01—Abstract
Summary
Summary of the 10-K filed July 12, 2007. Cited figures are marked; the original filing is the authoritative source.
VeriSign, Inc. (filing as VeriSign; now trading as VRSN on NASDAQ Global Select Market) filed this Form 10-K for fiscal 2006 on July 12, 2007, a delayed filing that restates the balance sheet as of December 31, 2005 and the statements of income, stockholders' equity, comprehensive income and cash flows for 2005 and 2004, following an independent review of historical stock option grant practices.
The company recorded $171.4 milliona in pre-tax stock-based compensation expense related to past grants, and the filing discloses a material weakness in internal control over financial reporting, with management concluding that disclosure controls were not effective as of December 31, 2006. KPMG issued an adverse opinion on internal control effectiveness while giving an unqualified opinion on the financial statements. Reported 2006 results from continuing operations show revenues of $1.575 billion (down from $1.613 billion restated for 2005), net income of $379.0 million, which includes a $349.8 million income tax benefit from releasing a $236.4 million valuation allowance and a $113.4 million favorable IRS ruling.
Total assets were $3.97 billionb and stockholders' equity was $2.38 billion at year-end 2006. Cash, cash equivalents and short-term investments totaled $699.8 million, against $199.0 million borrowed under a $500 million credit facility that the company was not in compliance with on reporting covenants as of the filing date (waived through July 13, 2007). Leadership and legal matters dominated the period.
CEO Stratton Sclavos resigned May 27, 2007 and William A. Roper, Jr. became President and CEO; CFO Dana Evan resigned July 10, 2007 and Albert E. Clement was appointed CFO.
The company disclosed a federal grand jury subpoena and a formal SEC investigation order related to option grants, a $80 millionc insurer-funded securities litigation settlement, and numerous pending class actions tied to Jamba content services. In 2007 the company also formed a joint venture with Fox Entertainment that gives Fox a 51% interest in the Jamba business.
02—Key points
Key Highlights
- Restatement: balance sheet as of December 31, 2005 and income statements for 2005 and 2004 restated after an independent review of stock option grants from January 1998 to May 2006; $171.4 million pre-tax stock-based compensation expense recognized for 8,164 grants with incorrect measurement dates.
- Material weakness in internal control over financial reporting as of December 31, 2006; disclosure controls and procedures concluded not effective; KPMG issued an adverse opinion on internal control effectiveness.
- 2006 revenues of $1,575.2 million versus $1,612.6 million (restated) in 2005; Internet Services Group revenues rose to $758.8 million while Communications Services Group revenues fell to $816.5 million.
- Net income of $379.0 million in 2006, aided by a $349.8 million tax benefit from releasing a $236.4 million valuation allowance and a $113.4 million IRS-related benefit.
- Cash, cash equivalents and short-term investments of $699.8 million at December 31, 2006; $199.0 million drawn on a $500 million revolver, repaid February 28, 2007.
- Leadership turnover: CEO Sclavos resigned May 27, 2007 (William Roper appointed); CFO Dana Evan resigned July 10, 2007 (Albert Clement appointed).
- Jamba joint ventures with Fox Entertainment finalized January 31, 2007, with VeriSign holding a 49% interest; the company also recorded $26.9 million in restructuring charges in Q1 2007.
03—Questions
Frequently Asked Questions
Why was the 10-K filed late and what was restated?
The filing restates the December 31, 2005 balance sheet and 2005 and 2004 income statements, cash flows and equity, along with 2005 quarterly data and the March 31, 2006 interim period. The restatement followed an independent review of stock option grant measurement dates from 1998 to 2006 conducted under an ad hoc group of independent directors, which identified 8,164 grants with incorrectly determined measurement dates. The filing states that previously filed 10-Ks and 10-Qs affected by the restatement should no longer be relied upon.
What is the status of the SEC and criminal investigations?
The company received a grand jury subpoena from the U.S. Attorney for the Northern District of California on June 26, 2006 and an informal SEC request, followed by a formal SEC order of investigation on February 9, 2007. The company states it is fully cooperating with both investigations. The filing does not predict their outcome.
How strong is the company's liquidity and debt position?
At December 31, 2006, cash, cash equivalents and short-term investments totaled $699.8 million, and working capital from continuing operations was negative $19.9 million. The company had $199.0 million outstanding under its $500 million senior unsecured revolving facility, which it repaid on February 28, 2007. The filing states it was not in compliance with certain reporting covenants under the credit agreement as of the filing date, with lenders waiving compliance through July 13, 2007.
Did 2006 earnings reflect core operating performance?
Not solely. Income from continuing operations before taxes was $136.7 million, but the company recorded an income tax benefit of $241.3 million, which included the $236.4 million valuation allowance release and the $113.4 million IRS-related benefit. Operating income from continuing operations was $95.8 million, down from $216.7 million in 2005 restated.
What are the key risks highlighted for investors?
The filing highlights pending securities and derivative litigation, the SEC and grand jury investigations, the material weakness in internal controls, dependence on the .com and .net registry agreements with ICANN and the Department of Commerce, competitive pricing pressure in communications services, and ongoing consumer and royalty litigation related to the Jamba content business.
04—Continue