Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended June 30, 2008

OR

 

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

For the transition period from                      to                     

Commission File Number: 000-23593

 

 

VERISIGN, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   94-3221585

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

487 East Middlefield Road, Mountain View, CA   94043
(Address of principal executive offices)   (Zip Code)

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 by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x        Accelerated filer  ¨        Non-accelerated filer  ¨        Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    YES  ¨    NO  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class

 

Shares Outstanding July 31, 2008

Common stock, $.001 par value  

193,210,208

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page
   PART I—FINANCIAL INFORMATION   

Item 1.

  

Condensed Consolidated Financial Statements (Unaudited)

   3

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   31

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   46

Item 4.

  

Controls and Procedures

   46
   PART II—OTHER INFORMATION   

Item 1.

  

Legal Proceedings

   48

Item 1A.

  

Risk Factors

   48

Item 4.

  

Submission of Matters to a Vote of Security Holders

   67

Item 6.

  

Exhibits

   68

Signatures

   69

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As required under Item 1—Condensed Consolidated Financial Statements (Unaudited) included in this section are as follows:

 

Financial Statement Description

   Page

Ÿ       

 

Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007

   4

Ÿ       

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2008 and 2007

   5

Ÿ       

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007

   6

Ÿ       

 

Notes to Condensed Consolidated Financial Statements

   7

 

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Table of Contents

VERISIGN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

     June 30,
2008
    December 31,
2007
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 621,017     $ 1,376,722  

Short-term investments

     548       1,011  

Accounts receivable, net of allowance for doubtful accounts of $3,729 and $6,329 at June 30, 2008, and December 31, 2007, respectively

     125,138       208,799  

Prepaid expenses and other current assets

     160,203       163,041  

Assets held for sale

     466,204       —    
                

Total current assets

     1,373,110       1,749,573  
                

Property and equipment, net

     435,971       621,917  

Goodwill

     617,524       1,082,420  

Other intangible assets, net

     62,386       121,792  

Restricted cash

     47,209       46,936  

Other assets

     300,976       290,647  

Investments in unconsolidated entities

     112,137       109,828  
                

Total long-term assets

     1,576,203       2,273,540  
                

Total assets

   $ 2,949,313     $ 4,023,113  
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 318,110     $ 398,124  

Accrued restructuring costs

     31,544       2,878  

Deferred revenues

     581,833       552,070  

Other liabilities

     2,844       2,632  

Liabilities related to assets held for sale

     9,041       —    
                

Total current liabilities

     943,372       955,704  
                

Long-term deferred revenues

     198,486       186,719  

Long-term accrued restructuring costs

     1,208       1,473  

Convertible debentures

     1,263,199       1,265,296  

Other long-term liabilities

     39,846       41,133  
                

Total long-term liabilities

     1,502,739       1,494,621  
                

Total liabilities

     2,446,111       2,450,325  
                

Commitments and contingencies

    

Minority interest in subsidiaries

     58,715       54,485  

Stockholders’ equity:

    

Preferred stock—par value $.001 per share; Authorized shares: 5,000,000;

    

Issued and outstanding shares: none

     —         —    

Common stock—par value $.001 per share; Authorized shares: 1,000,000,000;

    

Issued and outstanding shares: 196,687,528 excluding 104,896,643 held in treasury, at June 30, 2008, and 222,849,348 excluding 73,720,953 shares held in treasury, at December 31, 2007

     301       297  

Additional paid-in capital

     21,551,301       22,559,045  

Accumulated deficit

     (21,117,891 )     (21,043,014 )

Accumulated other comprehensive income

     10,776       1,975  
                

Total stockholders’ equity

     444,487       1,518,303  
                

Total liabilities and stockholders’ equity

   $ 2,949,313     $ 4,023,113  
                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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VERISIGN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2008     2007     2008     2007  

Revenues

   $ 303,240     $ 258,988     $ 599,873     $ 528,884  
                                

Costs and expenses

        

Cost of revenues

     86,033       82,675       177,620       169,561  

Sales and marketing

     51,993       62,545       109,581       139,732  

Research and development

     32,891       31,868       68,752       71,937  

General and administrative

     57,783       74,355       120,380       122,846  

Restructuring, impairments and other charges, net

     136,958       14,319       157,071       38,434  

Amortization of other intangible assets

     5,495       16,461       14,193       34,631  
                                

Total costs and expenses

     371,153       282,223       647,597       577,141  
                                

Operating loss

     (67,913 )     (23,235 )     (47,724 )     (48,257 )

Other (loss) income, net

     (5,171 )     11,934       (7,743 )     93,214  
                                

(Loss) income from continuing operations before income taxes, earnings (loss) from unconsolidated entities and minority interest

     (73,084 )     (11,301 )     (55,467 )     44,957  
                                

Income tax benefit (expense)

     4,293       (5,632 )     (1,003 )     (10,254 )

Earnings (loss) from unconsolidated entities, net of tax

     1,172       1,748       (590 )     2,196  

Minority interest, net of tax

     (989 )     82       (1,895 )     (487 )
                                

(Loss) income from continuing operations

     (68,608 )     (15,103 )     (58,955 )     36,412  

Discontinued operations, net of tax

     565       10,386       (15,192 )     20,624  
                                

Net (loss) income

   $ (68,043 )   $ (4,717 )   $ (74,147 )   $ 57,036  
                                

Basic (loss) income per share from:

        

Continuing operations

   $ (0.35 )   $ (0.06 )   $ (0.29 )   $ 0.15  

Discontinued operations

     —         0.04       (0.08 )     0.08  
                                

Net (loss) income

   $ (0.35 )   $ (0.02 )   $ (0.37 )   $ 0.23  
                                

Diluted (loss) income per share from:

        

Continuing operations

   $ (0.35 )   $ (0.06 )   $ (0.29 )   $ 0.15  

Discontinued operations

     —         0.04       (0.08 )     0.08  
                                

Net (loss) income

   $ (0.35 )   $ (0.02 )   $ (0.37 )   $ 0.23  
                                

Shares used in per share computation:

        

Basic

     195,515       243,846       201,032       243,849  
                                

Diluted

     195,515       243,846       201,032       246,102  
                                

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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VERISIGN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Six Months Ended
June 30,
 
     2008     2007  

Cash flows from operating activities:

    

Net (loss) income

   $ (74,147 )   $ 57,036  

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

    

Gain on divestiture of businesses, net of tax

     (31,629 )     (74,999 )

Unrealized gain on joint venture call options

     —         (3,755 )

Unrealized gain on contingent interest derivative on convertible debentures

     (2,084 )     —    

Depreciation of property and equipment

     61,084       55,564  

Amortization of other intangible assets

     17,452       61,456  

Impairment of goodwill, other intangible assets and assets held for sale

     117,208       4,849  

Provision for doubtful accounts

     1,166       (720 )

Stock-based compensation

     46,096       42,047  

Restructuring and other charges, net

     45,679       37,342  

Loss on sale of property and equipment

     80,371       —    

Net gain on sale and impairment of investments

     (258 )     (885 )

Loss (earnings) from unconsolidated entities, net of tax

     590       (2,196 )

Minority interest, net of tax

     1,895       487  

Deferred income taxes

     (19,355 )     (11,469 )

Changes in operating assets and liabilities:

    

Accounts receivable

     31,186       (110,843 )

Prepaid expenses and other current assets

     10,330       130,661  

Accounts payable and accrued liabilities

     (104,105 )     (106,241 )

Deferred revenues

     62,302       76,698  
                

Net cash provided by operating activities

     243,781       155,032  
                

Cash flows from investing activities:

    

Purchases of investments

     —         (135,882 )

Proceeds from sale of property and equipment

     48,843       —    

Proceeds from maturities and sales of investments

     100       248,128  

Purchases of property and equipment

     (59,620 )     (47,511 )

Proceeds received from divestiture of businesses, net of cash contributed

     60,613       152,643  

Proceeds received from contingent purchase price adjustment

     1,175       —    

Other assets

     1,950       1,989  
                

Net cash provided by investing activities

     53,061       219,367  
                

Cash flows from financing activities:

    

Proceeds from issuance of common stock from option exercises and employee stock purchase plans

     92,405       —    

Change in net assets of minority interest

     134       89  

Repurchases of common stock

     (1,148,380 )     —    

Proceeds from credit facility

     200,000       —    

Repayment of short-term debt related to credit facility

     (200,000 )     (199,000 )

Dividend paid to minority interest

     (723 )     —    
                

Net cash used in financing activities

     (1,056,564 )     (198,911 )
                

Effect of exchange rate changes on cash and cash equivalents

     4,017       (984 )
                

Net (decrease) increase in cash and cash equivalents

     (755,705 )     174,504  

Cash and cash equivalents at beginning of period

     1,376,722       501,784  
                

Cash and cash equivalents at end of period

     621,017       676,288  

Cash and cash equivalents of Jamba Service at end of period

     —         (19,771 )
                

Cash and cash equivalents of continuing operations at end of period

   $ 621,017     $ 656,517  
                

Supplemental cash flow disclosures:

    

Cash paid for interest

   $ 20,442     $ 2,649  
                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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VERISIGN, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

Interim Financial Statements

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by VeriSign, Inc. and its subsidiaries (collectively, “VeriSign” or the “Company”) in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and notes normally provided in audited financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and other adjustments) considered necessary for a fair presentation have been included. The results of operations for any interim period are not necessarily indicative, nor comparable to the results of operations for any other interim period or for a full fiscal year. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes contained in VeriSign’s fiscal 2007 Annual Report on Form 10-K filed with the SEC (the “2007 Form 10-K”) on February 29, 2008.

Reclassifications and Adjustments

The Condensed Consolidated Statements of Operations have been reclassified for all periods presented to reflect discontinued operations treatment. Unless noted otherwise, discussions in the Notes to Condensed Consolidated Financial Statements pertain to continuing operations.

As a result of a comprehensive review of its business strategy, VeriSign changed its reportable segments in 2008. Previously, the Company had the following two reportable segments: Internet Services Group (“ISG”) and Communications Services Group (“CSG”). As of June 30, 2008, the Company’s business consists of the following reportable segments: Internet Infrastructure and Identity Services (“3IS”), which consists of Naming Services, Secure Socket Layer (“SSL”) Certificate Services, and Identification and Authentication Services (“IAS”), and Other Services, which represents continuing operations of non-core businesses and legacy products and services. Accordingly, the segment information has been reclassified for all periods presented. See Note 12, “Segment Information,” for further information regarding the Company’s reportable segments.

During the first quarter of 2008, the Company identified that it had not accrued for penalties related to late payment of federal payroll taxes for the periods during fiscal 2004 through fiscal 2007 of approximately $7.5 million. During the second quarter of 2008, the Company identified that it had not accrued for $2.1 million for penalties and interest related to late payment of state payroll taxes for the periods during fiscal 2005 through fiscal 2007. The amounts associated with each affected prior period are not material to the consolidated financial statements of such periods. However, as the cumulative amount of unrecorded penalties identified during the first two quarters of 2008 are expected to have a significant impact on the results of operations of fiscal 2008, the Company has corrected the prior periods, as presented, by recording the penalties and interest in their respective prior periods, resulting in increased operating expenses and decreased net income (loss) previously reported. This required reversing the penalties and interest recorded during the first quarter of 2008 of approximately $7.5 million. There were no penalties to be recorded for the three and six months ended June 30, 2007, and as a result there was no impact on the results of operations for the three and six months ended June 30, 2007.

In addition, the Company identified an overstatement of its consolidated income tax expense of $5.0 million relating to the first quarter of 2008, of which $1.7 million impacts income tax expense from continuing operations and $3.3 million impacts income tax expense associated with discontinued operations. The Company determined the amounts are not material to the Condensed Consolidated Financial Statements of the first quarter of 2008. Consistent with the correction of the unrecorded penalties described above, the Company adjusted the income tax expense of the first quarter of 2008 in presenting the consolidated results of operations for the six months ended June 30, 2008, as presented in this Quarterly Report.

 

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The following table presents the effects of the adjustments to the Company’s Condensed Consolidated Statement of Operations for the three months ended March 31, 2008:

 

     Three months ended March 31, 2008  
     As Reported     Adjustments     As Adjusted  
     (In thousands)  

Revenues .

   $ 354,281     $ —       $ 354,281  

Costs and expenses .

     323,719       (7,343 )(1)     316,376  
                        

Operating income

     30,562       7,343  (1)     37,905  
                        

Income from continuing operations before income taxes

     25,657       7,497  (1)     33,154  

Income tax expense

     (13,399 )     1,715  (2)     (11,684 )

Discontinued operations, net of tax

     (30,845 )     3,271  (2)     (27,574 )
                        

Net loss

   $ (18,587 )   $ 12,483     $ (6,104 )
                        

Basic income (loss) per share from:

      

Continuing operations

   $ 0.06       $ 0.10  

Discontinued operations

   $ (0.15 )     $ (0.13 )
                  

Net loss

   $ (0.09 )     $ (0.03 )
                  

Diluted income (loss) per share from:

      

Continuing operations

   $ 0.06       $ 0.10  

Discontinued operations

   $ (0.15 )     $ (0.13 )
                  

Net loss

   $ (0.09 )     $ (0.03 )
                  

 

(1) Reversal of federal payroll tax penalties and interest previously reported in VeriSign’s Form 10-Q for the quarter ended March 31, 2008, filed with the SEC on May 12, 2008.
(2) Correction of income tax expense overstatement previously reported in VeriSign’s Form 10-Q for the quarter ended March 31, 2008, filed with the SEC on May 12, 2008.

The results of operations for the three months ended March 31, 2008, were further adjusted for classification of a disposal group as a discontinued operation, as described in Note 4, “Assets Held for Sale and Discontinued Operations.”

The cumulative effect of the payroll tax penalties and interest described above as of December 31, 2006, of $3.6 million (relating to 2006 of $1.0 million, 2005 of $1.8 million and 2004 of $0.8 million) is presented in the 2007 interim condensed consolidated financial statements as an adjustment to Accumulated deficit as of January 1, 2007. Accounts payable and accrued liabilities, and Accumulated deficit, as of January 1, 2008, individually increased by $9.6 million.

 

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Recent Accounting Pronouncements

In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. Accounting Principles Board (“APB”) 14-1 (“FSP APB 14-1”), “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” FSP APB 14-1 specifies that issuers of convertible debt instruments should separately account for the liability (debt) and equity (conversion option) components of such instruments in a manner that reflects the issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008, and will be adopted by the Company in the first quarter of fiscal 2009. FSP APB 14-1 will be applied retrospectively to all periods presented. The Company’s adoption of FSP APB 14-1 will affect its 3.25% junior subordinated convertible debentures due 2037. The Company expects the adoption of FSP APB 14-1 will result in higher interest expense for fiscal 2007 through fiscal 2037, assuming the debentures will be settled upon maturity in 2037, associated with a significant reduction in its debentures balance along with a corresponding increase in its stockholders’ equity as of December 31, 2007 and 2008.

In April 2008, the FASB issued FSP No. Statement of Financial Accounting Standards (“SFAS”) 142-3 (“FSP SFAS 142-3”), “Determination of the Useful Life of Intangible Assets.” FSP SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets.” The intent of FSP SFAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) (“SFAS 141R”), “Business Combinations,” and other generally accepted accounting principles (“GAAP”). FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008, and will be adopted by the Company in the first quarter of fiscal 2009. The Company is currently evaluating the effect of FSP SFAS 142-3 and the impact it will have on its financial position and results of operations.

In March 2008, the FASB issued SFAS No. 161 (“SFAS 161”), “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.” SFAS 161 requires enhanced disclosures about an entity’s derivative instruments and hedging activities. It requires qualitative disclosures about the objectives and strategies for using derivative instruments, quantitative disclosures about the fair value amounts of gains and losses on derivative instruments, and disclosures about how derivative instruments and related hedged items affect a company’s financial position, results of operations and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 and will be adopted by the Company in the first quarter of fiscal 2009. The Company is currently evaluating the effect of SFAS 161, and the impact it will have on its financial position and results of operations.

In December 2007, the FASB issued SFAS No. 160 (“SFAS 160”), “Non-controlling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51,” which requires all entities to report minority interests in subsidiaries as equity in the consolidated financial statements, and requires that transactions between entities and non-controlling interests be treated as equity. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 and will be adopted by the Company in the first quarter of fiscal 2009. The Company is currently evaluating the effect of SFAS 160, and the impact it will have on its financial position and results of operations.

In December 2007, the FASB issued SFAS 141R which will significantly change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS 141R is effective for fiscal years beginning on or after December 15, 2008, and will be adopted by the Company in the first quarter of fiscal 2009. The Company is currently evaluating the effect of SFAS 141R, and the impact it will have on its financial position and results of operations.

 

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Note 2. Stock-Based Compensation

Stock-based compensation is classified in the Condensed Consolidated Statements of Operations in the same expense line items as cash compensation. The following table presents the total stock-based compensation:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2008    2007    2008    2007
     (In thousands)

Stock-based compensation:

           

Cost of revenues

   $ 3,624    $ 1,968    $ 8,087    $ 4,489

Sales and marketing

     3,558      4,105      8,314      8,812

Research and development

     2,465      1,982      6,211      4,831

General and administrative

     10,310      15,099      17,159      20,227

Restructuring, impairments and other charges, net

     3,050      —        6,781      2,297

Other (loss) income, net

     610      —        610      —  
                           

Stock-based compensation for continuing operations

     23,617      23,154      47,162      40,656

Discontinued operations

     5,919      2,119      9,169      3,544
                           

Total stock-based compensation

   $ 29,536    $ 25,273    $ 56,331    $ 44,200
                           

VeriSign currently uses the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase plan awards. The determination of the fair value of stock-based payment awards using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. The following table sets forth the weighted-average assumptions used to estimate the fair value of the stock options and employee stock purchase plan awards:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2008     2007     2008     2007  

Stock options:

        

Volatility

   33 %   34 %   36 %   34 %

Risk-free interest rate

   2.92 %   4.76 %   2.62 %   4.71 %

Expected term

   3.10     3.30     3.11     3.10  

Dividend yield

   zero     zero     zero     zero  

Employee stock purchase plan awards:

        

Volatility

   n/a     n/a     31 %   n/a  

Risk-free interest rate

   n/a     n/a     2.69 %   n/a  

Expected term

   n/a     n/a     1.25     n/a  

Dividend yield

   n/a     n/a     zero     n/a  

VeriSign’s expected volatility is based on the average of the historical volatility over the period commensurate with the expected term of the options and the mean historical implied volatility of traded options. The risk-free interest rates are derived from the average United States (“U.S.”) Treasury constant maturity rates during the respective periods commensurate with the expected term. The expected terms are based on an analysis of the observed and expected time to post-vesting exercise and/or cancellation of options. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero. The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option and award forfeitures and records stock-based compensation only for those options and awards that are expected to vest.

 

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During the six months ended June 30, 2007, the Company was precluded from selling shares under its employee stock purchase plan due to not being current in its filings with the SEC. The Company suspended its employee payroll withholdings for the purchase of its common stock under the employee stock purchase plan until July 16, 2007, when it became current in its SEC filings.

The following table presents the nature of the Company’s total stock-based compensation, inclusive of amounts for discontinued operations:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2008     2007     2008     2007  

Stock-based compensation:

        

Stock options

   $ 5,352     $ 8,851     $ 11,975     $ 20,404  

Employee stock purchase plans

     6,167       2,312       14,694       4,761  

Restricted stock units

     7,863       3,751       15,831       6,628  

Stock options/awards acceleration

     10,730       10,961       14,975       13,258  

Capitalization (1)

     (576 )     (602 )     (1,144 )     (851 )
                                

Total stock-based compensation

   $ 29,536     $ 25,273     $ 56,331     $ 44,200  
                                

 

(1) The capitalized amount is included in Property and equipment, net.

During the first and second quarters of 2008, the Company modified certain stock-based awards to accelerate the vesting of twenty-five percent (25%) of unvested “in-the-money” stock options outstanding and 25% of unvested restricted stock units outstanding on the termination dates of employees affected by divestitures and workforce reductions. The Company remeasured the fair value of these modified awards and recorded the charges over the future service periods, if any. The modification charges are included in Restructuring, impairments and other charges, net, for continuing operations as well as for discontinued operations.

In addition, during the second quarter of 2008, the Company modified certain stock-based awards outstanding for Mr. William A. Roper, Jr., the former chief executive officer. Pursuant to the settlement agreement with Mr. Roper, the Company accelerated the vesting of Mr. Roper’s then unvested shares of sign-on options, unvested shares of sign-on restricted stock unit awards, first-year options outstanding that would otherwise have vested had Mr. Roper remained employed with the Company through August 8, 2008, and one-third of the first-year restricted stock unit awards outstanding. Upon acceleration of vesting of Mr. Roper’s stock-based awards, the Company recognized an additional amount of $4.9 million of stock-based compensation during the second quarter of 2008.

During the second quarter of 2007, the Company recorded additional stock-based compensation of $11.0 million related to the acceleration of vesting of certain stock-based awards for Mr. Stratton Sclavos, a former chief executive officer.

Note 3. Joint Ventures

On January 31, 2007, VeriSign entered into two joint venture agreements with Fox Entertainment (“Fox”), a subsidiary of News Corporation, to provide mobile entertainment to consumers on a global basis. Under the terms of the agreements, Fox owns a 51% interest and VeriSign owns a 49% interest in the joint ventures.

In 2007, the Company provided a working capital loan of $15.0 million under a promissory note to the joint ventures, of which $8.9 million is outstanding as of June 30, 2008, and is included in Other assets.

In connection with the joint ventures, VeriSign and Fox entered into various put and call arrangements related to the Company’s ownership interests in the joint ventures, including VeriSign’s right to sell all of its

 

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interests in the joint ventures to Fox for $150 million and $350 million in fiscal 2010 and 2012, respectively (the “put options”), and Fox’s right to purchase all of VeriSign’s interests in the joint ventures for $400 million, the greater of $250 million or fair value, and the greater of $400 million or fair value, in fiscal 2009, 2010 and 2012, respectively (the “call options”). As of June 30, 2008, the Company determined that the call options did not have a material value. The Company has not recorded the value of the put options separately from its investments in the joint ventures.

Note 4. Assets Held for Sale and Discontinued Operations

During the fourth quarter of 2007, VeriSign announced a change to its business strategy to be more aligned with its core competencies, which are to provide highly scaleable, reliable and secure Internet infrastructure and identity services to customers around the world. The strategy calls for the divesture or winding down of a number of non-core businesses in the Company’s portfolio, such as communications, billing and commerce, content delivery, messaging and enterprise security services as well as other smaller businesses. By divesting or winding down these non-core businesses, additional resources should be available to invest in the core businesses that will remain: Naming Services, SSL Certificate Services, and IAS.

Assets classified as held for sale are recorded at the lower of their carrying amount or fair value less costs to sell and are not depreciated or amortized. Classification of the Company’s disposal groups as held for sale occurs when sufficient authority to sell the disposal group has been obtained, the disposal group is available for immediate sale, an active program to sell the disposal group has been initiated and its sale is probable within one year.

The results of operations of disposal groups held for sale or disposed of are presented as discontinued operations when the underlying operations and cash flows of the disposal group will be or have been eliminated from the Company’s continuing operations and the Company no longer has the ability to influence the operating and/or financial policies of the disposal group.

Completed Divestitures

On April 30, 2008, the Company sold its Digital Brand Management Services (“DBMS”) business which offered a range of corporate domain name and brand protection services that help enterprises, legal professionals, information technology professionals and brand marketers monitor, protect and build digital brand equity for net cash proceeds of $50.4 million and recorded a gain on sale of $30.5 million. The net cash proceeds include $5.0 million that was placed in an escrow account to cover any contingent claims made by the buyer against VeriSign through April 30, 2009. If no claims are made, the amount in escrow will be released to VeriSign during its second quarter of fiscal 2009. The DBMS business was part of the former ISG segment. The historical results of operations of the DBMS business have been classified as discontinued operations for all periods presented.

On April 30, 2008, the Company sold its Content Delivery Network (“CDN”) business which offered broadband content services that enable the delivery of high-quality video and other rich media securely and efficiently at a very large scale, for net cash proceeds of $1.0 million and recorded a gain on sale of $1.4 million. The Company has retained an equity ownership in the CDN business and has accounted for its investment in the CDN business on an equity method basis. As a result of the Company’s continuing involvement in the CDN business, the historical results of operations of the CDN business have not been classified as discontinued operations. The CDN business was part of the former CSG segment.

On March 31, 2008, the Company sold its Self-Care and Analytics (“SC&A”) business, which provided online analysis applications for mobile communications customers and online customer self-service with a single view of billing across multiple systems, for net cash proceeds of $14.2 million and recorded a gain on sale of $0.5 million. The SC&A business was part of the former CSG segment. The historical results of operations of the SC&A business have been classified as discontinued operations for all periods presented.

 

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On September 1, 2007, the Company sold its wholly-owned Jamba Service GmbH subsidiary (“Jamba Service”), which marketed insurance and extended service warranties to consumers for mobile electronic equipment and products, for net cash proceeds of $12.8 million and recorded a gain on sale of $1.8 million. Jamba Service was part of the former CSG segment. The historical results of operations of Jamba Service have been classified as discontinued operations for all periods presented.

Assets Held for Sale

The Company did not have any assets held for sale as of December 31, 2007. The following table presents the carrying amounts of major classes of assets and liabilities related to assets held for sale as of June 30, 2008. During the three and six months ended June 30, 2008, the Company recorded losses on disposals, including estimated losses of $45.9 million and $71.4 million, respectively, which is included in discontinued operations. Gains on disposal are recorded on the date the sale of the disposal group is consummated.

 

     June 30,
2008
     (In thousands)

Assets:

  

Accounts receivable

   $ 46,629

Goodwill

   $ 355,383

Other long-lived assets

     64,192
      

Total assets held for sale

   $ 466,204
      

Liabilities:

  

Deferred revenues

   $ 9,041
      

Total liabilities related to assets held for sale

   $ 9,041
      

As of June 30, 2008, businesses classified as held for sale and presented as discontinued operations included the following. As the Company executes its divestiture strategy, additional businesses are likely to be classified as held for sale in future periods.

Communications Services

The Company’s Communications Services business provides communications services, such as connectivity and interoperability services, intelligent database services and clearing and settlement services. The Company’s Connectivity and interoperability services primarily include its Signaling System 7 (“SS7”) Connectivity and Voice and Data Roaming services. The Company’s intelligent database services primarily include its Number Portability, Caller Name Identification, Toll-free Database and TeleBlock Do Not Call Services. The Company’s clearing and settlement services primarily include its Clearinghouse services which serve as a distribution and collection point for billing information and payment collection for services provided by one carrier to customers billed by another.

Communications Consulting

The Company’s Communications Consulting business offers a full range of strategy and technology consulting, business planning, sourcing, and implementation services to help telecommunications operators and equipment manufacturers drive profitable new business and technology strategies.

 

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Enterprise Security Services

The Company’s Enterprise Security Services business includes the Managed Security Services (“MSS”) business, the iDefense Security Intelligence services business, and the Security Consulting business. The Company’s MSS business enables enterprises to effectively monitor and manage their network security infrastructure 24 hours per day, 365 days per year while reducing the associated time, expense, and personnel commitments by relying on VeriSign’s security platform and experienced security staff. The Company’s iDefense Security Intelligence services business delivers comprehensive, actionable intelligence to help companies decide how to respond to threats and manage risk on networks. The Security Consulting business provides services that assist companies in understanding corporate security requirements, navigating the maze of diverse regulations, identifying security vulnerabilities, defending against and responding to attacks, reducing risk, and meeting the security compliance requirements of their business and industry.

International Clearing

The Company’s International Clearing business enables financial settlement and call data settlement for wireless and wireline carriers.

The current and historical operations, gains and losses upon disposition, including estimated losses upon disposition, of these disposal groups are presented as discontinued operations for all periods presented in the Company’s Condensed Consolidated Statements of Operations. The amounts presented represent direct operating costs of the disposal groups. The Company has determined direct costs consistent with the manner in which the disposal groups were structured and managed during the respective periods. Allocations of indirect costs such as corporate overheads have not been made.

For a period of time, the Company will continue to generate cash flows and will report income statement activity in continuing operations that are associated with these disposal groups and certain of the completed divestitures. The activities that will give rise to these impacts are transitional in nature and generally result from agreements that ensure and facilitate the orderly transfer of business operations. The nature, magnitude and duration of the agreements will vary depending on the specific circumstances of the service, location and/or business need. The agreements can include the following: logistics, customer service, support of financial processes, procurement, human resources, facilities management, data collection and information services. Existing agreements extend for periods less than 12 months.

The following table presents the revenues and the components of discontinued operations, net of tax:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2008     2007     2008     2007  
     (In thousands)  

Revenues

   $ 89,064     $ 108,636     $ 187,877     $ 216,186  
                                

(Loss) income before income taxes

   $ (38,782 )   $ 17,060     $ (59,299 )   $ 32,209  

Income tax benefit (expense)

     9,897       (6,674 )     12,714       (11,585 )
                                

(Loss) income from discontinued operations

     (28,885 )     10,386       (46,585 )     20,624  
                                

Gain on sale of discontinued operations, before income taxes

     32,083       —         31,614       —    

Income tax expense on sale of discontinued operations

     (2,633 )     —         (221 )     —    
                                

Gain on sale of discontinued operations

     29,450       —         31,393       —    
                                

Total discontinued operations, net of tax

   $ 565     $ 10,386     $ (15,192 )   $ 20,624  
                                

 

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Note 5. Restructuring, Impairments and Other Charges, Net

A comparison of restructuring, impairments and other charges, net, is presented below:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
     2008    2007     2008    2007
     (In thousands)

2008 restructuring plan charges

   $ 11,982    $ —       $ 31,780    $ —  

2007 restructuring plan charges

     98      3,162       369      25,195

2003 and 2002 restructuring plan charges

     16      48       60      142
                            

Total restructuring charges for continuing operations

     12,096      3,210       32,209      25,337

Impairments and other charges for continuing operations

     124,862      11,109       124,862      13,097
                            

Total restructuring, impairments and other charges, net,
for continuing operations

     136,958      14,319       157,071      38,434
                            

2008 restructuring plan charges for discontinued operations

     7,118      —         13,470      —  

2007 restructuring plan charges for discontinued operations

     —        889       —        3,537

Impairments and other charges for discontinued operations

     45,904      (29 )     71,415      220
                            

Total restructuring, impairments and other charges, net,
for discontinued operations

     53,022      860       84,885      3,757
                            

Total restructuring, impairments and other charges, net

   $ 189,980    $ 15,179     $ 241,956    $ 42,191
                            

2008 Restructuring Plan

In the fourth quarter of 2007, VeriSign announced a change in its business strategy to be more aligned with its core competencies, which are providing highly scaleable, reliable and secure Internet infrastructure and identity services to customers around the world. The strategy calls for divestiture or winding down of a number of non-core businesses in its portfolio. As part of this divestiture strategy, the Company initiated a restructuring plan in the first quarter of 2008, which includes workforce reductions, excess facilities and other exit costs primarily related to the consulting and professional fees incurred for initiating and executing the divestiture strategy. As of June 30, 2008, VeriSign recorded a total of $45.2 million in restructuring charges, inclusive of amounts for discontinued operations, under its 2008 restructuring plan.

2007 Restructuring Plan

In January 2007, VeriSign initiated a restructuring plan to execute a company-wide reorganization replacing the previous business unit structure with a combined worldwide sales and services team, and an integrated development and products organization. The restructuring plan included workforce reductions, abandonment of excess facilities, and other exit costs.

2003 and 2002 Restructuring Plans

In November 2003, VeriSign announced a restructuring initiative related to the sale of its Network Solutions business and the realignment of other business units. The restructuring plan resulted in reductions in workforce, abandonment of excess facilities, disposals of property and equipment and other charges.

In April 2002, VeriSign announced plans to restructure its operations to rationalize, integrate and align resources. This restructuring plan included workforce reductions, abandonment of excess facilities, write-off of abandoned property and equipment and other charges.

 

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The following table presents the consolidated restructuring charges, inclusive of amounts for discontinued operations, associated with all the restructuring plans:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
         2008            2007        2008    2007
     (In thousands)

Workforce reduction

   $ 18,043    $ 1,183    $ 43,679    $ 23,298

Excess facilities

     274      1,472      288      2,626

Other exit costs

     897      1,444      1,712      2,950
                           

Total restructuring charges

   $ 19,214    $ 4,099    $ 45,679    $ 28,874
                           

Of the total consolidated restructuring charges, $7.1 million and $13.5 million relate to workforce reduction for discontinued operations for the three and six months ended June 30, 2008, respectively. Of the total consolidated restructuring charges, $0.1 million and $2.6 million relate to workforce reduction for discontinued operations for the three and six months ended June 30, 2007, respectively.

For the three and six months ended June 30, 2008, $3.1 million and $6.8 million, respectively, of the workforce reduction charges relate to stock-based compensation for certain severed employees. For the six months ended June 30, 2007, $2.3 million of the workforce reduction charges relate to stock-based compensation for certain severed employees. For the three months ended June 30, 2007, there were no workforce reduction charges related to stock-based compensation for severed employees.

As of June 30, 2008, the consolidated accrued restructuring costs associated with all restructuring plans were $32.8 million and consist of the following:

 

     Accrued
Restructuring
Costs at
December 31,
2007
   Restructuring
Charges
   Cash
Payments
    Non-cash
Charges
    Accrued
Restructuring
Costs at

June 30,
2008
     (In thousands)

Workforce reduction

   $ 493    $ 43,679    $ (5,829 )   $ (8,971 )   $ 29,372

Excess facilities

     3,702      288      (1,539 )     23       2,474

Other exit costs

     156      1,712      (962 )     —         906
                                    

Total accrued restructuring costs

   $ 4,351    $ 45,679    $ (8,330 )   $ (8,948 )   $ 32,752
                                    

Included in current portion of accrued restructuring costs

             $ 31,544
                

Included in long-term portion of accrued restructuring costs

             $ 1,208
                

Cash payments totaling approximately $4.1 million related to the abandonment of excess facilities under all restructuring plans will be paid over the respective lease terms, the longest of which extends through 2011. The present value of future cash payments related to lease terminations due to the abandonment of excess facilities is expected to be as follows:

 

     Contractual
Lease
Payments
   Anticipated
Sublease
Income
    Net
     (In thousands)

2008 (remaining 6 months)

   $ 802    $ (34 )   $ 768

2009

     1,138      (473 )     665

2010

     1,169      (591 )     578

2011

     878      (415 )     463
                     
   $ 3,987    $ (1,513 )   $ 2,474
                     

 

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Impairments and Other Charges

The following table presents the consolidated impairments and other charges, inclusive of amounts for discontinued operations:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2008    2007    2008    2007
     (In thousands)

Impairment of goodwill, other intangible assets and assets held for sale

   $ 91,697    $ 4,849    $ 117,208    $ 4,849

Other charges

     79,069      6,231      79,069      8,468
                           

Total impairments and other charges

   $ 170,766    $ 11,080    $ 196,277    $ 13,317
                           

Impairments of goodwill, other intangible assets and assets held for sale

During the three and six months ended June 30, 2008, the Company recorded a charge of $91.7 million and $117.2 million, respectively, for impairment of goodwill, other intangible assets and assets held for sale. During the second quarter of 2008, the Company recorded a charge of $45.8 million in continuing operations for an impairment of goodwill related to its Post-pay business which offers advanced billing and customer care services to wireless carriers. During the three and six months ended June 30, 2008, the Company recorded a charge of $45.9 million and $71.4 million, respectively, in discontinued operations for estimated losses on assets held for sale. See Note 6, “Goodwill and Other Intangible Assets,” for further information regarding the impairment of goodwill related to the Post-pay business.

Other charges

During the second quarter of 2008, the Company recorded a loss of $79.1 million in continuing operations as a result of the sale of a portion of its Mountain View facilities, as described in Note 7, “Other Balance Sheet Items.” The sale of Mountain View facilities was consummated as a result of the 2008 restructuring plan to divest or wind down the non-core businesses. During the three and six months ended June 30, 2007, the Company recorded a charge of $6.2 million and $8.5 million, respectively, for excess and obsolete property and equipment. Of the total consolidated other charges, $0.2 million relates to discontinued operations for the six months ended June 30, 2007.

Note 6. Goodwill and Other Intangible Assets

The following table summarizes the changes in the carrying amount of goodwill as allocated to the Company’s reportable segments during the six months ended June 30, 2008:

 

     Internet
Infrastructure
and Identity
Services
   Other
Services
    Total  
     (In thousands)  

Balance at December 31, 2007

   $ 362,308    $ 720,112     $ 1,082,420  

Divestiture of businesses

     —        (19,726 )     (19,726 )

Impairment

     —        (45,793 )     (45,793 )

Reclassification to assets held for sale

     —        (401,368 )     (401,368 )

Other adjustments (1)

     2,566      (575 )     1,991  
                       

Balance at June 30, 2008

   $ 364,874    $ 252,650     $ 617,524  
                       

 

(1) VeriSign makes certain goodwill adjustments after the initial purchase of acquired companies for income tax adjustments, foreign exchange fluctuations and other additions or reductions that were determined after the initial purchase.

 

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VeriSign performed its annual impairment tests during the second quarter of 2008 and 2007. The fair value of VeriSign’s reporting units is determined using either the income or the market valuation approach or a combination thereof. Under the income approach, the fair value of the reporting unit is based on the present value of estimated future cash flows the reporting unit is expected to generate over its remaining life. Under the market approach, the value of the reporting unit is based on an analysis that compares the value of the reporting unit to values of publicly traded companies in similar lines of business. In the application of the income and market valuation approaches, VeriSign is required to make estimates of future operating trends and judgments on discount rates and other variables. Actual future results related to assumed variables could differ from these estimates. The Company did not record any impairment for goodwill from the annual impairment test conducted during the second quarter of 2007.

During the second quarter of 2008, the Company performed an impairment review of its Naming Services, SSL Certificate Services, IAS and VeriSign Japan reporting units related to its core businesses; and the Post-pay business and Messaging Services reporting units related to its non-core businesses. In accordance with SFAS 142, the Company tested goodwill for each of these reporting units for impairment by comparing the fair value of the reporting unit to its carrying value. The comparison of fair value to carrying value represents Step 1 of the two-step approach required by SFAS 142. The estimated fair value of each reporting unit was computed using the combination of the income and market valuation approach. Each of the reporting units reviewed for impairment, except for the Post-pay business reporting unit, had a fair value in excess of its carrying value and no further analysis was required. The Post-pay business reporting unit had a fair value less than its carrying value and the Company concluded that the goodwill in its Post-pay business reporting unit was impaired and that further analysis was required to determine the amount by which the carrying value of the goodwill of this reporting unit exceeded its implied fair value.

A Step 2 analysis requires the Company to allocate the fair value of the Post-pay business reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a current business combination and the fair value of the reporting unit was the price paid to acquire it. Prior to this allocation of the assets to the reporting unit, the Company assessed the long-lived assets of that unit for impairment, and determined they were not impaired. Based on this allocation, the excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. The carrying value of goodwill for the Post-pay business reporting unit exceeded its implied goodwill calculated by $45.8 million which the Company recorded as an impairment charge in continuing operations for the quarter ended June 30, 2008.

VeriSign’s other intangible assets are comprised of:

 

     June 30, 2008
     Gross
Carrying
Value
   Accumulated
Amortization
    Net
Carrying
Value
     (In thousands)

Customer relationships

   $ 46,093    $ (22,773 )   $ 23,320

Technology in place

     76,390      (53,145 )     23,245

Carrier relationships

     36,300      (27,749 )     8,551

Non-compete agreement

     3,381      (2,151 )     1,230

Trade name

     5,800      (1,772 )     4,028

Other

     9,000      (6,988 )     2,012
                     

Total other intangible assets

   $ 176,964    $ (114,578 )   $ 62,386
                     

 

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     December 31, 2007
     Gross
Carrying
Value
   Accumulated
Amortization
    Net
Carrying
Value
     (In thousands)

Customer relationships

   $ 212,978    $ (152,844 )   $ 60,134

Technology in place

     212,377      (179,144 )     33,233

Carrier relationships

     36,300      (26,864 )     9,436

Non-compete agreement

     30,154      (19,089 )     11,065

Trade name

     12,968      (7,425 )     5,543

Other

     9,000      (6,619 )     2,381
                     

Total other intangible assets

   $ 513,777    $ (391,985 )   $ 121,792
                     

Fully amortized other intangible assets are not included in the above tables. At June 30, 2008, the net carrying value of other intangible assets included in the 3IS segment totaled $27.9 million. At December 31, 2007, the net carrying value of other intangible assets which relate to businesses that have been divested or classified as disposal groups held for sale as of June 30, 2008, totaled $45.6 million. Estimated future amortization expense related to other intangible assets at June 30, 2008, is as follows:

 

     (In thousands)

2008 (remaining 6 months)

   $ 10,593

2009

     19,485

2010

     14,926

2011

     9,339

2012

     5,059

Thereafter

     2,984
      
   $ 62,386
      

Note 7. Other Balance Sheet Items

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

 

     June 30,
2008
   December 31,
2007
     (In thousands)

Prepaid expenses

   $ 33,259    $ 25,344

Other current assets

     126,944      137,697
             

Total prepaid expenses and other current assets

   $ 160,203    $ 163,041
             

Other current assets primarily consist of pass-through receivables, which are amounts that the Company collects from its customers that are due to third-party vendors as part of a revenue sharing agreement; non-trade receivables, which primarily consist of income tax receivables and value added tax receivables; and deferred tax assets.

 

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Property and Equipment, Net

The following table presents the detail of Property and equipment, net:

 

     June 30,
2008
    December 31,
2007
 
     (In thousands)  

Land

   $ 133,746     $ 222,750  

Buildings

     63,010       118,220  

Computer equipment and software

     514,512       738,549  

Capital work in progress

     80,399       69,298  

Office equipment, furniture and fixtures

     17,922       33,408  

Leasehold improvements

     48,248       47,510  
                

Total cost

     857,837       1,229,735  

Less: accumulated depreciation and amortization

     (421,866 )     (607,818 )
                

Total property and equipment, net

   $ 435,971     $ 621,917  
                

During the second quarter of 2008, the Company sold certain property and equipment in its Mountain View, California location for net cash proceeds of $47.6 million. The sale primarily included land with a total cost of $88.1 million and buildings with a total cost of $50.1 million. The accumulated depreciation of the Mountain View property which was sold was $12.5 million. During the first quarter of 2008, the Company reclassified certain leasehold improvements, with a cost of $29.2 million, to buildings as the Company determined this is a more appropriate categorization of these assets. The amounts presented at December 31, 2007, are reclassified accordingly.

Other Assets

Other assets consist of the following:

 

     June 30,
2008
   December 31,
2007
     (In thousands)

Long-term deferred tax assets

   $ 244,956    $ 230,695

Long-term note receivable

     8,857      15,000

Long-term investments

     5,985      6,385

Debt issuance costs

     27,765      28,411

Security deposits and other

     13,413      10,156
             

Total other assets

   $ 300,976    $ 290,647
             

Long-term note receivable as of June 30, 2008, included a working capital loan provided under a promissory note to the joint ventures described in Note 3, “Joint Ventures.” The promissory note bears an interest rate of 6% per annum and is receivable in December 2011. The promissory note may be optionally prepaid by the borrower at any time before maturity. Debt issuance costs represent costs incurred upon the issuance of the convertible debentures and credit facility which are being amortized over their respective terms.

 

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Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consist of the following:

 

     June 30,
2008
   December 31,
2007
     (In thousands)

Accounts payable

   $ 9,308    $ 9,075

Accrued employee compensation

     113,424      136,891

Customer deposits

     89,526      115,014

Taxes payable and other tax liabilities

     23,127      25,847

Other accrued liabilities

     82,725      111,297
             

Total accounts payable and accrued liabilities

   $ 318,110    $ 398,124
             

Note 8. Comprehensive (Loss) Income

Comprehensive (loss) income consists of net (loss) income adjusted for unrealized gains and losses on marketable securities classified as available-for-sale and foreign currency translation adjustments.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2008     2007     2008     2007  
     (In thousands)  

Net (loss) income

   $ (68,043 )   $ (4,717 )   $ (74,147 )   $ 57,036  

Change in unrealized (loss) gain on investments, net of tax

     (512 )     1,237       (315 )     2,882  

Foreign currency translation adjustments

     (7,366 )     (3,090 )     9,116       (1,471 )
                                

Comprehensive (loss) income

   $ (75,921 )   $ (6,570 )   $ (65,346 )   $ 58,447  
                                

Note 9. Credit Facility

VeriSign has a credit agreement (the “Credit Agreement”) with a syndicate of banks and other financial institutions related to a $500.0 million senior unsecured revolving credit facility (the “Facility”), under which VeriSign, or certain designated subsidiaries may be borrowers. The Facility is available for cash borrowings up to $500.0 million and for the issuance of letters of credit up to a maximum limit of $50.0 million. During the first quarter of 2008, the Company borrowed $200.0 million and repaid $60.0 million under the Facility. During the second quarter of 2008, the Company repaid the previously outstanding loan balance of $140.0 million under the Facility. As of June 30, 2008, the Company did not have any outstanding borrowings under the Facility and the Company had utilized $1.4 million for outstanding letters of credit. The Company’s Credit Agreement contains negative covenants that limit its ability to sell assets and freely deploy the proceeds it receives from such sales, subject to exceptions based on the size and timing of the sales. As of June 30, 2008, the Company was in compliance with all covenants under the Facility.

Note 10. Calculation of Net (Loss) Income Per Share

The Company computes basic net (loss) income per share by dividing net (loss) income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share gives effect to dilutive potential common equivalent shares, including unvested stock options, unvested restricted stock units, employee stock purchases, warrants and the conversion spread relating to the convertible debentures using the treasury stock method.

 

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The following table presents the computation of basic and diluted net (loss) income per share:

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
    2008     2007     2008     2007
    (In thousands, except per share data)

(Loss) income:

       

(Loss) income from continuing operations

  $ (68,608 )   $ (15,103 )   $ (58,955 )   $ 36,412

Discontinued operations, net of tax

    565       10,386       (15,192 )     20,624
                             

Net (loss) income .

  $ (68,043 )   $ (4,717 )   $ (74,147 )   $ 57,036
                             

Weighted-average shares:

       

Weighted-average common shares outstanding

    195,515       243,846       201,032       243,849

Weighted-average potential common shares outstanding:

       

Stock options .

    —         —         —         1,884

Unvested restricted stock awards

    —         —         —         218

Employee stock purchase plans and other .

    —         —         —         151
                             

Shares used to compute diluted net (loss) income per share

    195,515       243,846       201,032       246,102
                             

(Loss) income per share:

       

Basic:

       

Continuing operations.

  $ (0.35 )   $ (0.06 )   $ (0.29 )   $ 0.15

Discontinued operations.

    —         0.04       (0.08 )     0.08
                             

Net (loss) income .

  $ (0.35 )   $ (0.02 )   $ (0.37 )   $ 0.23
                             

Diluted:

       

Continuing operations

  $ (0.35 )   $ (0.06 )   $ (0.29 )   $ 0.15

Discontinued operations

    —         0.04       (0.08 )     0.08
                             

Net (loss) income .

  $ (0.35 )   $ (0.02 )   $ (0.37 )   $ 0.23
                             

Weighted-average potential common shares do not include stock options with an exercise price that exceeded the average fair market value of VeriSign’s common stock for the periods presented. The following table sets forth the weighted-average potential common shares that were excluded from the above calculation because their effect was anti-dilutive, and the respective weighted-average exercise prices of the weighted-average stock options outstanding:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2008    2007    2008    2007
     (In thousands, except per share data)

Weighted-average stock options outstanding (1)

     11,635      32,000      12,876      16,714

Weighted-average exercise price

   $ 25.59    $ 27.14    $ 25.19    $ 41.97

Weighted-average restricted stock awards outstanding (1)

     4,357      2,475      4,566      66

Weighted-average conversion spread related to convertible debentures (1)

     3,053      —        1,655      —  

 

(1) As the Company recognized a net loss for the three months ended June 30, 2008 and 2007 and six months ended June 30, 2008, all potential common shares were excluded as they were anti-dilutive.

Note 11. Repurchase of Common Stock

On January 31, 2008, the Board of Directors of VeriSign authorized a stock repurchase program (“2008 Stock Repurchase Program”) having an aggregate purchase price of up to $600.0 million of its common stock.

 

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On February 8, 2008, the Company entered into an Accelerated Share Repurchase (“ASR”) agreement to repurchase $600.0 million of its common stock under the 2008 Stock Repurchase Program. The Company paid $600.0 million to a financial institution in exchange for an initial purchase of 15.1 million shares. The ASR agreement was completed on July 10, 2008, when the Company received an additional 1.4 million shares for an aggregate of 16.5 million shares under the terms of the agreement. The average price per share paid by the Company on the ASR agreement was $36.33.

In 2006, the Board of Directors authorized a stock repurchase program (“2006 Stock Repurchase Program”) with no expiration date to repurchase up to $1.0 billion of its common stock. During the second quarter of 2008, the Company did not repurchase any shares under the 2006 Stock Repurchase Program. During the first quarter of 2008, the Company repurchased approximately 15.9 million shares of its common stock for an aggregate cost of $544.7 million under the 2006 Stock Repurchase Program. In July 2008, the Company repurchased approximately 3.5 million shares of its common stock at an average stock price of $34.38 per share for an aggregate of $120.0 million pursuant to a stock repurchase agreement with a financial institution under the 2006 Stock Repurchase Program. As of August 8, 2008, approximately $320.0 million is available under the 2006 Stock Repurchase Program.

Note 12. Segment Information

Description of segments

As a result of a comprehensive review of its business strategy, VeriSign changed its reportable segments in 2008. Previously, the Company had the following two reportable operating segments: ISG and CSG. As of June 30, 2008, the Company’s business consists of the following reportable segments: 3IS, and Other Services. The 3IS segment is comprised of Naming Services, SSL Certificate Services, IAS and VeriSign Japan. The Naming Services business is the authoritative directory provider of all .com, .net, .cc, and .tv domain names. SSL Certificate Services enable enterprises and Internet merchants to implement and operate secure networks and websites that utilize SSL protocol. These services provide customers the means to authenticate themselves to their end users and website visitors and to encrypt communications between client browsers and web servers. IAS includes Managed public key infrastructure (“PKI”) services, Unified Authentication services, and VeriSign Identity Protection services. VeriSign Japan is a majority-owned subsidiary and its operations primarily consist of resale of SSL Certificate Services and IAS.

The Other Services segment consists of the continuing operations of non-core businesses and legacy products and services. The non-core businesses that the Company plans to divest or wind down primarily include billing and payment services, digital content services and messaging services.

The segments were determined based on how the chief operating decision maker (“CODM”) views and evaluates VeriSign’s operations. VeriSign’s Chief Executive Officer has been identified as the CODM. Other factors, including customer base, homogeneity of products, technology and delivery channels, were also considered in determining the reportable segments.

The following table presents the results of VeriSign’s reportable segments:

 

     Internet
Infrastructure
and Identity
Services
   Other
Services
   Total
Segments
     (In thousands)

Three months ended June 30, 2008:

        

Revenues

   $ 232,963    $ 70,277    $ 303,240

Cost of revenues

     36,734      34,966      71,700
                    
   $ 196,229    $ 35,311    $ 231,540
                    

 

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     Internet
Infrastructure
and Identity
Services
   Other
Services
   Total
Segments
     (In thousands)

Three months ended June 30, 2007:

        

Revenues

   $ 193,260    $ 65,728    $ 258,988

Cost of revenues

     27,971      32,802      60,773
                    
   $ 165,289    $ 32,926    $ 198,215
                    
     Internet
Infrastructure
and Identity
Services
   Other
Services
   Total
Segments
     (In thousands)

Six months ended June 30, 2008:

        

Revenues

   $ 456,048    $ 143,825    $ 599,873

Cost of revenues

     74,535      72,666      147,201
                    
   $ 381,513    $ 71,159    $ 452,672
                    
     Internet
Infrastructure
and Identity
Services
   Other
Services
   Total
Segments
     (In thousands)

Six months ended June 30, 2007:

        

Revenues

   $ 374,163    $ 154,721    $ 528,884

Cost of revenues

     53,255      75,475      128,730
                    
   $ 320,908    $ 79,246    $ 400,154
                    

A reconciliation of the totals reported for the reportable segments to the applicable line items in the Condensed Consolidated Statements of Operations is as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2008     2007     2008     2007  
     (In thousands)  

Total revenues from reportable segments

   $ 303,240     $ 258,988     $ 599,873     $ 528,884  

Total cost of revenues from reportable segments

     71,700       60,773       147,201       128,730  

Unallocated operating expenses (1)

     299,453       221,450       500,396       448,411  
                                

Operating loss

     (67,913 )     (23,235 )     (47,724 )     (48,257 )

Other (loss) income, net

     (5,171 )     11,934       (7,743 )     93,214  
                                

(Loss) income from continuing operations before income taxes, earnings (loss) from unconsolidated entities and minority interest

   $ (73,084 )   $ (11,301 )   $ (55,467 )   $ 44,957  
                                

 

(1) Unallocated operating expenses include unallocated cost of revenues, sales and marketing, research and development, general and administrative, restructuring, impairments and other charges, net, and amortization of other intangible assets.

 

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Geographic Revenues

The following table presents a comparison of the Company’s geographic revenues:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2008    2007    2008    2007
     (In thousands)

United States

   $ 218,067    $ 201,708    $ 434,826    $ 417,236

Switzerland

     52,203      26,048      97,803      29,883

Japan

     20,512      18,044      39,563      34,241

Other

     12,458      13,188      27,681      47,524
                           

Total revenues

   $ 303,240    $ 258,988    $ 599,873    $ 528,884
                           

VeriSign operates in North America, Europe, Japan, Australia, Latin America, South Africa and India. Revenues are generally attributed to the respective countries in which the VeriSign contracting entities are located, which does not necessarily reflect the location of the Company’s customers.

The following table presents a comparison of property and equipment, net of accumulated depreciation, by geographic region:

 

     June 30,
2008
   December 31,
2007
     (In thousands)

Americas:

     

United States

   $ 408,987    $ 592,554

CALA (1)

     232      1,130
             

Total Americas

     409,219      593,684

EMEA (2)

     8,734      10,005

APAC (3)

     18,018      18,228
             

Total property and equipment, net

   $ 435,971    $ 621,917
             

 

(1) Canada and Latin America (“CALA”)
(2) Europe, the Middle East and Africa (“EMEA”)
(3) Australia, Japan and Asia Pacific (“APAC”)

Note 13. Other (Loss) Income, Net

The following table presents the components of other (loss) income, net:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2008     2007     2008     2007  
     (In thousands)  

Interest income

   $ 2,792     $ 8,456     $ 11,137     $ 17,178  

Interest expense

     (10,425 )     (354 )     (20,300 )     (2,583 )

Net gain on sale and impairment of investments

     203       56       258       885  

Net gain on divestiture of businesses

     2,127       —         1,001       74,999  

Unrealized gain on joint venture call options

     —         3,755       —         3,755  

Unrealized gain on contingent interest derivative on convertible debentures

     246       —         2,084       —    

Income from transition services agreements

     1,366       —         1,366       —    

Other, net

     (1,480 )     21       (3,289 )     (1,020 )
                                

Total other (loss) income, net

   $ (5,171 )   $ 11,934     $ (7,743 )   $ 93,214  
                                

 

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Interest income is earned principally from the investment of VeriSign’s surplus cash balances. Interest expense is derived principally from interest on VeriSign’s short-term debt and convertible debentures. Income from transition services agreements includes income generated from services provided to the purchasers of the divested businesses for a certain period of time to ensure and facilitate the transfer of business operations for those businesses. Other, net, primarily consists of foreign exchange rate gains and losses.

Note 14. Income Taxes

For the three and six months ended June 30, 2008, the Company recorded an income tax benefit for continuing operations of $4.3 million and an income tax expense for continuing operations of $1.0 million, respectively. For the three and six months ended June 30, 2007, the Company recorded income tax expenses for continuing operations of $5.6 million and $10.3 million, respectively. The decrease in income tax expense was primarily attributable to the decrease in income from continuing operations before income taxes.

The Company applies a valuation allowance to certain deferred tax assets which management does not believe that it is more likely than not that they will be realized. These deferred assets consist primarily of investments with differing book and tax bases, capital loss carryforwards, and net operating losses related to certain foreign operations.

As of June 30, 2008, the Company had an unrecognized tax benefit for income taxes associated with uncertain tax positions of $41.4 million. If the liabilities associated with these uncertain tax positions are recognized in the future, the entire amount of unrecognized tax benefits would affect the effective tax rate. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. At June 30, 2008, the Company had $11.0 million of accrued interest and penalties relating to uncertain tax positions. For the three months ended June 30, 2008, and June 30, 2007, the Company expensed $0.5 million and $0.7 million, respectively, for interest and penalties related to income tax liabilities through income tax expense.

The Company is currently under examination by the Internal Revenue Service (“IRS”) and the California Franchise Tax Board for the years ended December 31, 2004, and December 31, 2005. The Company is also under examination by numerous state taxing jurisdictions. Because the Company may utilize net operating losses and other tax attributes to offset its taxable income in years subsequent to their origination, such attributes can be adjusted by the IRS and other taxing authorities until the statute closes on the year in which such attribute was utilized. The Company is not currently under examination by significant international taxing jurisdictions. The statutes of limitations for these jurisdictions are generally 5 years.

Note 15. Fair Value of Financial Instruments

In February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets or Financial Liabilities,” which provides companies with an option to report selected financial assets and liabilities at fair value. SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The Company has not elected to report its financial instruments at fair value, other than those already recognized and reported at fair value.

In September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), “Fair Value Measurements,” which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. On February 12, 2008, the FASB issued FSP SFAS 157-2, Effective Date of FASB Statement No. 157, which defers the effective date for adoption of fair value measurements for nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after

 

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November 15, 2008. These nonfinancial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination.

The Company adopted SFAS 157 effective January 1, 2008, for all of its financial assets and liabilities that are recognized or disclosed at fair value on a recurring basis (at least annually). To increase consistency and comparability in fair value measurements, SFAS 157 establishes a fair value hierarchy based on the inputs used in valuation techniques. There are three levels to the fair value hierarchy of inputs to fair value, as follows:

 

   

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

   

Level 2: Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

   

Level 3: Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

The Company measures and reports certain financial assets and liabilities at fair value on a recurring basis, including its investments in money market funds, foreign currency forward contracts, equity investments in other public companies and a contingent interest derivative associated with its convertible debentures.

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis, by level within the fair value hierarchy:

 

     June 30, 2008
     Level 1    Level 2    Level 3    Total
     (In thousands)

Assets:

           

Investments in money market funds

   $ 486,086    $ —      $ —      $ 486,086

Equity investments

     548      —        —        548
                           

Total

   $ 486,634    $ —      $ —      $ 486,634
                           

Liabilities:

           

Foreign currency forward contracts

   $ —      $ 1,357    $ —      $ 1,357

Contingent interest derivative on convertible debentures

     —        —        12,080      12,080
                           

Total

   $ —      $ 1,357    $ 12,080    $ 13,437
                           

The fair value of the Company’s investments in money market funds approximates their face value. Such instruments are included in Cash and cash equivalents.

The fair value of the Company’s foreign currency forward contracts is based on foreign currency rates quoted by banks or foreign currency dealers and other public data sources. Such instruments are included in Prepaid expenses and other current assets. The Company recorded unrealized losses of $1.4 million and $0.7 million for the six months ended June 30, 2008, and June 30, 2007, respectively, in Other (loss) income, net, related to changes in the fair value of its foreign currency forward contracts.

Equity investments relate to the Company’s investments in the securities of other public companies. The fair value of these investments is based on the quoted market prices of the underlying shares. Such investments are included in Short-term investments.

 

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The following table summarizes the change in the fair value of the Company’s Level 3 contingent interest derivative on convertible debentures:

 

     Six Months
Ended
June 30, 2008
 
     (In thousands)  

Balance at December 31, 2007

   $ 14,164  

Unrealized gain (1)

     (2,084 )
        

Balance at June 30, 2008

   $ 12,080  
        

 

(1) The unrealized gain is included in Other (loss) income, net.

The Company’s junior subordinated convertible debentures have contingent interest payments that are considered to be an embedded derivative. The Company accounts for the embedded derivative separately from the convertible debentures at fair value, with gains and losses reported in Other (loss) income, net. The Company has utilized a valuation model based on simulations of stock prices, interest rates, credit ratings and bond prices to estimate the value of the embedded derivative. The inputs to the model include risk adjusted interest rates, volatility and average yield curve observations and stock price. As several significant inputs are not observable, the overall fair value measurement of the embedded derivative is classified as Level 3.

Note 16. Commitments and Contingencies

Lease Commitments

On June 19, 2008, the Company entered into a lease agreement with the purchaser of its Mountain View property. Under the terms of the lease agreement, the Company will lease the property for an initial term of 30 months, which will expire on December 31, 2010, with an option to extend the lease for five years from the date of initial term expiration. The Company’s lease obligations under the initial term will be approximately $3.1 million, $5.6 million and $5.4 million in 2008, 2009 and 2010, respectively

Legal Proceedings

On September 7, 2001, NetMoneyIN, an Arizona corporation, filed a complaint alleging patent infringement against VeriSign and several other previously-named defendants in the United States District Court for the District of Arizona asserting infringement of certain patents. The complaint alleged that VeriSign’s Payflow payment products and services directly infringe certain claims of NetMoneyIN’s three patents and requested the Court to enter judgment in favor of NetMoneyIN, a permanent injunction against the defendants’ alleged infringing activities, an order requiring defendants to provide an accounting for NetMoneyIN’s damages, to pay NetMoneyIN such damages and three times that amount for any willful infringers, and an order awarding NetMoneyIN attorney fees and costs. NetMoneyIN has withdrawn its allegations of infringement of one of the patents and the Court has dismissed with prejudice all claims of infringement of such patent. In its ruling on the claim construction issues, the Court found some of the claims asserted against VeriSign to be valid. NetMoneyIN may file an appeal after a final judgment seeking to overturn this ruling. Only one claim remains in the case. On July 13, 2007, the Court issued an order granting summary judgment in favor of VeriSign based on the Court’s finding that such claim is invalid, and denying all other pending dispositive motions. On August 29, 2007, plaintiff filed a Notice of Appeal. On September 19, 2007, the United States Court of Appeals for the Federal Circuit docketed the appeal. Oral argument took place on July 10, 2008. While the Company cannot predict the outcome of this lawsuit, it believes that the allegations are without merit.

On February 14, 2005, Southeast Texas Medical Associates, LLP filed a putative class action lawsuit in the Superior Court of California, alleging violations of the unfair competition laws, breach of express warranty and unjust enrichment relating to VeriSign’s Secure Site Pro SSL certificates. The complaint is brought on behalf of a class of persons who purchased the Secure Site Pro SSL certificate from February 2001 to present. On April 17, 2006, the class was certified and class notice was issued on May 21, 2007. VeriSign disputes these claims. In March 2008, the parties entered into a settlement agreement to resolve this matter. The settlement became final on July 15, 2008.

 

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On April 11, 2005, Prism Technologies, LLC filed a complaint against VeriSign in the United States District Court for the District of Delaware alleging that VeriSign’s “Go Secure” suite of applications and related hardware and software products and its Unified Authentication solution and related hardware and software products, including the VeriSign Identity Protection (“VIP”) product infringe United States Patent No. 6,516,416, entitled “Subscription Access System for Use With an Untrusted Network.” Prism Technologies seeks judgment in favor of Prism Technologies, a permanent injunction from infringement, damages in an amount not less than a reasonable royalty, attorneys’ fees and costs. On April 2, 2007, the Court issued a ruling from the claim construction hearing. On April 13, 2007, the Court granted Defendants’ Motion for Leave to File Amended Answers and Counterclaims to add an inequitable conduct defense. On April 23, 2007, on the basis of the claim construction ruling, the Court entered a stipulated Final Judgment of Non-Infringement, dismissing all claims and counterclaims in the case. On April 27, 2007, Plaintiff filed a Notice of Appeal. On February 5, 2008, the United States Court of Appeals for the Federal Circuit affirmed the district court’s claim construction ruling and dismissal in VeriSign’s favor.

On July 6, 2006, a stockholder derivative complaint (Parnes v. Bidzos, et al., and VeriSign) was filed against the Company, as a nominal defendant, and certain of its current and former directors and executive officers related to certain historical stock option grants. The complaint seeks unspecified damages on behalf of VeriSign, constructive trust and other equitable relief. Two other derivative actions were filed, one in United States District Court for the Northern District of California (Port Authority v. Bidzos, et al., and VeriSign), and one in state court (Port Authority v. Bidzos, et al., and VeriSign) on August 14, 2006. The state court derivative actions are stayed pending resolution of the federal action. The Company is named as a nominal defendant in these actions. The federal actions have been consolidated and plaintiffs filed a consolidated complaint on November 20, 2006. Motions to dismiss the consolidated federal court complaint were heard on May 23, 2007. Those motions were granted on September 14, 2007. On November 16, 2007, a second amended shareholder derivative complaint was filed wherein the Company was again named a nominal defendant. By stipulation and Court order, defendants’ obligation to respond to the second amended shareholder derivative complaint has been continued pending informal efforts by the parties to resolve the action. On May 15, 2007, a putative class action (Mykityshyn v. Bidzos, et al., and VeriSign) was filed in Superior Court for the State of California, Santa Clara County, naming the Company and certain current and former officers and directors, alleging false representations and disclosure failures regarding certain historical stock option grants. The plaintiff purports to represent all individuals who owned VeriSign’s common stock between April 3, 2002, and August 9, 2006. The complaint seeks rescission of amendments to the 1998 and 2006 Option Plans and the cancellation of shares added to the 1998 Option Plan. The complaint also seeks to enjoin defendants from granting any stock options and from allowing the exercise of any currently outstanding options granted under the 1998 and 2006 Option Plans. The complaint seeks an unspecified amount of compensatory damages, costs and attorneys fees. The identical case was filed in state court under a separate name (Pace. v. Bidzos, et al., and VeriSign) on June 19, 2007, and on October 3, 2007 (Mehdian v. Bidzos, et al.). On December 3, 2007, a consolidated complaint was filed in Superior Court for the State of California, Santa Clara County. VeriSign and the individual defendants dispute all of these claims. Defendants’ collective pleading challenges to the putative consolidated class action complaint are scheduled for hearing in August 2008.

On November 7, 2006, a judgment was entered against VeriSign by an Italian trial court in the matter of Penco v. VeriSign, Inc. for Euro 5.8 million plus fees arising from a lawsuit brought by a former consultant who claimed to be owed commissions. The Company was granted a stay on execution of the judgment and the company filed an appeal. On July 9, 2008, the appellate court rejected all of plaintiff’s claims.

On November 30, 2006, Freedom Wireless, Inc. filed a complaint against VeriSign and other defendants alleging that VeriSign infringes certain patents by making, using, selling or supplying products, methods or services relating to supplying prepaid wireless telephone services to telecommunications companies. VeriSign filed an answer to the complaint on January 25, 2007. The lawsuit was filed in the United States District Court for the Eastern District of Texas. On May 16, 2008, the parties entered into a confidential settlement agreement. The claims against VeriSign have been dismissed.

 

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On May 31, 2007, plaintiffs Karen Herbert, et al., on behalf of themselves and a nationwide class of consumers (“Herbert”), filed a complaint against VeriSign, Inc., m-Qube, Inc., and other defendants alleging that defendants collectively operate an illegal lottery under the laws of multiple states by allowing viewers of the NBC television show “Deal or No Deal” to incur premium text message charges in order to participate in an interactive television promotion called “Lucky Case Game.” The lawsuit is pending in the United States District Court for the Central District of California, Western Division. On June 5, 2007, plaintiffs Cheryl Bentley, et al., on behalf of themselves and a nationwide class of consumers (“Bentley”), filed a complaint against VeriSign, Inc., m-Qube, Inc., and other defendants alleging that defendants collectively operate an illegal lottery under the laws of multiple states by allowing viewers of the NBC television show “The Apprentice” to incur premium text message charges in order to participate in an interactive television promotion called “Get Rich With Trump.” Both Herbert and Bentley are currently pending in the United States Court of Appeals for the Ninth Circuit awaiting resolution of defendants’ petition for interlocutory appeal of the District Court’s denial of a motion to dismiss. While the Company cannot predict the outcome of any of these matters, it believes that the allegations in each of them are without merit and intends to vigorously defend against them. On June 7, 2007, plaintiffs Michael and Michele Hardin, on behalf of themselves and a nationwide class of consumers, filed a complaint against VeriSign, Inc. and other defendants in the United States District Court for the Northern District of Georgia alleging that defendants collectively operate various “gambling games” in violation of Georgia state law. Plaintiffs allege that interactive television promotions contained in various broadcasts, including NBC’s “Deal or No Deal,” wrongly permit participants to incur premium text message charges in order to participate in the promotions to win a prize. The Hardin lawsuit was dismissed on April 28, 2008 following a favorable ruling by the Georgia Supreme Court on a matter of law certified to the Supreme Court by the United States District Court.

On October 9, 2007, the Associated Press filed a complaint in the United States District Court for the Southern District of New York against Moreover Technologies, Inc. and VeriSign, Inc. for copyright and trademark infringement and other claims arising from the Real Time Publishing business. The complaint seeks unspecified compensatory, punitive and treble damages and a permanent injunction. While the Company cannot predict the outcome of this matter, it intends to vigorously defend against the claims.

On April 30, 2008, Prism Technologies LLC filed a complaint against VeriSign in the United States District Court for the District of Nebraska alleging that VeriSign’s manufacture, sale and use of “security certificates” infringes a United States patent. While the Company cannot predict the outcome of this matter, it intends to vigorously defend against the claims.

VeriSign is involved in various other investigations, claims and lawsuits arising in the normal conduct of its business, none of which, in its opinion will have a material effect on its business. The Company cannot assure you that it will prevail in any litigation. Regardless of the outcome, any litigation may require the Company to incur significant litigation expense and may result in significant diversion of management attention.

Note 17. Subsequent Events

The ASR agreement described in Note 11, “Repurchase of Common Stock,” was completed on July 10, 2008, when the Company received an additional 1.4 million shares for an aggregate of 16.5 million shares under the terms of the agreement. The average price per share paid by the Company on the ASR agreement was $36.33.

In July 2008, the Company also repurchased approximately 3.5 million shares of its common stock at an average stock price of $34.38 per share for an aggregate of $120.0 million pursuant to a stock repurchase agreement with a financial institution under the 2006 Stock Repurchase Program.

In July 2008, the Company invested an additional amount of $15.7 million pursuant to capital calls approved by the board of managers of the joint ventures with Fox, and recorded the amount as investments in unconsolidated entities. The purpose of the capital calls was to fund the ongoing business and working capital needs of the joint ventures. As of June 30, 2008, the Company does not have any further commitments for additional investments in the joint ventures.

On August 5, 2008, the Company’s Board of Directors authorized additional stock repurchases having an aggregate purchase price of up to $680.0 million of the Company’s common stock under the 2008 Stock Repurchase Program.

 

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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 Condensed Consolidated Financial Statements and related notes.

Except for historical information, this Quarterly Report on Form 10-Q 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 revenue mix. Forward-looking statements include, among others, those statements including the words “expects,” “anticipates,” “intends,” “believes” and similar language. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” in Part II, Item 1A. 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 or Current Reports on Form 8-K that we file in 2008 and our 2007 Form 10-K, which was filed on February 29, 2008, which discuss our business in greater detail. 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

We operate intelligent infrastructure services that enable and protect billions of interactions every day across the world’s voice and data networks and provide enterprises, governmental entities, and individuals with highly scaleable, reliable and secure Internet infrastructure and identity services.

Our business consists of the following reportable segments: Internet Infrastructure and Identity Services (“3IS”), and Other Services. Our 3IS segment, comprising the retained core businesses from our former ISG segment, consists of our Naming Services, Secure Socket Layer (“SSL”) Certificate Services, Identity and Authentication Services (“IAS”) businesses and VeriSign Japan.

The Naming Services business is the exclusive registry of all .com, .net, .cc and .tv domain names and maintains a shared registration system that allows registrars to enter new names in the master directory and to submit modifications, transfers, re-registrations and deletions for their domain names. The SSL Certificate Services business enables our online customers, such as enterprises or Internet merchants, to authenticate themselves to their end users and ecrypt Internet communications through use of public key infrastructure (“PKI”) and SSL protocol. The IAS business includes managed PKI services, unified authentication services, and identity protection services, all of which provide services intended to help enterprises secure intranets, extranets and other applications and devices and provide authentication credentials. VeriSign Japan is a majority-owned subsidiary and its operations primarily consist of resale of SSL Certificate Services and IAS.

The Other Services segment consists of the continuing operations of non-core businesses as well as legacy products and services. The businesses included in the Other Services segment provide various managed solutions to fixed line, broadband, mobile operators and enterprise customers through our integrated content and commerce platforms.

During the fourth quarter of 2007, we announced a change to our business strategy to allow management to focus its attention on our core competencies and to make additional resources available to invest in our core businesses. The strategy calls for a divestiture or winding down of all the business lines in our former Communications Services Group (“CSG”), and all business lines in our former Internet Services Group (“ISG”) except for our core businesses. The business lines that we expect to divest, including those that have been sold since the fourth quarter of 2007, accounted for approximately 50% of our overall revenues in fiscal 2007. The

 

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continued execution of our divestiture plan is subject to the availability of financing, identification of buyers, and general market conditions. While we are executing our divestiture plan, we will experience additional risks, including, but not limited to the disruption of our business and the potential loss of key employees; difficulties separating operations, services, products and personnel; and the potential damage to relationships with our existing customers. For example, our divestiture plan will require a substantial amount of management, administrative and operational resources. Once our divestiture plan is completed, the scale and scope of our operations will decrease in absolute terms, which we expect will allow our remaining core businesses to benefit from a more efficient and streamlined operational structure. However, we cannot assure you that we will be able to achieve the full strategic and financial benefits we expect from the divestiture of our non-core businesses and there is no guarantee that the planned divestitures will occur or will not be significantly delayed.

Our Core Businesses

Our core businesses consist of our Naming Services, SSL Certificate Services, and IAS businesses.

Naming Services

As of June 30, 2008, we had approximately 87.3 million domain names registered under the .com and .net registries. The number of domain names registered is largely driven by Internet usage and broadband penetration rates. Although growth in absolute number of registrations remains greatest in mature markets such as the United States and Europe, growth on an annual percentage basis is expected to be greatest in markets where Internet penetration has demonstrated the greatest potential for growth. We are largely insulated from the risk posed by fluctuations in exchange rates due to the fact that all revenues paid to us for .com and .net registrations are in U.S. dollars.

SSL Certificate Services

As of June 30, 2008, we had an installed base of SSL certificates of approximately 1.1 million. The major factors impacting the growth and performance of our SSL Certificate Services business are the penetration and adoption of the Internet, especially through broadband services, the spread of e-commerce, the utilization of electronic means for executing financial transactions (such as credit card payments), and the extent to which advertising through search engines encourages consumers to engage in e-commerce. As a result of the growing impact of the Internet on global commercial transactions, we expect continued revenue growth in our business, primarily in markets outside of the United States where e-commerce has the largest growth potential.

IAS

As with our SSL Certificate Services business, the major factors impacting the growth and performance of our IAS business are the penetration and adoption of the Internet, especially through broadband services, the spread of e-commerce, the utilization of electronic means for executing financial transactions (such as credit card payments), and the extent to which advertising through search engines encourages consumers to engage in e-commerce. As a result of the growing impact of the Internet on global commercial transactions, we expect continued growth in our business, in particular from our VeriSign Identity Protection (“VIP”) and One Time Password (“OTP”) programs which we expect will account for a greater percentage of our product mix over time.

Business Highlights and Trends—Three and six months ended June 30, 2008

Our 3IS segment recorded revenues of $233.0 million and $456.0 million during the three and six months ended June 30, 2008, respectively, experiencing an increase of 21% and 22%, respectively, from the same periods last year. For the three and six months ended June 30, 2008, domestically and internationally, we experienced revenue growth in all of the business lines in the 3IS segment, with the largest growth coming from our Naming services business. Our increased revenues are primarily related to the continued expansion of e-commerce which has, in turn, resulted in an increase in active domain names ending in .com and .net, an increase in the installed base of SSL certificates and an increase in demand for our identity and authentication services.

 

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Our Other Services segment recorded revenues of $70.3 million and $143.8 million during the three and six months ended June 30, 2008, respectively, experiencing an increase of 7% and a decrease of 7%, respectively, from the same periods last year. We expect revenues for our Other Services segment to decrease in absolute dollars as we divest or wind down non-core businesses.

We recorded a net loss of $68.0 million and $74.1 million during the three and six months ended June 30, 2008, respectively, as compared to a net loss of $4.7 million and a net income of $57.0 million during the three and six months ended June 30, 2007, respectively. Our net loss during the three and six months ended June 30, 2008, is primarily a result of an impairment charge of goodwill of $45.8 million related to our Post-pay business and estimated losses on assets held for sale of $45.9 million during the second quarter of 2008.

On June 19, 2008, we sold certain land and buildings located in Mountain View, California for net cash proceeds of $47.6 million. At the time of closing, we entered into a separate lease agreement with the purchaser of the Mountain View property. We leased the property from the purchaser for an initial term of 30 months, expiring December 31, 2010, with an option to extend the lease for five years from the date of initial term expiration. Our lease obligations under the initial term are $14.1 million. As a result of the sale, we recorded a loss of approximately $79.1 million.

On April 30, 2008, we sold our Digital Brand Management Services (“DBMS”) business which offered a range of corporate domain name and brand protection services that help enterprises, legal professionals, information technology professionals and brand marketers monitor, protect and build digital brand equity for net cash proceeds of $50.4 million and recorded a gain on sale of $30.5 million. The net cash proceeds include $5.0 million that was placed in an escrow account to cover any contingent claims made by the buyer against us through April 30, 2009. If no claims are made, the amount in escrow will be released to us during our second quarter of fiscal 2009. The DBMS business was part of our former ISG segment. The historical results of operations of the DBMS business have been classified as discontinued operations for all periods presented.

On April 30, 2008, we sold our Content Delivery Network (“CDN”) business which offered broadband content services that enable the delivery of high-quality video and other rich media securely and efficiently at a very large scale, for net cash proceeds of $1.0 million and recorded a gain on sale of $1.4 million. We have retained an equity ownership in the CDN business and have accounted for our investment in the CDN business on an equity method basis. As a result of our continuing involvement in the CDN business, the historical results of operations of the CDN business have not been classified as discontinued operations. The CDN business was part of our former CSG segment.

On March 31, 2008, we sold our Self-Care and Analytics (“SC&A”) business unit, which provided online analysis applications for mobile communications customers and online customer self-service with a single view of billing across multiple systems, for net cash proceeds of $14.2 million and recorded a gain on sale of $0.5 million. The SC&A business was part of our former CSG segment. The historical results of operations of the SC&A business have been classified as discontinued operations for all periods presented.

Our 2008 Restructuring Plan, was announced in late 2007 to complement our divestiture plan. We recorded $45.2 million in restructuring charges related to the 2008 Restructuring Plan as of June 30, 2008, of which expenses related to severance and benefit costs for terminated employees, inclusive of amounts for discontinued operations, totaled $43.6 million. Since announcing the 2008 Restructuring Plan, we have reduced our headcount in businesses targeted for divestiture, either through sale of businesses, employee terminations or voluntary resignations.

Recent Accounting Pronouncements

Recent accounting pronouncements are detailed in Note 1, “Basis of Presentation,” of the Notes to Condensed Consolidated Financial Statements.

 

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Subsequent Events

The ASR agreement described in Note 11, “Repurchase of Common Stock,” of the Notes to Condensed Consolidated Financial Statements, was completed on July 10, 2008, when we received an additional 1.4 million shares for an aggregate of 16.5 million shares under the terms of the ASR agreement. The average price per share paid by us on the ASR agreement was $36.33.

In July 2008, we repurchased approximately 3.5 million shares of our common stock at an average stock price of $34.38 per share for an aggregate of $120.0 million pursuant to a stock repurchase agreement with a financial institution under the 2006 Stock Repurchase Program.

In July 2008, we invested an additional amount of $15.7 million pursuant to capital calls approved by the board of managers of the joint ventures with Fox, and recorded the amount as investments in unconsolidated entities. The purpose of the capital calls was to fund the ongoing business and working capital needs of the joint ventures. We do not have further commitments for any additional investments in the joint ventures.

On August 5, 2008, our Board of Directors authorized additional stock repurchases having an aggregate purchase price of up to $680.0 million of our common stock under the 2008 Stock Repurchase Program.

Results of Operations

The following table presents information regarding our results of operations as a percentage of revenues:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2008     2007     2008     2007  

Revenues

   100 %   100 %   100 %   100 %
                        

Costs and expenses

        

Cost of revenues

   28     32     30     32  

Sales and marketing

   17     24     18     26  

Research and development

   11     12     11     14  

General and administrative

   19     29     20     23  

Restructuring, impairments and other charges, net

   45     6     27     7  

Amortization of other intangible assets

   2     6     2     7  
                        

Total costs and expenses

   122     109     108     109  
                        

Operating loss

   (22 )   (9 )   (8 )   (9 )

Other (loss) income, net

   (2 )   5     (1 )   18  
                        

(Loss) income from continuing operations before income taxes, earnings (loss) from unconsolidated entities and minority interest

   (24 )   (4 )   (9 )   9  

Income tax benefit (expense)

   2     (2 )       (2 )

Earnings (loss) from unconsolidated entities, net of tax

                

Minority interest, net of tax

                
                        

(Loss) income from continuing operations

   (22 )   (6 )   (9 )   7  

Discontinued operations, net of tax

       4     (3 )   4  
                        

Net (loss) income

   (22 %)   (2 %)   (12 %)   11 %
                        

 

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Revenues

We have two reportable segments: Internet Infrastructure and Identity Services and Other Services. A comparison of revenues is presented below:

 

     Three Months Ended
June 30,
   %
Change
 
     2008    2007   
     (Dollars in thousands)       

Internet Infrastructure and Identity Services

   $ 232,963    $ 193,260    21 %

Other Services

     70,277      65,728    7 %
                

Total revenues

   $ 303,240    $ 258,988    17 %
                
     Six Months Ended
June 30,
   %
Change
 
     2008    2007   
     (Dollars in thousands)       

Internet Infrastructure and Identity Services

   $ 456,048    $ 374,163    22 %

Other Services

     143,825      154,721    (7 %)
                

Total revenues

   $ 599,873    $ 528,884    13 %
                

The changes in revenues during the three and six months ended June 30, 2008, are described in the segment discussions that follow.

Internet Infrastructure and Identity Services

3IS segment revenues increased $39.7 million and $81.9 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year.

The following table compares active domain names ending in .com and .net managed by our Naming Services business and the approximate installed base of SSL certificates in our SSL Certificate Services business as of June 30, 2008 and 2007:

 

     June 30,    %
Change
 
     2008    2007   

Active domain names ending in .com and .net

   87.3 million    73.0 million    20 %

Installed base of SSL certificates

   1,056,000    923,000    14 %

Naming Services

Revenues in our Naming Services business are derived from registrations for domain names in the .com, .net, .tv, and .cc domain name registries. We receive a fixed fee per domain name registered with the .com and .net registries, at a fee per annual registration that is fixed pursuant to our agreements with the Internet Corporation for Assigned Names and Numbers (“ICANN”). Changes in revenues are driven largely by increases in the number of new domain name registrations and the renewal rate for existing registrations.

Our Naming Services revenues increased $26.0 million and $50.4 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year, primarily due to a 20% year-over-year increase in active domain names ending in .com and .net and partly due to an increase in .com and .net domain name registry fees which became effective during October 2007.

Our .com and .net domain name registry fees will increase further by 7% and 10%, respectively, which are expected to become effective on October 1, 2008.

 

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SSL Certificate Services

Revenues in our SSL Certificate Services business are derived from licensing and service fees charged to our customers for the issuance of SSL certificates that authenticate their identity to the third parties with whom they carry out secured transactions. Revenues in the SSL Certificate Services business are related to fees charged per certificate, which are based upon a number of factors, including: (i) the brand name under which the certificate is issued, level of encryption and rigor of authentication; (ii) the number of servers authenticated, and (iii) the duration of the certification. We issue SSL certificates for one, two and three years and the majority of our customers tend to commit to shorter certifications. We have historically experienced strong renewal rates. We have not increased prices for our SSL certificates during the first six months ended June 30, 2008.

Our SSL Certificate Services revenues increased $11.6 million and $24.9 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year, primarily due to a 14% year-over-year increase in the installed base of SSL certificates.

IAS

Revenues in our IAS business are derived from a one-time credential sale to the customer seeking network services, and a one-time set-up fee. We also charge an annual service fee based upon the number of individual users authorized by the customer to access its network and a customer support fee. Our managed PKI service is characterized by lower growth rates than other product lines within the IAS business, reflecting the greater maturity of our managed PKI service. Over time, we expect the VIP and OTP programs will account for a larger percentage of our product mix over time. We anticipate that due to consistent growth, our managed PKI service could remain a significant presence in our product mix.

Our IAS revenues increased $1.4 million and $5.6 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year, primarily due to increased demand for our enterprise authentication and identity protection services.

Other Services

Other Services segment revenues increased $4.5 million and decreased $10.9 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year. The decrease during the six months ended June 30, 2008, as compared to the same period last year, was primarily due to a decrease of $28.9 million from our legacy businesses which includes the divested majority ownership interest in our Jamba subsidiary, our CDN business and other smaller historical businesses. Our mobile content and messaging services revenues increased $5.1 million and $13.1 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year primarily due to an increase in volume in our inter-carrier Multi-Media Messaging Services (“MMS”) and Short Send Messaging Services (“SMS”). Our payment services revenues increased $2.5 million and $4.9 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year, primarily due to an increase in revenues from our advanced billing and customer care services to wireless carriers.

We expect revenues for our Other Services segment to decrease in absolute dollars as we divest or wind down certain non-core businesses in 2008. Upon classification as discontinued operations, the revenues of the non-core business will be reclassified from Other Services to discontinued operations.

Within the Other Services segment, our divestiture plan has led some of our customers to delay entering into arrangements with us until they are able to obtain greater clarity concerning the composition and direction the divested businesses will take following the completion of the divestiture plan. We anticipate having greater clarity as to the trends impacting these businesses as the divestiture plan progresses.

 

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Geographic Revenues

A comparison of our geographic revenues is presented below:

 

     Three Months Ended
June 30,
   %
Change
 
     2008    2007   
     (In thousands)       

United States

   $ 218,067    $ 201,708    8 %

Switzerland

     52,203      26,048    100 %

Japan

     20,512      18,044    14 %

Other

     12,458      13,188    (6 %)
                

Total revenues

   $ 303,240    $ 258,988    17 %
                

 

     Six Months Ended
June 30,
   %
Change
 
     2008    2007   
     (In thousands)       

United States

   $ 434,826    $ 417,236    4 %

Switzerland

     97,803      29,883    227 %

Japan

     39,563      34,241    16 %

Other

     27,681      47,524    (42 %)
                

Total revenues

   $ 599,873    $ 528,884    13 %
                

Revenues are generally attributed to the respective countries in which the VeriSign contracting entities are located, which does not necessarily reflect the location of our customers.

Revenues in Switzerland increased $26.2 million and $67.9 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year, primarily due to the continued implementation of our global business structure including contracting through our foreign subsidiaries for services provided to customers located outside the United States and Japan. Revenues in the United States increased $16.4 million and $17.6 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year, primarily due to continued growth in our Naming Services and SSL Certificate Services businesses. Revenues in Japan increased $2.5 million and $5.3 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year, primarily due to increases in demand from our SSL Certificate Services and IAS. Revenues from our Other regions decreased $0.7 million and $19.8 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year. The decrease during the six months ended June 30, 2008, was primarily due to the divestiture of our majority ownership interest in our Jamba subsidiary in the first quarter of 2007.

Mature markets, such as the United States and Western Europe, where broadband and e-commerce have seen strong market penetration, may be expected to see consistent incremental growth reflecting the maturity of these markets. We expect to see larger increases in revenues from other EMEA and APAC countries driven by greater growth in international regions, resulting from greater broadband and Internet penetration and expanding e-commerce as electronic means of payment are increasingly adopted.

 

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Cost of revenues

Cost of revenues consist primarily of content licensing costs, costs related to providing digital certificate enrollment and issuance services, billing services, operational costs for the domain name registration business, customer support and training, consulting and development services, labor costs to provide security and costs of facilities and computer equipment used in these activities.

A comparison of cost of revenues is presented below:

 

     Three Months Ended
June 30,
   %
Change
    Six Months Ended
June 30,
   %
Change
 
           2008                2007            2008    2007   
     (Dollars in thousands)          (Dollars in thousands)       

Cost of revenues

   $ 86,033    $ 82,675    4 %   $ 177,620    $ 169,561    5 %

Cost of revenues increased $3.4 million and $8.1 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year. Salary and employee benefits expenses, which include stock-based compensation expenses, increased $5.8 million and $13.1 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year. The increase is primarily due to an increase in the issuances of restricted stock to employees and greater participation pertaining to our employee stock purchase plan that allowed employees to increase their contribution withholding percentages beginning in the latter half of 2007. The increase in salary and employee benefits expenses is partially offset by a decrease in headcount related to the 2008 restructuring plan to divest or wind down our non-core businesses. Depreciation expense increased $2.5 million and $4.9 million during the three months and six months ended June 30, 2008, respectively, as compared to the same periods last year, due to an increase in capitalized projects placed into service during the latter half of 2007. Contract and professional service expenses decreased $2.3 million and $2.9 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year, primarily due to a reduction in spending on consulting services as a result of management’s realignment initiatives relating to the 2008 restructuring plan. Telecommunication expenses increased $0.7 million and $3.1 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year, primarily due to increased spending on capacity for global constellation sites that support our .com and .net registries. Direct cost of revenues decreased $2.6 million during the three months ended June 30, 2008, as compared to the same period last year, primarily due to lower costs incurred for our registry fees and lower consumer authentication costs. Direct cost of revenues decreased $10.2 million during the six months ended June 30, 2008, as compared to the same period last year, primarily due to the divestiture of our majority ownership interest in Jamba during the first quarter of 2007, partially offset by the increases during the second quarter of 2008.

Sales and marketing

Sales and marketing expenses consist primarily of salaries, sales commissions, sales operations and other personnel-related expenses, travel and related expenses, trade shows, costs of lead generation, costs of computer and communications equipment and support services, facilities costs, consulting fees and costs of marketing programs, such as the Internet, television, radio, print and direct mail advertising costs.

A comparison of sales and marketing expenses is presented below:

 

     Three Months Ended
June 30,
   %
Change
    Six Months Ended
June 30,
   %
Change
 
           2008                2007            2008    2007   
     (Dollars in thousands)          (Dollars in thousands)       

Sales and marketing

   $ 51,993    $ 62,545    (17 %)   $ 109,581    $ 139,732    (22 %)

Sales and marketing expenses decreased $10.6 million and $30.2 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year. Salary and employee benefit

 

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expenses, which include stock-based compensation expenses, decreased $8.4 million and $18.3 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year. The decrease is primarily due to lower headcount resulting from the 2007 and 2008 restructuring plan activities. Advertising and marketing expenses increased $1.2 million and decreased $5.6 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year. The increase in advertising and marketing expenses during the second quarter of 2008, as compared to the same period last year, was primarily due to efforts to increase the market penetration of our Naming Services and SSL Certificate Services businesses. The decrease in advertising and marketing expenses during the six months ended June 30, 2008, as compared to the same period last year, was primarily due to a reduction in spending in our Content Services business as a result of the divestiture of our majority ownership interest in Jamba during the first quarter of 2007. Travel expenses decreased $1.5 million and $2.5 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year, primarily due to reduced travel that resulted from lower headcount. Allocated overhead expenses decreased $1.1 million and $2.0 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year, primarily due to a reduction in headcount in the sales and marketing function, year-over-year.

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.

A comparison of research and development expenses is presented below:

 

     Three Months Ended
June 30,
   %
Change
    Six Months Ended
June 30,
   %
Change
 
           2008                2007                  2008                2007         
     (Dollars in thousands)          (Dollars in thousands)       

Research and development

   $ 32,891    $ 31,868    3 %   $ 68,752    $ 71,937    (4 %)

Research and development expenses increased $1.0 million and decreased $3.2 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year. Salary and employee benefits expenses, which include stock-based compensation expenses, increased $1.5 million and $3.4 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year, primarily due to merit pay increases in the first half of 2008, partially offset by a decrease in headcount as a result of workforce reduction and redeployment initiated by the 2007 and 2008 restructuring plans. The increase is also in part due to an increase in the issuances of restricted stock to employees and greater participation pertaining to our employee stock purchase plan that allowed employees to increase their contribution withholding percentages beginning in the latter half of 2007. Depreciation expenses increased $1.4 million and $2.7 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year, primarily due to an increase in capitalized projects placed into service during the latter half of 2007. Contract and professional services expenses decreased $2.2 million and $8.3 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year, primarily driven by decreased deployment of external consultants resulting from the 2008 restructuring plan initiatives during the first six months of fiscal 2008. Allocated overhead expenses decreased $0.3 million and $1.4 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year, primarily due to a reduction in headcount in the research and development function, year-over-year.

General and administrative

General and administrative expenses consist primarily of salaries and other personnel-related expenses for our executive, administrative, legal, finance, information technology and human resources personnel, facilities, computer and communications equipment, management information systems, support services, professional services fees, certain tax and license fees and bad debt expense.

 

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A comparison of general and administrative expenses is presented below:

 

     Three Months Ended
June 30,
   %
Change
    Six Months Ended
June 30,
   %
Change
 
           2008                2007            2008    2007   
     (Dollars in thousands)          (Dollars in thousands)       

General and administrative

   $ 57,783    $ 74,355    (22 %)   $ 120,380    $ 122,846    (2 %)

General and administrative expenses decreased $16.6 million and $2.5 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year. Salary and employee benefits expenses, which include stock-based compensation expenses, decreased $12.8 million and $8.6 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year. The decrease was primarily due to stock-based compensation and severance charges related to a former chief executive officer in the second quarter of 2007. The decrease was partially offset by an increase in the issuances of restricted stock to employees and greater participation pertaining to our employee stock purchase plan that allowed employees to increase their contribution withholding percentages beginning in the latter half of 2007, and $4.9 million of stock-based compensation expenses related to the acceleration of vesting of stock-based awards for our former chief executive officer in the second quarter of 2008. Legal expenses decreased $5.9 million and increased $2.2 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year. The decrease in legal expenses during the second quarter of 2008, as compared to the same period last year, was primarily due to releases in the second quarter of 2008 of previously accrued estimated litigation costs as a result of negotiated settlements. The increase in legal expenses for the six months ended June 30, 2008, as compared to the same period last year, was primarily due to increased litigation expense and legal consulting fees related to the 2008 restructuring plan to divest or wind down our non-core businesses. Allocated overhead expenses increased $1.4 million and $2.8 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year primarily due to proportionately higher headcount in the general and administrative function.

Restructuring, impairments and other charges, net

A comparison of restructuring, impairments and other charges, net, is presented below:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2008    2007    2008    2007
     (In thousands)

2008 restructuring plan charges

   $ 11,982    $ —      $ 31,780    $ —  

2007 restructuring plan charges

     98      3,162      369      25,195

2003 and 2002 restructuring plan charges

     16      48      60      142
                           

Total restructuring charges for continuing operations

     12,096      3,210      32,209      25,337

Impairments and other charges for continuing operations

     124,862      11,109      124,862      13,097
                           

Total restructuring, impairments and other charges, net, for continuing operations

     136,958      14,319      157,071      38,434

Total restructuring, impairments and other charges, net, for discontinued operations

     53,022      860      84,885      3,757
                           

Total restructuring, impairments and other charges, net

   $ 189,980    $ 15,179    $ 241,956    $ 42,191
                           

2008 Restructuring Plan: In late 2007, we announced a restructuring plan to change our business strategy to be more aligned with our core competencies, which are to provide highly scaleable, reliable and secure Internet infrastructure and identity services to customers around the world. The restructuring plan includes workforce reductions, abandonment of excess facilities and other exit costs. As of June 30, 2008, we recorded $45.2 million in restructuring charges, inclusive of amounts for discontinued operations, under our 2008 restructuring plan. See

 

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Note 5, “Restructuring, Impairments and Other Charges, Net,” of the Notes to Condensed Consolidated Financial Statements for further information on our restructuring plans.

Under our 2008 restructuring plan, through the second quarter of fiscal 2008, we notified certain employees of their termination and recognized total consolidated expense relating to severance and benefits costs of $43.6 million, inclusive of amounts for discontinued operations. As part of the 2008 restructuring plan, we anticipate recording additional charges related to our workforce reduction, excess facilities and other exit costs over the next several quarters, the timing of which will primarily depend upon the timing of notification of the employees leaving VeriSign as determined by local employment laws and as we exit facilities. In addition, we anticipate incurring additional charges associated with productivity improvement initiatives and expense reduction measures. While the estimate of these charges is not yet finalized, the total amount and timing of these charges will depend upon the nature, timing, and extent of these future actions.

2007 Restructuring Plan: In January 2007, we initiated a restructuring plan to execute a company-wide reorganization replacing our previous business unit structure with a new combined worldwide sales and services team, and an integrated development and products organization. The restructuring plan included workforce reductions, abandonment of excess facilities and other exit costs.

2003 and 2002 Restructuring Plans: In November 2003, we initiated a restructuring plan related to the sale of our Network Solutions business and the realignment of other business units. In April 2002, we initiated a plan to restructure our operations to rationalize, integrate and align resources.

Impairments of goodwill, other intangible assets and assets held for sale

During the three and six months ended June 30, 2008, we recorded a charge of $91.7 million and $117.2 million, respectively, for impairment of goodwill, other intangible assets and assets held for sale. During the second quarter of 2008, we recorded a charge of $45.8 million in continuing operations for an impairment of goodwill related to our Post-pay business. During the three and six months ended June 30, 2008, we recorded a charge of $45.9 million and $71.4 million, respectively, in discontinued operations, for impairment of assets held for sale.

Other charges

During the second quarter of 2008, we recorded a loss of $79.1 million as a result of the sale of certain Mountain View facilities. The sale of the Mountain View facilities was consummated as a result of our 2008 restructuring plan to divest or wind down our non-core businesses. During the three and six months ended June 30, 2007, we recorded a charge of $6.2 million and $8.5 million, respectively, for excess and obsolete property and equipment. Of the total consolidated other charges, $0.2 million relates to discontinued operations for the six months ended June 30, 2007.

Amortization of other intangible assets

A comparison of amortization of other intangible assets is presented below:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
         2008            2007        2008    2007
     (In thousands)

Amortization of other intangible assets

   $ 5,495    $ 16,461    $ 14,193    $ 34,631

Amortization of other intangible assets decreased approximately $11.0 million and $20.4 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year, primarily due to a $62.6 million impairment charge for other intangible assets at December 31, 2007. Amortization expense also decreased due to certain other intangible assets becoming fully amortized during the latter half of 2007.

 

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Other (loss) income, net

Other (loss) income, net, consists primarily of interest earned on our cash, cash equivalents, and investments, interest expense related to our borrowings, gains and losses on the sale and impairment of equity investments, gains and losses on divestiture of businesses, realized and unrealized gains and losses on the contingent interest derivative on convertible debentures, income from transition services agreements, and the net effect of foreign currency gains and losses.

A comparison of other (loss) income, net, is presented below:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2008     2007     2008     2007  
     (In thousands)  

Interest income

   $ 2,792     $ 8,456     $ 11,137     $ 17,178  

Interest expense

     (10,425 )     (354 )     (20,300 )     (2,583 )

Net gain on sale and impairment of investments

     203       56       258       885  

Net gain on divestiture of businesses

     2,127       —         1,001       74,999  

Unrealized gain on joint venture call options

     —         3,755       —         3,755  

Unrealized gain on contingent interest derivative on convertible debentures

     246       —         2,084       —    

Income from transition services agreements

     1,366       —         1,366       —    

Other, net

     (1,480 )     21       (3,289 )     (1,020 )
                                

Total other (loss) income, net

   $ (5,171 )   $ 11,934     $ (7,743 )   $ 93,214  
                                

Other (loss) income, net, decreased approximately $17.1 million and $101.0 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods last year. Interest income during the three and six months ended June 30, 2008, decreased primarily due to lower average invested balances, resulting from stock repurchase activity during the third quarter of 2007 and the first quarter of 2008 partially offset by cash proceeds received from convertible debentures during the third quarter of 2007, as well as lower average interest rates compared to the same periods last year. Interest expense increased during the three and six months ended June 30, 2008, as compared to the same periods last year, primarily due to the additional interest expense related to our convertible debentures issued during the third quarter of 2007. We recorded a pre-tax gain of $2.1 million on the sale of our CDN business during the second quarter of 2008. We recorded a $0.2 million and $2.1 million unrealized gain on the contingent interest derivative on convertible debentures during the three and six months ended June 30, 2008, respectively. Due to the fact that we are required to mark-to-market the fair value of the contingent interest derivative on convertible debentures at each reporting period, such revaluations could result in further gains or losses. We entered into certain transition services agreements with the purchasers of certain divested businesses. The income received from such agreements was $1.4 million during the second quarter of 2008.

Income taxes

For the three and six months ended June 30, 2008, we recorded an income tax benefit for continuing operations of $4.3 million and an income tax expense for continuing operations of $1.0 million, respectively. For the three and six months ended June 30, 2007, we recorded income tax expenses for continuing operations of $5.6 million and $10.3 million, respectively. The decrease in income tax expense was primarily attributable to the decrease in income from continuing operations before income taxes.

 

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Earnings (loss) from unconsolidated entities, net of tax

Earnings (loss) from unconsolidated entities, net of tax, represent the net income recognized from the joint ventures entered into with Fox.

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
         2008            2007        2008     2007
     (In thousands)

Earnings (loss) from unconsolidated entities, net of tax

   $ 1,172    $ 1,748    $ (590 )   $ 2,196

Minority interest, net of tax

Minority interest, net of tax, represents the portion of net income belonging to minority shareholders of our consolidated subsidiary, VeriSign Japan.

A comparison of minority interest is presented below:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
 
         2008             2007        2008     2007  
     (In thousands)  

Minority interest, net of tax

   $ (989 )   $ 82    $ (1,895 )   $ (487 )

Minority interest, net of tax, increased during the three and six months ended June 30, 2008, as compared to the same periods last year, primarily due to the increase in net income from our VeriSign Japan subsidiary. The increase is primarily due to an increase in SSL Certificate Services revenues.

Discontinued operations, net of tax

Classification of our disposal groups as held for sale occurs when sufficient authority to sell the disposal group has been obtained, the disposal group is available for immediate sale, an active program to sell the disposal group has been initiated and its sale is probable within one year. The results of operations of disposal groups held for sale or disposed of are presented as discontinued operations when the underlying operations and cash flows of the disposal group will be or have been eliminated from our continuing operations and we no longer have the ability to influence the operating and/or financial policies of the disposal group.

As of June 30, 2008, businesses classified as held for sale and presented as discontinued operations included the following: Communications Services, Communications Consulting, and International Clearing (all previously part of our former CSG segment), and Enterprise Security Services (previously part of our former ISG segment). Businesses that were divested during the second quarter of 2008, and whose results of operations are reflected as discontinued operations include the DBMS business (previously part of our former ISG segment) and the SC&A business (previously part of our former CSG segment). We also sold our CDN business (previously part of our former CSG segment) during the second quarter of 2008. We retained an equity ownership in the CDN business and accounted for the investment on an equity method basis. As a result of our continuing involvement in the CDN business, the historical results of operations of the CDN business have not been classified as discontinued operations.

 

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The following table presents the revenues and the components of discontinued operations, net of tax:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2008     2007     2008     2007  
     (In thousands)  

Revenues

   $ 89,064     $ 108,636     $ 187,877     $ 216,186  
                                

(Loss) income before income taxes

   $ (38,782 )   $ 17,060     $ (59,299 )   $ 32,209  

Income tax benefit (expense)

     9,897       (6,674 )     12,714       (11,585 )
                                

(Loss) income from discontinued operations

     (28,885 )     10,386       (46,585 )     20,624  
                                

Gain on sale of discontinued operations, before income taxes

     32,083       —         31,614       —    

Income tax expense on sale of discontinued operations

     (2,633 )     —         (221 )     —    
                                

Gain on sale of discontinued operations

     29,450       —         31,393       —    
                                

Total discontinued operations, net of tax

   $ 565     $ 10,386     $ (15,192 )   $ 20,624  
                                

We incurred losses from discontinued operations for the three and six months ended June 30, 2008, primarily due to estimated losses on the assets held for sale. See Note 4, “Assets Held for Sale and Discontinued Operations,” of the Notes to Condensed Consolidated Financial Statements for further information on our discontinued operations.

The continued execution of our divestiture plan is subject to the availability of financing, identification of buyers, and general market conditions.

Liquidity and Capital Resources

 

     June 30,
2008
   December 31,
2007
     (In thousands)

Cash and cash equivalents

   $ 621,017    $ 1,376,722

Short-term investments

     548      1,011
             

Subtotal

     621,565      1,377,733

Restricted cash

     47,209      46,936
             

Total

   $ 668,774    $ 1,424,669
             

As of June 30, 2008, our principal source of liquidity was $621.0 million of cash and cash equivalents consisting principally of money market funds.

On February 8, 2008, we entered into an ASR agreement to repurchase $600.0 million of our common stock under the 2008 Stock Repurchase Program. We paid $600.0 million to a financial institution in exchange for an initial purchase of 15.1 million shares. The ASR agreement was completed on July 10, 2008, when we received an additional 1.4 million shares for an aggregate of 16.5 million shares under the terms of the ASR agreement. The average price per share paid on the ASR agreement was $36.33.

In July 2008, we also repurchased approximately 3.5 million shares of our common stock at an average stock price of $34.38 per share for an aggregate of $120.0 million pursuant to a stock repurchase agreement with a financial institution under the 2006 Stock Repurchase Program. As of August 8, 2008, approximately $320.0 million is available under the 2006 Stock Repurchase Program.

In July 2008, the Company invested an additional amount of $15.7 million pursuant to capital calls approved by the board of managers of the joint ventures with Fox, and recorded the amount as investments in unconsolidated entities. The purpose of the capital calls was to fund the ongoing business and working capital needs of the joint ventures.

 

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During the second quarter of 2008, we sold certain property and equipment in our Mountain View, California location for a cash consideration of $47.6 million, net of transaction costs and recorded a loss of $79.1 million in continuing operations as a result of the sale of our Mountain View facilities, as described in Note 7, “Other Balance Sheet Items,” of the Notes to Condensed Consolidated Financial Statements.

On June 19, 2008, we entered into a lease agreement with the purchaser of our Mountain View property. Under the terms of the lease agreement, we will lease the property for an initial term of 30 months, which will expire on December 31, 2010, with an option to extend the lease for five years from the date of initial term expiration. Our lease obligations under the initial term will be approximately $3.1 million, $5.6 million and $5.4 million in 2008, 2009 and 2010, respectively.

During the first quarter of 2008, we received $200.0 million from draw-down of our credit facility and repaid $60.0 million of the borrowed amount. During the second quarter of 2008, we repaid the entire outstanding balance of $140.0 million under the credit facility.

In summary, our cash flows were as follows:

 

     Six Months Ended
June 30,
 
     2008     2007  
     (In thousands)  

Net cash provided by operating activities

   $ 243,781     $ 155,032  

Net cash provided by investing activities

     53,061       219,367  

Net cash used in financing activities

     (1,056,564 )     (198,911 )

Effect of exchange rate changes on cash and cash equivalents

     4,017       (984 )
                

Net (decrease) increase in cash and cash equivalents

   $ (755,705 )   $ 174,504  
                

Cash flows from operating activities

Our largest source of operating cash flows is cash collections from our customers. Our primary uses of cash from operating activities are for personnel related expenditures, and other general operating expenses, as well as payments related to taxes and facilities.

Net cash provided by operating activities increased for the six months ended June 30, 2008, as compared to the same period last year, primarily due to non-cash items and changes in operating assets and liabilities. The non-cash items contributing to the increase primarily include an impairment charge for goodwill, estimated loss on assets held for sale, an increase in stock-based compensation expense resulting from an increase in the issuances of restricted stock to employees and greater participation pertaining to our employee stock purchase plan that allowed employees to increase their contribution withholding percentages beginning in the latter half of 2007, loss from unconsolidated entities, net of tax, loss on sale of certain Mountain View property and equipment, and a decrease in amortization of other intangible assets primarily due to a $62.6 million impairment charge at December 31, 2007. Amortization expense of other intangible assets also decreased due to certain other intangible assets becoming fully amortized during the latter half of 2007 and due to the divestiture of our majority ownership interest in Jamba in the first quarter of 2007. The non-cash items partially offsetting the increase include the decrease in gain on divestiture of businesses, and unrealized gain on the contingent interest derivative on convertible debentures. The changes in operating assets and liabilities was primarily due to changes in accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities, and deferred revenues due to the timing of shipments, receipts, purchases and payments.

Cash flows from investing activities

The changes in cash flows from investing activities primarily relate to the divestiture of businesses, timing of purchases, maturities and sales of investments, and purchases of property and equipment.

 

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Net cash provided by investing activities decreased for the six months ended June 30, 2008, as compared to the same period last year. The decrease was primarily due to a decrease in proceeds received from maturity and sales of investments for the six months ended June 30, 2008, and a decrease in proceeds received from divestiture of businesses, net of cash contributed, for the six months ended June 30, 2008, partially offset by proceeds received from the sale of our Mountain View property and equipment in the second quarter of 2008.

Cash flows from financing activities

The changes in cash flows from financing activities primarily relate to borrowings and payments under debt obligations as well as stock repurchase and stock option exercise activities.

Net cash used in financing activities increased for the six months ended June 30, 2008, as compared to the same period last year, primarily due to an increase in cash used for stock repurchases, partially offset by an increase in proceeds received from issuance of common stock from stock option exercises and employee stock purchase plans, and proceeds received from draw-down of credit facility.

Other Liquidity and Capital Resources Information

As of June 30, 2008, restricted cash primarily includes $45.0 million related to a trust established during 2004 for our director and officer liability self-insurance coverage. On May 6, 2008, the Board of Directors approved termination of the trust, which requires the written consent of two-thirds of the known beneficiaries of the trust. We are in the process of obtaining the consents required to terminate the trust. Once the trust is terminated, our ability to use the $45.0 million related to the trust will no longer be restricted.

The credit facility is available for cash borrowings up to a maximum of $500.0 million and for the issuance of letters of credit up to a maximum limit of $50.0 million. As of June 30, 2008, we had no outstanding borrowings under the credit facility and we had utilized $1.4 million for outstanding letters of credit.

Future operating lease payments include payments related to leases on excess facilities included in our restructuring plans. If sublease rates decrease in these markets, or if it takes longer than expected to sublease these facilities, the actual lease expense could exceed this estimate by an additional $1.6 million over the next three years relating to our restructuring plans. Cash payments totaling approximately $4.1 million related to the abandonment of excess facilities will be paid over the next three years. See Note 5, “Restructuring, Impairments and Other Charges, Net,” of the Notes to Condensed Consolidated Financial Statements.

We believe existing cash and cash equivalents, together with funds generated from operations should be sufficient to meet our working capital, capital expenditure requirements and to service our debt for the next 12 months. We regularly assess our cash management approach and activities in view of our current and potential future needs.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk profile has not changed significantly from that described in our 2007 Form 10-K, except that at June 30, 2008, we held forward contracts in notional amounts totaling approximately $68.8 million.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our President and Chief Executive Officer, on an interim basis, and Acting Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of June 30, 2008. We determined that our disclosure controls and procedures were not effective to

 

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ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC because of the material weakness in our internal control over financial reporting as disclosed in Item 9A, Controls and Procedures, of our 2007 Form 10-K. In light of the material weakness, we implemented additional analyses and procedures to ensure that the financial statements we issue are prepared in accordance with GAAP and are fairly presented in all material respects. The Company has performed the additional analyses and procedures with respect to this Quarterly Report on Form 10-Q. Accordingly, we believe that the condensed consolidated financial statements (unaudited) included in this Quarterly Report on Form 10-Q fairly present, in all material respects, the Company’s financial position, results of operations and cash flows for the periods presented.

Changes in Internal Control over Financial Reporting

During our last fiscal quarter, there has not occurred any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations of Disclosure Controls and Internal Control Over Financial Reporting

Because of its inherent limitations, our internal control over financial reporting may not prevent material errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The continued effectiveness of our internal control over financial reporting is subject to risks, including that the controls may become inadequate because of changes in conditions or that the degree of compliance with our policies or procedures may deteriorate.

 

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PART II—OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

The information set forth under the “Legal Proceedings in Note 16, “Commitments and Contingencies,” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1, of this Quarterly Report on Form 10-Q is incorporated herein by reference.

 

ITEM 1A. RISK FACTORS

In addition to other information in this Quarterly Report on Form 10-Q, the following risk factors should be carefully considered in evaluating us and our business because these factors currently have a significant impact or may have a significant impact on our business, operating results or financial condition. Actual results could differ materially from those projected in the forward-looking statements contained in this Quarterly Report on Form 10-Q as a result of the risk factors discussed below and elsewhere in this Quarterly Report on Form 10-Q.

Risks relating to our business

Our operating results may fluctuate and our future revenues and profitability are uncertain.

Our operating results have varied in the past and may fluctuate significantly in the future as a result of a variety of factors, many of which are outside our control. These factors include the following:

 

   

the uncertainties, costs and risks related to our proposed divestiture plan, including any income statement charges we incur in connection therewith;

 

   

the long sales and implementation cycles for, and potentially large order sizes of, some of our security services and the timing and execution of individual customer contracts;

 

   

volume of domain name registrations and customer renewals in our Naming Services business;

 

   

changes in the payment structures of online advertising network providers as well as policies proposed and implemented by ICANN which could impact the number of domain name registrations;

 

   

the mix of all our services sold during a period;

 

   

our success in marketing and market acceptance of our services by our existing customers and by new customers;

 

   

changes in marketing expenses related to promoting and distributing our services;

 

   

customer renewal rates and turnover of customers of our services;

 

   

continued development of our direct and indirect distribution channels for our information and security services, both in the United States and abroad;

 

   

changes in the level of spending for information technology-related products and services by enterprise customers;

 

   

the impact of price changes in our communications services and information and security services or our competitors’ products and services; and

 

   

general economic and market conditions as well as economic and market conditions specific to e-commerce and the telecommunications and Internet industries.

Our operating expenses may increase. If an increase in our expenses is not accompanied by a corresponding increase in our revenues, our operating results will suffer, particularly as revenues from some of our services are recognized ratably over the term of the service, rather than immediately when the customer pays for them, unlike our sales and marketing expenditures, which are expensed in full when incurred.

 

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Due to all of the above factors, our revenues and operating results are difficult to forecast. Therefore, we believe that period-to-period comparisons of our operating results will not necessarily be meaningful, and you should not rely upon them as an indication of future performance. Also, operating results may fall below our expectations and the expectations of securities analysts or investors in one or more future periods. If this were to occur, the market price of our common stock would likely decline.

Our operating results may be adversely affected by the uncertain geopolitical environment and unfavorable economic and market conditions.

Adverse economic conditions worldwide have contributed to downturns in the telecommunications and technology industries in the past and could impact our business in the future, resulting in:

 

   

reduced demand for our services as a result of a decrease in information technology and telecommunications spending by our customers;

 

   

increased price competition for our products and services; and

 

   

higher overhead costs as a percentage of revenues.

Recent political turmoil in many parts of the world, including terrorist and military actions, may continue to put pressure on global economic conditions. If the economic and market conditions in the United States and globally do not improve, or if they deteriorate, we may experience material adverse impacts on our business, operating results and financial condition as a consequence of the above factors or otherwise.

Our diversified business structure may result in significant fluctuations of our financial results.

Many of the companies we have acquired during the past seven years operated in different businesses from our then-current business. Although we plan on divesting many of these businesses, until our divestiture plan is complete, our success will depend on many factors, many of which are not entirely under our control, including, but not limited to, the following:

 

   

the use of the Internet and other IP networks for e-commerce and communications;

 

   

the extent to which digital certificates and domain names are used for e-commerce or communications;

 

   

growth in demand for our services;

 

   

the competition for any of our services;

 

   

the perceived security of e-commerce and communications over the Internet and other IP networks;

 

   

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

 

   

the success in marketing and overall demand for our content services to consumers and businesses;

 

   

the loss of customers through industry consolidation or customer decisions to deploy in-house or competitor technology and services; and

 

   

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

To address these risks we must, among other things, continue to:

 

   

successfully market our services to new and existing customers;

 

   

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

 

   

respond to competitive developments;

 

   

successfully introduce new services; and

 

   

successfully introduce enhancements to our services to address new technologies and standards and changing market conditions.

 

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We may not realize the benefits we are seeking from our investments in the Jamba joint ventures as a result of lower than predicted operating results, larger funding requirements or lower cash distributions or otherwise.

We have a 49% equity interest in two joint ventures (a U.S. joint venture and a Netherlands joint venture) related to our former Jamba business. We will recognize our proportionate share of the income or losses of these joint ventures in our condensed consolidated statements of operations. We do not have control over the budget, day-to-day management or many of the other operating expenditures of the joint ventures, and therefore, we cannot predict with certainty the extent of the impact on our financial statements of these joint ventures for any particular period. Accordingly, our share of the income or losses of these joint ventures could materially affect our results of operations in future periods.

The joint venture agreements contain provisions requiring minimum cash distributions to the members. However, these provisions are subject to conditions and limitations, and therefore, we cannot assure you that we will ever receive cash distributions from these joint ventures. If the joint ventures require capital to fund their operations, we could be required to make capital contributions or loans to the joint ventures. The business operated by the U.S. joint venture is a newer business and therefore it may be more likely to require additional funding, although we cannot assure you that the Netherlands joint venture will not require additional funding as well. Additionally, we could be required to pay additional amounts to the joint ventures if it is later determined that we breached any of the representations or warranties in the formation agreement for the joint ventures.

The value of our investment in these joint ventures is subject to general economic, technological and market trends, as well as to the operating and financial decisions of the management team of the joint venture, all of which are outside of our control. In addition, these joint ventures may not gain the expected number of customers and/or generate the expected level of revenues, and consequently, we may never receive any cash distributions from these joint ventures, and in fact, they may require additional funding, any of which could diminish the value of or dilute our investment. Our investments in these joint ventures may not provide the economic returns we are seeking and may not increase in value above the minimum amounts at which we can require Fox or News Corporation to buy our shares from us. We cannot assure you that the commercial agreements, including the Gateway Services Agreement, will provide us any benefit. It is also possible that Fox and News Corporation could purchase our shares from us in the future, prior to the businesses of the joint ventures reaching their full potential. Therefore, we cannot provide you with any assurance as to whether we will achieve a favorable return on our investment.

We also entered into various other commercial relationships with the joint ventures; however, we cannot assure you that we will derive significant revenues from these other relationships.

Our international operations subject our business to additional economic risks that could have an adverse impact on our revenues and business.

As of June 30, 2008, we had approximately 1,100 employees outside the United States, including Europe, Asia, Australia, and the Americas. Expansion into international markets has required and will continue to require significant management attention and resources. We may also need to tailor some of our other services for a particular market and to enter into international distribution and operating relationships. We have limited experience in localizing our services and in developing international distribution or operating relationships. We may not succeed in expanding our services into international markets. Failure to do so could harm our business. Moreover, local laws and customs in many countries differ significantly from those in the United States. In many foreign countries, particularly in those with developing economies, it is common for others to engage in business practices that are prohibited by our internal policies and procedures or United States regulations applicable to us. There can be no assurance that all of our employees, contractors and agents will not take actions in violation of them. Violations of laws or key control policies by our employees, contractors or agents could result in financial reporting problems, fines, penalties, or prohibition on the importation or exportation of our products and could have a material adverse effect on our business. In addition, we face risks inherent in doing business on an international basis, including, among others:

 

   

competition with foreign companies or other domestic companies entering the foreign markets in which we operate;

 

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differing and uncertain regulatory requirements;

 

   

legal uncertainty regarding liability, enforcing our contracts and compliance with foreign laws;

 

   

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

 

   

tariffs and other trade barriers and restrictions;

 

   

difficulties in staffing and managing foreign operations;

 

   

longer sales and payment cycles;

 

   

problems in collecting accounts receivable;

 

   

currency fluctuations, as our international revenues from Europe, Japan, South America, Canada and Australia are not denominated in United States dollars;

 

   

difficulty in repatriating profits to the United States;

 

   

potential problems associated with adapting our services to technical conditions existing in different countries;

 

   

the necessity of developing foreign language portals and products for our services;

 

   

difficulty of authenticating customer information for digital certificates and other purposes;

 

   

political instability;

 

   

failure of foreign laws to protect our United States proprietary rights adequately;

 

   

more stringent privacy policies in foreign countries;

 

   

additional vulnerability from terrorist groups targeting United States interests abroad;

 

   

seasonal reductions in business activity; and

 

   

potentially adverse tax consequences.

Governmental regulation and the application of existing laws may slow business growth, increase our costs of doing business and create potential liability.

Application of new and existing laws and regulations to the Internet and wireless communications industry can be unclear. The costs of complying or failing to comply with these laws and regulations could limit our ability to operate in our markets, expose us to compliance costs and substantial liability and result in costly and time-consuming litigation.

Foreign, federal or state laws could have an adverse impact on our business. For example, recent laws include those designed to restrict the on-line distribution of certain materials deemed harmful to children and impose additional restrictions or obligations for on-line services when dealing with minors. Such legislation may impose significant additional costs on our business or subject us to additional liabilities.

Due to the nature of the Internet, it is possible that the governments of other states and foreign countries might attempt to regulate Internet transmissions or prosecute us for violations of their laws. We might unintentionally violate such laws, such laws may be modified and new laws may be enacted in the future. Any such developments could increase the costs of regulatory compliance for us, force us to change our business practices or otherwise materially harm our business.

 

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We have identified a material weakness in our internal controls over financial reporting that could cause investors to lose confidence in the reliability of our financial statements and result in a decrease in the value of our securities.

Our management has identified a material weakness in our internal control over financial reporting as of December 31, 2007, arising from internal control deficiencies in our stock administration policies and practices, as discussed in Part II, Item 9A, “Controls and Procedures” of our Annual Report on Form 10-K for the year ended December 31, 2007. In addition, due to the identification of a material weakness in internal control over financial reporting, our President and Chief Executive Officer, on an interim basis, and Acting Chief Financial Officer concluded that, as of June 30, 2008, our disclosure controls and procedures were not effective as discussed in Part I, Item 4, “Controls and Procedures” of this report. We expect remediation of this material weakness to be completed by the end of the fourth quarter of 2008, and we expect that the cost of remediation will be immaterial.

We will continue to evaluate, upgrade and enhance our internal controls. Because of inherent limitations, our internal control over financial reporting may not prevent or detect misstatements, errors or omissions, and any projections of any evaluation of effectiveness of internal controls to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with our policies or procedures may deteriorate. We cannot be certain in future periods that other control deficiencies that may constitute one or more “significant deficiencies” (as defined by the relevant auditing standards) or material weaknesses in our internal control over financial reporting will not be identified. If we fail to maintain the adequacy of our internal controls, including any failure to implement or difficulty in implementing required new or improved controls, our business and results of operations could be harmed, the results of operations we report could be subject to adjustments, we could fail to be able to provide reasonable assurance as to our financial results or the effectiveness of our internal controls or meet our reporting obligations and there could be a material adverse effect on our business.

We have expended significant resources in connection with our efforts to comply with the requirements of the Sarbanes-Oxley Act. In future periods, we will likely continue to expend substantial amounts in connection with these compliance efforts and with ongoing evaluation of, and improvements and enhancements to, our internal control over financial reporting. These expenditures may make it difficult for us to control or reduce the growth of our general and administrative and other expenses, which could adversely affect our results of operations.

Issues arising from our agreements with ICANN and the DOC could harm our registry business.

The United States Department of Commerce (“DOC”) has adopted a plan for the phased transition of the DOC’s responsibilities for the domain name system to Internet Corporation for Assigned Names and Numbers (“ICANN”). As part of this transition, as the exclusive registry of domain names within the .com and .net generic top-level domains (“gTLDs”), we have entered into agreements with ICANN and with the DOC.

We face risks arising from our agreements with ICANN and the DOC and from the planned transition of the DOC’s responsibilities for the domain name system to ICANN, including the following:

 

   

ICANN could adopt or promote policies, procedures or programs that are unfavorable to us as the registry operator of the .com and .net gTLDs, that are inconsistent with our current or future plans, or that affect our competitive position;

 

   

the DOC or ICANN could terminate our agreements to be the registry for the .com or .net gTLDs under certain circumstances, in which case it could have a material adverse impact on our business;

 

   

the .net or .com Registry Agreements may not renew when they expire in 2011 and 2012 respectively, in which case it could have a material adverse effect on our business;

 

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DOC’s or ICANN’s interpretation of provisions of our agreements with either of them could differ from ours;

 

   

the DOC could revoke its recognition of ICANN, as a result of which the DOC could take the place of ICANN for purposes of our agreements with ICANN, and could take actions that are harmful to us and could disrupt current or future business plans;

 

   

the DOC could not renew its agreement with ICANN, in which case there would no longer be DOC oversight;

 

   

ICANN’s relationship with the DOC could terminate and another entity could exercise oversight of ICANN;

 

   

the United States Government could refuse to transfer certain responsibilities for domain name system administration to ICANN due to security, stability or other reasons, resulting in fragmentation or other instability in domain name system administration; and

 

   

our registry business could face legal or other challenges resulting from our activities or the activities of registrars and registrants.

Challenges to ongoing privatization of Internet administration could harm our domain name registry business.

Risks we face from challenges by third parties, including governmental authorities in the United States and other countries, to our role in the ongoing privatization of the Internet include:

 

   

legal, regulatory or other challenges could be brought, including challenges to the agreements governing our relationship with the DOC or ICANN, or to the legal authority underlying the roles and actions of the DOC, ICANN or us;

 

   

the United States Congress could take action that is unfavorable to us;

 

   

ICANN could fail to maintain its role, potentially resulting in instability in domain name system administration; and

 

   

some governments and governmental authorities outside the United States have in the past disagreed, and may in the future disagree, with the actions, policies or programs of ICANN, the United States Government and us relating to the domain name system. These foreign governments or governmental authorities may take actions or adopt policies or programs that are harmful to our business.

As a result of these and other risks, it may be difficult for us to introduce new services in our domain name registry business and we could also be subject to additional restrictions on how this business is conducted.

We rely on third parties who maintain and control root zone servers and route Internet communications.

We currently administer and operate only two of the thirteen root zone servers. The others are administered and operated by independent operators on a non-regulated basis. Root zone servers are name servers that contain authoritative data for the very top of the Domain Name System (“DNS”) hierarchy. These servers have the software and data needed to locate name servers that contain authoritative data for the top-level domains. Because of the importance to the functioning of the Internet of these root zone servers, our Naming Services business could be harmed if these independent operators fail to maintain these servers properly or abandon these servers, which would place additional capacity demands on the two root zone servers we operate.

Further, our Naming Services business could be harmed if any of these volunteer operators fails to include or provide accessibility to the data that it maintains in the root zone servers that it controls. In the event and to the extent that ICANN is authorized to set policy with regard to an authoritative root zone server system, as provided in our registry agreement with ICANN, it is required to ensure that the authoritative root will point to the top-level domain zone servers designated by us. If ICANN does not do this, our business could be harmed.

 

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Services offered by our 3IS segment rely on the continued integrity of public key cryptography technology that may be compromised or proven obsolete over time.

Services offered by our 3IS segment depend on public key cryptography technology. With public key cryptography technology, a user is given a public key and a private key, both of which are required to perform encryption and decryption operations. The security afforded by this technology depends on the integrity of a user’s private key and that it is not lost, stolen or otherwise compromised. The integrity of private keys also depends in part on the application of specific mathematical principles known as “factoring.” This integrity is predicated on the assumption that the factoring of large numbers into their prime number components is difficult. Should an easy factoring method or other method be developed, the security of encryption products utilizing public key cryptography technology may require significant modifications or would be reduced or eliminated. Furthermore, any significant advance in techniques for attacking cryptographic systems could also render some or all of our existing PKI services obsolete or unmarketable. If improved techniques for attacking cryptographic systems were ever developed, we would likely have to reissue digital certificates to some or all of our customers, which could damage our reputation and brand or otherwise harm our business. In the past there have been public announcements of the successful attack upon cryptographic keys of certain kinds and lengths and of the potential misappropriation of private keys and other activation data. This type of publicity could also hurt the public perception as to the safety of the public key cryptography technology included in our digital certificates. This negative public perception could harm our business.

Undetected or unknown defects in our services could harm our business and future operating results.

Services as complex as those we offer or develop frequently contain undetected defects or errors. Despite testing, defects or errors may occur in our existing or new services, which could result in loss of or delay in revenues, loss of market share, failure to achieve market acceptance, diversion of development resources, injury to our reputation, tort or warranty claims, increased insurance costs or increased service and warranty costs, any of which could harm our business. The performance of our services could have unforeseen or unknown adverse effects on the networks over which they are delivered as well as on third-party applications and services that utilize our services, which could result in legal claims against us, harming our business. Furthermore, we often provide implementation, customization, consulting and other technical services in connection with the implementation and ongoing maintenance of our services, which typically involves working with sophisticated software, computing and communications systems. Our failure or inability to meet customer expectations in a timely manner could also result in loss of or delay in revenues, loss of market share, failure to achieve market acceptance, injury to our reputation and increased costs.

If we encounter system interruptions, we could be exposed to liability and our reputation and business could suffer.

We depend on the uninterrupted operation of our various systems, secure data centers and other computer and communication networks. Our systems and operations are vulnerable to damage or interruption from:

 

   

power loss, transmission cable cuts and other telecommunications failures;

 

   

damage or interruption caused by fire, earthquake, and other natural disasters;

 

   

computer viruses or software defects; and

 

   

physical or electronic break-ins, sabotage, intentional acts of vandalism, terrorist attacks and 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, both of which are susceptible to earthquakes; Providence, Rhode Island; Dulles, Virginia; Lacey, Washington; Overland Park, Kansas; Melbourne, Australia; and Berlin, Hamburg and Verl, Germany. Any damage or failure that causes interruptions in any of these facilities or our

 

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other computer and communications systems could materially harm our business. Although we carry insurance for property damage and business interruption, we do not carry insurance or financial reserves for interruptions or potential losses arising from earthquakes or terrorism.

In addition, our ability to issue SSL certificates, our domain name registry services and other of our services depend on the efficient operation of the Internet connections from customers to our secure data centers and from our customers to the shared registration system. These connections depend upon the efficient operation of Internet service providers and Internet backbone service providers, all of which have had periodic operational problems or experienced outages in the past.

A failure in the operation of our domain name zone servers, the domain name root zone servers, or other events could result in the deletion of one or more domain names from the Internet for a period of time. A failure in the operation of our shared registration system could result in the inability of one or more other registrars to register and maintain domain names for a period of time. A failure in the operation or update of the master database that we maintain could result in the deletion of one or more top-level domains from the Internet and the discontinuation of second-level domain names in those top-level domains for a period of time. Any of these problems or outages could decrease customer satisfaction, which could harm our business.

If we experience security breaches, we could be exposed to liability and our reputation and business could suffer.

We retain certain confidential customer information in our secure data centers and various registration systems. It is critical to our business strategy that our facilities and infrastructure remain secure and are perceived by the marketplace to be secure. Our domain name registry operations also depend on our ability to maintain our computer and telecommunications equipment in effective working order and to reasonably protect our systems against interruption, and potentially depend on protection by other registrars in the shared registration system. The root zone servers and top-level domain name zone servers that we operate are critical hardware to our registry services operations. Therefore, we may have to expend significant time and money to maintain or increase the security of our facilities and infrastructure.

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 such problems. Any physical or electronic break-in or other security breach or compromise of the information stored at our secure data centers and domain name registration systems may jeopardize the security of information stored on our premises or in the computer systems and networks of our customers. In such an event, we could face significant liability, customers could be reluctant to use our services and we could be at risk for loss of various security and standards based compliance certifications needed for certain of our businesses. Such an occurrence could also result in adverse publicity and therefore adversely affect the market’s perception of the security of e-commerce and communications over IP networks as well as of the security or reliability of our services.

The reliance of our network connectivity and interoperability services and content services on third-party communications infrastructure, hardware and software exposes us to a variety of risks we cannot control.

The success of our network connectivity and interoperability services and content services depends on our network infrastructure, including the capacity leased from telecommunications suppliers. In particular, we rely on AT&T, Sprint and other telecommunications providers for leased long-haul and local loop transmission capacity. These companies provide the dedicated links that connect our network components to each other and to our customers. Our business also depends upon the capacity, reliability and security of the infrastructure owned by third parties that is used to connect telephone calls. Specifically, we currently lease capacity from regional providers on four of the fourteen mated pairs of SS7 signal transfer points that comprise our network. SS7 is a network control system comprised of protocols for the interpretation and use of network control and operation signals and the associated hardware and software needed for transmission, reception and interpretation of the signals.

 

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We have no control over the operation, quality or maintenance of a significant portion of that infrastructure or whether or not those third parties will upgrade or improve their equipment. We depend on these companies to maintain the operational integrity of our connections. If one or more of these companies is unable or unwilling to supply or expand its levels of service to us in the future, our operations could be severely interrupted. In addition, rapid changes in the telecommunications industry have led to the merging of many companies. These mergers may cause the availability, pricing and quality of the services we use to vary and could cause the length of time it takes to deliver the services that we use to increase significantly.

Our signaling and SS7 services rely on links, equipment and software provided to us from our vendors, the most important of which are gateway equipment and software from Tekelec and Agilent Technologies, Inc. We cannot assure you that we will be able to continue to purchase equipment from these vendors on acceptable terms, if at all. If we are unable to maintain current purchasing terms or ensure product availability with these vendors, we may lose customers and experience an increase in costs in seeking alternative suppliers of products and services.

We rely on our intellectual property, and any failure by us to protect, or any misappropriation of, our intellectual property could harm our business.

Our success depends on our internally developed technologies, patents and other intellectual property. Despite our precautions, it may be possible for a third party to copy or otherwise obtain and use our trade secrets or other forms of our intellectual property without authorization. Furthermore, the laws of foreign countries may not protect our proprietary rights in those countries to the same extent United States law protects these rights in the United States. In addition, it is possible that others may independently develop substantially equivalent intellectual property. If we do not effectively protect our intellectual property, our business could suffer. Additionally, we have filed patent applications with respect to certain of our technology in the United States Patent and Trademark Office and patent offices outside the United States. Patents may not be awarded with respect to these applications and even if such patents are awarded, such patents may not provide us with sufficient protection of our intellectual property. In the future, we may have to resort to litigation to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. This type of litigation, regardless of its outcome, could result in substantial costs and diversion of management and technical resources.

We also license third-party technology that is used in our products and services to perform key functions. These third-party technology licenses may not continue to be available to us on commercially reasonable terms or at all. Our business could suffer if we lost the rights to use these technologies. Additionally, another party could claim that the licensed software infringes a patent or other proprietary right. Litigation between the licensor and a third-party or between us and a third-party could lead to royalty obligations for which we are not indemnified or for which indemnification is insufficient, or we may not be able to obtain any additional license on commercially reasonable terms or at all. The loss of, or our inability to obtain or maintain, any of these technology licenses could delay the introduction of our Internet infrastructure services until equivalent technology, if available, is identified, licensed and integrated. This could harm our business.

We rely on the strength of our VeriSign brand to differentiate ourselves in the marketing of our products, particularly with respect to our SSL certificates. Dilution of our brand could harm our business.

We could become subject to claims of infringement of intellectual property of others, which could be costly to defend and which could harm our business.

Claims relating to infringement of intellectual property of others or other similar claims have been made against us in the past and could be made against us in the future. In addition, we provide links to news content as part of our real-time publisher service. It is possible that we could become subject to additional claims for infringement of the intellectual property of third parties. Any claims, with or without merit, could be time

 

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consuming, result in costly litigation and diversion of technical and management personnel, cause delays or require us to develop non-infringing technology or enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on acceptable terms or at all. If a successful claim of infringement were made against us, we could be required to pay damages or have portions of our business enjoined. If we could not develop non-infringing technology or license the infringed or similar technology on a timely and cost-effective basis, our business could be harmed.

In addition, legal standards relating to the validity, enforceability, and scope of protection of intellectual property rights in Internet-related businesses are uncertain and still evolving. Because of the growth of the Internet and Internet-related businesses, patent applications are continuously and simultaneously being filed in connection with Internet-related technology. There is a significant number of United States and foreign patents and patent applications in our areas of interest, and we believe that there has been, and is likely to continue to be, significant litigation in the industry regarding patent and other intellectual property rights.

We must establish and maintain strategic and other relationships.

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, and, in addition, our ability to enter into or maintain strategic relationships may be impacted by our divestiture plan. If we fail to enter into additional relationships, we would have to devote substantially more resources to the distribution, sale and marketing of our information and security services than we would otherwise.

Our success in obtaining results from these relationships will depend both on the ultimate success of the other parties to these relationships and on the ability of these parties to market our services successfully.

Furthermore, our ability to achieve future growth will also depend on our ability to continue to establish direct seller channels and to develop multiple distribution channels. Failure of one or more of our strategic relationships to result in the development and maintenance of a market for our services could harm our business. If we are unable to maintain our relationships or to enter into additional relationships, this could harm our business.

Failure of VeriSign Affiliates to follow our security and trust practices or to maintain the privacy or security of confidential customer information could have an adverse impact on our revenues and business.

We have licensed to VeriSign Affiliates our Processing Center platform, which is designed to replicate our own secure data centers and allows the VeriSign Affiliate to offer back-end processing of PKI services for enterprises. The VeriSign Processing Center platform provides a VeriSign Affiliate with the knowledge and technology to offer PKI services similar to those offered by us. It is critical to our business strategy that the facilities and infrastructure used in issuing and marketing digital certificates remain secure and we are perceived by the marketplace to be secure. Although we provide the VeriSign Affiliate with training in security and trust practices, network management and customer service and support, these practices are performed by the VeriSign Affiliate and are outside of our control. Any failure of a VeriSign Affiliate to maintain the privacy or security 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 e-commerce and communication over IP networks generally.

Our VeriSign Identity Protection services business depends in part on the acceptance of our services.

Our future growth in our VeriSign Identity Protection services as part of our IAS business depends, in part, on the commercial success and acceptance, and reliability of our VeriSign Identity Protection services. Our

 

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VeriSign Identity Protection services business will suffer if our target customers do not use our VeriSign Identity Protection services. Our future financial performance will also depend on the successful development, introduction and customer acceptance of new and enhanced VeriSign Identity Protection services. We are not certain that our target customers will choose our VeriSign Identity Protection services or continue to use our VeriSign Identity Protection services.

Many of our target markets are evolving, and if these markets fail to develop or if our products and services are not widely accepted in these markets, our business could suffer.

We target our information and security services at the market for trusted and secure e-commerce and communications over IP and other networks. Our Naming Services business is developing managed services in emerging markets that involve naming and directory services other than registry and related infrastructure services. These emerging markets are rapidly evolving, may never gain wide acceptance and may not grow. Even if these markets grow, our services may not be widely accepted. Accordingly, the demand for our services is very uncertain. The factors that may affect market acceptance of our services include the following:

 

   

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

 

   

public perception of the security of our technologies and of IP and other networks;

 

   

the introduction and consumer acceptance of new generations of mobile handsets;

 

   

demand for supply chain information services, including acceptance of the EPCglobal Network ;

 

   

the ability of the Internet infrastructure to accommodate increased levels of usage; and

 

   

government regulations affecting e-commerce and communications over IP networks.

If the market for e-commerce and communications over IP and other networks does not grow or these services are not widely accepted in the market, our business would be materially harmed.

We depend on key personnel to manage our business effectively and may not be successful in attracting and retaining such personnel.

We depend on the performance of our senior management team and other key employees. Our success also depends on our ability to attract, integrate, train, retain and motivate these individuals and additional highly skilled technical and sales and marketing personnel, both in the United States and abroad.

All of the members of our senior management team and other key employees are at-will employees and we do not maintain key person life insurance for any of our senior management team members or key employees. The loss of the services of any of our senior management team or other key employees or failure to attract, integrate, train, retain and motivate additional key employees could harm our business.

We recently experienced changes in our senior management team, and we may face difficulty in attracting and retaining permanent, qualified leadership personnel.

During the second quarter of 2008, we appointed D. James Bidzos, our Chairman of the Board, as President, Chief Executive Officer and Executive Chairman, on an interim basis, and Brian G. Robins, our Senior Vice President, Finance, to Acting Chief Financial Officer. The search for permanent replacements to fill any of these positions may be a distraction to our interim executives, senior management, business partners, and customers, and, although we believe we have taken appropriate measures to address the impact of these changes, there is a risk that such changes may impair our ability to meet our business objectives. During this period of transition, there may be operational inefficiencies as our new management team becomes familiar with our business and operations. We cannot provide you with any assurance that the search for any permanent replacements will be successful, and if we cannot recruit qualified permanent replacements for any such positions, our business may suffer.

 

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Compliance with rules and regulations concerning corporate governance is costly and could harm our business.

Ongoing compliance with the corporate governance requirements of the Sarbanes-Oxley Act and the NASDAQ Stock Market has increased the scope, complexity and cost of our corporate governance, reporting and disclosure practices, and our compliance efforts have required significant management attention. It is more difficult and more expensive for us to obtain director and officer liability insurance, and we have been required to accept reduced coverage and incur substantially higher costs to obtain the reduced level of coverage. Further, our board members, chief executive officer and chief financial officer face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified board members and executive officers, which could harm our business.

We have anti-takeover protections that may discourage, delay or prevent a change in control that could benefit our stockholders.

Our amended and restated Certificate of Incorporation and Bylaws contain provisions that could make it more difficult for a third party to acquire us without the consent of our Board of Directors. These provisions include:

 

   

our stockholders may take action only at a duly called meeting and not by written consent;

 

   

special meetings of our stockholders may be called only by the chief executive officer, the president or our Board of Directors, and cannot be called by our stockholders;

 

   

our board must be given advance notice regarding stockholder-sponsored proposals for consideration at annual meetings and for stockholder nominations for the election of directors;

 

   

vacancies on our Board of Directors can be filled until the next annual meeting of stockholders by majority vote of the members of the Corporate Governance and Nominating Committee or a majority of directors then in office if no such committee exists or a sole remaining director; and

 

   

our Board of Directors has the ability to designate the terms of and issue new series of preferred stock without stockholder approval.

VeriSign has also adopted a stockholder rights plan that may discourage, delay or prevent a change of control or the acquisition of a substantial bloc of our common stock and may make any future unsolicited acquisition attempt more difficult. Under the rights plan:

 

   

The rights will generally become exercisable if a person or group acquires 20% or more of VeriSign’s outstanding common stock (unless such transaction is approved by our Board of Directors) and thus becomes an “acquiring person.”

 

   

Each right, when exercisable, will entitle the holder, other than the “acquiring person,” to acquire shares of VeriSign’s common stock at a 50% discount to the then-prevailing market price.

 

   

As a result, the rights plan will cause substantial dilution to a person or group that becomes an “acquiring person” on terms that our Board of Directors does not believe are in our best interests and those of our stockholders and may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares.

In addition, Section 203 of the General Corporation Law of Delaware prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns or within the last three years has owned 15% or more of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless in the same transaction the interested stockholder acquired 85% ownership of our voting stock (excluding certain

 

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shares) or the business combination is approved in a prescribed manner. Section 203 therefore may impact the ability of an acquirer to complete an acquisition of us after a successful tender offer and accordingly could discourage, delay or prevent an acquirer from making an unsolicited offer without the approval of our Board of Directors.

Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates.

We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are subject to audit by various tax authorities. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different than that which is reflected in historical income tax provisions and accruals. Should additional taxes be assessed as a result of an audit or litigation, an adverse effect on our income tax provision and net income in the period or periods for which that determination is made could result.

Risks relating to the competitive environment in which we operate

The business environment is highly competitive and, if we do not compete effectively, we may suffer price reductions, reduced gross margins and loss of market share.

Competition in Naming Services. We face competition in the domain name registry space from other gTLD and country code top-level domain (“ccTLD”) registries that are competing for the business of entities and individuals that are seeking to establish a web presence, including registries offering services related to the .info, .org, .mobi, .biz, .name, .pro, .aero, .museum and .coop gTLDs and registries offering services related to ccTLDs. ICANN currently has registry agreements with 15 registries for the operation of 16 gTLDs. In addition, there are over 240 ccTLD registries.

We also face competition from service providers that offer outsourced domain name registration, resolutions and other DNS services to organizations that require a reliable and scalable infrastructure. Among the competitors are UltraDNS, NeuLevel and Afilias.

Additional competition to our business may arise from the upcoming introduction of new Internationalized Domain Name TLDs (“IDN TLDs”) and new gTLDs by ICANN. These new domain extensions could become available by the third quarter of 2009 in the form of translations or transliterated versions of the .com and .net TLD and by the last quarter of 2009 in the form of new gTLDs. We do not yet know the impact, if any, these new domain extensions may have on our business, but the increase of name availability in the marketplace could introduce new choices for end-users as well as create end-user confusion around brand preference, which could have a material adverse effect on our business.

Competition in SSL Certificate Services and IAS. Our SSL Certificate Services and IAS are targeted at the rapidly evolving market for Internet security services, including network security, authentication and validation, which enable secure e-commerce and communications over wireline and wireless IP networks. The market for SSL Certificate Services and IAS is intensely competitive, subject to rapid change and significantly affected by new product and service introductions and other market activities of industry participants.

Principal competitors generally fall within one of the following categories: (1) companies such as RSA, the security division of EMC, and Entrust Technologies, which offer software applications and related digital certificate products that customers operate themselves; (2) companies such as Digital Signature Trust Company (a subsidiary of Identrus) that primarily offer digital certificate and certification authority-related services; (3) companies focused on providing a bundled offering of products and services; and (4) companies offering competing SSL certificate and other security services, including domain name registrars. We also experience

 

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competition from a number of smaller companies, and we believe that our primary long-term competitors may not yet have entered the market. Furthermore, AOL and Microsoft have introduced software products that enable the issuance and management of digital certificates, and we believe that other companies could introduce similar products.

In addition, browser companies that embed our interface technologies or otherwise feature them as a provider of digital certificate products and services in their web browsers or on their websites could also promote our competitors or charge us substantial fees for promotions in the future.

Competition in Managed Security Services. Security services and product firms, telecommunications companies, and consulting companies or professional services groups of other companies with Internet expertise are current or potential competitors to our managed security services. These companies include large systems integrators and consulting firms, such as Accenture and IBM Global Services, security product companies, such as Symantec, and telecommunications providers, such as Verizon Business and BT Counterpane.

Competition in Communications Services. The market for communications services is extremely competitive and subject to significant pricing pressure. Competition in this area arises from two primary sources. Incumbent carriers provide competing in-house services in their respective regions. In addition, we face direct competition from national, unregulated companies, including Syniverse Technologies, Telcordia, NeuStar and other carriers such as Southern New England Telephone Diversified Group, a unit of AT&T. Furthermore, customers are increasingly likely to deploy internally developed communications technologies and services which may reduce the demand for technologies and services from third party providers, such as VeriSign, and further increase competitive pricing pressures.

Competition in Commerce Services. Our wireless billing and payment services are also subject to competition from providers such as Comverse, Amdocs, Convergys Corporation and Boston Communications Group. We are also aware of major Internet service providers, software developers and smaller entrepreneurial companies that are or may in the future be focusing significant resources on developing and marketing products and services that may compete directly with ours. Furthermore, customers are increasingly likely to deploy internally developed communications technologies and services which may reduce the demand for technologies and services from third-party providers such as VeriSign and further increase competitive pricing pressures.

Competition in Content Services. The market for content services is extremely competitive. Competitors include developers of content and entertainment products and services in a variety of domestic and international markets, such as Infospace, Itouch, Arvato mobile, Monstermob, and Motricity. This business also faces competition from mobile network operators such as Cingular, Verizon Wireless, Sprint Nextel Corporation, T-Mobile, Vodafone, O2, Orange, E-Plus and Telefónica, as well as Internet portal operators such as Yahoo!, AOL, T-Online and Google. Additional competitors are handset manufacturers such as Nokia and software providers such as Microsoft and Apple. As the market for wireless data, including information and entertainment data, matures, new categories of competitors, such as mobile phone companies, broadcasters, music publishers, other content providers or others have begun to develop competing products or services.

Competition in Real-Time Publisher Services. We face competition from various smaller companies providing similar services.

General. Several of our current and potential competitors have longer operating histories and significantly greater financial, technical, marketing and other resources than we do and therefore may be able to respond more quickly than we can to new or changing opportunities, technologies, standards and customer requirements. Many of these competitors also have broader and more established distribution channels that may be used to deliver competing products or services directly to customers through bundling or other means. If such competitors were to bundle competing products or services for their customers, the demand for our products and services might be substantially reduced and the ability to distribute our products successfully and the utilization of our services would be substantially diminished.

 

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New technologies and the expansion of existing technologies may increase the competitive pressure. New technologies and the expansion of existing technologies may increase competitive pressure. We cannot assure you that competing technologies developed by others or the emergence of new industry standards will not adversely affect our competitive position or render our security services or technologies noncompetitive or obsolete. In addition, our markets are characterized by announcements of collaborative relationships involving our competitors. The existence or announcement of any such relationships could adversely affect our ability to attract and retain customers. As a result of the foregoing and other factors, we may not be able to compete effectively with current or future competitors, and competitive pressures that we face could materially harm our business.

Our inability to react to changes in our industry and successfully introduce new products and services could harm our business.

The Internet and communications network services industry are characterized by rapid technological change and frequent new product and service announcements which require us continually to improve the performance, features and reliability of our services, particularly in response to competitive offerings. In order to remain competitive and retain our market share, we must continually improve our access technology and software, support the latest transmission technologies, and adapt our products and services to changing market conditions and customer preferences. We cannot assure you that we will be able to adapt to these challenges or respond successfully or in a cost effective way to adequately meet them. Our failure to do so would adversely affect our ability to compete and retain customers or market share.

Risks related to our divestiture plan

We may face difficulties and incur costs associated with our divestiture plan and our financial condition, results of operations or cash flows could be adversely affected.

Until the divestitures are complete, we will experience additional risks, including, but not limited to the disruption of our business and the potential loss of key employees; difficulties separating operations, services, products and personnel; and the potential damage to relationships with our existing customers.

For example, our divestiture plan will require a substantial amount of management, administrative and operational resources. These demands may distract our employees from the day-to-day operation of VeriSign’s core businesses.

There is also risk that we may incur additional charges associated with an impairment of a portion of goodwill and other intangible assets due to changes in market conditions for acquisitions and dispositions. Under generally accepted accounting principles, we are required to evaluate goodwill for impairment on an annual basis, and to re-evaluate goodwill and to evaluate other intangible assets as events or circumstances indicate that such assets may be impaired. Further, we are likely to incur income statement charges to complete the divestiture plan, which could be material.

If we are unable to successfully address any of these risks for future dispositions, our financial condition, results of operations or cash flows could be adversely affected.

We may be unable to achieve some or all of the benefits that we expect will result from the divestiture plan and such benefits may be delayed or not occur at all.

We may not be able to achieve the full strategic and financial benefits we expect from the divestiture of VeriSign’s non-core businesses from our portfolio. For example, we may encounter difficulties identifying buyers for certain businesses or be unable to sell businesses identified for divestiture, and there can be no assurance that analysts and investors will place greater value on VeriSign following the divestiture plan than the value placed on us pre-divestiture.

 

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In addition, there is no guarantee that the planned divestitures will occur or will not be further delayed. Completion of the divestiture plan is subject to a number of factors, including:

 

   

business, political and economic conditions in the United States and in other countries in which the Company currently operates;

 

   

governmental regulations and policies, actions and approvals of regulatory bodies;

 

   

the operating performance of the Company or the businesses or assets offered for sale;

 

   

identification of buyers and negotiation of sale agreements;

 

   

the willingness of buyers to assume certain liabilities associated with the businesses or assets offered for sale;

 

   

our ability to identify and separate the assets associated with the businesses offered for sale from the core businesses we choose to retain; and

 

   

the availability of financing or other sources of funding to buyers under reasonable terms and conditions.

Subsequent to the end of the second quarter of 2008, management determined that due in large part to the downturn in the economy, the divestiture plan would take longer and would be more complicated than originally expected. Buyers have become more conservative, which is making it more difficult to consummate dispositions and has required some modifications to our original approach to individual dispositions. For example, some potential buyers have asked for more detailed financial information than we originally anticipated, which has increased the time required to conduct the sale process. In addition, the credit crisis has limited sources of financing for potential purchasers, which has affected the number of proposals we have received. These developments are having an adverse effect on the timing and our chances of completing the divesture plan.

We may be adversely affected under certain covenants in our Facility.

Our Credit Agreement contains a negative covenant that limits our ability to sell assets and freely deploy the proceeds we receive from such sales, subject to exceptions based on the size and timing of the sales. Therefore, depending on the size and timing of any dispositions that we decide to pursue as part of our divestiture plan, we may find it necessary to seek an amendment to our Credit Agreement or to structure the sales in a manner that complies with the covenant but that is potentially less favorable to the Company than would otherwise be the case. There can be no guarantee that we will be successful in obtaining any such amendment on acceptable terms or at all or be able to structure potential dispositions accordingly.

We may continue to be responsible for a portion of our contingent and other corporate liabilities following the divestiture of certain businesses.

It is possible that under the agreements reached with buyers for businesses divested under the divestiture plan, we may remain liable for certain contingent and corporate liabilities. There is a possibility that we will incur costs and expenses associated with the management of these contingent and other corporate liabilities. These contingent and other corporate liabilities could potentially relate to consolidated securities litigation, as well as actions brought by third parties as a result of the divestiture plan. Where responsibility for such liabilities is to be shared with the buyer, it is possible that the buyer or another party may be in default for payments for which they are responsible, obligating us to pay amounts in excess of our agreed-upon share of the assumed obligations.

Completion of the divestiture plan may restrict our ability to compete in certain market sectors.

It is possible that under the agreements reached with buyers for businesses divested under the plan, we will be restricted from competing, either directly or indirectly, with those businesses or from entering certain market sectors for a defined period of time pursuant to negotiated non-compete arrangements.

 

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Risks related to our securities

We have a considerable number of common shares subject to future issuance.

As of June 30, 2008, we had one billion authorized common shares, of which approximately 196.7 million shares were outstanding. In addition approximately, 39.8 million common shares were reserved for issuance pursuant to employee stock option and employee stock purchase plans (“Equity Plans”), and approximately 36.4 million shares were reserved for issuance upon conversion of the debentures. The availability of substantial amounts of our common stock resulting from the exercise or settlement of equity awards outstanding under our Equity Plans or the conversion of debentures using common stock, which would be dilutive to existing security holders, could adversely affect the prevailing market price of our common stock and could impair our ability to raise additional capital through the sale of equity securities.

We have not historically maintained substantial levels of indebtedness, and our financial condition and results of operations could be adversely affected if we do not effectively manage our liabilities.

As a result of the sale of the debentures, we have a substantially greater amount of long term debt than we have maintained in the past. In addition to the debentures, we have a Facility with a borrowing capacity of $500.0 million. As of June 30, 2008, we had no outstanding borrowings under the Facility and we had utilized $1.4 million of the $50.0 million limit for outstanding letters of credit. The availability of borrowing capacity under the Facility allows us immediate access to working capital if we identify opportunities for the use of this cash. Our maintenance of substantial levels of debt could adversely affect our flexibility to take advantage of corporate opportunities and could adversely affect our financial condition and results of operations.

We may not have the ability to repurchase the debentures in cash upon the occurrence of a fundamental change, or to pay cash upon the conversion of debentures, as required by the indenture governing the 3.25% junior subordinated convertible debentures.

Holders of our outstanding 3.25% junior subordinated convertible debentures will have the right to require us to repurchase the debentures upon the occurrence of a fundamental change as defined in the Indenture dated as of August 20, 2007 (the “Indenture”). Although we currently have the intent and the ability to settle the principal amount of the convertible debentures in cash as required under the Indenture, we may not have sufficient funds to repurchase the debentures in cash or to make the required repayment at such time or have the ability to arrange necessary financing on acceptable terms. In addition, upon conversion of the debentures, we will be required to make cash payments to the holders of the debentures equal to the lesser of the principal amount of the debentures being converted and the conversion value of those debentures. Such payments could be significant, and we may not have sufficient funds to make them at such time.

A fundamental change may also constitute an event of default or prepayment under, or result in the acceleration of the maturity of, our then-existing indebtedness. Our ability to repurchase the debentures in cash or make any other required payments may be limited by law or the terms of other agreements relating to our indebtedness outstanding at the time. Our failure to repurchase the debentures or pay cash in respect of conversions when required would result in an event of default with respect to the debentures.

While we currently have the intent and ability to settle the principal in cash, if we conclude that we no longer have the ability, in the future, we will be required to change our accounting policy for earnings per share from the treasury stock method to the if-converted method.

There may be potential new accounting pronouncements or regulatory rulings which may have an impact on our future financial condition and results of operations.

There may be potential new accounting pronouncements or regulatory rulings, which may have an impact on our future financial condition and results of operations. For example, in May 2008, the FASB issued

 

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FSP APB 14-1, Accounting for Convertible Debt Instruments that May be Settled in Cash upon Conversion (Including Partial Cash Settlement), that will significantly affect the accounting for convertible debt, including our 3.25% junior subordinated convertible debentures. The FSP specifies that issuers of convertible debt instruments should separately account for the liability (debt) and equity (conversion option) components of such instruments in a manner that reflects the issuer’s non-convertible debt borrowing rate. In applying this FSP, the FASB emphasized that the FSP will be applied to the terms of the instruments as they existed for the time periods they existed, therefore, the application of the FSP will be applied retrospectively to all periods presented. The FSP is effective for fiscal years beginning after December 15, 2008, and will be adopted by us in the first quarter of fiscal 2009. Although FSP APB 14-1 will have no impact on our actual past or future cash flows, it will require us to record a significant amount of non-cash interest expense for fiscal 2007 through fiscal 2037 as the debt discount is amortized, assuming the debentures will be settled upon maturity in 2037, associated with a significant reduction in our debentures balance along with a corresponding increase in our stockholders’ equity as of December 31, 2007 and 2008. In addition, if our debentures are redeemed or converted prior to maturity, any unamortized debt discount would result in a loss on extinguishment. As a result, there could be a material adverse impact on our results of operations and earnings per share. These impacts could adversely affect the trading price of our common stock and in turn negatively impact the trading price of the debentures.

Certain other risks

The following risks are primarily related to businesses we expect to divest as part of our divestiture plan. Until our divestiture plan is complete, any one or more of these risks could have a significant impact on our financial condition, results of operations or cash flows. In addition, the materialization of any one or more of these risks could affect the timing of future dispositions, the price at which we dispose our businesses or whether we are able to dispose our businesses at all.

Our communications services business depends in part on the acceptance of our SS7 network and the telecommunications industry’s continuing use of SS7 technology.

Our future growth in our communications services business depends, in part, on the commercial success and reliability of our SS7 network. Our communications services business will suffer if our target customers do not use our SS7 network. Our future financial performance will also depend on the successful development, introduction and customer acceptance of new and enhanced SS7-based services. We are not certain that our target customers will choose our particular SS7 network solution or continue to use our SS7 network.

The inability of our customers to successfully implement our signaling and network services with their existing systems could adversely affect our business.

Significant technical challenges exist in our signaling and network services business because many of our customers:

 

   

purchase and implement SS7 network services in phases;

 

   

deploy SS7 connectivity across a variety of telecommunication switches and routes; and

 

   

integrate our SS7 network with a number of legacy systems, third-party software applications and engineering tools.

Customer implementation currently requires participation by our order management and our engineering and operations groups, each of which has limited resources. Some customers may also require us to develop costly customized features or capabilities, which increases our costs and consumes a disproportionate share of our limited customer service and support resources. Also, we typically charge one-time fees for initially connecting a customer to our SS7 network and a monthly recurring flat rate fee after the connection is established. If new or existing customers have difficulty deploying our products or require significant amounts of

 

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our engineering service support, we may experience reduced operating margins. Our customers’ ability to deploy our network services to their own customers and integrate them successfully within their systems depends on our customers’ capabilities and the complexity involved. Difficulty in deploying those services could reduce our operating margins due to increased customer support and could cause potential delays in recognizing revenues until the services are implemented.

Our failure to achieve or sustain market acceptance of our communications services at desired pricing levels and industry consolidation could adversely impact our revenues and cash flow.

The telecommunications industry is characterized by significant price competition. Competition and industry consolidation in our communications services could result in significant pricing pressure and an erosion in our market share. Pricing pressure from competition could cause large reductions in the selling price of our services. For example, our competitors may provide customers with reduced communications costs for Internet access or private network services, reducing the overall cost of services and significantly increasing pricing pressures on us. We would need to offset the effects of any price reductions by increasing the number of our customers, generating higher revenues from enhanced services or reducing our costs, and we may not be able to do so successfully. We believe that the business of providing network connectivity and related network services will see increased consolidation in the future. Consolidation could decrease selling prices and increase competition in these industries, which could erode our market share, revenues and operating margins in our communications services business. Furthermore, customers may choose to deploy internally developed communications technologies and services thereby reducing the demand for technologies and services we offer which could harm our business.

Our content services business depends on agreements with many different third parties, including wireless carriers and content providers. If these agreements are terminated or not renewed, or are amended to require us to change the way our content services are offered to customers, our business could be harmed.

Our content services business depends on our ability to enter into and maintain agreements with many different third parties including wireless carriers and other mobile phone service providers, upon which this business is highly dependent for billing its customers.

These agreements are typically for a short term, or are otherwise terminable upon short notice, and in the case of agreements with carriers, other mobile phone service providers and content developers, are nonexclusive. If these third parties reduce their commitment to us, terminate their agreements with us or enter into similar agreements with our competitors, our content services business could be materially harmed.

 

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

The 2008 Annual Meeting of Stockholders was held on May 29, 2008, at our corporate offices, located at 487 East Middlefield Road, Mountain View, California. Two proposals were voted on at the meeting. The results of each proposal are as follows:

Proposal No. 1 to elect six directors of VeriSign, each to serve a one-year term, or until a successor has been elected and qualified or until the director’s earlier resignation or removal, was approved by the stockholders. The nominees received the following votes:

 

     For    Withheld

D. James Bidzos

   165,352,959    10,171,628

William L. Chenevich

   130,921,380    44,603,207

Kathleen A. Cote

   170,286,593    5,237,994

John D. Roach

   136,797,569    38,727,018

Louis A. Simpson

   135,501,250    40,023,337

Timothy Tomlinson

   138,379,283    37,145,304

Roger H. Moore and William A. Roper, Jr., were incumbent directors with terms expiring in 2009. Mr. Roper resigned from the Board of Directors on June 30, 2008.

In Proposal No. 2, stockholders ratified the appointment of KPMG LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2008. This proposal received the following votes:

 

     Votes

For

   169,251,565

Against

   4,576,293

Abstain

   1,696,728

Abstentions and broker non-votes were included in the determination of the number of shares represented at the meeting for purposes of determining the presence of a quorum at the Annual Meeting of Stockholders.

 

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ITEM 6. EXHIBITS

(a) Index to Exhibits

 

Exhibit

Number

  

Exhibit Description

  Filed
Herewith
10.01    Lease between PR III Middlefield Road, LLC, Landlord, and VeriSign, Inc., Tenant, dated as of June 19, 2008.   X
10.02    Settlement Agreement and General Release by and between VeriSign, Inc. and William A. Roper, Jr., dated June 30, 2008.   X
10.03    Release and Waiver of Age Discrimination Claims by William A. Roper, Jr., dated June 30, 2008   X
31.01    Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a).   X
31.02    Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a).   X
32.01    Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350). *   X
32.02    Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350). *   X

 

* As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly Report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and are not incorporated by reference in any filing of VeriSign, Inc. under the Securities Act of 1933 or the Securities Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in such filings.

 

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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.

 

            VERISIGN, INC.
Date: August 8, 2008     By:   /s/    D. JAMES BIDZOS        
       

D. James Bidzos

Interim President and Chief Executive Officer

(Principal Executive Officer)

Date: August 8, 2008     By:   /s/    BRIAN G. ROBINS        
       

Brian G. Robins

Acting Chief Financial Officer

(Principal Accounting Officer)

 

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EXHIBITS

As required under Item 6—Exhibits, the exhibits filed as part of this report are provided in this separate section. The exhibits included in this section are as follows:

 

Exhibit

Number

 

Exhibit Description

10.01   Lease between PR III Middlefield Road, LLC, Landlord, and VeriSign, Inc., Tenant, dated as of June 19, 2008.
10.02   Settlement Agreement and General Release by and between VeriSign, Inc. and William A. Roper, Jr., dated June 30, 2008.
10.03   Release and Waiver of Age Discrimination Claims by William A. Roper, Jr., dated June 30, 2008
31.01   Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a).
31.02   Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a).
32.01   Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350). *
32.02   Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350). *

 

* As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly Report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and are not incorporated by reference in any filing of VeriSign, Inc. under the Securities Act of 1933 or the Securities Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in such filings.

 

70

Lease between PR III Middlefield Road, LLC, Landlord, and VeriSign, Inc., Tenant

EXHIBIT 10.01

LEASE

between

PR III MIDDLEFIELD ROAD, LLC,

Landlord

and

VERISIGN, INC.,

Tenant

Date: As of: June 19, 2008

Premises:

675 and 685 East Middlefield Road

Mountain View, California 94043


TABLE OF CONTENTS

 

          Page

1.

   DEFINITIONS    1

2.

   DEMISE    6

3.

   TERM    7

4.

   RENT    8

5.

   REAL ESTATE TAXES    9

6.

   USE AND COMPLIANCE    10

7.

   INSTALLATIONS OF TENANT PROPERTY    13

8.

   UTILITIES AND SERVICES    14

9.

   REPAIR AND MAINTENANCE; EXPENSES    14

10.

   MECHANICS’ AND OTHER LIENS    19

11.

   ALTERATIONS    19

12.

   INSURANCE    20

13.

   DAMAGE OR DESTRUCTION    22

14.

   CONDEMNATION    24

15.

   DEFAULT BY TENANT    26

16.

   LANDLORD OR TENANT MAY PERFORM THE OTHER’S OBLIGATIONS    28

17.

   SURRENDER OF PREMISES; HOLDOVER    29

18.

   ASSIGNMENT AND SUBLETTING    30

19.

   INDEMNITY    31

20.

   ENVIRONMENTAL MATTERS    32

21.

   SUBORDINATION    32

22.

   BROKER    33

23.

   NOTICES    33

24.

   QUIET ENJOYMENT    34

25.

   ESTOPPEL CERTIFICATE    34

26.

   LIMITATION OF LIABILITY    34

27.

   ACCESS OF LANDLORD TO PREMISES    34

28.

   AUTHORITY    35

29.

   LANDLORD EXCULPATION    35

30.

   TRANSFER OF LANDLORD’S INTEREST    35

31.

   ERISA    36

32.

   ANTI-TERRORISM REPRESENTATIONS    36

 

i


TABLE OF CONTENTS

 

          Page

33.

   WAIVER OF POST-JUDGMENT REMEDY, REDEMPTION, COUNTERCLAIM AND JURY TRIAL    36

34.

   PROPOSITION 65 WARNING    37

35.

   TERMINOLOGY    37

36.

   MISCELLANEOUS PROVISIONS    37

EXHIBITS

  

Exhibit A Description of the Land

  

Exhibit B Form of Subordination, Non-Disturbance and Attornment Agreement

  

 

ii


LEASE

THIS LEASE (Lease”) is made as of June 19, 2008, (the “Effective Date”) by and between PR III Middlefield Road, LLC, a California limited liability company, (“Landlord”) and VeriSign, Inc., a Delaware corporation, (“Tenant”).

W I T N E S S E T H:

WHEREAS, Landlord owns fee simple title to a parcel of land, more particularly described as the “Land” below, upon which are currently constructed surface parking areas, infrastructure components and the following improvements: (i) the building commonly known as 675 East Middlefield Road, Mountain View, California containing approximately 52,931 rentable square feet of interior floor area and (ii) the building commonly known as 685 East Middlefield Road, Mountain View, California containing approximately 105,950 rentable square feet of interior floor area.

WHEREAS, Landlord desires to lease the Property to Tenant and Tenant desires to lease the Property from Landlord, upon and subject to the terms and conditions set forth herein.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows:

1. DEFINITIONS

As used herein, the following terms and phrases shall have the meanings indicated below:

1.1 “Additional Rent” means any payments or reimbursements required to be made by Tenant to Landlord hereunder during the Term of this Lease, other than the Basic Rent.

1.2 “Alterations” means any alterations, additions, improvements or replacements to the Premises.

1.3 “Anti-Terrorism Laws” has the meaning set forth in Section 32.

1.4 “Basic Rent” has the meaning set forth in Section 4.1.

1.5 “Building” or “Buildings” means, individually or collectively as the context requires, the buildings, other improvements, associated equipment and appurtenances thereto of every kind and description located on and within the Land as of the Commencement Date.

1.6 “Building Systems” has the meaning set forth in Section 9.1.

1.7 “Casualty” has the meaning set forth in Section 13.1.

1.8 “Chiller” means that certain water cooled chiller referenced in that certain Property Condition Assessment Report dated February 8, 2008, prepared by Marx/Okubo as Job No. 08-9007 B.

 

1


1.9 “Claims” means, collectively, liability, claims, demands, damages and costs (including attorneys’ fees and expenses) of any and every kind or character, known or unknown, for, arising out of, or attributable to, an event, circumstance or condition, including, without limitation, any and all actual, threatened or potential claims, claims for contribution under Environmental Laws, suits, proceedings, actions, causes of action, demands, liabilities, losses, obligations, orders, requirements or restrictions, liens, penalties, fines, charges, debts, damages, costs, and expenses of every kind and nature, whether now known or unknown, whether foreseeable or unforeseeable, whether under any foreign, federal, state or local law (both statutory and non-statutory), and, whether asserted or demanded by a third party against Landlord, a Landlord Affiliate or any other claimant or potential claimant, or incurred directly or indirectly by any of them.

1.10 “Commencement Date” means the Effective Date of this Lease.

1.11 “Common Areas” has the meaning set forth in Section 6.3.

1.12 “Condemnation” has the meaning set forth in Section 14.1.

1.13 “Condemnation Restoration Completion Estimate” has the meaning set forth in Section 14.3.

1.14 “Damaged Property” has the meaning set forth in Section 13.1.

1.15 “Default Rate” means ten percent (10%) per annum.

1.16 “Effective Date” has the meaning set forth in the first sentence of this Lease.

1.17 “EMBP 455” has the meaning set forth in Section 1.54.

1.18 “Environmental Laws” means any applicable federal, state or local law, statute, regulation, rule, ordinance, permit, prohibition, restriction, license, requirement, agreement, consent, or approval, or any determination, directive, judgment, decree or order of any executive, administrative or judicial authority at any federal, state or local level (whether now existing or subsequently adopted or promulgated) relating to pollution or the protection of the environment, natural resources or public health and safety.

1.19 “Event of Default” has the meaning set forth in Section 15.1.

1.20 “Expenses” has the meaning set forth in Section 4.4.

1.21 “Expiration Date” means the last day of the thirtieth (30th) full calendar month following the Commencement Date.

1.22 “Extension Notice” has the meaning set forth in Section 3.3.

1.23 “Extension Option” has the meaning set forth in Section 3.2.

 

2


1.24 “Extension Optionee” has the meaning set forth in Section 3.4.

1.25 “Extension Period” has the meaning set forth in Section 3.2.

1.26 “Extension Period Fair Market Rent” has the meaning set forth in Section 3.6.

1.27 “Governmental Authority” means the United States, the state, county, city and political subdivision in which the Property is located or that exercises jurisdiction over the Property, Landlord or Tenant, and any agency, department, commission, board, bureau or instrumentality of any of the foregoing that exercises jurisdiction over the Property, Landlord or Tenant.

1.28 “Hazardous Materials” means any material, waste, chemical, compound, substance, mixture, or byproduct that is identified, defined, designated, listed, restricted or otherwise regulated under Environmental Laws as a “hazardous constituent,” “hazardous substance,” “hazardous material,” “extremely hazardous material,” “hazardous waste,” “acutely hazardous waste,” “hazardous waste constituent,” “infectious waste,” “medical waste,” “biohazardous waste,” “extremely hazardous waste,” “pollutant,” “toxic pollutant,” or “contaminant,” or any other formulation intended to classify substances by reason of properties that are deleterious to the environment, natural resources or public health or safety including, without limitation, ignitability, corrosiveness, reactivity, carcinogenicity, toxicity, and reproductive toxicity. The term Hazardous Materials shall include, without limitation, the following:

(a) a “Hazardous Substance,” “Hazardous Material,” “Hazardous Waste,” or “Toxic Substance” under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601, et seq., the Hazardous Materials Transportation Act, 49 U.S.C. Section 5101, et seq. or the Solid Waste Disposal Act, 42 U.S.C. Section 6901, et seq., including any regulations promulgated thereunder, as any of the foregoing may be amended;

(b) an “Acutely Hazardous Waste,” “Extremely Hazardous Waste,” “Hazardous Waste,” or “Restricted Hazardous Waste,” under Section 25110.02, 25115, 25117 or 25122.7 of the California Health and Safety Code, or listed pursuant to Section 25140 of the California Health and Safety Code, as any of the foregoing may be amended;

(c) a “Hazardous Material,” “Hazardous Substance” or “Hazardous Waste” under Section 25117, 25260, 25281, 25316, 25501, or 25501.1 of the California Health and Safety Code, as any of the foregoing may be amended;

(d) “Oil” or a “Hazardous Substance” under Section 311 of the Federal Water Pollution Control Act, 33 U.S.C. Section 1321, as may be amended; as well as any other hydrocarbonic substance, fraction, distillate or by-product;

(e) any substance or material defined, identified or listed as an “Acutely Hazardous Waste,” “Extremely Hazardous Material,” “Extremely Hazardous Waste,”

 

3


“Hazardous Constituent,” “Hazardous Material,” “Hazardous Waste,” “Hazardous Waste Constituent,” or “Toxic Waste” pursuant to Division 4.5, Chapters 10 or 11 of Title 22 of the California Code of Regulations, as may be amended;

(f) any substance or material listed by the State of California as a chemical known by the State to cause cancer or reproductive toxicity pursuant to Section 25249.8 of the California Health and Safety Code, as may be amended;

(g) a “Biohazardous Waste” or “Medical Waste” under Sections 117635 or 117690 of the California Health and Safety Code, as may amended;

(h) mold;

(i) asbestos and any asbestos containing material; and/or

(j) a substance that, due to its characteristics or interaction with one or more other materials, wastes, chemicals, compounds, substances, mixtures, or byproducts, damages or threatens to damage the environment, natural resources or public health or safety, or is required by any law or public entity to be remediated, including remediation which such law or public entity requires in order for property to be put to any lawful purpose.

1.29 “Holdover Period” has the meaning set forth in Section 17.3.

1.30 “Insurance Requirements” means the requirements, whether now or hereafter in force, of any insurer, the local Board of Fire Underwriters and Fire Insurance Rating Organization or any other organization performing the same or similar functions, applicable to the Premises, or the use or manner of use thereof.

1.31 “Land” means that certain parcel of land located in the City of Mountain View, Santa Clara County, California identified as parcel Number 16 060 013 in the land records of Santa Clara, aggregating approximately 10.6 acres of land area and appurtenances thereto of every kind and description, which parcel of land is more particularly described on Exhibit A attached hereto and made a part hereof.

1.32 “Landlord Affiliate” means any firm, corporation or other entity directly or indirectly controlled by, in control of or under common control with Landlord.

1.33 “Landlord Party” or “Landlord Parties” means (1) any Landlord Affiliate, (2) any principal, director, officer, employee, agent, consultant or contractor of Landlord or any Landlord Affiliate, or (3) any Mortgagee or any principal, director, officer, employee, agent, consultant or contractor thereof.

1.34 “Landlord’s Restoration Work” has the meaning set forth in Section 13.1.

1.35 “Legal Requirements” means all laws (including Environmental Laws), statutes, ordinances, orders, rules, regulations and requirements and permits of any

 

4


Governmental Authority, whether now or hereafter in force, applicable to the Premises, or the ownership, operation, occupancy, repair, maintenance or use thereof. The term “Legal Requirements” shall include any requirements of Environmental Laws.

1.36 “Monetary Default” has the meaning set forth in Section 15.1(a).

1.37 “Mortgage” means any mortgage, deed of tru