Note 1.    Description of Business and Summary of Significant Accounting Policies

 

Description of Business

 

VeriSign, Inc. (“VeriSign” or the “Company”) was incorporated in Delaware on April 12, 1995. VeriSign’s mission is to bring trust to the Internet. The Company offers a comprehensive spectrum of products and services that enable confidence among Internet users, website owners and operators of digital networks.

 

The Company’s business consists of two reportable segments: (1) Internet Infrastructure and Identity Services (“3IS”) which consists of Naming Services and Authentication Services; and (2) Other Services, which consists of the continuing operations of the Content Portal Services (“CPS”), the remaining non-core business, and legacy products and services from divested businesses.

 

Naming Services is the authoritative directory provider of all .com, .net, .cc, ..tv, .name, .jobs and .edu domain names. Authentication Services is comprised of Business Authentication Services and User Authentication Services. Business Authentication Services enable enterprises and Internet merchants to implement and operate secure networks and websites that utilize Secure Socket Layer (“SSL”) protocol. Business Authentication Services provide customers the means to authenticate themselves to their end users and website visitors and to encrypt transactions and communications between client browsers and Web servers. User Authentication Services includes identity protection services, fraud detection services and managed public key infrastructure (“PKI”) services. User Authentication Services are intended to help enterprises secure intranets, extranets and other applications and devices, and provide authentication credentials.

 

Basis of Presentation

 

The accompanying consolidated financial statements of VeriSign and its subsidiaries have been prepared in conformity with generally accepted accounting principles in the United States (“U.S.”). All significant intercompany accounts and transactions have been eliminated.

 

The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

 

As of December 31, 2009, VeriSign owned approximately 53.7% of the outstanding shares of capital stock of its consolidated subsidiary, VeriSign Japan K.K. The noncontrolling interest’s proportionate share of income is included in Net (income) loss attributable to noncontrolling interest in subsidiary, net of tax, in the Consolidated Statements of Operations. Changes in VeriSign’s proportionate share of the net assets of VeriSign Japan K.K. resulting from sales of capital stock by the subsidiary are accounted for as equity transactions.

 

 

Reclassifications – Discontinued Operations

 

The Consolidated Statements of Operations have been reclassified for all periods presented to reflect the presentation of all divested and wound-down businesses as discontinued operations. Unless noted otherwise, discussions in the Notes to Consolidated Financial Statements pertain to continuing operations. Classification activity occurring in 2009 which have been applied retroactively, include the following:

 

In 2009, the Company disaggregated its Enterprise and Security Services (“ESS”) disposal group held for sale, into the following three businesses: (i) Global Security Consulting (“GSC”), (ii) iDefense Security Intelligence Services (“iDefense”) and (iii) Managed Security Services (“MSS”). The Company decided to retain its iDefense business and, accordingly, reclassified the assets and liabilities related to iDefense as held and used in 2009. The Company also reclassified the historical results of operations of iDefense from discontinued operations to continuing operations as part of its Naming Services business for all periods presented.

 

In 2009, the Company decided to wind down the operations of the CPS business after termination of active negotiations with a potential buyer. The Company expects the winding-down to be completed no later than the end of 2010. Accordingly, the Company reclassified the assets and liabilities related to CPS as held and used in 2009. The Company also reclassified the historical results of operations of CPS from discontinued operations to continuing operations for all periods presented.

 

In 2009, the Company completed the winding-down of its Pre-Pay billing and payment (“Pre-pay”) Services business and reclassified its historical results of operations from continuing operations to discontinued operations for all periods presented.

 

Reclassifications – Adoption of New Accounting Standards

 

Effective January 1, 2009, the Company retroactively adopted Statement of Financial Accounting Standard (“SFAS”) No. 160 (“SFAS 160”), “Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51,” codified into Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation (“ASC 810”). The standard requires all entities to report noncontrolling interests in subsidiaries as equity in the consolidated financial statements, and requires that transactions between entities and noncontrolling interests be treated as equity. The Company reclassified the noncontrolling interest in its consolidated VeriSign Japan subsidiary of $47.7 million to Stockholders’ equity as of December 31, 2006.

 

Effective January 1, 2009, the Company retroactively adopted FASB Staff Position Accounting Principles Board No. 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”, codified into FASB ASC Subtopic 470-20, Debt with Conversion and Other Options (“ASC 470-20”). The standard 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 borrowing rate for a similar non-convertible debt. The Company’s adoption of the standard affected its 3.25% junior subordinated convertible debentures due 2037 (the “Convertible Debentures”).

 

Effective January 1, 2007, the Company adopted FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes”, codified into ASC 740-10. Under ASC 740-10, an entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. The cumulative effect of adopting ASC 740-10 was a decrease in income taxes payable of $9.3 million, an increase in long-term deferred tax assets of $26.2 million, and a decrease in the Accumulated deficit balance of $35.5 million as of January 1, 2007.

 

The following table presents the effects of the retroactive adjustments to the Company’s Consolidated Balance Sheet as of December 31, 2008, upon the adoption of ASC 470-20 and ASC 810:

 

		As Reported (1)				Adjustments						As Adjusted
		(in thousands, except share and per share data)
A S S E T S
Current assets:
Cash and cash equivalents		$	789,068			$	—					$	789,068
Accounts receivable, net of allowance for doubtful accounts of $1,208 at December 31, 2008			83,749				—						83,749
Prepaid expenses and other current assets			268,178				—						268,178
Assets held for sale			483,840				—						483,840
Total current assets			1,624,835				—						1,624,835
Property and equipment, net			382,241				3,257			(2)			385,498
Goodwill			283,109				—						283,109
Other intangible assets, net			35,312				—						35,312
Other assets			247,735				(209,617	)		(3)			38,118
Total long-term assets			948,397				(206,360	)					742,037
Total assets		$	2,573,232			$	(206,360	)				$	2,366,872
L I A B I L I T I E S  A N D  S T O C K H O L D E R S’  E Q U I T Y
Current liabilities:
Accounts payable and accrued liabilities		$	263,535			$	—					$	263,535
Accrued restructuring costs			28,920				—						28,920
Deferred revenues			629,800				—						629,800
Deferred tax liabilities			5,463				—						5,463
Liabilities related to assets held for sale			49,160				—						49,160
Total current liabilities			976,878				—						976,878
Long-term deferred revenues			215,281				—						215,281
Long-term accrued restructuring costs			3,037				—						3,037
Convertible debentures			1,261,655				(692,943	)		(4)			568,712
Other long-term tax liabilities			16,378				68,165			(5)			84,543
Total long-term liabilities			1,496,351				(624,778	)					871,573
Total liabilities			2,473,229				(624,778	)					1,848,451
Commitments and contingencies
Stockholders’ equity:
VeriSign 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: 191,547,795 excluding 112,717,587 held in treasury, at December 31, 2008			304				—						304
Additional paid-in capital			21,472,895				418,996			(6)			21,891,891
Accumulated deficit			(21,439,410	)			(578	)					(21,439,988	)
Accumulated other comprehensive income			17,006				—						17,006
Total VeriSign stockholders’ equity			50,795				418,418						469,213
Noncontrolling interest in subsidiary			49,208				—						49,208
Total stockholders’ equity			100,003				418,418						518,421
Total liabilities and stockholders’ equity		$	2,573,232			$	(206,360	)				$	2,366,872

 

 

 

(1)	As presented in the Company’s 2008 Form 10-K, except Noncontrolling interest in subsidiary which has been retroactively presented as a separate component of Stockholders’ equity.

(2)

Property and equipment, net, as of December 31, 2008, increased by $3.3 million due to the retroactive capitalization of interest costs using the Company’s non-convertible debt borrowing rate of 8.39% as of the date of issuance. Prior to the adoption of ASC 470-20, the Company capitalized its interest costs at the stated interest rate on the Convertible Debentures of 3.25%.

(3)

Other assets as of December 31, 2008, decreased by $209.6 million due to a decrease to long-term deferred tax assets and a retroactive adjustment of debt issuance costs upon the adoption of ASC 470-20. Long-term deferred tax assets as of December 31, 2008, decreased by $195.7 million, and the Company reclassified $14.5 million of debt issuance costs from Other assets to Additional paid-in capital. The reclassification resulted in a cumulative decrease in amortization of debt issuance costs of $0.6 million as of December 31, 2008.

(4)	Convertible debentures, including contingent interest derivative, as of December 31, 2008, decreased by $692.9 million due to the reclassification of the $700.7 million equity component of the convertible debt to Stockholders’ equity offset by $7.8 million accretion of interest.

(5)	Long-term deferred tax liabilities as of December 31, 2008, increased by $68.2 million upon adoption of ASC 470-20.

(6)

Additional paid-in capital as of December 31, 2008 increased by $419.0 million. The Company determined that the equity component of the Convertible Debentures was $700.7 million. This amount was reclassified from Convertible debentures, including contingent interest derivative, to Additional paid-in capital. The Company reclassified the equity component related debt issuance costs of $14.5 million from Other assets to Additional paid-in capital. The Company recorded long-term deferred tax liabilities of $267.2 million with a corresponding impact to Additional paid-in capital.

 

The following table presents the effects of the retroactive adjustments to the Company’s Consolidated Statements of Operations for the years ended December 31, 2008 and December 31, 2007:

 

		Year Ended December 31, 2008
		As Previously Reported (1)				Adoption of New Accounting Standard (2)						Reclassification Adjustments (3)				As Adjusted
		(in thousands, except share and per share data)
Revenues		$	961,735			$	—					$	3,013			$	964,748
Costs and expenses
Cost of revenues			227,351				24						4,031				231,406
Sales and marketing			167,184				1						5,021				172,206
Research and development			91,508				61						(2,621	)			88,948
General and administrative			206,294				18						(5,296	)			201,016
Restructuring, impairments and other charges, net			188,551				—						7,868				196,419
Amortization of other intangible assets			10,069				—						1,086				11,155
Total costs and expenses			890,957				104			(4)			10,089				901,150
Operating income			70,778				(104	)					(7,076	)			63,598
Other income, net			52,473				(3,350	)		(5)			(314	)			48,809
Income from continuing operations before income taxes and loss from unconsolidated entities			123,251				(3,454	)					(7,390	)			112,407
Income tax expense			(42,800	)			4,025			(6)			(422	)			(39,197	)
Loss from unconsolidated entities, net of tax			(3,868	)			—						—				(3,868	)
Income from continuing operations, net of tax			76,583				571						(7,812	)			69,342
Loss from discontinued operations, net of tax			(467,284	)			(130	)		(4)			7,812				(459,602	)
Net loss			(390,701	)			441						—				(390,260	)
Less: Net loss attributable to noncontrolling interest in subsidiary			16,009				—						—				16,009
Net loss attributable to VeriSign Inc and subsidiaries common stockholders		$	(374,692	)		$	441					$	—			$	(374,251	)
Basic income (loss) per share attributable to VeriSign, Inc. and subsidiaries common stockholders from:
Continuing operations		$	0.47			$	—					$	(0.04	)		$	0.43
Discontinued operations			(2.37	)			—						0.04				(2.33	)
Net loss		$	(1.90	)		$	—					$	—			$	(1.90	)
Diluted income (loss) per share attributable to VeriSign, Inc. and subsidiaries common stockholders from:
Continuing operations		$	0.46			$	—					$	(0.04	)		$	0.43
Discontinued operations			(2.33	)			—						0.04				(2.30	)
Net loss		$	(1.87	)		$	—					$	—			$	(1.87	)
Shares used to compute net loss per share attributable to VeriSign, Inc. and subsidiaries common stockholders:
Basic			197,201				197,201						197,201				197,201
Diluted			200,602				200,602						200,602				200,602

 

 

		Year Ended December 31, 2007
		As Previously Reported (1)				Adoption of New Accounting Standard (2)						Reclassification Adjustments (3)				As Adjusted
		(in thousands, except share and per share data)
Revenues		$	847,457			$	—					$	3,052			$	850,509
Costs and expenses
Cost of revenues			240,962				—						(843	)			240,119
Sales and marketing			236,729				—						5,398				242,127
Research and development			100,213				—						(5,779	)			94,434
General and administrative			263,862				1						(15,826	)			248,037
Restructuring, impairments and other charges, net			234,977				—						1,242				236,219
Amortization of other intangible assets			16,506				—						4,585				21,091
Total costs and expenses			1,093,249				1			(4)			(11,223	)			1,082,027
Operating loss			(245,792	)			(1	)					14,275				(231,518	)
Other income, net			94,618				(293	)		(5)			82				94,407
Loss from continuing operations before income taxes and loss from unconsolidated entities			(151,174	)			(294	)					14,357				(137,111	)
Income tax benefit			9,296				(725	)		(6)			(5,120	)			3,451
Loss from unconsolidated entities, net of tax			(2,018	)									—				(2,018	)
Loss from continuing operations, net of tax			(143,896	)			(1,019	)					9,237				(135,678	)
Loss from discontinued operations, net of tax			(1,592	)			—						(9,237	)			(10,829	)
Net loss			(145,488	)			(1,019	)					—				(146,507	)
Less: Net income attributable to noncontrolling interest in subsidiary			(3,840	)			—						—				(3,840	)
Net loss attributable to VeriSign inc and subsidiaries and common stockholders		$	(149,328	)		$	(1,019	)				$	—			$	(150,347	)
Basic loss per share attributable to VeriSign, Inc. and subsidiaries common stockholders from:
Continuing operations		$	(0.62	)		$	—					$	0.04			$	(0.59	)
Discontinued operations			(0.01	)			—						(0.04	)			(0.04	)
Net loss		$	(0.63	)		$	—					$	—			$	(0.63	)
Diluted loss per share attributable to VeriSign, Inc. and subsidiaries common stockholders from:
Continuing operations		$	(0.62	)		$	—					$	0.04			$	(0.59	)
Discontinued operations			(0.01	)			—						(0.04	)			(0.04	)
Net loss		$	(0.63	)		$	—					$	—			$	(0.63	)
Shares used to compute net loss per share attributable to VeriSign, Inc. and subsidiaries common stockholders:
Basic			237,707				237,707						237,707				237,707
Diluted			237,707				237,707						237,707				237,707

 

 

(1)

As presented in or derived from the Company’s 2008 Form 10-K, except per share amounts and Net loss attributable to noncontrolling interest in subsidiary. Per share amounts have been adjusted to present the net loss per share attributable to VeriSign common stockholders. Net income attributable to noncontrolling interest in subsidiary has been presented to derive the net loss attributable to VeriSign common stockholders.

(2)	Adjustment upon adoption of ASC 470-20.

(3)

Adjustments resulting from reclassification of the results of operations of the Company’s iDefense business and CPS business from discontinued operations to continuing operations; and reclassification of the results of operations of the Company’s Pre-pay Services business from continuing operations to discontinued operations.

(4)	Total Costs and expenses and Loss from discontinued operations, net of tax, increased due to additional depreciation expense recorded retroactively as a result of an increase in capitalized interest costs upon adoption of ASC 470-20.

(5)	Other income, net, decreased primarily due to additional interest expense recorded retroactively upon adoption of ASC 470-20.

(6)	Income tax expense decreased and income tax benefit decreased for the years ended December 31, 2008 and 2007, primarily due to a decrease in income from continuing operations before taxes as a result of the retroactive adjustments.

 

Significant Accounting Policies

 

Cash and Cash Equivalents

 

VeriSign considers all highly-liquid investments purchased with original maturities of three months or less to be cash equivalents. Cash and cash equivalents include certain money market funds, commercial paper and various deposit accounts. All marketable investments are classified as available-for-sale and are carried at fair value. Unrealized gains and losses, net of taxes, are reported as a component of Accumulated other comprehensive income. VeriSign maintains its cash and cash equivalents with financial institutions that have investment grade ratings and, as part of its cash management process, performs periodic evaluations of the relative credit standing of these financial institutions. In 2008, because of liquidity concerns, the Company reclassified its money-market investments in The Reserve Primary Fund (the “Primary Fund”) and The Reserve International Liquidity Fund, Ltd (the “International Fund”) from Cash and cash equivalents to Prepaid expenses and other current assets in its consolidated balance sheet.

 

Investments in Unconsolidated Entities

 

VeriSign accounted for its former investment in Jamba joint ventures as an equity method investment, based on its ability to exert significant influence, but not control, over the joint ventures prior to its sale in October 2008. VeriSign has recorded its investments at the amount of capital contributed plus its percentage interest in the Jamba joint ventures’ earnings or loss.

 

Trade Accounts Receivable and Allowances for Doubtful Accounts

 

Trade accounts receivable are recorded at the invoiced amount and generally do not include finance charges. VeriSign maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Concentration of credit risk with respect to accounts receivable is limited by the diversity of the customer base and geographic dispersion. VeriSign also performs ongoing credit evaluation of its customers and generally requires no collateral. VeriSign maintains an allowance for potential credit losses on its accounts receivable. VeriSign regularly reviews the adequacy of its accounts receivable allowance after considering the significance of the accounts receivable balance, each customer’s expected ability to pay and its collection history with each customer. In determining its reserves, VeriSign analyzes historical collection experience and current economic trends.

 

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets with generally 35 to 40 years for buildings, 10 years for building improvements and three to five years for computer equipment, purchased software, office equipment, and furniture and fixtures. Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful lives of the assets or associated lease terms.

 

Capitalized Software

 

Development costs incurred in the research and development of new software products to be sold and marketed, and enhancements to existing software products are expensed as incurred until technological feasibility in the form of a working model has been established. VeriSign’s software has been available for general release concurrent with the establishment of technological feasibility, and accordingly no such costs have been capitalized.

 

Software included in property and equipment includes amounts paid for purchased software and development costs for software used internally that has been capitalized. The following table summarizes the capitalized costs related to third-party implementation and consulting services as well as costs related to internally developed software:

 

		Year Ended December 31,
		2009			2008
		(In thousands)
Internally used third-party software and consulting fees		$	4,123		$	4,982
Internally developed software			28,895			31,961

 

Goodwill and Other Long-lived Assets

 

Goodwill represents the excess of costs over fair value of net assets of businesses acquired. Goodwill and other intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually during the second quarter. Such goodwill and other intangible assets may also be tested for impairment between annual tests in the presence of impairment indicators such as, but not limited to: (a) a significant adverse change in legal factors or in the business climate; (b) an adverse action or assessment by a regulator; (c) unanticipated competition; (d) loss of key personnel; (e) a more-likely-than-not expectation of sale or disposal of a reporting unit or a significant portion thereof; (f) testing for recoverability of a significant asset group within a reporting unit; or (g) recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.

 

VeriSign performs its annual goodwill impairment analysis at its reporting unit level, which is one level below its operating segment level during the second quarter of each year. 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 that 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.

 

Long-lived assets, such as property, plant, and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such events or circumstances include, but are not limited to, a significant decrease in the fair value of the underlying business, a significant decrease in the benefits realized from an acquired business, difficulties or delays in integrating the business or a significant change in the operations of an acquired business. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset, or asset group, to estimated undiscounted future cash flows expected to be generated by the asset, or asset group. An impairment charge is recognized by the amount by which the carrying amount of the asset exceeds its fair value.

 

VeriSign amortizes intangible assets with estimable useful lives on a straight-line basis over their useful lives.

 

Restructuring Charges

 

VeriSign records restructuring charges related to workforce reduction pursuant to a severance plan using a standard formula of benefits based upon tenure with the Company. The accounting for such restructuring charges is dependent upon determination of the following criteria: (i) the Company’s obligation relating to employees’ rights to receive compensation for future absences is attributable to employees’ services already rendered; (ii) the obligation relates to rights that vest or accumulate; (iii) payment of the compensation is probable; and (iv) the amount can be reasonably estimated.

 

VeriSign records restructuring charges related to excess facilities and other one-time severance costs at fair value only when the liability is incurred. Excess facilities restructuring charges take into account the fair value of lease obligations of the abandoned space, including the potential for sublease income. Estimating the amount of sublease income requires management to make estimates for the space that will be rented, the rate per square foot that might be received and the vacancy period of each property.

 

Foreign Currency Translation

 

VeriSign conducts business throughout the world and transacts in multiple currencies. The functional currency for most of VeriSign’s international subsidiaries is the U.S. Dollar. The Company’s subsidiaries’ financial statements are remeasured into U.S. Dollars using a combination of current and historical exchange rates and any remeasurement gains and losses are included in operating results.

 

The financial statements of the Company’s subsidiaries for which the local currency is the functional currency are translated into U.S. Dollars using the current rate for assets and liabilities and a weighted-average rate for the period for revenues and expenses. This translation results in a cumulative translation adjustment that is included in accumulated other comprehensive income or loss, a separate component of stockholders’ equity.

 

VeriSign maintains a foreign currency risk management program designed to mitigate foreign exchange risks associated with the monetary assets and liabilities of its operations that are denominated in non-functional currencies. The primary objective of this program is to minimize the gains and losses resulting from fluctuations in exchange rates. The Company does not enter into foreign currency transactions for trading or speculative purposes, nor does it hedge foreign currency exposures in a manner that entirely offsets the effects of changes in exchange rates. The program may entail the use of forward or option contracts, and in each case, these contracts are limited to a duration of less than 12 months.

 

 

At December 31, 2009, VeriSign held forward contracts in notional amounts totaling $79.2 million to mitigate the impact of exchange rate fluctuations associated with certain assets and liabilities held in foreign currencies. All forward contracts are recorded at fair market value. The Company attempts to limit its exposure to credit risk by executing foreign exchange contracts with financial institutions that have investment grade ratings. The Company records changes in fair value of the foreign currency forward contracts to Other (loss) income, net, within the Consolidated Statements of Operations.

 

Accumulated Other Comprehensive Income

 

Accumulated other comprehensive income includes foreign currency translation adjustments and unrealized gains and losses on marketable securities classified as available-for-sale. The following table summarizes the changes in the components of accumulated other comprehensive income attributable to VeriSign Inc. and subsidiaries common stockholders for 2009 and 2008:

 

		Foreign Currency Translation Adjustments Gain (Loss), net of tax				Unrealized Gain (Loss) On Investment, net of tax				Total Accumulated Other Comprehensive Income
		(In thousands)
Balance, December 31, 2007		$	2,734			$	289			$	3,023
Changes .			14,494				(511	)			13,983
Balance, December 31, 2008			17,228				(222	)			17,006
Changes			(9,514	)			167				(9,347	)
Balance, December 31, 2009		$	7,714			$	(55	)		$	7,659

 

Revenue Recognition

 

VeriSign recognizes revenues once persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is probable. VeriSign defines each of these four criteria as follows:

 

•

Persuasive evidence of an arrangement exists:    It is the Company’s customary practice to have a written contract, signed by both the customer and VeriSign or a purchase order from those customers who have previously negotiated a standard license arrangement with VeriSign.

 

•

Delivery has occurred or services have been rendered:    Delivery of the Company’s products is deemed to have occurred upon activation of services. The Company’s services are delivered from activation of service through the term of the arrangement.

 

•

The fee is fixed or determinable:    Arrangements with payment terms extending beyond customary payment terms are considered not to be fixed or determinable, and revenues from such arrangements are recognized as payments become due and payable or upon collection.

 

•

Collectibility is reasonably assured:    Collectibility is assessed on a customer-by-customer basis. VeriSign typically sells to customers for whom there is a history of successful collection. New customers are subjected to a credit review process that evaluates the customer’s financial position and, ultimately, their ability to pay. If VeriSign determines from the outset of an arrangement that collectibility is not probable based upon its credit review process, revenues are recognized as cash is collected.

 

Revenues from arrangements with multiple elements are allocated based on the fair value of the elements. For these arrangements, the Company evaluates all deliverables in each arrangement to determine whether they represent separate units of accounting. Fair value is determined based on reliable evidence of the fair value of each deliverable. Revenues are recognized in accordance with generally accepted accounting policies for the separate elements when the services have value on a stand-alone basis and fair value of the separate elements exists.

 

Naming Services

 

VeriSign’s revenues primarily include registry services for the .com and .net generic top-level domains and certain country code top-level domains, and managed domain name services. Domain name registration revenues consist primarily of registration fees charged to registrars for domain name registration services. Revenues from the initial registration or renewal of domain name registration services are deferred and recognized ratably over the registration term, generally one to two years and up to ten years. Fees for renewals and advance extensions to the existing term are deferred until the new incremental period commences. These fees are then recognized ratably over the new registration term. Revenues from VeriSign Internet Defense Services are not significant.

 

Business Authentication Services

 

Revenues from Business Authentication Services include the sale or renewal of digital certificates. These revenues are deferred and recognized ratably over the life of the digital certificate, which is generally 12 to 36 months. Post-contract customer support (“PCS”) when sold is bundled with the digital certificates and recognized as a combined unit of accounting over the certificate term.

 

User Authentication Services

 

Revenues from the sale of User Authentication Services primarily consist of a set-up fee, annual managed service and per seat license fee. Revenues from the fees are deferred and recognized ratably over the term of the license, generally 12 to 36 months. PCS, when sold, is bundled with the User Authentication Services and recognized as a combined unit of accounting over the license term.

 

Revenues Classified in Discontinued Operations

 

Revenues derived from the Company’s disposal groups classified as discontinued operations have been recognized upon delivery of services performed.

 

Advertising Expense

 

Advertising costs are expensed as incurred and are included in Sales and marketing in the accompanying Consolidated Statements of Operations. Advertising expense was $33.2 million, $27.3 million and $30.5 million in 2009, 2008 and 2007, respectively.

 

Income Taxes

 

VeriSign uses the asset and liability method to account for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The

 

 

effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. VeriSign records a valuation allowance to reduce deferred tax assets to an amount whose realization is more likely than not.

 

VeriSign’s operations globally involve dealing with uncertainties and judgments in the application of complex tax regulations in multiple jurisdictions. The final taxes payable are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions and resolution of disputes arising from U.S. federal, state, and international tax audits. The Company may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. The Company adjusts these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from its current estimate of the tax liabilities.

 

The Company’s assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and character of future taxable income, such as income from operations or capital gains income. Actual operating results and the underlying amount and character of income in future years could render the Company’s current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause the Company’s actual income tax obligations to differ from its estimates, thus materially impacting its financial position and results of operations.

 

Stock-Based Compensation

 

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. In addition, the Company uses the Monte-Carlo simulation option-pricing model to determine the fair value of market-based awards. The Monte-Carlo simulation option-pricing model takes into account the same input assumptions as the Black-Scholes model; however, it also further incorporates into the fair-value determination, the possibility that the market condition may not be satisfied. Compensation costs related to awards with a market-based condition are recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period for each such award.

 

VeriSign recognizes a benefit from stock-based compensation in additional paid-in-capital if an incremental tax benefit is realized as a reduction in income taxes payable after all other tax attributes currently available to it have been utilized. Additionally, VeriSign accounts for the indirect benefits of stock-based compensation on the research tax credit through the Consolidated Statements of Operations as part of continuing operations rather than through paid-in-capital.

 

Discontinued Operations

 

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, the disposal group is actively marketed, its sale is probable within one year, and changes to the plan of sale are unlikely. If at any time these criteria are no longer met, the disposal group would be reclassified as held and used. The Company evaluates the held for sale classifications during each reporting period.

 

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 will no longer have any significant continuing involvement in the operations of the disposal group after the disposal transaction. This assessment is made at the time the disposal group is classified as held for sale and for a one-year period after the sale of the disposal group.

 

Recent Accounting Pronouncements

 

In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13—Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force (“ASU 2009-13”). ASU 2009-13 addresses how to measure and allocate arrangement consideration to one or more units of accounting within a multiple-deliverable arrangement. ASU 2009-13 modifies the requirements for determining whether a deliverable can be treated as a separate unit of accounting by removing the criteria that objective evidence of fair value exist for the undelivered elements. ASU 2009-13 is effective for the Company prospectively for revenue arrangements entered into or materially modified beginning January 1, 2011. Early adoption is permitted. The Company is in the process of evaluating the impact adoption will have on its financial condition and results of operations.

 

In October 2009, the FASB issued ASU No. 2009-14—Software (Topic 985): Certain Revenue Arrangements That Include Software Elements—a consensus of the FASB Emerging Issues Task Force (“ASU 2009-14”). ASU 2009-14 modifies the scope of the software revenue recognition guidance to exclude arrangements that contain tangible products for which the software element is “essential” to the functionality of the tangible products. ASU 2009-14 is effective for the Company prospectively for revenue arrangements entered into or materially modified beginning January 1, 2011. Early adoption is permitted. The Company is in the process of evaluating the impact adoption will have on its financial condition and results of operations.