
           Research and development
        
      3,405
        
        
      2,552
        
       
        
      9,478
        
       
        
      6,242
        
       
     
     
        
           General and administrative
        
      2,142
        
        
      1,673
        
       
        
      6,122
        
       
        
      5,842
        
       
     
     
        
           Special charges
        
      — 
         
        
      3,555
        
       
        
      — 
         
       
        
      3,555
        
       
     
     
        
        
      
        
      
        
        
      
        
        
      
        
     
     
        
                  
                Total costs and
        expenses
        
      22,781
        
        
      19,087
        
       
        
      62,471
        
       
        
      45,555
        
       
     
     
        
        
      
        
      
        
        
      
        
        
      
        
     
     
        
           Operating income (loss)
        
      1
        
      (8,582
        
      )
        
      (5,371
        
      )
        
      (19,836
        
      )
     
     
      Other income
        
        
      1,272
        
        
      628
       
        
      4,071
        
       
        
      1,677
        
       
     
     
        
        
      
        
      
        
        
      
        
        
      
        
     
     
        
           Income (loss) before minority interest
        
        
      1,273
        
        
      (7,954
        
      )
        
      (1,300
        
      )
        
      (18,159
        
      )
     
     
      Minority
        interest in net loss of subsidiary
        
      294
        
      237
       
        
      722
       
        
      950
       
     
     
        
        
      
        
      
        
        
      
        
        
      
        
     
     
        
           Net income (loss)
        
      $  
        1,567
        
      $(7,717
        
      )
        
      $  
          (578
      )
        
      $(17,209
        
      )
     
     
        
        
      
        
      
        
        
      
        
        
      
        
     
     
      Basic net
        income (loss) per share
        
      $  
          0.03
        
      $  
        (0.17
      )
        
      $  
        (0.01
      )
        
      $  
          (0.41
      )
     
     
        
        
      
        
      
        
        
      
        
        
      
        
     
     
      Shares used in
        basic net income
      

           (loss) per share computation
        
        
      50,757
        
        
      45,232
        
       
        
       49,861
        
       
        
      42,084
        
       
     
     
        
        
      
        
      
        
        
      
        
        
      
        
     
     
      Diluted net
        income (loss) per share
        
      $  
          0.03
        
      $  
        (0.17
      )
        
      $  
        (0.01
      )
        
      $  
          (0.41
      )
     
     
        
        
      
        
      
        
        
      
        
        
      
        
     
     
      Shares used in
        diluted net income
      

           (loss) per share computation
        
        
      57,599
        
        
      45,232
        
       
        
      49,861
        
       
        
      42,084
        
       
     
     
        
        
      
        
      
        
        
      
        
        
      
        
     
    
    
    
    
    
    
    
    
    
    
 
See accompanying Notes to Consolidated Financial
      Statements
 
 VERISIGN, INC. AND SUBSIDIARIES
      
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
      
 

     
       
        
      Nine
         Months Ended September 30,
     
     
       
        
      1999
         
        
        
      
        1998 
 
     
     
      Cash flows from
        operating activities:
        
      
      
        
      
      
     
     
        
           Net loss
        
      $  
              (578
      )
        
      $(17,209
        
      )
     
     
        
           Adjustments to reconcile net loss to net cash
        
        
      
      
        
      
      
     
     
        
           provided by (used in) operating activities:
        
        
      
      
        
      
      
     
     
        
                Depreciation
        and amortization
        
      3,873
        
       
        
      2,862
        
       
     
     
        
                Minority
        interest in net loss of subsidiary
        
      (722
      )
        
      (950
      )
     
     
        
                Stock-based
        compensation
        
      77
       
        
      2,248
        
       
     
     
        
                Loss on
        disposal of property and equipment
        
      362
       
        
      40
       
     
     
        
                Changes in
        operating assets and liabilities:
        
      
      
        
      
      
     
     
        
                  
           Accounts receivable
        
      (10,264
        
      )
        
      (5,080
        
      )
     
     
        
                  
           Prepaid expenses and other current assets
        
        
      (2,633
        
      )
        
      (1,357
        
      )
     
     
        
                  
           Accounts payable
        
      897
       
        
      2,001
        
       
     
     
        
                  
           Accrued liabilities
        
      344
       
        
      1,678
        
       
     
     
        
                  
           Deferred revenue
        
      12,177
        
       
        
      5,194
        
       
     
     
        
        
      
        
        
      
        
     
     
        
                  
           Net cash provided by (used in) operating
        activities
        
      3,533
        
       
        
      (10,573
        
      )
     
     
        
        
      
        
        
      
        
     
     
      Cash flows from
        investing activities:
        
      
      
        
      
      
     
     
        
           Purchases of short-term investments
        
        
       (112,636
        
      )
        
       (48,500
        
      )
     
     
        
           Maturities and sales of short-term investments
        
        
      40,961
        
       
        
      32,085
        
       
     
     
        
           Purchases of long-term investments
        
      (10,119
        
      )
        
      — 
         
       
     
     
        
           Purchases of property and equipment
        
        
      (4,308
        
      )
        
      (3,506
        
      )
     
     
        
           Other assets
        
      (2,269
        
      )
        
      (122
      )
     
     
        
        
      
        
        
      
        
     
     
        
                  
           Net cash used in investing activities
        
        
      (88,371
        
      )
        
      (20,043
        
      )
     
     
        
        
       
 
        
        
       
 
        
     
     
      Cash flows from
        financing activities:
        
      
      
        
      
      
     
     
        
           Collections on notes receivable from
        stockholders
        
      409
       
        
      62
       
     
     
        
           Subchapter S distributions by SecureIT, Inc.
        
        
      — 
         
       
        
      (199
      )
     
     
        
           Net proceeds from issuance of common stock
        
        
      131,101
        
       
        
      43,913
        
       
     
     
        
        
      
        
        
      
        
     
     
        
                  
           Net cash provided by financing activities
        
        
      131,510
        
       
        
      43,776
        
       
     
     
        
        
      
        
        
      
        
     
     
        
           Net change in cash and cash equivalents
        
        
      46,672
        
       
        
      13,160
        
       
     
     
        
           Cash and cash equivalents at beginning of
        period
        
      22,786
        
       
        
      4,942
        
       
     
     
        
        
      
        
        
      
        
     
     
        
           Cash and cash equivalents at end of period
        
        
      $  
          69,458
       
        
      $  
        18,102
       
     
     
        
        
      
        
        
      
        
     
     
        
           Noncash investing activity:
      

                
        Unrealized gain on long-term investments
        
      $  
          35,021
       
        
      $  
            —  
       
     
     
        
        
      
        
        
      
        
     
    
    
    
    
    
    
    
    
    
 
      The
      accompanying interim unaudited consolidated balance sheets and
      statements of operations and cash flows reflect all normal
      recurring adjustments that are, in the opinion of management,
      necessary for a fair presentation of the financial position of
      VeriSign, Inc. at September 30, 1999, and the results of
      operations and cash flows for the interim periods ended September
      30, 1999 and 1998.
 
      The
      accompanying unaudited consolidated financial statements have
      been prepared in accordance with the instructions for Form 10-Q
      and, therefore, do not include all information and footnotes
      necessary for a complete presentation of VeriSign’s results
      of operations, financial position and cash flows. We filed
      audited consolidated financial statements that included all
      information and footnotes necessary for a complete presentation
      for each of the years in the three-year period ended December 31,
      1998 in our 1998 Annual Report on Form 10-K. The consolidated
      financial statements for the period ended September 30, 1998 have
      been restated to reflect the acquisition of SecureIT , Inc. which
      was accounted for as a pooling of interests.
 
     The results of
      operations for any interim period are not necessarily indicative
      of our results of operations for any other future interim period
      or for a full fiscal year.
 

     
       (1)
        
      
       
        
        Basis of Presentation
      
     
    
    
    
    
    
    
    
    
    
 
     The carrying amount
      of cash and cash equivalents, investments, accounts receivable,
      and accounts payable approximate their respective fair values.
      
 

     
       (2)
        
      
       
        
        Fair Values of Financial Instruments
        
      
     
    
    
    
    
    
 
     In January 1999,
      VeriSign sold an additional 3,195,000 shares of its common stock
      to the public for net proceeds of approximately $121.4 million,
      after underwriting discounts and commissions and expenses of the
      offering.
 
     On May 28, 1999,
      VeriSign completed a two-for-one stock split in the form of a
      stock dividend for stockholders of record on May 14, 1999. On May
      27, 1999, VeriSign’s stockholders approved an increase in
      the number of authorized shares of common stock which was
      required to effect the stock split. All share numbers in these
      consolidated financial statements and notes thereto for all
      periods presented have been retroactively restated to reflect the
      two-for-one stock split.
VERISIGN, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—
      (Continued)
 

       

     
       (3)
        
      
       
        
        Stockholders’ Equity
      
     
    
    
    
    
    
    
    
    
    
     
    
 
        
        Basic net income (loss) per share is computed using
      the weighted-average number of common shares outstanding during
      the period. Diluted net income (loss) per share is computed using
      the weighted-average number of common stock and, when dilutive,
      common equivalent shares from options to purchase common stock
      using the treasury stock method. The following is a
      reconciliation of the number of shares used in the basic and
      diluted earnings per share computations for the periods presented:
      
 

     
        (4)
        
      
       
        
         Net Income (Loss) per Share
      
     
    
    
    
    
    
 
       
            Accumulated other comprehensive income
         presented in the accompanying consolidated balance sheets
         consists of the accumulated net unrealized gain on
         available-for-sale investments.
 

     
       
        
      
        Three Months Ended September 30,
        
        
      Nine
         Months Ended September 30,
     
     
       
        
      1999
         
 
        
      1998
         
        
        
      1999
         
        
        
      1998
         
        
     
     
       
        
      (In
        thousands)
     
     
      Shares used in
        basic net income (loss) per
      

           share computation
        
      50,757
        
        
      45,232
        
       
        
      49,861
        
       
        
      42,084
        
       
     
     
      Effect of
        dilutive potential common
      

           shares
        
      6,842
        
        
      — 
         
       
        
      — 
         
       
        
      — 
         
       
     
     
        
        
      
        
      
        
        
      
        
        
      
        
     
     
      Shares used in
        diluted net income (loss)
      

           per share computation
        
      57,599
        
        
      45,232
        
       
        
      49,861
        
       
        
      42,084
        
       
     
     
        
        
      
        
      
        
        
      
        
        
      
        
     
      
     

       Antidilutive common equivalent
        shares excluded from diluted net income (loss) per share for
        the three months ended September 30, 1999 consisted of options
        to purchase 26,841 shares of common stock with a
        weighted-average exercise price of $97.05 and in the three
        months ended September 30, 1998 consisted of options to
        purchase 4,443,578 shares with a weighted-average exercise
        price of $3.87. Antidilutive common equivalent shares excluded
        from diluted net loss per share for the nine months ended
        September 30, 1999 and 1998, consisted of options to purchase
        9,324,575 shares of common stock with a weighted-average
        exercise price of $17.50 in the 1999 period, and options to
        purchase 4,559,844 shares of common stock with a
        weighted-average exercise price of $2.50 in the 1998 period.
        
      
       
      

        (5) 
           Comprehensive Income (Loss)
       
        
       

         Comprehensive income consists
          of net income (loss) and other comprehensive income. The
          components of comprehensive income (loss) are as follows:
          
        
         
        

          
           
         
           Three Months Ended September 30,
           
         
           Nine Months Ended September 30,
        
        
          
           
         1999
            
 
           
         
           1998 
 
           
         
           1999 
 
           
         
           1998 
 
        
        
          
           
         
           (In thousands)
        
        
         Net income
           (loss)
           
         $  
           1,567
           
         $(7,717
           
         )
           
         $  
             (578
         )
           
         $(17,209
           
         )
        
        
         Unrealized
           gain on investments
           
         35,021
           
           
         — 
            
          
           
         35,021
           
          
           
         — 
            
          
        
        
           
           
         
           
         
           
           
         
           
           
         
           
        
        
         
           Comprehensive income (loss)
           
         $36,588
           
           
         $(7,717
           
         )
           
         $34,443
           
          
           
         $(17,209
           
         )
        
        
           
           
         
           
         
           
           
         
           
           
         
           
        
       
       
       
       
       
 
       
            VeriSign operates in the United States,
         Europe and Japan and derives substantially all of its revenues
         from sales of Internet trust services. There have been no
         significant changes in our operating segment or in the
         geographic location of our long-lived assets since December
         31, 1998.
 
VERISIGN, INC. AND SUBSIDIARIES
         
 
NOTES TO CONSOLIDATED FINANCIAL
         STATEMENTS—(Continued)
 
 

        
          
           (6)
         
          
             Segment Information
         
        
       
       
       
       
       
       
       
       
       
       
 
       
            In June 1998, the Financial Accounting
         Standards Board issued Statement of Financial Accounting
         Standards (SFAS) No. 133, “Accounting for Derivative
         Instruments and Hedging Activities.” SFAS No. 133
         established methods of accounting for derivative financial
         instruments and hedging activities related to those
         instruments as well as other hedging activities. Because
         VeriSign currently holds no derivative instruments and does
         not engage in hedging activities, we expect that the adoption
         of SFAS No. 133 will have no material impact on our financial
         position, results of operations or cash flows. We will be
         required to implement SFAS No. 133 for the year ending
         December 31, 2001.
 
         
          In December 1998, the AICPA issued SOP No. 98-9, “
         Modification of SOP 97-2, Software Revenue Recognition, with
         Respect to Certain Transactions.” SOP No. 98-9 requires
         recognition of revenue using the “residual method”
         in a multiple-element software arrangement when fair value
         does not exist for one or more of the delivered elements in
         the arrangement. Under the “residual method,” the
         total fair value of the undelivered elements is deferred and
         recognized in accordance with SOP No. 97-2. VeriSign will be
         required to implement SOP No. 98-9 for the year ending
         December 31, 2000. We expect that the adoption of SOP No. 98-9
         will not have a material impact on our financial position,
         results of operations or cash flows.

        
         
            (7)
         
          
           Recent Accounting Pronouncements
           
         
        
       
       
       
       
       
       
   
                  On
         November 11, 1999, VeriSign announced a two-for-one stock
         split for stockholders of record on November 22, 1999. This
         stock split has not been reflected in the September 30, 1999
         financial statements.
 
  ITEM 2.    
         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF
       

                 
                 OPERATIONS
         
 
       
            You should read the following discussion
         in conjunction with the interim unaudited consolidated
         financial statements and related notes.
 
       
            Except for historical information, this
         Report contains forward-looking statements within the meaning
         of Section 27A of the Securities Act of 1933 and Section 21E
         of the Securities Exchange Act of 1934. These forward-looking
         statements involve risks and uncertainties, including, among
         other things, statements regarding our anticipated costs and
         expenses and plans for addressing Year 2000 issues. Our actual
         results may differ significantly from those projected in the
         forward-looking statements. Factors that might cause or
         contribute to these differences include, but are not limited
         to, those discussed in the section below entitled “
         Factors That May Affect Future Results of Operations.”
         You should carefully review the risks described in other
         documents we file from time to time with the Securities and
         Exchange Commission, including the Quarterly Reports on Form
         10-Q that we have filed or will file in 1999 and our Annual
         Report on Form 10-K, which was filed on February 22, 1999. You
         are cautioned not to place undue reliance on the
         forward-looking statements, which speak only as of the date of
         this Quarterly Report on Form 10-Q. We undertake no obligation
         to publicly release any revisions to the forward-looking
         statements or reflect events or circumstances after the date
         of this document.
 
Overview
 
       
            VeriSign is the leading provider of Internet
         trust services for websites, enterprises and individuals to
         conduct trusted and secure electronic commerce and
         communications over IP networks. We have established strategic
         relationships with industry leaders, including AT&T, BT,
         Checkpoint Technologies, Cisco, Microsoft, Netscape, Network
         Associates, Network Solutions, RSA Security and VISA, to
         enable widespread utilization of our digital certificate
         services and to assure interoperability with a wide variety of
         applications and network equipment. We have used our secure
         online infrastructure to sell over 180,000 of our website
         digital certificates to date. In addition, we have issued over
         3.9 million of our digital certificates for individuals. Our
         website certificates currently protect the websites of a
         predominant number of leading online merchants, global
         financial institutions, Fortune 500 companies and government
         agencies. We also offer VeriSign OnSite, a managed service
         that allows an organization to leverage our trusted data
         processing infrastructure to develop and deploy customized
         digital certificate services for use by employees, customers
         and business partners. Since its introduction in November
         1997, we have sold over 600 OnSite service solutions to
         enterprises including Bank of America, Barclays,
         Hewlett-Packard, the Internal Revenue Service, Kodak,
         Southwest Securities, Sumitomo Bank, Texas Instruments and US
         West. We have also begun to build an international network of
         affiliates who provide our trust services under licensed
         co-branding relationships using our proprietary technology and
         business practices. We currently have affiliate relationships
         with 18 organizations including Arabtrust in the Middle East,
         BT in the United Kingdom, CIBC of Canada, CertiSur of
         Argentina, Certplus of France, eSign of Australia, HiTrust of
         Taiwan, KPN Telecom of The Netherlands, Roccade of The
         Netherlands, the South African Certification Agency in South
         Africa, and VPN Tech of Canada.
 
       
            We have derived substantially all of our
         revenues to date from fees for services rendered in connection
         with deploying Internet trust services. Revenues from these
         trust services consist of fees for the issuance of digital
         certificates, fees for digital certificate service
         provisioning, fees for technology and business process
         licensing to affiliates and fees for consulting,
         implementation, training, support and maintenance services.
         Each of these sources of revenue has different revenue
         recognition methods. We defer revenues from the sale or
         renewal of digital certificates and recognize these revenues
         ratably over the life of the digital certificate, generally 12
         months. We defer revenues from the sale of our OnSite managed
         services and recognize these revenues ratably over the term of
         the license, generally 12 months. We recognize revenues from
         the sale of digital certificate technology and business
         process licensing to affiliates upon delivery of the
         technology and signing of an agreement, provided the fee is
         fixed and determinable, collectibility is probable and the
         arrangement does not require significant production,
         modification or customization of the software. We
       recognize revenues from consulting and training services using
         the percentage-of-completion method for fixed-fee development
         arrangements or as the services are provided for
         time-and-materials arrangements. We recognize revenues ratably
         over the term of the agreement for support and maintenance
         services.
 
       
            We market our Internet trust services
         worldwide through multiple distribution channels, including
         the Internet, direct sales, telesales, value added resellers,
         systems integrators and our international affiliates. A
         significant portion of our revenues to date has been generated
         through sales from our website, but we intend to continue
         increasing our direct sales force, both in the United States
         and abroad, and to continue to expand our other distribution
         channels.
 
       
            In connection with the formation of VeriSign
         Japan, we licensed technology and contributed other assets to
         VeriSign Japan. Subsequent to its formation, additional
         investors purchased minority interests in VeriSign Japan. As
         of September 30, 1999, we owned 50.5% of the outstanding
         capital stock of VeriSign Japan. Accordingly, our consolidated
         financial statements include the accounts of VeriSign Japan
         and our consolidated statements of operations reflect the
         minority shareholders’ share of the net losses of
         VeriSign Japan.
 
       
            We have experienced substantial net losses
         in each fiscal period since our inception. As of September 30,
         1999, we had an accumulated deficit of $52.0 million. These
         net losses and accumulated deficit resulted from the
         significant costs incurred in the development and sale of our
         Internet trust services and in the establishment and
         deployment of our technology, infrastructure and practices.
         Although our revenues have grown in recent periods, we may be
         unable to sustain this growth. Therefore, you should not
         consider our historical growth indicative of future revenue
         levels or operating results. In addition, although we had a
         slight profit during the quarter ended September 30, 1999, we
         may not be able to sustain profitability on a quarterly or
         annual basis in the future. A more complete description of
         these and other risks relating to our business is set forth
         under the caption “Factors That May Affect Future Results
         of Operations.”
 
Results of Operations
 

        
          
            (8)
         
          
           Subsequent Event 
         
        
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
 

        
         
          
           Revenues
         
        
       
       
       
 
       
            Revenues increased significantly from the
         prior year primarily due to increased sales of our Internet
         trust services, particularly our website digital certificates
         and VeriSign OnSite services, the expansion of our
         international affiliate network and delivery of more training
         and consulting services.
 
       
            No customer accounted for 10% or more of
         revenues during the three months or nine months ended
         September 30, 1999 or 1998. Revenues of VeriSign Japan and
         revenues from international customers accounted for 29% of
         total revenues in the third quarter of 1999, and 12% of total
         revenues in the third quarter of 1998. During the first nine
         months of 1999, revenues of VeriSign Japan and revenues from
         international customers accounted for 26% of total revenues,
         while during the same period in 1998 revenues of VeriSign
         Japan and revenues from international customers accounted for
         11% of total revenues.
 
 Costs and Expenses
 

        
          
           
         1999
            
           
           
         1998
            
           
           
         
           Change 
 
        
        
          
           
         
           (Dollars in thousands)
        
        
         Three-month
           period:
           
         
           
         
           
         
         
        
        
           
                   Revenues
           
           
         $22,782
           
           
         $10,505
           
           
         117
           
         %
        
         
        

         Nine-month
           period:
           
         
           
         
           
         
         
        
        
           
                   Revenues
           
           
         $57,100
           
           
         $25,719
           
           
         122
           
         %
        
       
       
       
       
       
       
       
       
       
 

        
         
          
           Cost of revenues
         
        
       
       
       
 
       
            Cost of revenues consists primarily of costs
         related to providing digital certificate enrollment and
         issuance services, customer support and training, consulting
         and development services and costs of facilities and computer
         equipment used in these activities. Cost of revenues also
         includes fees paid to third parties to verify certificate
         applicants’ identities, insurance premiums for our
         service warranty plan and errors and omission insurance and
         the cost of software resold to customers.
 
       
            Growth of revenues was the primary cause of
         the increase in cost of revenues from 1998 to 1999. We hired
         more employees to support the growth of demand for our
         products and services during the period and to support the
         growth of our security consulting and training activities. The
         cost of insurance premiums for our service warranty plan
         increased because of greater certificate volume. In addition,
         we incurred increased expenses for access to third-party
         databases, higher support charges for our external disaster
         recovery program and increased expenses related to the cost of
         software products resold to customers as part of network
         security solution implementations.
 
       
            Cost of revenues as a percentage of revenue
         decreased from 1998 to 1999 primarily due to the overall
         increase in revenues, the continued experience of economies of
         scale on our technology infrastructure and the efficiency
         gains in the certificate enrollment and issuance process.
         
 
       
            Certain of our services, such as
         implementation consulting and training, require greater
         initial personnel involvement and therefore have higher costs
         than other types of services. As a result, we anticipate that
         cost of revenues will vary in future periods depending on the
         mix of services sold.
 

        
          
           
         
           1999 
 
           
         
           1998 
 
           
         
           Change 
 
        
        
          
           
         
           (Dollars in thousands)
        
        
         Three-month
           period:
           
         
         
           
         
         
           
         
         
        
        
           
                   Cost of
           revenues
           
         $  
           8,405
          
           
         $  
           5,190
          
           
         62
           
         %
        
        
           
                   Percentage
           of revenues
           
         37
           
         %
           
         49
           
         %
           
         
         
        
         
        

         Nine-month
           period:
           
         
         
           
         
         
           
         
         
        
        
           
                   Cost of
           revenues
           
         $22,379
           
          
           
         $13,467
           
          
           
         66
           
         %
        
        
           
                   Percentage
           of revenues
           
         39
           
         %
           
         52
           
         %
           
         
         
        
       
       
       
       
       
       
       
       
       
       
       
 

        
         
          
           Sales and marketing
         
        
       
       
       
 
       
            Sales and marketing expenses consist
         primarily of costs related to sales, marketing, practices and
         external affair activities. These expenses include salaries,
         sales commissions and other personnel-related expenses, travel
         and related expenses, costs of computer and communications
         equipment and support services, facilities costs, consulting
         fees and costs of marketing programs.
 
       
            Sales and marketing expenses increased from
         1998 to 1999 as a result of the continued growth of our direct
         sales force and the expansion of our marketing efforts,
         particularly in lead and demand generation
       activities. The expansion of our international sales presence in
         Europe during the third quarter of 1999 also contributed to
         the increase in these expenses. Sales and marketing expenses
         as a percentage of revenues decreased from 1998 to 1999
         primarily due to the increase in recurring revenue from
         existing customers, which tend to have lower acquisition costs
         associated with them, the increase in the productivity of the
         direct sales force, and the increase in the effectiveness of
         the marketing lead and demand generation activities.
         
 
       
            We anticipate that sales and marketing
         expenses will continue to increase in absolute dollars as we
         expand our direct sales force and increase our marketing and
         demand generation activities both in the United States and
         abroad.
 

        
          
           
         
           1999 
 
           
         
           1998 
 
           
         
           Change 
 
        
        
          
           
         
           (Dollars in thousands)
        
        
         Three-month
           period:
           
         
         
           
         
         
           
         
         
        
        
           
                   Sales and
           marketing
           
         $  
           8,829
          
           
         $  
           6,117
          
           
         44
           
         %
        
        
           
                   Percentage
           of revenues
           
         39
           
         %
           
         58
           
         %
           
         
         
        
         
        

         Nine-month
           period:
           
         
         
           
         
         
           
         
         
        
        
           
                   Sales and
           marketing
           
         $24,492
           
          
           
         $16,449
           
          
           
         49
           
         %
        
        
           
                   Percentage
           of revenues
           
         43
           
         %
           
         64
           
         %
           
         
         
        
       
       
       
       
       
       
       
       
       
 

        
         
          
           Research and development
         
        
       
       
       
 
       
            Research and development expenses consist
         primarily of costs related to research and development
         personnel, including salaries and other personnel-related
         expenses, consulting fees and the costs of facilities,
         computer and communications equipment and support services
         used in service and technology development.
 
       
            Research and development expenses increased
         in absolute dollars in the third quarter of 1999 from the
         third quarter of 1998 as we invested in the design, testing
         and deployment of, and technical support for, our expanded
         Internet trust service offerings and technology. The increase
         reflects the expansion of our engineering staff and related
         costs required to support our continued emphasis on developing
         new products and services as well as enhancing existing
         products and services. During 1999, we continued to make
         significant investments in development of all of our services.
         The decrease in research and development expenses as a
         percentage of revenues from 1998 to 1999 is primarily due to
         the fact that revenues increased faster than research and
         development expenses.
 
       
            We believe that timely development of new
         and enhanced Internet trust services and technology are
         necessary to remain competitive in the marketplace.
         Accordingly, we intend to continue to recruit experienced
         research and development personnel and to make other
         investments in research and development. As a result, we
         expect research and development expenses will continue to
         increase in absolute dollars. To date, we have expensed all
         research and development expenditures as incurred.
 

        
          
           
         
           1999 
 
           
         
           1998 
 
           
         
           Change 
 
        
        
          
           
         
           (Dollars in thousands)
        
        
         Three-month
           period:
           
         
         
           
         
         
           
         
         
        
        
           
                   Research and
           development
           
         $3,405
           
          
           
         $2,552
           
          
           
         33
           
         %
        
        
           
                   Percentage
           of revenues
           
         15
           
         %
           
         24
           
         %
           
         
         
        
         
        

         Nine-month
           period:
           
         
         
           
         
         
           
         
         
        
        
           
                   Research and
           development
           
         $9,478
           
          
           
         $6,242
           
          
           
         52
           
         %
        
        
           
                   Percentage
           of revenues
           
         17
           
         %
           
         24
           
         %
           
         
         
        
       
       
       
       
       
       
       
       
       
 

        
         
          
           General and administrative
         
        
       
       
       
 
       
            General and administrative expenses consist
         primarily of salaries and other personnel-related expenses for
         our administrative, finance and human relations personnel,
         facilities and computer and communications equipment, support
         services and professional services fees.
 
       
              Our expenses increased from 1998 to 1999
         primarily due to increased staffing levels required to manage
         and support our expanded operations, the implementation of
         additional management information systems and related
         procedures, and the expansion of our corporate headquarters.
         The decrease in general and administrative expenses as a
         percentage of revenues from 1998 to 1999 is primarily due to
         the fact that revenues increased faster than general and
         administrative expenses as we begin to experience economies of
         scale on our corporate infrastructure.
 
       
            We expect to continue to invest in a more
         comprehensive executive and administrative infrastructure. As
         a result, we anticipate that general and administrative
         expenses will increase in absolute dollars.
 

        
          
           
         
           1999 
 
           
         
           1998 
 
           
         
           Change 
 
        
        
          
           
         
           (Dollars in thousands)
        
        
         Three-month
           period:
           
         
         
           
         
         
           
         
         
        
        
           
                   General and
           administrative
           
         $2,142
           
          
           
         $1,673
           
          
           
         28
           
         %
        
        
           
                   Percentage
           of revenues
           
         9
         %
           
         16
           
         %
           
         
         
        
         
        

         Nine-month
           period:
           
         
         
           
         
         
           
         
         
        
        
           
                   General and
           administrative
           
         $6,122
           
          
           
         $5,842
           
          
           
         5
         %
        
        
           
                   Percentage
           of revenues
           
         11
           
         %
           
         23
           
         %
           
         
         
        
       
       
       
       
       
       
       
       
       
 

        
         
          
           Special charges
         
        
       
       
       
 
       
            In connection with the acquisition of
         SecureIT, we recorded in the third quarter of 1998 a special
         charge to operating expenses for direct and other
         merger-related costs pertaining to the merger transaction and
         certain stock-based compensation charges of approximately $2.4
         million and $1.2 million, respectively. Merger transaction
         costs consisted primarily of fees for investment bankers,
         attorneys, accountants, filing fees and other related charges.
         The stock-based compensation charges related to certain
         performance stock options held by Secure IT employees whose
         vesting accelerated upon a change of control.
 

        
          
           
         
           1999 
 
           
         
           1998 
 
           
         
           Change 
 
        
        
          
           
         
           (Dollars in thousands)
        
        
         Three-month
           period:
           
         
         
           
         
         
           
         
         
        
        
           
                   Special
           charges
           
         $— 
            
          
           
         $3,555
           
          
           
         (100
           
         )%
           
        
        
           
                   Percentage
           of revenues
           
         0
         %
           
         34
           
         %
           
         
         
        
         
        

         Nine-month
           period:
           
         
         
           
         
         
           
         
         
        
        
           
                   Special
           charges
           
         $— 
            
          
           
         $3,555
           
          
           
         (100
           
         )%
           
        
        
           
                   Percentage
           of revenues
           
         0
         %
           
         14
           
         %
           
         
         
        
       
       
       
       
       
 

        
         
          
           Other Income
         
        
       
       
       
 
       
            Other income consists primarily of interest
         earned on our cash, cash equivalents and short-term
         investments and the net effect of foreign currency transaction
         gains and losses. Other income also includes charges for any
         gains or losses on the disposal of property and equipment and
         other miscellaneous expenses.
 
       
            The increase in other income in 1999
         compared to 1998 is primarily due to a significantly higher
         average cash and short-term investment base in the 1999
         period. This increase in the investment base was a result of
         the cash generated from our follow-on public offering of
         3,195,000 shares of our common stock during January 1999.
         After deducting underwriting discounts and commissions and
         offering expenses, proceeds from the follow-on offering were
         approximately $121.4 million. The increase in other income was
         slightly offset by the loss on disposal of property and
         equipment and other miscellaneous expenses.
 

        
          
           
         
           1999 
 
           
         
           1998 
 
           
         
           Change 
 
        
        
          
           
          (Dollars in thousands)
         
        
        
         Three-month
           period:
           
         
         
           
         
         
           
         
         
        
        
           
                   Other income
           
           
         $1,272
           
          
           
         $  
           628
          
           
         103
           
         %
        
        
           
                   Percentage
           of revenues
           
         6
         %
           
         6
         %
        
         
        

         Nine-month
           period:
           
         
         
           
         
         
           
         
         
        
        
           
                   Other income
           
           
         $4,071
           
          
           
         $1,677
           
          
           
         143
           
         %
        
        
           
                   Percentage
           of revenues
           
         7
         %
           
         7
         %
           
         
         
        
       
       
       
       
       
       
       
 
       
            We have not recorded any provision for
         federal and California income taxes because we have
         experienced net losses since inception. As of December 31,
         1998, we had federal net operating loss carryforwards of
         approximately $52.3 million and California net operating loss
         carryforwards of approximately $46.5 million. If we are not
         able to use them, the federal net operating loss carryforwards
         will expire in 2010 through 2018 and the state net operating
         loss carryforwards will expire in 2003. The Tax Reform Act of
         1986 imposes substantial restrictions on the utilization of
         net operating losses and tax credits in the event of a
         corporation’s ownership change, as defined in the
         Internal Revenue Code. Our ability to utilize net operating
         loss carryforwards may be limited as a result of an ownership
         change. We do not anticipate that any material limitation
         exists on our ability to use our carryforwards and credits. We
         have provided a full valuation allowance on our deferred tax
         assets because of the uncertainty regarding their realization.
         
 

        
         
          
            Provision for Income Taxes
         
        
       
       
       
       
       
 
       
            Minority interest in the net loss of
         VeriSign Japan was $294,000 in the third quarter of 1999 and
         $237,000 in the third quarter of 1998. During the first nine
         months of 1999, the minority interest in the net loss of
         VeriSign Japan was $722,000 compared to $950,000 during the
         first nine months of 1998. The increase from the third quarter
         of 1998 to the third quarter of 1999 was primarily due to
         VeriSign Japan’s higher operating losses as compared to
         the prior year. The decrease from the first nine months of
         1999 to the first nine months of 1998 was primarily due to
         VeriSign Japan’s lower operating losses as compared to
         the prior year. As the VeriSign Japan business continues to
         develop and evolve, we expect that the minority interest in
         net loss of subsidiary will continue to fluctuate in future
         periods.
 
Factors That May Affect Future Results
         of Operations
 

        
         
          
           Minority Interest in Net Loss of Subsidiary
           
         
        
       
       
       
       
       
       
       
 
       
            VeriSign was incorporated in April 1995, and
         we began introducing our Internet trust services in June 1995.
         Accordingly, we have only a limited operating history on which
         to base an evaluation of our business and prospects. Our
         prospects must be considered in light of the risks and
         uncertainties encountered by companies in the early stages of
         development. These risks and uncertainties are often worse for
         companies in new and rapidly evolving markets. Our success
         will depend on many factors, including, but not limited to,
         the following:
 

        
         
          
           We have a limited operating history.
           
         
        
       
       
       
       
       
 

        
         
          
           Ÿ  
         
          
           the rate and timing of the growth and use of IP
           networks for electronic commerce and communications;
           
         
        
       
       
       
 

        
         
          
           Ÿ  
         
          
           the extent to which digital certificates are used for
           electronic commerce and communications;
         
        
       
       
       
 

        
         
          
           Ÿ  
         
          
           the continued evolution of electronic commerce as a
           viable means of conducting business;
         
        
       
       
       
 

        
         
          
           Ÿ  
         
          
           the demand for our Internet trust services;
           
         
        
       
       
       
 

        
         
          Ÿ  
         
          competition levels;
         
        
       
       
       
 

        
         
          
           Ÿ  
         
          
           the perceived security of electronic commerce and
           communications over IP networks;
         
        
       
       
       
 

        
         
          
           Ÿ  
         
          
           the perceived security of our services, technology,
           infrastructure and practices; and
         
        
       
       
       
 

                    
         To address these risks we must, among other things:
          

        
         
          
           Ÿ  
         
          
           our continued ability to maintain our current, and
           enter into additional, strategic relationships.
         
        
       
       
       
       
 

        
         
         
           Ÿ  
         
          
           successfully market our Internet trust services and
           our digital certificates to new and existing customers;
           
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           attract, integrate, train, retain and motivate
           qualified personnel;
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           respond to competitive developments;
         
        
       
       
       
 

        
         
         
            Ÿ  
         
          
           successfully introduce new Internet trust services;
           and
         
        
       
       
       
 
       
            We cannot be certain that we will
         successfully address any of these risks.
 

        
         
         
           Ÿ  
         
          
           successfully introduce enhancements to our existing
           Internet trust services to address new technologies and
           standards.
         
        
       
       
       
       
       
 
       
            To date, many businesses and consumers have
         been deterred from utilizing IP networks for a number of
         reasons, including, but not limited to:
 

        
         
          
           Our business depends on the adoption of IP
           networks .
         
        
       
       
       
       
       
 

        
         
         
           Ÿ  
         
          
           potentially inadequate development of network
           infrastructure;
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           security concerns including the potential for
           merchant or user impersonation and fraud or theft of stored
           data and information communicated over IP networks;
           
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           inconsistent quality of service;
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           lack of availability of cost-effective, high-speed
           service;
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           limited numbers of local access points for corporate
           users;
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           inability to integrate business applications on IP
           networks;
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           the need to operate with multiple and frequently
           incompatible products; and
         
        
       
       
       
 
       
            The adoption of IP networks will require a
         broad acceptance of new methods of conducting business and
         exchanging information. Companies and government agencies that
         already have invested substantial resources in other methods
         of conducting business may be reluctant to adopt new methods.
         Also, individuals with established patterns of purchasing
         goods and services and effecting payments may be reluctant to
         change.
 

        
         
         
           Ÿ  
         
          
           a lack of tools to simplify access to and use of IP
           networks.
         
        
       
       
       
       
       
 
       
            We target our Internet trust services at the
         market for trusted and secure electronic commerce and
         communications over IP networks. This is a new and rapidly
         evolving market that may not continue to grow. Accordingly,
         the demand for our Internet trust services is very uncertain.
         Even if the market for electronic commerce and communications
         over IP networks grows, our Internet trust services may not be
         widely accepted. The factors that may affect the level of
         market acceptance of digital certificates and, consequently,
         our Internet trust services, include the following:
         
 

        
         
          
           Our market is new and evolving.
         
        
       
       
       
       
       
 

        
         
         
           Ÿ  
         
          
           market acceptance of products and services based upon
           authentication technologies other than those we use;
           
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           public perception of the security of digital
           certificates and IP networks;
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           the ability of the Internet infrastructure to
           accommodate increased levels of usage; and
         
        
       
       
       
 
       
            Even if digital certificates achieve market
         acceptance, our Internet trust services may fail to address
         the market’s requirements adequately. If digital
         certificates do not achieve market acceptance in a timely
         manner and sustain acceptance, or if our Internet trust
         services in particular, do not achieve or sustain market
         acceptance, our business would be materially harmed.
         
 

        
         
         
           Ÿ  
         
          
           government regulations affecting electronic commerce
           and communications over IP networks.
         
        
       
       
       
       
       
 
       
            We depend on the uninterrupted operation of
         our data centers and our other computer and communications
         systems. We must protect these systems from loss, damage or
         interruption caused by fire, earthquake, power
       loss, telecommunications failure or other events beyond our
         control. Most of our systems are located at, and most of our
         customer information is stored in, our facilities in Mountain
         View, California and Kawasaki, Japan, areas susceptible to
         earthquakes. Any damage or failure that causes interruptions
         in our secure data centers and our other computer and
         communications systems could materially harm our business. In
         addition, our ability to issue digital certificates depends on
         the efficient operation of the Internet connections from
         customers to our secure data centers. These connections depend
         upon efficient operation of web browsers, Internet service
         providers and Internet backbone service providers, all of
         which have had periodic operational problems or experienced
         outages in the past. Any of these problems or outages could
         adversely affect customer satisfaction.
 
       
            Our success also depends upon the
         scalability of our systems. Our systems have not been tested
         at the volumes that may be required in the future. Thus, it is
         possible that a substantial increase in demand for our
         Internet trust services could cause interruptions in our
         systems. Any interruptions could adversely affect our ability
         to deliver our Internet trust services and therefore could
         materially harm our business.
 
       
            Although we periodically perform, and retain
         accredited third parties to perform, audits of our operational
         practices and procedures, we may not be able to remain in
         compliance with our internal standards or those set by
         third-party auditors. If we fail to maintain these standards,
         we may have to expend significant time and money to return to
         compliance and our business could be materially harmed.
         
 
       
            We retain certain confidential customer
         information in our secure data centers. It is critical to our
         business strategy that our facilities and infrastructure
         remain secure and are perceived by the marketplace to be
         secure. Despite our security measures, our infrastructure may
         be vulnerable to physical break-ins, computer viruses, attacks
         by hackers or similar disruptive problems. It is possible that
         we may have to expend additional financial and other resources
         to address these problems. Any physical or electronic
         break-ins or other security breaches or compromises of the
         information stored at our secure data centers might jeopardize
         the security of information stored on our premises or in the
         computer systems and networks of our customers. In this event,
         we could face significant liability and customers could be
         reluctant to use our Internet trust services. This type of
         occurrence could also result in adverse publicity and
         therefore adversely affect the market’s perception of the
         security of electronic commerce and communications over IP
         networks as well as of the security or reliability of our
         services.
 

        
         
          
           System interruptions and security breaches could
           harm our business.
         
        
       
       
       
       
       
       
       
       
       
       
       
 
       
            Our historical growth has placed, and any
         further growth is likely to continue to place, a significant
         strain on our resources. VeriSign has grown from 26 employees
         at December 31, 1995 to 371 employees at September 30, 1999.
         We have also opened additional sales offices and have
         significantly expanded our operations, both in the U.S. and
         abroad, during this time period. We also expanded our
         operations by acquiring SecureIT during 1998. To be
         successful, we will need to implement additional management
         information systems, develop further our operating,
         administrative, financial and accounting systems and controls
         and maintain close coordination among our executive,
         engineering, accounting, finance, marketing, sales and
         operations organizations. Any failure to manage growth
         effectively could materially harm our business.
 

        
         
          
           We must manage our growth and expansion.
           
         
        
       
       
       
       
       
 
       
            One of our significant business strategies
         has been to enter into strategic or other similar
         collaborative relationships in order to reach a larger
         customer base than we could reach through our direct sales and
         marketing efforts. We may need to enter into additional
         relationships to execute our business plan. We may not be able
         to enter into additional, or maintain our existing, strategic
         relationships on commercially reasonable terms. If we failed
         to do so, we would have to devote substantially more resources
         to the distribution, sale and marketing of our Internet trust
         services than we would otherwise need to do. Furthermore, as a
         result of our emphasis on these relationships, our success in
         them will depend both on the ultimate success of the other
         parties to these relationships, particularly in the use and
         promotion of IP networks for trusted and secure electronic
         commerce and communications, and on the ability of certain of
         these parties to market our Internet
       trust services successfully. Failure of one or more of our
         strategic relationships to result in the development and
         maintenance of a market for our Internet trust services could
         materially harm our business.
 
       
            Our existing strategic relationships do not,
         and any future strategic relationships may not, afford
         VeriSign any exclusive marketing or distribution rights. In
         addition, the other parties may not view their relationships
         with us as significant for their own businesses. Therefore,
         they could reduce their commitment to VeriSign at any time in
         the future. These parties could also pursue alternative
         technologies or develop alternative products and services
         either on their own or in collaboration with others, including
         our competitors. If we are unable to maintain our strategic
         relationships or enter into additional strategic
         relationships, our business could be materially harmed.
         
 

        
         
          
           We must establish and maintain strategic
           relationships.
         
        
       
       
       
       
       
       
       
 
       
            We market many of our Internet trust
         services directly to large companies and government agencies.
         The sale and implementation of our services to these entities
         typically involves a lengthy education process and a
         significant technical evaluation and commitment of capital and
         other resources. This process is also subject to the risk of
         delays associated with customers’ internal budgeting and
         other procedures for approving large capital expenditures,
         deploying new technologies within their networks and testing
         and accepting new technologies that affect key operations. As
         a result, the sales and implementation cycles associated with
         certain of our Internet trust services can be lengthy. Our
         quarterly and annual operating results could be materially
         harmed if orders forecasted for a specific customer for a
         particular quarter are not realized.
 

        
         
          
           Certain of our Internet trust services have
           lengthy sales and implementation cycles.
         
        
       
       
       
       
       
 
       
            Revenues of VeriSign Japan and revenues from
         other international affiliates and customers accounted for
         approximately 26% of our revenues in the first nine months of
         1999 and 14% of our revenues for the full year of 1998. We
         intend to expand our international operations and
         international sales and marketing activities. Expansion into
         these markets has required and will continue to require
         significant management attention and resources. We may also
         need to tailor our Internet trust services for a particular
         market and to enter into international distribution and
         operating relationships. We have limited experience in
         localizing our Internet trust services and in developing
         international distribution or operating relationships. We may
         not succeed in expanding our Internet trust service offerings
         into international markets. Any of these failures could harm
         our business. In addition, there are certain risks inherent in
         doing business on an international basis, including, among
         others:
 

        
         
          
           Our international operations are subject to
           certain risks.
         
        
       
       
       
       
       
 

        
         
         
           Ÿ  
         
          
           regulatory requirements;
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           legal uncertainties;
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           export and import restrictions on cryptographic
           technology and products incorporating that technology;
           
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           tariffs and other trade barriers;
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           difficulties in staffing and managing foreign
           operations;
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           longer sales and payment cycles;
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           problems in collecting accounts receivable;
           
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           difficulties in authenticating customer information;
           
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           political instability;
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           seasonal reductions in business activity; and
           
         
        
       
       
       
 
       
              We have licensed to certain international
         affiliates the VeriSign Processing Center platform, which is
         designed to replicate our own secure data centers and allows
         the affiliate to offer back-end processing of Internet trust
         services. The VeriSign Processing Center platform provides
         these affiliates with the knowledge and technology to offer
         Internet trust services similar to those offered by VeriSign.
         It is critical to our business strategy that the facilities
         and infrastructure used in issuing and marketing digital
         certificates remain secure and be perceived by the marketplace
         to be secure. Although we provide our affiliates with training
         in security and trust practices, network management and
         customer service and support, these practices are performed by
         our affiliates and are outside of our control. Any failure of
         an affiliate to maintain the privacy of confidential customer
         information could result in negative publicity and therefore
         adversely affect the market’s perception of the security
         of our services as well as the security of electronic commerce
         and communication over IP networks generally. See “—
         System interruptions and security breaches could harm our
         business.”
 
       
            All of our international revenues from
         sources other than VeriSign Japan are denominated in U.S.
         dollars. If additional portions of our international revenues
         were to be denominated in foreign currencies, we could become
         subject to increased risks relating to foreign currency
         exchange rate fluctuations.
 

        
         
         
           Ÿ  
         
          
           potentially adverse tax consequences.
         
        
       
       
       
       
       
       
       
 
       
            We may acquire additional businesses,
         technologies, product lines or service offerings in the
         future. Acquisitions involve a number of risks including,
         among others:
 

        
         
          
           Acquisitions could harm our business.
           
         
        
       
       
       
       
       
 

        
         
         
           Ÿ  
         
          
           the difficulty of assimilating the operations and
           personnel of the acquired businesses;
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           the potential disruption of our business;
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           our inability to integrate, train, retain and
           motivate key personnel of the acquired businesses;
           
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           the diversion of our management from our day-to-day
           operations;
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           our inability to incorporate acquired technologies
           successfully into our Internet trust services;
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           the additional expenses associated with completing
           acquisitions and amortizing any acquired intangible assets;
           
         
        
       
       
       
 

        
         
         
           Ÿ  
         
          
           the potential impairment of relationships with our
           employees, customers and strategic partners; and
         
        
       
       
       
 
       
             If we are unable to successfully address
         any of these risks, our business could be materially harmed.
         
 
Year 2000 Compliance
 

        
         
         
           Ÿ  
         
          
           the inability to maintain uniform standards,
           controls, procedures and policies.
         
        
       
       
       
       
       
       
       
 
       
            Many currently installed computer systems
         and software products are unable to distinguish between
         twentieth century dates and twenty-first century dates. This
         situation could result in system failures or miscalculations
         causing disruptions of operations of any business, including,
         among other things, a temporary inability to process
         transactions, send invoices or engage in similar normal
         business activities. As a result, many companies’
         software and computer systems may need to be upgraded or
         replaced to comply with these “Year 2000”
         requirements.
 

        
         
          
           Background of Year 2000 Issues
         
        
       
       
       
       
       
 
       
            Our business depends on the operation of
         numerous systems that could potentially be affected by Year
         2000 related problems. The systems include: hardware and
         software systems used to deliver our Internet trust services,
         including our proprietary software systems as well as software
         supplied by third parties; communications networks such as the
         Internet and private intranets; the internal systems of our
         customers and
       suppliers; digital certificates and software products sold to
         customers; the computer and communications hardware and
         software systems we use internally to manage our business; and
         non-information technology systems and services we use to
         manage our business, such as telephone systems and building
         systems.
 
       
            Based on an analysis of all systems
         potentially affected by conducting business in the year 2000
         and beyond, we have applied a phased approach to making these
         systems, and accordingly our operations, ready for the year
         2000. Beyond awareness of the issues and scope of systems
         involved, the phases of activities has included: an assessment
         of specific underlying computer systems, programs and/or
         hardware; remediation or replacement of Year 2000
         non-compliant technology; validation and testing of
         technologically compliant Year 2000 solutions; and
         implementation of the Year 2000 compliant systems. The table
         below provides the status and timing of the phased activities.
         
 

        
         
          
           State of Readiness
         
        
       
       
       
       
       
       
       
 
       
            As a trusted third-party certificate
         authority providing, among other services, digital
         certificates and related life cycle services, we depend on the
         hardware and software products from third parties used to
         deliver these Internet trust services. Inoperability of these
         products due to Year 2000 issues could harm our business. We
         have completed our assessment of our third-party vendors and
         have received their Year 2000 compliance statements.
         
 

        
          Impacted Systems
            
           
           
          Status
            
         
 
           
         Targeted Implementation
            
           
        
        
         Internet
           trust services sold to
         

              customers
           
         Digital
           certificates tested and
         

         available for customer trial
           
         Completed
           
        
         
        

         
           Non-information technology
         

              systems and services
           
         Systems
           upgraded or replaced as
         

         appropriate, testing and
         

         implementation completed
           
         Completed
           
        
         
        

         Hardware and
           software systems
         

              used to deliver services
           
           
         Systems
           upgraded or replaced as
         

         appropriate, testing and
         

         implementation completed
           
         Completed
           
        
         
        

         
           Communication networks used to
         

              provide services
           
         Systems
           upgraded or replaced as
         

         appropriate, testing and
         

         implementation completed
           
         Completed
           
        
         
        

         Operability
           with internal systems
         

              of customers and suppliers
           
           
         Systems
           upgraded or replaced as
         

         appropriate, testing and
         

         implementation completed
           
         Completed
           
        
         
        

         Hardware and
           software systems
         

              used to manage VeriSign’s
         

              business
           
         Systems
           upgraded or replaced as
         

         appropriate, testing and
         

         implementation completed
           
         Completed
           
        
       
       
       
       
       
 
       
            We expect that costs directly related to
         Year 2000 issues will not exceed approximately $500,000 for
         both costs incurred to date and future costs, including cases
         where non-compliant information technology systems have been
         or need to be replaced. We would have incurred the replacement
         cost of non-information technology systems regardless of the
         Year 2000 issue due to technological obsolescence and/or our
         growth. We have and will continue to expense all costs arising
         from Year 2000 issues, funding them from working capital.
         
 
       
            We do not believe that future expenditures
         to upgrade internal systems and applications will materially
         harm our business. In addition, while we do not know the
         potential costs of redeployment of personnel and any delays in
         implementing other projects, we anticipate the costs to be
         immaterial and we expect minimal adverse impact to our
         business.
 

        
         
          
           Costs to Address Year 2000 Issues
         
        
       
       
       
       
       
       
       
 
       
            We believe our digital certificates and
         Internet trust services are Year 2000 compliant; however,
         success of our Year 2000 compliance efforts may depend on the
         success of our customers in dealing with Year 2000 issues. We
         provide our Internet trust services to companies in a variety
         of industries, each with different issues and Year 2000
         compliance challenges. Customer difficulties with Year 2000
         issues could interfere with the use of Year 2000 compliant
         digital certificates, which might require us to devote
         additional resources to resolve underlying problems. If
         problems exist within our digital certificate technology as it
         relates to customers’ management information systems,
         business applications or productivity tools, our business,
         financial condition and results of operations could be
         materially harmed. This risk is minimized by our current
         offering of Year 2000 compliant test digital certificates that
         can validate the Year 2000 operation of customer applications
         and systems. However, there is no method to determine which
         customers will validate their applications and systems for
         Year 2000 compliance with our technology.
 
       
            Furthermore, the purchasing patterns of
         these customers or potential customers may be affected by Year
         2000 issues as companies expend significant resources to
         become Year 2000 compliant. The costs of becoming Year 2000
         compliant for current or potential customers may result in
         fewer funds being available to purchase and implement our
         Internet trust services.
 

        
         
          
            Risks of the Year 2000 Issues
         
        
       
       
       
       
       
       
       
 
       
            We have developed a Year 2000 contingency
         plan in conjunction with organizing a Year 2000 Team for the
         rollover weekend of January 1st and 2nd of the Year 2000. The
         Year 2000 Team consists of representatives from the
         engineering, production, and customer service departments who
         are responsible for responding to any potential internal or
         external problems that may occur during rollover weekend. This
         contingency plan document will be used during rollover weekend
         as a guidebook, should problems occur. We have a comprehensive
         disaster recovery plan that can be enabled in the event of a
         localized failure of our secure data centers. However, failure
         to address any unforeseen Year 2000 issues could harm our
         business.
 
Liquidity and Capital Resources
         
 

        
         
          
           Contingency Plans
         
        
       
       
       
       
       
       
       
 
       
            Prior to our initial public offering, we
         financed our operations primarily through private sales of
         equity securities, raising approximately $46.1 million. Our
         initial public offering, which we completed in January 1998,
         yielded net proceeds of approximately $43.7 million. In
         January 1999, we sold an additional 1,597,500 shares of common
         stock to the public for net proceeds of approximately $121.4
         million. At September 30, 1999, our principal source of
         liquidity was $160.1 million of cash, cash equivalents and
         short-term investments, consisting principally of commercial
         paper, medium term notes, corporate bonds and notes, market
         auction securities, United States government agency securities
         and money market funds.
 
       
            Net cash provided by operating activities
         was $3.5 million in the first nine months of 1999 compared to
         net cash used in operating activities of $10.6 million in the
         first nine months of 1998. Net cash provided by operating
         activities in the first nine months of 1999 was primarily the
         result of increases in deferred revenue and accounts payable
         and the $3.9 million reconciling adjustment for depreciation
         and amortization which were partially offset by the $578,000
         net loss and increases in accounts receivable and prepaid
         expenses. Net cash used in operating activities in the first
         nine months of 1998 was primarily the result of the $17.2
         million net
       loss and the increase in accounts receivable and prepaid
         expenses, which were partially offset by the $2.2 million
         reconciling adjustment for stock-based compensation and the
         increases in accounts payable, accrued liabilities and
         deferred revenue.
 
       
            Net cash used in investing activities was
         $88.4 million in the first nine months of 1999 compared to
         $20.0 million in the first nine months of 1998. Net cash used
         in investing activities in these periods was primarily the
         result of net purchases of short-term investments of $71.7
         million in the first nine months of 1999 and $16.4 million in
         the first nine months of 1998. Capital expenditures for
         property and equipment totaled $4.3 million in the first nine
         months of 1999 and $3.5 million in the first nine months of
         1998. Our planned capital expenditures for the full year of
         1999 are approximately $5 million to $7 million, primarily for
         computer and communications equipment and leasehold
         improvements. During the first nine months of 1999, VeriSign
         invested approximately $10.1 million in long-term investments
         including Keynote Systems, Inc. an Internet performance
         measurement company. As of September 30, 1999, we also had
         commitments under noncancelable operating leases for our
         facilities for various terms through 2005.
 
       
            Net cash provided by financing activities
         was $131.5 million in the first nine months of 1999, primarily
         all from the sale of additional common stock to the public. In
         the first nine months of 1998, net cash provided by financing
         activities was $43.8 million, derived virtually all from our
         initial public offering.
 
       
            We believe our existing cash, cash
         equivalents and short-term investments, will be sufficient to
         meet our working capital and capital expenditure requirements
         for at least the next 12 months. However, at some time, we may
         need to raise additional funds through public or private
         financing, strategic relationships or other arrangements. This
         additional funding, if needed, might not be available on terms
         attractive to us, or at all. If we have to enter into
         strategic relationships to raise additional funds we might be
         required to relinquish rights to certain of our technologies.
         Our failure to raise capital when needed could materially harm
         our business. If additional funds are raised through the
         issuance of equity securities, the percentage of our stock
         owned by our then-current stockholders would be reduced.
         Furthermore, these equity securities might have rights,
         preferences or privileges senior to those of our common stock.
         
 
Recent Accounting Pronouncements
         
 
       
            In June 1998, the Financial Accounting
         Standards Board issued Statement of Financial Accounting
         Standards (SFAS) No. 133, “Accounting for Derivative
         Instruments and Hedging Activities.” SFAS No. 133
         established methods of accounting for derivative financial
         instruments and hedging activities related to those
         instruments as well as other hedging activities. Because
         VeriSign currently holds no derivative instruments and does
         not engage in hedging activities, we expect that the adoption
         of SFAS No. 133 will have no material impact on our financial
         position, results of operations or cash flows. We will be
         required to implement SFAS No. 133 for the year ending
         December 31, 2001.
 
       
            In December 1998, the AICPA issued SOP No.
         98-9, “Modification of SOP 97-2, Software Revenue
         Recognition, with Respect to Certain Transactions.” SOP
         No. 98-9 requires recognition of revenue using the “
         residual method” in a multiple-element software
         arrangement when fair value does not exist for one or more of
         the delivered elements in the arrangement. Under the “
         residual method,” the total fair value of the undelivered
         elements is deferred and recognized in accordance with SOP No.
         97-2. VeriSign will be required to implement SOP No. 98-9 for
         the year ending December 31, 2000. We expect that the adoption
         of SOP No. 98-9 will not have a material impact on our
         financial position, results of operations or cash flows.
         
 
 ITEM 3.    
         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
         
 
Interest rate sensitivity
         
 
       
            The primary objective of VeriSign’s
         investment activities is to preserve principal while at the
         same time maximizing the income we receive from our
         investments without significantly increasing risk. Some of the
         securities that we have invested in may be subject to market
         risk. This means that a change in prevailing interest rates
         may cause the principal amount of the investment to fluctuate.
         For example, if we hold a security that was issued with a
         fixed rate equal to the then-prevailing interest rate and the
         prevailing interest rate later rises, the fair value of our
         investment will decline. To minimize this risk, we maintain
         our portfolio of cash equivalents and short-term investments
         in a variety of securities, including commercial paper,
         medium-term notes, corporate bonds and notes, market auction
         securities and money market funds. In general, money market
         funds are not subject to market risk because the interest paid
         on these funds fluctuates with the prevailing interest rate.
         In addition, we invest in relatively short-term securities. As
         of September 30, 1999, 74% of our investments had maturity
         dates within one year.
 
       
            The following table presents the amounts of
         our cash equivalents and short-term investments that are
         subject to market risk by range of expected maturity and
         weighted-average interest rates as of September 30, 1999. This
         table does not include money market funds because these funds
         are not subject to market risk.
 

        
          
           
         September
           30,
         

         1999 
           
           
         December
           31,
         

         1998 
           
           
         
           Change 
 
        
        
          
           
         
           (Dollars in thousands)
        
        
         Cash, cash
           equivalents and short-term investments
           
          
           $160,092
         
           
          
           $41,745
         
           
         283
           
         %
        
        
         Working
           capital
           
          
           $148,911
         
           
          
           $31,085
         
           
         379
           
         %
        
        
         Stockholders
           ’ equity
           
          
           $206,758
         
           
          
           $40,728
         
           
         408
           
         %
        
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
 
Exchange rate sensitivity
         
 
       
            VeriSign considers its exposure to foreign
         currency exchange rate fluctuations to be minimal. Our
         recently established subsidiary in Sweden has not had
         significant operations to date. All revenues derived from our
         European affiliates are denominated in United States dollars
         and, therefore, are not subject to exchange rate fluctuations.
         
 
       
            Both the revenues and expenses of our
         majority-owned subsidiary in Japan are denominated in Japanese
         yen. This serves as a natural hedge since even though an
         unfavorable change in the exchange rate of the Japanese yen
         against the United States dollar results in lower revenues
         when the subsidiary’s revenues are translated to United
         States dollars, operating expenses will also be lower.
         
 
       
            Because of our minimal exposure to foreign
         currencies, we have not engaged in any hedging transactions to
         date.
 
 PART II—OTHER INFORMATION
         
 
ITEM 2.    CHANGES
         IN SECURITIES AND USE OF PROCEEDS
 
(d)    Use of Proceeds.
         
 
       
            In January 1998, VeriSign completed the
         initial public offering of its common stock. The managing
         underwriters in the offering were Morgan Stanley & Co.
         Incorporated, Hambrecht & Quist LLC and Wessels, Arnold
         & Henderson L.L.C. We realized net proceeds from the
         offering of approximately $43.7 million after deducting the
         underwriting discounts and commissions and expenses of the
         offering. Through September 30, 1999, we used approximately
         $14.9 million of the net proceeds from the offering to fund
         operating expenses, the transaction charges related to the
         acquisition of SecureIT and to increase working capital.
         Approximately $8.7 million of the net proceeds was used to
         purchase and install computers and peripheral equipment and
         leasehold improvements and approximately $10.1 million was
         used to invest in certain companies as long-term investments.
         The remaining $10.0 million has been invested in short-term,
         interest-bearing, investment grade securities.
 
ITEM 6.    EXHIBITS
         AND REPORTS ON FORM 8-K
 
(a)    Index to Exhibits
         
 

        
          
           
         
           Maturing in
           
         
           Total 
 
           
         
           Fair
         

         Value 
 
        
        
          
           
         
           One Year
         

         or Less 
 
           
         
           Over
         

         One Year 
 
        
        
         Included in
           cash and cash equivalents
           
         $41,423
           
          
           
         $  
           None
          
           
         $41,423
           
           
         $41,423
           
        
        
           
                   
           Weighted-average interest rates
           
         5.39
           
         %
           
         
         
           
         
           
         
        
        
         Included in
           short-term investments
           
         $56,862
           
          
           
         $33,772
           
          
           
         $90,634
           
           
         $90,634
           
        
        
           
                   
           Weighted-average interest rates
           
         5.41
           
         %
           
         6.14
           
         %
           
         
           
         
        
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
 
(b)    Reports on Form
         8-K
 
       
           No reports on Form 8-K were filed in the quarter
         ended September 30, 1999.
 
 SIGNATURES
 
       
            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.
 

        
         
           Exhibit
         

         Number
           
           
         
           Exhibit Description 
 
           
         
           Incorporated by Reference
           
         
           Filed
         

         Herewith 
 
        
        
         
           
         Form
            
 
           
         Date
            
 
           
         Number
            
 
        
        
          
           27.01
         
           
         Financial
           Data Schedule
         

         (available in EDGAR format only)
           
           
                     
                   
           
           
                     
                   
           
           
                     
                   
           
          
           X
         
        
       
       
       
       
       
       
       
       
       
       
       
 

        
         
          
           VERISIGN, INC.
         
        
       
       
       
 
 
 

        
          
           Date: November 12, 1999
         
         By:
           /s/    S
           TRATTON 
         D. SCLAVOS
          
         
             
 
           Stratton D. Sclavos 
           President and
         Chief Executive Officer
           
         (Principal Executive Officer)
           
         
        
       
       
       
       
       
 
 SUMMARY OF TRADEMARKS
 
       
            The following trademarks and service marks
         of VeriSign, Inc., which may be registered in certain
         jurisdictions, may be referenced in this Form 10-Q:
         
 
Trademarks
 
       
            SecureIT
       ^TM
       
       
            VeriSign Logo
       
            VeriSign is a registered trademark
         exclusively licensed to VeriSign, Inc.
 
Service Marks
 
       
            Digital ID
       ^SM
       
       
            Digital ID Center
       ^SM
       
       
            Go Secure!
       ^SM
       
       
            NetSureSM Protection Plan
       
            VeriSign OnSite
       ^SM
       
       
            VeriSign Trust Network
       ^SM
       
       
            VeriSign V-Commerce
       ^SM
       
       
            WebPass
       ^SM
        ID
       
            WorldTrust
       ^SM
       
 
       
            All other brand or product names are
         trademarks or registered trademarks of their respective
         holders.
  



 5

This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at September 30, 1999, and the Consolidated
Statements of Operations for the nine months ended September 30, 1999, and is
qualified in its entirety by reference to these financial statements.

 1,000
 U.S. DOLLARS

                             
                   9-MOS
                          DEC-31-1999
                             JAN-01-1999
                               SEP-30-1999
                                      1
                                          69,458
                                    90,634
                                   20,901
                                       868
                                          0
                               184,932
                                          19,973
                                  10,163
                                 243,021
                           36,021
                                              0
                                0
                                          0
                                            51
                                     206,707
                   243,021
                                         57,100
                                57,100
                                                0
                                   22,379
                                40,092
                                     0
                                   0
                                  (578)
                                         0
                              (578)
                                       0
                                      0
                                            0
                                     (578)
                                   (0.01)
                                   (0.01)




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H.6%C,68R960X9C4U83,^70T^/@US=&%R='AR968-,3

        
          
           Date: November 12, 1999
         
         By:
           /s/
               DANA 
         L. EVAN
           
 
           
         
           Dana L. Evan Executive
           Vice President of Finance and Administration
         and Chief Financial Officer
           
         (Principal Financial and
           Accounting Officer)
		Page

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements		3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		10

Item 3. Quantitative and Qualitative Disclosures About Market Risk		23

PART II—OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds		24

Item 6. Exhibits and Reports on Form 8-K		24

Signatures		25

Summary of Trademarks		26

EXHIBIT

Exhibit 27.01 Financial Data Schedule (available in EDGAR format only)
Financial Statement Description		Sequentially Numbered Page
Consolidated Balance Sheets
As of September 30, 1999 and December 31, 1998		4

Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 1999 and 1998		5

Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 1998		6

Notes to Consolidated Financial Statements		7
	September 30, 1999		December 31, 1998
Assets
Current assets:
Cash and cash equivalents	$ 69,458		$ 22,786
Short-term investments	90,634		18,959
Accounts receivable, net	20,033		9,769
Prepaid expenses and other current assets	4,807		2,174

Total current assets	184,932		53,688
Property and equipment, net	9,810		9,234
Long-term investments	45,576		436
Other assets, net	2,703		937

	$ 243,021		$ 64,295

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$ 6,369		$ 5,472
Accrued liabilities	4,379		4,035
Deferred revenue	25,273		13,096

Total current liabilities	36,021		22,603

Minority interest in subsidiary	242		964

Commitments
Stockholders ’ equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized; none issued	—		—
Common stock, $.001 par value;
Authorized: 200,000,000 shares;
Issued and outstanding: 51,210,758 shares in 1999 and 46,173,384 shares in 1998	51		46
Additional paid-in capital	223,870		92,774
Notes receivable from stockholders	—		(409	)
Deferred compensation	(199	)	(276	)
Accumulated other comprehensive income	35,021		—
Accumulated deficit	(51,985	)	(51,407	)

Total stockholders’ equity	206,758		40,728

	$ 243,021		$ 64,295
	Three Months Ended September 30,			Nine Months Ended September 30,
	1999	1998		1999		1998
Revenues	$22,782	$10,505		$57,100		$ 25,719

Costs and expenses:
Cost of revenues	8,405	5,190		22,379		13,467
Sales and marketing	8,829	6,117		24,492		16,449
Research and development	3,405	2,552		9,478		6,242
General and administrative	2,142	1,673		6,122		5,842
Special charges	—	3,555		—		3,555

Total costs and expenses	22,781	19,087		62,471		45,555

Operating income (loss)	1	(8,582	)	(5,371	)	(19,836	)
Other income	1,272	628		4,071		1,677

Income (loss) before minority interest	1,273	(7,954	)	(1,300	)	(18,159	)
Minority interest in net loss of subsidiary	294	237		722		950

Net income (loss)	$ 1,567	$(7,717	)	$ (578	)	$(17,209	)

Basic net income (loss) per share	$ 0.03	$ (0.17	)	$ (0.01	)	$ (0.41	)

Shares used in basic net income (loss) per share computation	50,757	45,232		49,861		42,084

Diluted net income (loss) per share	$ 0.03	$ (0.17	)	$ (0.01	)	$ (0.41	)

Shares used in diluted net income (loss) per share computation	57,599	45,232		49,861		42,084
	Nine Months Ended September 30,
	1999		1998
Cash flows from operating activities:
Net loss	$ (578	)	$(17,209	)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization	3,873		2,862
Minority interest in net loss of subsidiary	(722	)	(950	)
Stock-based compensation	77		2,248
Loss on disposal of property and equipment	362		40
Changes in operating assets and liabilities:
Accounts receivable	(10,264	)	(5,080	)
Prepaid expenses and other current assets	(2,633	)	(1,357	)
Accounts payable	897		2,001
Accrued liabilities	344		1,678
Deferred revenue	12,177		5,194

Net cash provided by (used in) operating activities	3,533		(10,573	)

Cash flows from investing activities:
Purchases of short-term investments	(112,636	)	(48,500	)
Maturities and sales of short-term investments	40,961		32,085
Purchases of long-term investments	(10,119	)	—
Purchases of property and equipment	(4,308	)	(3,506	)
Other assets	(2,269	)	(122	)

Net cash used in investing activities	(88,371	)	(20,043	)

Cash flows from financing activities:
Collections on notes receivable from stockholders	409		62
Subchapter S distributions by SecureIT, Inc.	—		(199	)
Net proceeds from issuance of common stock	131,101		43,913

Net cash provided by financing activities	131,510		43,776

Net change in cash and cash equivalents	46,672		13,160
Cash and cash equivalents at beginning of period	22,786		4,942

Cash and cash equivalents at end of period	$ 69,458		$ 18,102

Noncash investing activity: Unrealized gain on long-term investments	$ 35,021		$ —
	1999	1998	Change
	(Dollars in thousands)
Three-month period:
Revenues	$22,782	$10,505	117	%

Nine-month period:
Revenues	$57,100	$25,719	122	%
	(Dollars in thousands)
	1999		1998		Change
Three-month period:
Special charges	$—		$3,555		(100	)%
Percentage of revenues	0	%	34	%

Nine-month period:
Special charges	$—		$3,555		(100	)%
Percentage of revenues	0	%	14	%
Impacted Systems	Status	Targeted Implementation
Internet trust services sold to customers	Digital certificates tested and available for customer trial	Completed

Non-information technology systems and services	Systems upgraded or replaced as appropriate, testing and implementation completed	Completed

Hardware and software systems used to deliver services	Systems upgraded or replaced as appropriate, testing and implementation completed	Completed

Communication networks used to provide services	Systems upgraded or replaced as appropriate, testing and implementation completed	Completed

Operability with internal systems of customers and suppliers	Systems upgraded or replaced as appropriate, testing and implementation completed	Completed

Hardware and software systems used to manage VeriSign’s business	Systems upgraded or replaced as appropriate, testing and implementation completed	Completed
	September 30, 1999	December 31, 1998	Change
	(Dollars in thousands)
Cash, cash equivalents and short-term investments	$160,092	$41,745	283	%
Working capital	$148,911	$31,085	379	%
Stockholders ’ equity	$206,758	$40,728	408	%
	Maturing in				Total	Fair Value
	One Year or Less		Over One Year		Total	Fair Value
Included in cash and cash equivalents	$41,423		$ None		$41,423	$41,423
Weighted-average interest rates	5.39	%
Included in short-term investments	$56,862		$33,772		$90,634	$90,634
Weighted-average interest rates	5.41	%	6.14	%
Exhibit Number		Exhibit Description		Incorporated by Reference						Filed Herewith
Exhibit Number		Exhibit Description		Form		Date		Number		Filed Herewith
27.01		Financial Data Schedule (available in EDGAR format only)								X