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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 of, 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 2008 Annual Report on Form 10-K (the “2008 Form 10-K”) filed with the SEC on March 3, 2009.
The Company evaluated subsequent events through November 6, 2009, the date this Quarterly Report on Form 10-Q was filed with the SEC.
Reclassifications
The Condensed Consolidated Statements of Operations have been reclassified for all periods presented to reflect current discontinued operations treatment. Unless noted otherwise, discussions in the Notes to Condensed Consolidated Financial Statements pertain to continuing operations.
During the first quarter of 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 for all periods presented.
Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (“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 in order to account for those undelivered elements as a single unit of accounting. 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. Currently, the Company is 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. Currently, the Company is evaluating the impact adoption will have on its financial condition and results of operations.
Adoption of New Accounting Standards
Effective January 1, 2009, the Company 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 FASB Accounting Standards Codification (“ASC”) 810, Consolidation. 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 $49.2 million to Stockholders’ equity as of December 31, 2008.
Effective January 1, 2009, the Company retroactively adopted 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)”, codified into FASB ASC Subtopic 470-20, Debt with Conversion and Other Options. 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”). The condensed consolidated financial statements have been retroactively adjusted for all periods presented in accordance with the standard. See Note 9, “Junior Subordinated Convertible Debentures,” for further information regarding the adoption of the standard.
The following tables present the effects of the retroactive adjustments to the Company’s Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2008:
| Three Months Ended September 30, 2008 | ||||||||||||||||
| As Reported (1) |
Adoption of New Accounting Standard (2) |
Reclassification to Continuing Operations (3) |
As Adjusted |
|||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
|
Revenues |
$ | 243,031 | $ | — | $ | 2,903 | $ | 245,934 | ||||||||
|
Cost of revenues |
55,626 | 9 | (4) | 1,630 | 57,265 | |||||||||||
|
Other costs and expenses |
119,961 | 20 | (4) | 1,515 | 121,496 | |||||||||||
|
Operating income |
67,444 | (29 | ) | (242 | ) | 67,173 | ||||||||||
|
Other loss, net |
(12,689 | ) | (761 | )(5) | — | (13,450 | ) | |||||||||
|
Income from continuing operations before income taxes and loss from unconsolidated entities |
54,755 | (790 | ) | (242 | ) | 53,723 | ||||||||||
|
Income tax expense |
9,433 | (557 | )(6) | — | 8,876 | |||||||||||
|
Loss from unconsolidated entities, net of tax |
(2,509 | ) | — | — | (2,509 | ) | ||||||||||
|
Income from continuing operations, net of tax |
42,813 | (233 | ) | (242 | ) | 42,338 | ||||||||||
|
Loss from discontinued operations, net of tax |
(242,830 | ) | (25 | )(4) | 242 | (242,613 | ) | |||||||||
|
Net loss |
(200,017 | ) | (258 | ) | — | (200,275 | ) | |||||||||
|
Less: Net income attributable to noncontrolling interest in subsidiary |
(815 | ) | — | — | (815 | ) | ||||||||||
|
Net loss attributable to VeriSign common stockholders |
$ | (200,832 | ) | $ | (258 | ) | $ | — | $ | (201,090 | ) | |||||
|
Basic loss per share attributable to VeriSign common stockholders: |
||||||||||||||||
|
Continuing operations |
$ | 0.22 | $ | (0.01 | ) | $ | — | $ | 0.21 | |||||||
|
Discontinued operations |
(1.26 | ) | 0.01 | — | (1.25 | ) | ||||||||||
|
Net loss |
$ | (1.04 | ) | $ | — | $ | — | $ | (1.04 | ) | ||||||
|
Diluted loss per share attributable to VeriSign common stockholders: |
||||||||||||||||
|
Continuing operations |
$ | 0.21 | $ | — | $ | — | $ | 0.21 | ||||||||
|
Discontinued operations |
(1.24 | ) | — | — | (1.24 | ) | ||||||||||
|
Net loss |
$ | (1.03 | ) | $ | — | $ | — | $ | (1.03 | ) | ||||||
|
Shares used to compute net loss per share attributable to VeriSign common stockholders: |
||||||||||||||||
|
Basic |
193,853 | 193,853 | ||||||||||||||
|
Diluted |
195,930 | 195,930 | ||||||||||||||
| Nine Months Ended September 30, 2008 | ||||||||||||||||
| As Reported (1) |
Adoption of New Accounting Standard (2) |
Reclassification to Continuing Operations (3) |
As Adjusted |
|||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
|
Revenues |
$ | 714,726 | $ | — | $ | 8,506 | $ | 723,232 | ||||||||
|
Cost of revenues |
167,776 | 9 | (4) | 4,713 | 172,498 | |||||||||||
|
Other costs and expenses |
466,922 | 44 | (4) | 5,051 | 472,017 | |||||||||||
|
Operating income |
80,028 | (53 | ) | (1,258 | ) | 78,717 | ||||||||||
|
Other loss, net |
(20,069 | ) | (2,239 | )(5) | — | (22,308 | ) | |||||||||
|
Income from continuing operations before income taxes and loss from unconsolidated entities |
59,959 | (2,292 | ) | (1,258 | ) | 56,409 | ||||||||||
|
Income tax expense |
8,519 | (1,053 | )(6) | — | 7,466 | |||||||||||
|
Loss from unconsolidated entities, net of tax |
(3,099 | ) | — | — | (3,099 | ) | ||||||||||
|
Income from continuing operations, net of tax |
48,341 | (1,239 | ) | (1,258 | ) | 45,844 | ||||||||||
|
Loss from discontinued operations, net of tax |
(322,655 | ) | (66 | )(4) | 1,258 | (321,463 | ) | |||||||||
|
Net loss |
(274,314 | ) | (1,305 | ) | — | (275,619 | ) | |||||||||
|
Less: Net income attributable to noncontrolling interest in subsidiary |
(2,710 | ) | — | — | (2,710 | ) | ||||||||||
|
Net loss attributable to VeriSign common stockholders |
$ | (277,024 | ) | $ | (1,305 | ) | $ | — | $ | (278,329 | ) | |||||
|
Basic loss per share attributable to VeriSign common stockholders: |
||||||||||||||||
|
Continuing operations |
$ | 0.23 | $ | — | $ | (0.01 | ) | $ | 0.22 | |||||||
|
Discontinued operations |
(1.62 | ) | (0.01 | ) | 0.01 | (1.62 | ) | |||||||||
|
Net loss |
$ | (1.39 | ) | $ | (0.01 | ) | $ | — | $ | (1.40 | ) | |||||
|
Diluted loss per share attributable to VeriSign common stockholders: |
||||||||||||||||
|
Continuing operations |
$ | 0.22 | $ | — | $ | (0.01 | ) | $ | 0.21 | |||||||
|
Discontinued operations |
(1.58 | ) | (0.01 | ) | 0.01 | (1.58 | ) | |||||||||
|
Net loss |
$ | (1.36 | ) | $ | (0.01 | ) | $ | — | $ | (1.37 | ) | |||||
|
Shares used to compute net loss per share attributable to VeriSign common stockholders: |
||||||||||||||||
|
Basic |
198,622 | 198,622 | ||||||||||||||
|
Diluted |
202,951 | 202,951 | ||||||||||||||
| (1) | As reported in or derived from the Company’s 2008 Form 10-K, except per share amounts and Net income 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 FSP APB 14-1, codified into ASC FASB Subtopic 470-20, Debt with Conversion and Other Options. |
| (3) | Reclassification of the results of operations of the Company’s iDefense business from discontinued operations to continuing operations. |
| (4) | Cost of revenues, Other costs and expenses and Loss from discontinued operations, net of tax, increased during the three and nine months ended September 30, 2008, due to additional depreciation expense recorded retroactively as result of an increase in capitalized interest costs. |
| (5) | Other loss, net, increased during the three and nine months ended September 30, 2008, primarily due to additional interest expense recorded retroactively. |
| (6) | Income tax expense decreased during the three and nine months ended September 30, 2008, primarily due to a decrease in income from continuing operations before taxes. |
|
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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 classification of stock-based compensation:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||
| (In thousands) | ||||||||||||
|
Cost of revenues |
$ | 1,886 | $ | 1,721 | $ | 5,349 | $ | 6,231 | ||||
|
Sales and marketing |
2,350 | 712 | 7,496 | 6,931 | ||||||||
|
Research and development |
1,789 | 1,499 | 4,798 | 5,803 | ||||||||
|
General and administrative |
4,080 | 4,568 | 15,048 | 21,193 | ||||||||
|
Restructuring and other charges |
137 | 3,151 | 935 | 8,323 | ||||||||
|
Stock-based compensation for continuing operations |
10,242 | 11,651 | 33,626 | 48,481 | ||||||||
|
Stock-based compensation for discontinued operations |
1,067 | 7,386 | 5,779 | 26,887 | ||||||||
|
Total consolidated stock-based compensation |
$ | 11,309 | $ | 19,037 | $ | 39,405 | $ | 75,368 | ||||
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 September 30, |
Nine Months Ended September 30, |
|||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||
|
Stock options: |
||||||||||||
|
Volatility |
40 | % | 35 | % | 46 | % | 35 | % | ||||
|
Risk-free interest rate |
2.07 | % | 2.87 | % | 1.56 | % | 2.77 | % | ||||
|
Expected term |
3.29 | 3.41 | 3.67 | 3.29 | ||||||||
|
Dividend yield |
Zero | Zero | Zero | Zero | ||||||||
|
Employee stock purchase plan awards: |
||||||||||||
|
Volatility |
44 | % | 36 | % | 50 | % | 36 | % | ||||
|
Risk-free interest rate |
0.54 | % | 2.28 | % | 0.50 | % | 2.31 | % | ||||
|
Expected term |
1.25 | 1.25 | 1.25 | 1.25 | ||||||||
|
Dividend yield |
Zero | Zero | Zero | Zero | ||||||||
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.
The following table presents the nature of the Company’s total stock-based compensation, inclusive of amounts for discontinued operations:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Stock options |
$ | 2,897 | $ | 3,699 | $ | 9,688 | $ | 15,664 | ||||||||
|
Employee stock purchase plans |
2,468 | 4,729 | 7,856 | 19,423 | ||||||||||||
|
Restricted stock units |
6,044 | 5,565 | 22,010 | 20,751 | ||||||||||||
|
Stock options/awards acceleration |
596 | 5,808 | 1,985 | 21,438 | ||||||||||||
|
Capitalization (1) |
(696 | ) | (764 | ) | (2,134 | ) | (1,908 | ) | ||||||||
|
Total consolidated stock-based compensation |
$ | 11,309 | $ | 19,037 | $ | 39,405 | $ | 75,368 | ||||||||
| (1) | The capitalized amount is included in Property and equipment, net. |
During the nine months ended September 30, 2009 and 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 for continuing operations as well as for discontinued operations.
During the nine months ended September 30, 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 sign-on options, unvested sign-on restricted stock units, 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 units outstanding. Upon acceleration of vesting of Mr. Roper’s stock-based awards, the Company recognized an additional amount of $5.4 million of stock-based compensation in general and administrative expenses during the nine months ended September 30, 2008.
|
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Note 3. Assets Held for Sale and Discontinued Operations
In 2007, VeriSign announced a change to its business strategy to allow management to focus its attention on its core competencies and to make additional resources available to invest in its core businesses. This strategy calls for the divesture or winding down of the following remaining non-core businesses in the Company’s portfolio as of September 30, 2009: GSC (sold in October 2009), Messaging Services, and Pre-Pay billing and payment (“Pre-Pay”) Services. The Messaging Services business is comprised of Messaging and Mobile Media (“MMM”) Services (sold in October 2009), Content Portal Services (“CPS”), and Mobile Delivery Gateway (“MDG”) Services. All of the remaining non-core businesses in the Company’s portfolio, except for the Pre-Pay Services business, which the Company is currently in the process of winding down, are classified as disposal groups held for sale as of September 30, 2009, and their results of operations have been classified as discontinued operations for all periods presented.
During the first quarter of 2009, the Company disaggregated its ESS disposal group held for sale into the following three businesses: (i) GSC, (ii) iDefense and (iii) 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 Naming Services for all periods presented.
Completed Divestitures during 2009
On July 6, 2009, the Company sold its MSS business which enables enterprises to effectively monitor and manage their network security infrastructure 24 hours per day, every day of the year, while reducing the associated time, expense, and personnel commitments by relying on the MSS Business’ security platform and experienced security staff for a net cash consideration of $42.9 million. During the nine months ended September 30, 2009, the Company recorded a loss on sale of $5.3 million, net of an income tax expense of $12.9 million, and reversal of estimated losses on disposal recorded prior to sale.
On May 5, 2009, the Company sold its Real-Time Publisher (“RTP”) Services business which allows organizations to obtain access to and organize large amounts of constantly updated content, and distribute it, in real time, to enterprises, Web-portal developers, application developers and consumers. During the nine months ended September 30, 2009, the Company recorded a gain on sale of $7.2 million, net of an income tax benefit of $5.2 million, and reversal of estimated losses on disposal recorded prior to sale.
On May 1, 2009, the Company sold its Communications Services business which provides Billing and Commerce Services, Connectivity and Interoperability Services, and Intelligent Database Services to Transaction Network Services, Inc. (“TNS”) for cash consideration of $226.2 million. During the nine months ended September 30, 2009, the Company recorded a loss on sale of $57.3 million, net of an income tax expense of $55.3 million, and estimated losses on disposal recorded prior to sale. The cash consideration of $226.2 million was determined after certain initial adjustments to reflect the parties’ then-current estimate of working capital associated with the Communications Services business as of the closing date. During the quarter ended September 30, 2009, the Company determined the final working capital adjustment associated with the Communication Services business of $3.8 million which was received by the Company during the quarter.
On April 10, 2009, the Company sold its International Clearing business which enables financial settlement and call data settlement for wireless and wireline carriers. The Company recorded a gain on sale of $12.2 million, net of an income tax benefit of $6.0 million, primarily representing cumulative translation adjustments associated with the business.
Assets Held for Sale
The following table presents the carrying amounts of major classes of assets and liabilities related to assets held for sale as of September 30, 2009 and December 31, 2008:
| September 30, 2009 |
December 31, 2008 |
|||||
| (In thousands) | ||||||
|
Assets: |
||||||
|
Accounts receivable |
$ | 24,552 | $ | 58,588 | ||
|
Other current assets |
50,047 | 63,516 | ||||
|
Goodwill |
97,712 | 237,177 | ||||
|
Other long-lived assets |
67,891 | 124,559 | ||||
|
Total assets held for sale |
$ | 240,202 | $ | 483,840 | ||
|
Liabilities: |
||||||
|
Accounts payable and accrued liabilities |
$ | 36,027 | $ | 35,853 | ||
|
Deferred revenues |
5,428 | 13,307 | ||||
|
Total liabilities related to assets held for sale |
$ | 41,455 | $ | 49,160 | ||
As of September 30, 2009, businesses classified as held for sale and presented as discontinued operations are the following:
Global Security Consulting
The Company’s GSC business helps companies understand corporate security requirements, comply with all applicable regulations, identify security vulnerabilities, reduce risk, and meet the security compliance requirements applicable to the particular business and industry. On October 1, 2009, the Company sold its GSC business for cash consideration of $4.9 million.
Messaging and Mobile Media Services
The Company’s MMM Services business consists of the InterCarrier Messaging, PictureMail, Premium Messaging Gateway, and Mobile Enterprise Service offerings. The MMM Services business is an industry-leading global provider of short-messaging, multimedia messaging, and mobile content application services. MMM Services enables messages and multimedia content to be sent globally across any wireless operator and mobile device. MMM Services offers the global connectivity, network reliability, and scalability necessary to capitalize on the fast growing global messaging and media content markets.
On October 23, 2009, the Company sold its MMM Services business for cash consideration of $174.5 million after preliminary adjustments to reflect the parties’ estimate of working capital. The divestiture transaction will be subject to a final adjustment to reflect the actual working capital balance as of the closing date.
Mobile Delivery Gateway Services
MDG Services offer solutions to manage the complex operator interfaces, relationships, distribution, reporting and customer service for the delivery of premium mobile content to customers. The MDG messaging aggregation services enable short messaging and multimedia messaging service connectivity for content providers, aggregators and others to all wireless subscribers of certain carriers and/or countries and regions. MDG Services enable content providers to more rapidly expand their global reach.
Content Portal Services
CPS enables a seamless end-to-end business solution focused on providing best-in-class digital content portal services. CPS can be used as a content delivery platform for games, ringtones, and other content services. CPS is provided to mobile carriers and media companies primarily located in Canada.
In October 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 wind-down to be completed no later than the end of 2010.
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 overhead and goodwill impairments that are not directly attributable to a disposal group 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 generally extend for periods less than 12 months.
During the three months ended September 30, 2009, the Company recorded net gains on disposal, and net reversals of estimated losses on disposal of $5.0 million which are included in discontinued operations. During the nine months ended September 30, 2009, the Company recorded net losses on disposal, and net reversals of estimated losses on disposal of $5.2 million which are included in discontinued operations. During the three and nine months ended September 30, 2008, the Company recorded net losses on disposal, and estimated losses on disposal, of $236.4 million and $273.2 million, respectively, which are included in discontinued operations. Net gains on disposal are recorded on the date the sale of the disposal group is consummated. Full or partial reversals of previously reported estimated losses on disposal are recorded upon changes in the fair values and/or carrying values of the disposal groups.
The following table presents the revenues and the components of discontinued operations, net of tax:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Revenues |
$ | 40,544 | $ | 141,883 | $ | 212,981 | $ | 448,979 | ||||||||
|
(Loss) income before income taxes |
$ | (5,707 | ) | $ | 10,348 | $ | 27,930 | $ | (40,589 | ) | ||||||
|
Income tax (benefit) expense |
(6,937 | ) | 16,583 | 6,346 | 7,659 | |||||||||||
|
Gain (loss) from discontinued operations |
1,230 | (6,235 | ) | 21,584 | (48,248 | ) | ||||||||||
|
Gain (loss) on sale of discontinued operations and estimated (losses) reversals on assets held for sale, before income taxes |
17,028 | (236,738 | ) | 43,099 | (276,539 | ) | ||||||||||
|
Income tax expense (benefit) |
12,009 | (360 | ) | 48,340 | (3,324 | ) | ||||||||||
|
Gain (loss) on sale of discontinued operations |
5,019 | (236,378 | ) | (5,241 | ) | (273,215 | ) | |||||||||
|
Total income (loss) from discontinued operations, net of tax |
$ | 6,249 | $ | (242,613 | ) | $ | 16,343 | $ | (321,463 | ) | ||||||
|
|||
Note 4. Restructuring, Impairments and Other Charges
A comparison of restructuring, impairments and other charges is presented below:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||
| (In thousands) | ||||||||||||
|
Restructuring charges for continuing operations |
$ | 744 | $ | 5,895 | $ | 5,927 | $ | 28,210 | ||||
|
Impairments for continuing operations |
9,684 | — | 9,684 | — | ||||||||
|
Other charges for continuing operations |
— | 14 | 62 | 79,083 | ||||||||
|
Total restructuring, impairments and other charges for continuing operations |
10,428 | 5,909 | 15,673 | 107,293 | ||||||||
|
Restructuring charges for discontinued operations |
2,046 | 7,058 | 4,959 | 30,422 | ||||||||
|
Impairments for discontinued operations |
— | — | — | 45,793 | ||||||||
|
Total restructuring charges and impairments for discontinued operations |
2,046 | 7,058 | 4,959 | 76,215 | ||||||||
|
Total consolidated restructuring, impairments and other charges |
$ | 12,474 | $ | 12,967 | $ | 20,632 | $ | 183,508 | ||||
Restructuring Charges
As part of its divestiture strategy, VeriSign initiated a restructuring plan in the first quarter of 2008 (the “2008 Restructuring Plan”) which includes workforce reductions, abandonment of excess facilities and other exit costs. The restructuring charges in the table above are substantially related to the 2008 Restructuring Plan. Through September 30, 2009, VeriSign recorded a total of $80.5 million in restructuring charges, inclusive of amounts for discontinued operations, under its 2008 Restructuring Plan.
The following table presents the nature of the restructuring charges:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||
| 2009 | 2008 | 2009 | 2008 | ||||||||||
| (In thousands) | |||||||||||||
|
Continuing operations: |
|||||||||||||
|
Workforce reduction—severance and benefits |
$ | 467 | $ | 1,408 | $ | 3,598 | $ | 17,161 | |||||
|
Workforce reduction—stock-based compensation |
138 | 3,762 | 936 | 8,324 | |||||||||
|
Total workforce reduction |
605 | 5,170 | 4,534 | 25,485 | |||||||||
|
Excess facilities |
139 | 979 | 1,393 | 1,267 | |||||||||
|
Other exit costs |
— | (254 | ) | — | 1,458 | ||||||||
|
Total restructuring charges for continuing operations |
$ | 744 | $ | 5,895 | $ | 5,927 | $ | 28,210 | |||||
|
Discontinued operations: |
|||||||||||||
|
Workforce reduction—severance and benefits |
$ | 1,585 | $ | 3,621 | $ | 3,768 | $ | 22,705 | |||||
|
Workforce reduction—stock-based compensation |
458 | 3,437 | 1,049 | 7,717 | |||||||||
|
Total workforce reduction |
2,043 | 7,058 | 4,817 | 30,422 | |||||||||
|
Excess facilities |
3 | — | 142 | — | |||||||||
|
Other exit costs |
— | — | — | — | |||||||||
|
Total restructuring charges for discontinued operations |
$ | 2,046 | $ | 7,058 | $ | 4,959 | $ | 30,422 | |||||
|
Consolidated: |
|||||||||||||
|
Workforce reduction—severance and benefits |
$ | 2,052 | $ | 5,029 | $ | 7,366 | $ | 39,866 | |||||
|
Workforce reduction—stock based compensation |
596 | 7,199 | 1,985 | 16,041 | |||||||||
|
Total workforce reduction |
2,648 | 12,228 | 9,351 | 55,907 | |||||||||
|
Excess facilities |
142 | 979 | 1,535 | 1,267 | |||||||||
|
Other exit costs |
— | (254 | ) | — | 1,458 | ||||||||
|
Total consolidated restructuring charges |
$ | 2,790 | $ | 12,953 | $ | 10,886 | $ | 58,632 | |||||
As of September 30, 2009, the consolidated accrued restructuring costs are $9.1 million and consist of the following:
| Accrued Restructuring Costs at December 31, 2008 |
Restructuring Charges |
Cash Payments |
Non-cash | Accrued Restructuring Costs at September 30, 2009 |
|||||||||||||
| (In thousands) | |||||||||||||||||
|
Workforce reduction |
$ | 25,374 | $ | 9,351 | $ | (28,993 | ) | $ | (1,985 | ) | $ | 3,747 | |||||
|
Excess facilities |
6,583 | 1,535 | (2,421 | ) | (350 | ) | 5,347 | ||||||||||
|
Total accrued restructuring costs |
$ | 31,957 | $ | 10,886 | $ | (31,414 | ) | $ | (2,335 | ) | $ | 9,094 | |||||
|
Included in current portion
of accrued |
|
$ | 5,980 | ||||||||||||||
|
Included in long-term
portion of accrued |
|
$ | 3,114 | ||||||||||||||
Cash payments totaling $8.3 million related to the abandonment of excess facilities will be paid over the respective lease terms, the longest of which extends through 2016. 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) | ||||||||||
|
2009 (remaining 3 months) |
$ | 960 | $ | (225 | ) | $ | 735 | |||
|
2010 |
2,522 | (528 | ) | 1,994 | ||||||
|
2011 |
2,309 | (505 | ) | 1,804 | ||||||
|
2012 |
589 | (223 | ) | 366 | ||||||
|
2013 |
421 | (279 | ) | 142 | ||||||
|
Thereafter |
942 | (636 | ) | 306 | ||||||
| $ | 7,743 | $ | (2,396 | ) | $ | 5,347 | ||||
As part of the 2008 Restructuring Plan, the Company anticipates recording additional charges related to its workforce reduction, excess facilities and other exit costs through 2009. The estimate of these charges is not yet finalized and the total amount and timing of these charges will depend upon the nature, timing, and extent of these future actions.
Impairments and Other Charges
The following table presents the consolidated impairments and other charges, inclusive of amounts for discontinued operations:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||
| (In thousands) | (In thousands) | |||||||||||
|
Impairments for continuing operations |
$ | 9,684 | $ | — | $ | 9,684 | $ | — | ||||
|
Impairments for discontinued operations |
— | — | — | 45,793 | ||||||||
|
Other charges for continuing operations |
— | 14 | 62 | 79,083 | ||||||||
|
Total consolidated impairments and other charges |
$ | 9,684 | $ | 14 | $ | 9,746 | $ | 124,876 | ||||
During the three and nine months ended September 30, 2009, the Company recorded an impairment charge of $9.7 million related to its .name generic top-level domain (“gTLD”) intangible asset. See Note 5, “Goodwill and Other Intangible Assets” for further information.
During the nine months ended September 30, 2008, the Company recorded a goodwill impairment charge of $45.8 million in discontinued operations related to its divested Post-Pay business.
During the nine months ended September 30, 2008, the Company recorded a loss of $79.1 million in continuing operations as a result of the sale of certain Mountain View facilities. The sale of the Mountain View facilities was consummated as a result of the 2008 Restructuring Plan to divest or wind down the Company’s non-core businesses.
|
|||
Note 5. Goodwill and Other Intangible Assets
The following table summarizes the changes in the carrying amount of goodwill during the nine months ended September 30, 2009.
| (In thousands) | |||
|
Balance at December 31, 2008 |
$ | 283,109 | |
|
Reclassification from assets held for sale |
7,000 | ||
|
Other adjustments (1) |
105 | ||
|
Balance at September 30, 2009 |
$ | 290,214 | |
| (1) | Other adjustments consist of foreign exchange fluctuations. |
During the first quarter of 2009, the Company disaggregated its ESS disposal group held for sale, into the following three businesses: (i) GSC, (ii) iDefense, and (iii) MSS. The Company decided to retain its iDefense business and, accordingly, reclassified goodwill of $7.0 million allocated to iDefense as held and used in 2009.
The Company performs its annual impairment review of goodwill pertaining to its Naming Services, Authentication Services and VeriSign Japan reporting units, during the second quarter. During our 2009 annual impairment test, the Company determined that each of the reporting units had a fair value in excess of its carrying value and no further analysis was required.
Due to a strategic change in the planned use of our indefinite-lived .name gTLD intangible asset during the third quarter of 2009, the Company performed an impairment assessment. The Company considered both the market and the income approaches. Based on the income approach using market participant assumptions, which was determined to be the highest and best use of this asset, the Company has concluded that the fair value of the .name gTLD intangible asset has been reduced below its carrying value. The estimated fair value of the intangible asset related to the Company’s .name gTLD intangible asset was computed to be $2.0 million, and as a result the Company recorded an impairment charge of $9.7 million during the quarter ended September 30, 2009. The Company also determined that the intangible asset has a finite life for which amortization costs will be recorded over its estimated useful life on a straight-line basis.
During the second quarter of 2008, the Company recorded a goodwill impairment charge of $45.8 million in discontinued operations relating to its divested Post-Pay reporting unit.
All impairment charges are recorded to Restructuring, impairments and other charges within our condensed consolidated statements of operations.
|
|||
Note 6. Other Balance Sheet Items
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
| September 30, 2009 |
December 31, 2008 |
|||||
| (In thousands) | ||||||
|
Prepaid expenses |
$ | 25,068 | $ | 22,775 | ||
|
Deferred tax assets |
70,454 | 64,482 | ||||
|
Non-trade receivables |
15,165 | 13,054 | ||||
|
Receivables from buyers |
6,233 | 14,899 | ||||
|
Funds held by the Reserve |
32,445 | 150,346 | ||||
|
Other |
1,638 | 2,622 | ||||
|
Total prepaid expenses and other current assets |
$ | 151,003 | $ | 268,178 | ||
As of September 30, 2009, the Company had an aggregate of $32.4 million held by The Reserve’s Primary Fund (the “Primary Fund”) and The Reserve International Liquidity Fund, Ltd. (the “International Fund”), classified as Prepaid expenses and other current assets due to the lack of an active market for these investments. During the nine months ended September 30, 2009, the Company received distributions of $13.9 million and $104.0 million from the Primary Fund and the International Fund, respectively. During October 2009, the Company received a distribution of $2.4 million from the Primary Fund.
As of September 30, 2009, Receivables from buyers consists of receivables related to sale consideration of $2.5 million and receivables for payments made on behalf of buyers under transition services agreements of $3.7 million for certain divested businesses.
Property and Equipment, Net
The following table presents the detail of Property and equipment, net:
| September 30, 2009 |
December 31, 2008 |
|||||||
| (In thousands) | ||||||||
|
Land |
$ | 133,746 | $ | 133,746 | ||||
|
Buildings |
130,748 | 135,242 | ||||||
|
Computer equipment and software |
333,775 | 342,470 | ||||||
|
Capital work in progress |
16,937 | 16,595 | ||||||
|
Office equipment, furniture and fixtures |
15,005 | 15,491 | ||||||
|
Leasehold improvements |
53,296 | 52,690 | ||||||
|
Total cost |
683,507 | 696,234 | ||||||
|
Less: accumulated depreciation and amortization |
(311,094 | ) | (310,736 | ) | ||||
|
Total property and equipment, net |
$ | 372,413 | $ | 385,498 | ||||
Other Assets
Other assets consist of the following:
| September 30, 2009 |
December 31, 2008 |
|||||
| (In thousands) | ||||||
|
Long-term deferred tax assets |
$ | 4,990 | $ | 2,562 | ||
|
Long-term investments |
6,746 | 5,996 | ||||
|
Debt issuance costs |
12,545 | 13,233 | ||||
|
Long-term restricted cash |
1,895 | 1,858 | ||||
|
Security deposits and other |
11,221 | 14,469 | ||||
|
Total other assets |
$ | 37,397 | $ | 38,118 | ||
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
| September 30, 2009 |
December 31, 2008 |
|||||
| (In thousands) | ||||||
|
Accounts payable |
$ | 23,661 | $ | 30,690 | ||
|
Accrued employee compensation |
74,019 | 109,958 | ||||
|
Customer deposits, net |
22,314 | 30,432 | ||||
|
Taxes payable and other tax liabilities |
51,463 | 18,173 | ||||
|
Other accrued liabilities |
75,135 | 74,282 | ||||
|
Total accounts payable and accrued liabilities |
$ | 246,592 | $ | 263,535 | ||
Other Long-term Liabilities
Other long-term liabilities consist of the following:
| September 30, 2009 |
December 31, 2008 |
|||||
| (In thousands) | ||||||
|
Other long-term liabilities |
$ | 2,277 | $ | 161 | ||
|
Long-term tax liability |
13,831 | 15,549 | ||||
|
Deferred tax liability |
70,584 | 68,833 | ||||
|
Total other long-term liabilities |
$ | 86,692 | $ | 84,543 | ||
|
|||
Note 7. Stockholders’ Equity
Comprehensive Income (Loss)
Comprehensive income (loss) consists of Net income (loss) adjusted for unrealized gains and losses on marketable securities classified as available-for-sale and foreign currency translation adjustments. The following table presents the components of Comprehensive income (loss):
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Net income (loss) |
$ | 54,599 | $ | (200,275 | ) | $ | 155,886 | $ | (275,619 | ) | ||||||
|
Foreign currency translation adjustments |
5,820 | 284 | (9,039 | ) | 9,401 | |||||||||||
|
Change in unrealized (loss) gain on investments, net of tax |
(82 | ) | (91 | ) | 207 | (407 | ) | |||||||||
|
Comprehensive income (loss) |
60,337 | (200,082 | ) | 147,054 | (266,625 | ) | ||||||||||
|
Less: Comprehensive income attributable to noncontrolling interest in subsidiary |
3,645 | 1,225 | 1,621 | 6,383 | ||||||||||||
|
Comprehensive income (loss) attributable to VeriSign Inc. common stockholders |
$ | 56,692 | $ | (201,307 | ) | $ | 145,433 | $ | (273,008 | ) | ||||||
Repurchase of Common Stock
In 2006, the Board of Directors authorized a stock repurchase program (the “2006 Stock Repurchase Program”) with no expiration date to repurchase up to $1.0 billion of its common stock. In January 2008, the Board of Directors authorized additional repurchases of up to $600.0 million of the Company’s common stock to be conducted through an accelerated share repurchase agreement and the repurchase of $600.0 million of the Company’s common stock was completed in February 2008. In August 2008, the Board of Directors authorized the repurchase of up to an additional $680.0 million of the Company’s common stock with no expiration date in addition to the $320.0 million of the Company’s common stock available for repurchase under the 2006 Stock Repurchase Program (collectively, the “2008 Share Buyback Program”). During the three months ended September 30, 2009, VeriSign repurchased approximately 1.2 million shares of its common stock at an average stock price of $21.54 for an aggregate of $25.0 million under the 2008 Share Buyback Program. During the nine months ended September 30, 2009, VeriSign repurchased approximately 2.0 million shares of its common stock at an average stock price of $22.23 for an aggregate of $45.0 million under the 2008 Stock Buyback Program. As of September 30, 2009, approximately $905.0 million is available under the 2008 Share Buyback Program.
|
|||
Note 9. Junior Subordinated Convertible Debentures
In 2007, the Company issued $1.25 billion principal amount of 3.25% convertible debentures due August 15, 2037, to an initial purchaser in a private offering. The Convertible Debentures are subordinated in right of payment to the Company’s existing and future senior debt and to the other liabilities of the Company’s subsidiaries. The Convertible Debentures are initially convertible, subject to certain conditions, into shares of the Company’s common stock at a conversion rate of 29.0968 shares of common stock per $1,000 principal amount of Convertible Debentures, representing an initial effective conversion price of approximately $34.37 per share of common stock. The conversion rate will be subject to adjustment for certain events as outlined in the Indenture governing the Convertible Debentures but will not be adjusted for accrued interest. As of September 30, 2009, the if-converted value of the Convertible Debentures does not exceed its principal amount.
Effective January 1, 2009, the Company retroactively adopted FSP APB 14-1, codified in ASC 470-20, Debt with Conversion and Other Options. 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 calculated the carrying value of the liability component at issuance as the present value of its cash flows using a discount rate of 8.5% (borrowing rate for similar non-convertible debt with no contingent payment options), adjusted for the fair value of the contingent interest feature, yielding an effective interest rate of 8.39%. The carrying value of the liability component was determined to be $550.5 million. The excess of the principal amount of the debt over the carrying value of the liability component is also called “debt discount” or “equity component” of the Convertible Debentures. The equity component of the Convertible Debentures on the date of issuance was $700.7 million. The debt discount will be amortized using the Company’s effective interest rate of 8.39% over the term of the Convertible Debentures as a non-cash charge to interest expense included in Other loss, net. As of September 30, 2009, the remaining term of the Convertible Debentures is 27.9 years.
The table below presents the carrying amounts of the liability and equity components:
| September 30, 2009 |
December 31, 2008 |
|||||||
| (In thousands) | ||||||||
|
Carrying amount of equity component (net of issuance costs of $14,449) |
$ | 686,221 | $ | 686,221 | ||||
|
Principal amount of Convertible Debentures |
$ | 1,250,000 | $ | 1,250,000 | ||||
|
Unamortized discount of liability component |
(687,224 | ) | (691,837 | ) | ||||
|
Carrying amount of liability component |
562,776 | 558,163 | ||||||
|
Contingent interest derivative |
8,750 | 10,549 | ||||||
|
Convertible debentures, including contingent interest derivative |
$ | 571,526 | $ | 568,712 | ||||
The table below presents the interest expense for the contractual interest and the amortization of debt discount:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
|
Effective interest rate |
8.39 | % | 8.39 | % | 8.39 | % | 8.39 | % | ||||||||
|
Interest expense—contractual interest |
$ | 10,156 | $ | 10,156 | $ | 30,469 | $ | 30,469 | ||||||||
|
Interest expense—amortization of discount on the liability component |
$ | 1,576 | $ | 1,452 | $ | 4,632 | $ | 4,250 | ||||||||
The embedded features related to the contingent interest payments, over-allotment option, and the Company making specific types of distributions (e.g., extraordinary dividends) qualify as derivatives to be accounted for separately. The fair value of the derivatives at the date of issuance of the Convertible Debentures was $11.4 million including $7.8 million for the contingent interest payment features and $3.6 million for the over-allotment option feature, which is accounted for as a discount on the Convertible Debentures. The over-allotment feature was revalued at $12.6 million on the date of exercise at August 28, 2007, which is currently accounted for as a premium on the Convertible Debentures. The debt discount and the debt premium are being accreted to the face value of the Convertible Debentures as net interest expense over 30 years. The balances of the debt discount and debt premium are included in the carrying amount of the liability component.
|
|||
Note 10. Segment Information
Description of segments
The Company has the following two reportable segments: (1) 3IS and (2) Other Services.
The 3IS segment consists of Naming Services and Authentication Services. Naming Services is the authoritative directory provider of all .com, .net, .cc, .tv, .name and .jobs domain names. Authentication Services is comprised of Business Authentication Services, formerly known as Secure Socket Layer (“SSL”) Certificate Services; and User Authentication Services, formerly known as Identity and Authentication Services. Business Authentication Services enable enterprises and Internet merchants to implement and operate secure networks and websites that utilize SSL protocol. Business Authentication 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. User Authentication Services include identity protection services, fraud detection services, managed public key infrastructure (“PKI”) services, and unified authentication services. User Authentication Services are intended to help enterprises secure intranets, extranets and other applications and devices, and provide authentication credentials.
The Other Services segment consists of the continuing operations of the Company’s non-core business and legacy products and services from divested businesses. The Company is in the process of winding down the operations of its Pre-Pay Services business.
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 tables present the results of VeriSign’s reportable segments:
| Three months ended September 30, 2009 |
Three months ended September 30, 2008 |
|||||||||||||||||
| 3IS | Other Services |
Total Segments |
3IS | Other Services |
Total Segments |
|||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||
|
Revenues: |
||||||||||||||||||
|
Naming Services |
$ | 155,480 | $ | — | $ | 155,480 | $ | 141,838 | $ | — | $ | 141,838 | ||||||
|
Authentication Services |
101,428 | — | 101,428 | 99,484 | — | 99,484 | ||||||||||||
|
Other Services |
— | 1,087 | 1,087 | — | 4,612 | 4,612 | ||||||||||||
|
Total revenues |
256,908 | 1,087 | 257,995 | 241,322 | 4,612 | 245,934 | ||||||||||||
|
Cost of revenues |
47,574 | 515 | 48,089 | 41,415 | 2,098 | 43,513 | ||||||||||||
| $ | 209,334 | $ | 572 | $ | 209,906 | $ | 199,907 | $ | 2,514 | $ | 202,421 | |||||||
| Nine months ended September 30, 2009 |
Nine months ended September 30, 2008 |
|||||||||||||||||
| 3IS | Other Services |
Total Segments |
3IS | Other Services |
Total Segments |
|||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||
|
Revenues: |
||||||||||||||||||
|
Naming Services |
$ | 457,206 | $ | — | $ | 457,206 | $ | 403,034 | $ | — | $ | 403,034 | ||||||
|
Authentication Services |
307,162 | — | 307,162 | 296,582 | — | 296,582 | ||||||||||||
|
Other Services |
— | 5,241 | 5,241 | — | 23,616 | 23,616 | ||||||||||||
|
Total revenues |
764,368 | 5,241 | 769,609 | 699,616 | 23,616 | 723,232 | ||||||||||||
|
Cost of revenues |
140,933 | 2,753 | 143,686 | 119,033 | 9,294 | 128,327 | ||||||||||||
| $ | 623,435 | $ | 2,488 | $ | 625,923 | $ | 580,583 | $ | 14,322 | $ | 594,905 | |||||||
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 September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Total revenues from reportable segments |
$ | 257,995 | $ | 245,934 | $ | 769,609 | $ | 723,232 | ||||||||
|
Total cost of revenues from reportable segments |
48,089 | 43,513 | 143,686 | 128,327 | ||||||||||||
|
Unallocated operating expenses (1) |
134,776 | 135,248 | 391,939 | 516,188 | ||||||||||||
|
Operating income |
75,130 | 67,173 | 233,984 | 78,717 | ||||||||||||
|
Other loss, net |
(8,669 | ) | (13,450 | ) | (23,228 | ) | (22,308 | ) | ||||||||
|
Income from continuing operations before income taxes and loss from unconsolidated entities |
$ | 66,461 | $ | 53,723 | $ | 210,756 | $ | 56,409 | ||||||||
| (1) | Unallocated operating expenses include unallocated cost of revenues, sales and marketing, research and development, general and administrative, restructuring, impairments and other charges, and amortization of other intangible assets. |
Geographic Information
The Company operates in the U.S.; Australia, Japan and other Asia Pacific countries (“APAC”); Europe, the Middle East and Africa (“EMEA”); and certain other countries. The following table presents a comparison of the Company’s geographic revenues:
| Three
Months Ended September 30, |
Nine
Months Ended September 30, |
|||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||
| (In thousands) | ||||||||||||
|
U.S. |
$ | 147,485 | $ | 146,732 | $ | 448,721 | $ | 427,122 | ||||
|
APAC |
49,001 | 44,180 | 142,969 | 132,828 | ||||||||
|
EMEA |
42,563 | 38,970 | 124,468 | 116,560 | ||||||||
|
Other |
18,946 | 16,052 | 53,451 | 46,722 | ||||||||
|
Total revenues |
$ | 257,995 | $ | 245,934 | $ | 769,609 | $ | 723,232 | ||||
Revenues are generally attributed to the country of domicile and the respective regions in which the Company’s customers are located.
The following table presents a comparison of property and equipment, net, by geographic region:
| September 30, 2009 |
December 31, 2008 |
|||||
| (In thousands) | ||||||
|
U.S. |
$ | 347,769 | $ | 357,607 | ||
|
APAC |
15,301 | 19,176 | ||||
|
EMEA |
9,300 | 8,686 | ||||
|
Other |
43 | 29 | ||||
|
Total property and equipment, net |
$ | 372,413 | $ | 385,498 | ||
Assets are not tracked by segment and the CODM does not evaluate segment performance based on asset utilization. The Company’s goodwill balance is allocated entirely to its 3IS reportable segment.
Major Customers
One customer accounted for 16% and 15% of the Company’s revenues from continuing operations during the three and nine months ended September 30, 2009, respectively. One customer accounted for 14% and 13% of the Company’s revenues from continuing operations for the three and nine months ended September 30, 2008. No customer accounted for 10% or more of accounts receivable at September 30, 2009, and December 31, 2008.
|
|||
Note 11. Other Loss, Net
The following table presents the components of Other loss, net:
| Three
Months Ended September 30, |
Nine
Months Ended September 30, |
|||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Interest income |
$ | 791 | $ | 3,981 | $ | 3,359 | $ | 15,004 | ||||||||
|
Interest expense |
(11,867 | ) | (11,045 | ) | (35,477 | ) | (32,790 | ) | ||||||||
|
Net gain (loss) on sale and impairment of investments |
5 | (6,829 | ) | (41 | ) | (6,571 | ) | |||||||||
|
Net gain on divestiture of businesses |
— | — | 909 | 1,564 | ||||||||||||
|
Unrealized gain (loss) on contingent interest derivative on convertible debentures |
750 | (420 | ) | 1,799 | 1,664 | |||||||||||
|
Income from transition services agreements |
1,230 | 1,224 | 3,069 | 2,590 | ||||||||||||
|
Other, net |
422 | (361 | ) | 3,154 | (3,769 | ) | ||||||||||
|
Total other loss, net |
$ | (8,669 | ) | $ | (13,450 | ) | $ | (23,228 | ) | $ | (22,308 | ) | ||||
Interest income is earned principally from the investment of VeriSign’s surplus cash balances. Interest expense is derived principally from interest on VeriSign’s Convertible Debentures. During the nine months ended September 30, 2009, Other, net, primarily consists of $3.3 million received from Certicom Corporation (“Certicom”) due to the termination of the acquisition agreement entered into with Certicom during the three months ended March 31, 2009. During the nine months ended September 30, 2008, Other, net, primarily consists of net foreign exchange rate losses. During the three months ended September 30, 2009 and 2008, Other, net, primarily consists of net foreign exchange rate gains and losses, respectively.
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Note 12. Income Taxes
During the three and nine months ended September 30, 2009, the Company recorded income tax expense for continuing operations of $18.1 million and $71.2 million, respectively. During the three and nine months ended September 30, 2008, the Company recorded income tax expense for continuing operations of $8.9 million and $7.5 million, respectively. On February 20, 2009, the State of California enacted changes in tax laws that are expected to have a beneficial impact on the Company’s effective tax rate beginning in 2011. As a result, the Company revalued certain state deferred tax assets and liabilities that are expected to reverse after the effective date of the change, and recognized a discrete income tax benefit adjustment of $4.1 million during the nine months ended September 30, 2009.
The Company applies a valuation allowance to certain deferred tax assets when management does not believe that it is more likely than not that they will be realized. These deferred tax assets consist primarily of investments with differing book and tax bases and net operating losses related to certain foreign operations.
As of September 30, 2009, and December 31, 2008, the Company had gross unrecognized tax benefits for income taxes associated with uncertain tax positions of $28.2 million and $31.9 million, respectively. During the three and nine months ended September 30, 2009, the Company recorded a reduction in unrecognized tax benefits of $5.3 million and $3.7 million, respectively. Of the decrease of $5.3 million for the three months ended September 30, 2009, $3.0 million was related to lapses in the applicable statute of limitations, $2.0 million was related to tax positions taken during a prior period, and $0.3 million was related to current period activities. Of the decrease of $3.7 million for the nine months ended September 30, 2009, $3.0 million was related to lapses in the applicable statute of limitations, $2.0 million was related to tax positions taken during a prior period, and an increase of $1.3 million was related to tax positions taken during the current year. As of September 30, 2009 and December 31, 2008, $28.8 million and $31.7 million, respectively, of unrecognized tax benefits, including penalties and interest, would affect the Company’s effective tax rate if realized.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of Income tax expense. During the three and nine months ended September 30, 2009, the Company expensed $0.1 million and $0.7 million, respectively, for interest and penalties related to income tax liabilities through Income tax expense. During the three and nine months ended September 30, 2008, the Company expensed $0.4 million and $1.3 million, respectively, for interest and penalties related to income tax liabilities through Income tax expense.
The Company’s major taxing jurisdictions are the Internal Revenue Service, the California Franchise Tax Board, the Japan National Tax Agency and the State of Virginia Department of Revenue. The Company is not currently under examination by the Internal Revenue Service or the Virginia Department of Revenue. The Company is currently under examination by the California Franchise Tax Board for the years ended December 31, 2004 and December 31, 2005. Because the Company uses historic net operating loss carryforwards and other tax attributes to offset its taxable income in current and future years’ income tax returns for U.S. Federal, California and Virginia, such attributes can be adjusted by these taxing authorities until the statute closes on the year in which such attribute was utilized. The Company is not currently under examination by the Japan National Tax Agency. The years which remain subject to examination by the Japan National Tax Agency are those ended on December 31, 2007 and December 31, 2008. The balance of the gross unrecognized tax benefits is not expected to materially change in the next 12 months.
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Note 13. Fair Value of Financial Instruments
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2009:
| Total Fair Value as of September 30, 2009 |
Fair Value Measurement Using | |||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
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| (In thousands) | ||||||||||||
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Assets: |
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Investments in money market funds and time deposits |
$ | 1,342,689 | $ | 1,342,689 | $ | — | $ | — | ||||
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Equity investments |
338 | 338 | — | — | ||||||||
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Foreign currency forward contracts |
19 | — | 19 | — | ||||||||
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Total |
$ | 1,343,046 | $ | 1,343,027 | $ | 19 | $ | — | ||||
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Liabilities: |
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Contingent interest derivative on Convertible Debentures |
8,750 | $ | — | $ | — | 8,750 | ||||||
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Total |
$ | 8,750 | $ | — | $ | — | $ | 8,750 | ||||
The fair value of the Company’s investments in certain money market funds and time deposits approximates their face value. Such instruments are classified as Level 1 and 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. The Company recorded unrealized gains and losses related to changes in the fair value of its foreign currency forward contracts in Other loss, net. The Company recorded an unrealized gain of $0.5 million and an unrealized loss of $0.3 million during the three months ended September 30, 2009 and 2008, respectively, related to changes in the fair value of its foreign currency forward contracts. The Company recorded an unrealized gain of $1.2 million and an unrealized loss of $1.7 million during the nine months ended September 30, 2009 and 2008, respectively, 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 Prepaid expenses and other current assets.
The Company’s 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, 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.
The following table summarizes the change in the fair value of the Company’s Level 3 contingent interest derivative on Convertible Debentures during the nine months ended September 30, 2009 (in thousands):
|
Fair value at December 31, 2008 |
$ | 10,549 | ||
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Unrealized gain on contingent interest derivative on Convertible Debentures (1) |
(1,799 | ) | ||
|
Fair value at September 30, 2009 |
$ | 8,750 | ||
| (1) | Included in Other loss, net. |
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
The Company measures its disposal groups held for sale at the lower of their carrying amount or fair value less cost to sell. The following table summarizes the Company’s net assets of those disposal groups held for sale which are measured at fair value as of September 30, 2009:
| Fair Value Measurement Using Significant Unobservable Inputs (Level 3) |
Total gain for the three months ended September 30, 2009 |
Total gain for the nine months ended September 30, 2009 |
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| (In thousands) | |||||||||||
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Net assets of disposal groups held for sale |
$ | 198,576 | $ | 21,629 | (1) | $ | 33,293 | (1) | |||
| (1) | Included in income (loss) from discontinued operations, net of tax. |
The Company has classified the net assets of its disposal groups held for sale as Level 3 due to the lack of observable inputs to determine the fair values of such net assets. The fair value of net assets of disposal groups held for sale is determined considering active bids from potential buyers.
During the three months ended September 30, 2009, net assets of the disposal groups held for sale which are measured at fair value as of September 30, 2009, with a carrying amount of $177.0 million, were written up to their fair value of $198.6 million less costs to sell of $2.2 million (or $196.4 million), resulting in a net reversal of estimated losses previously reported of $21.6 million.
During the nine months ended September 30, 2009, the Company recorded a net gain of $33.3 million related to net reversals of estimated losses on the disposal groups which are measured at fair value as of September 30, 2009.
Other
The fair value of other financial instruments including accounts receivable, restricted cash and investments, and accounts payable, approximates their carrying amount, which is the amount for which the instrument could be exchanged in a current transaction between willing parties. The fair value of the Company’s Convertible Debentures at September 30, 2009, is $1.1 billion, and is based on quoted market prices.
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Note 14. Contingencies
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 U.S. 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 U.S. Court of Appeals for the Federal Circuit docketed the appeal. On October 20, 2008, the appellate court issued a decision that affirmed in part and reversed in part the summary judgment order and remanded the case for further proceedings in the trial court. VeriSign and NetMoney entered into a settlement agreement in July 2009. The case against VeriSign has been dismissed.
On July 6, 2006, a stockholder derivative complaint (Parnes v. Bidzos, et al., and VeriSign) was filed against VeriSign in the U.S. District Court for the Northern District of California, 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 the U.S. District Court for the Northern District of California (Port Authority v. Bidzos, et al., and VeriSign), and one in the Superior Court of the State of California, Santa Clara County (Port Authority v. Bidzos, et al., and VeriSign) on August 14, 2006. The state court derivative action is stayed pending resolution of the federal actions. The current directors and officers named in this state action are D. James Bidzos, William L. Chenevich, Roger H. Moore and Louis A. Simpson. 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. The current directors and officers named in this consolidated federal action are D. James Bidzos, William L. Chenevich, Roger H. Moore, Louis A. Simpson and Timothy Tomlinson. 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 in the federal action wherein the Company was again named as 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 the Company’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 the Company 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 the Superior Court for the State of California, Santa Clara County 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. The current directors and officers named in this consolidated class action are D. James Bidzos, William L. Chenevich, Roger H. Moore, Louis A. Simpson and Timothy Tomlinson. VeriSign and the individual defendants dispute all of these claims. Defendants’ collective pleading challenges to the putative consolidated class action complaint were granted with leave to amend in August 2008. By stipulation and Court order, plaintiff’s obligation to file an amended consolidated class action complaint has been continued pending informal efforts by the parties to resolve the action.
On November 7, 2006, a judgment was entered against VeriSign by a trial court in Terni, Italy, in the matter of Penco v. VeriSign, Inc. in the amount of 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 or about April 2, 2009, plaintiff filed an appeal in the Supreme Court of Cassation, Rome, Italy. VeriSign filed a Writ of Reply on May 5, 2009. While the Company cannot predict the outcome of these proceedings, it believes the allegations against it are without merit.
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, 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 U.S. 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, 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.” The Bentley matter is currently stayed. A motion to dismiss the ruling in Herbert is on appeal in the U.S. Court of Appeals for the Ninth Circuit. 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 September 12, 2008, Leon Stambler filed a declaratory judgment complaint against VeriSign in the U.S. District Court for the Eastern District of Texas. The complaint seeks an order permitting Stambler to proceed with patent infringement actions against VeriSign SSL certificate customers in actions in which VeriSign is not a party in view of Stambler’s prior unsuccessful action in 2003 against VeriSign on the same patents in which a verdict was returned against Stambler and a judgment was entered thereon. VeriSign has received requests to indemnify certain SSL certificate customers in the patent infringement actions brought by Stambler. VeriSign and Stambler entered into a confidential settlement agreement on June 1, 2009. Certain indemnity requests from customers are still pending. The declaratory judgment complaint against VeriSign was dismissed on June 8, 2009.
On June 5, 2009, the U.S. Court of Appeals for the Ninth Circuit reversed and remanded a district court order dismissing a second amended complaint filed by plaintiff Coalition for ICANN Transparency, Inc. (“CFIT”). CFIT filed its initial complaint and an application for a temporary restraining order against VeriSign and Internet Corporation for Assigned Names and Numbers (“ICANN”) in the U.S. District Court for the Northern District of California on November 28, 2005, asserting claims under Sections 1 and 2 of the Sherman Antitrust Act (the “Sherman Act”), the Cartwright Act, and Cal. Bus. & Prof. Code § 17200. The district court denied CFIT’s application for a temporary restraining order on November 30, 2005. Shortly after the action was initiated and CFIT’s application was denied, the district court granted defendants’ Motion for Judgment on the Pleadings on February 28, 2006, with leave to amend. CFIT filed a First Amended Complaint on March 14, 2006. The Court granted defendants’ Motion to Dismiss the First Amended Complaint, with leave to amend, on December 8, 2006. CFIT filed a Second Amended Complaint on December 28, 2006; ICANN was not included as a defendant in the Second Amended Complaint. The Second Amended Complaint, which VeriSign has not yet answered, asserted claims, among others, under Sections 1 and 2 of the Sherman Act against VeriSign, challenging in part VeriSign’s conduct in entering into, and the pricing, renewal and certain other terms of, the .com and .net registry agreements with ICANN. The same renewal and pricing terms in the .com registry agreement are incorporated by reference in the Cooperative Agreement between VeriSign and the U.S. Department of Commerce, which approved the .com Registry Agreement as in the public interest. The Court granted VeriSign’s Motion to Dismiss the Second Amended Complaint on May 14, 2007, without leave to amend, and entered judgment for VeriSign. CFIT filed a Notice of Appeal to the U.S. Court of Appeals for the Ninth Circuit on June 13, 2007. After briefing, the appeal was argued on December 8, 2008. The Ninth Circuit filed its Opinion reversing and remanding the dismissal of the Second Amended Complaint on June 5, 2009. VeriSign filed a motion for rehearing in the Ninth Circuit on July 2, 2009. While the Company cannot predict the outcome of these proceedings, it believes the allegations against it are without merit and intends to vigorously defend against them.
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.
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Note 15. Subsequent Events
On October 1, 2009, the Company sold its GSC business for cash consideration of $4.9M subject to certain adjustments related to employees’ compensation.
On October 23, 2009, the Company sold its MMM Services business, for cash consideration of $174.5 million after preliminary adjustments to reflect the parties’ estimate of working capital. The divestiture transaction will be subject to a final adjustment to reflect the actual working capital balance as of the closing date.
During October 2009, the Company received a distribution of $2.4 million from the Primary Fund.
During October 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 wind-down to be completed no later than the end of 2010.
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