Consolidated Pro Forma Financials Internet Multicasting Service Internet Software Consortium June 17, 2002 Consolidated Pro Forma Financials Table of Contents 1. Currency and Number Formats . . . . . . . . . . . . . . . . . 2 2. Analysis of Revenue Model and Registry Growth . . . . . . . . 3 2.1 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.2 Revenue Model Assumptions . . . . . . . . . . . . . . . . . . 3 2.3 Projected Registry Size . . . . . . . . . . . . . . . . . . . 4 2.4 Projected Revenue Stream . . . . . . . . . . . . . . . . . . . 4 3. Consolidated 5-Year Pro Forma Analysis of Cash Flow and Debt . 5 3.1 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.2 Pro Forma Net Income After Operations Costs at E745 Name 5 3.3 Debt, Capital Expense, and Public Works at E745 and Debt Financing . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.4 Debt, Capital Expense, and Public Works at E682.55 . . . 7 3.5 Analysis of Working Capital and Additional Expenses . . . . . 7 3.6 Working Capital and Reserves at E745 and Debt Financing . 8 3.7 Working Capital and Reserves at E682.55 . . . . . . . . . 8 4. Certification and Purpose . . . . . . . . . . . . . . . . . . 10 Authors' Addresses . . . . . . . . . . . . . . . . . . . . . . 11 A. Document Formats . . . . . . . . . . . . . . . . . . . . . . . 12 Internet Multicasting Service & Internet Software Consortium [Page 1] Consolidated Financials June 2002 1. Currency and Number Formats This document has all budget items and registry sizes in the format of thousands of units. For example, 1,100,000 is listed as 1,100 in the tables. This document uses E(Japanese Yen) as the unit of currency. This document is also available in the following currency formats: o € (European Euro) [1] o US$ (US Dollars) [2] Internet Multicasting Service & Internet Software Consortium [Page 2] Consolidated Financials June 2002 2. Analysis of Revenue Model and Registry Growth 2.1 Methodology We present here a highly conservative pro forma analysis of registry growth, revenue, expense, debt, and reserves. Our conservative assumptions are reflected in low renewal rates, a declining price forced by market conditions, and a decreasing rate of new registrants. The underlying revenue model contains data obtained from VeriSign via ICANN under NDA, so we are not publishing the full model, only aggregate information that can be derived from public sources. However, the full model is available to ICANN staff upon request. [3] Our financial analysis is based on two financing scenarios, one in which debt financing is used to cover initial startup costs, and a second scenario in which the debt financing is supplemented by a portion of the VeriSign endowment: o If we qualify for the VeriSign Endowment, our analysis is based on an initial price of E682.55 for add, transfer, and renew operations. In this scenario, initial expenses are covered through our E310.25 million line of credit, of which we anticipate using E186.15 million at peak. The outstanding debt is paid in early 2003, reducing interest costs and freeing capital for financing of core operations and Internet Public Works Programs as described in the proposal. o If we do not qualify for the VeriSign Endowment, our initial price is set at E744.60 to cover the increased costs of debt financing. In either case, we believe that we will only use 60% of our available credit, leaving a substantial cushion in case revenue or expenses differ from projections. 2.2 Revenue Model Assumptions Parameter Assumption ========= ========== Assumption for Percentage Renewals 24.00% New Registrations As % of Installed Base 1.92% Average Renewal Period in Years 1.5 Internet Multicasting Service & Internet Software Consortium [Page 3] Consolidated Financials June 2002 2.3 Projected Registry Size 2003 2004 2005 2006 2007 ======= ======= ====== ======= ======= New Registrants 443 427 470 690 793 Renewals 307 290 135 139 150 Total Registrations 750 717 606 829 944 Size at EOY 1,787 2,004 2,473 3,132 3,911 % Change in Registry -20.85% 12.14% 23.41% 26.63% 24.88% Size of Registry at Beginning of Period 2,258 Size of Registry at End of Period 3,911 Change in Registry in 5-year Period +1,653,289 2.4 Projected Revenue Stream Beginning Registry Price E682.55 Annual Decline in Price -10.00% Cumulative Revenue E3,130,919 2003 2004 2005 2006 2007 ======= ======= ====== ======= ======= Price at EOY E649.04 E585.75 E528.67 E476.54 E430.63 Gross Revenue E753,535 E647,554 E539,090 E565,772 E624,844 Based on an initial price point of E745 per name, gross revenue changes as follows: Beginning Registry Price E744.60 Annual Decline in Price -10.00% Cumulative Revenue E3,415,604 2003 2004 2005 2006 2007 ======= ======= ====== ======= ======= Price at EOY E707.37 E637.87 E575.82 E519.98 E469.10 Gross Revenue E822,038 E706,377 E588,110 E617,273 E681,557 Internet Multicasting Service & Internet Software Consortium [Page 4] Consolidated Financials June 2002 3. Consolidated 5-Year Pro Forma Analysis of Cash Flow and Debt 3.1 Methodology Our assessment of expenses is based on the deliverables detailed in the .org Proposal, analysis of past sending, and firm price quotes on key items such as capital expenditures. Our funding priorities are to first cover the operation of the core registry function. The pro forma net income after cost of operations presented in the next section is based on a staff of 19.75 FTE. Pro forma net income after cost of operations is modeled under two scenarios, one with the VeriSign endowment, the other without use of the endowment. Note that costs are identical in both scenarios. 3.2 Pro Forma Net Income After Operations Costs at E745 Name 2002 2003 2004 2005 2006 2007 ======= ========= ========= ========= ========= ========= Gross Revenue E822,038 E706,377 E588,110 E617,273 E681,557 COGS[1] -E8,191 -E6,950 -E5,833 -E6,081 -E6,701 Net Revenue E813,724 E699,304 E582,153 E611,068 E674,732 ---------------------------------------------------------------------------- Bid Prep.[2] E10,424 Payroll[3] E114,544 E241,871 E253,909 E275,254 E289,029 E317,820 Contract[4] E13,899 E24,572 E24,572 E33,507 E36,113 E37,602 Prof Srvs[5] E5,212 E12,658 E12,906 E13,155 E13,403 E13,775 Operations[6] E15,513 E61,181 E70,613 E73,840 E77,438 E81,286 Total E159,717 E340,282 E362,124 E395,879 E416,107 E450,607 ---------------------------------------------------------------------------- Net Income After Operations -E159,717 E473,442 E337,180 E186,274 E194,961 E224,125 Average Net Income as a Percent of Gross Revenue: 37% Notes "[1]" Cost of Goods Sold (COGS) is a 1% average cost for merchant processing fees, bank charges, and other costs directly related to revenue. "[2]" Bid Preparation includes the ICANN examination fee, travel, and outside legal fees. This category also includes negotiation of the registry agreement. "[3]" Payroll is based on 19.75 Full Time Equivalents (FTE). "[4]" Contractors includes fees for security, database throughput, routing, and other outside leading experts to provide quarterly Internet Multicasting Service & Internet Software Consortium [Page 5] Consolidated Financials June 2002 reviews. "[5]" Professional Services includes legal, insurance, accounting, and other professional services and includes provisions for yearly audits of financial statements and operations. "[6]" Cost of Operations includes co-location fees, transit costs, hardware and software support fees, travel, and rent, and other costs needed to provide the core registry function, the software deliverables listed in the proposal, the advanced development function, and front- and back-office functions. 3.3 Debt, Capital Expense, and Public Works at E745 and Debt Financing 2002 2003 2004 2005 2006 2007 ======= ========= ========= ========= ========= ========= Net Income After Operations -E159,717 E473,442 E337,180 E186,274 E194,961 E224,125 ---------------------------------------------------------------------------- Capital Expense[7] E85,877 E39,712 E20,477 E6,205 E24,820 E0 Interest E5,957 E15,264 E0 E0 E0 E0 Debt Repayment E0 E186,150 E0 E0 E0 E0 Total Debt and Capital Expense E91,958 E241,126 E20,477 E6,205 E24,820 E0 ---------------------------------------------------------------------------- Net Cash Flow After Capital and Debt -E251,675 E232,191 E316,703 E180,069 E170,141 E224,125 Notes "[7] Capital Expense" includes 3 large towers during pre-launch and launch periods. Additional line items are provided for development machines, and supplemental towers in additional exchange points in years 2-5 of the contract. Internet Multicasting Service & Internet Software Consortium [Page 6] Consolidated Financials June 2002 3.4 Debt, Capital Expense, and Public Works at E682.55 2002 2003 2004 2005 2006 2007 ======= ========= ========= ========= ========= ========= Net Income After Operations -E159,717 E405,559 E278,853 E137,751 E143,956 E167,907 ---------------------------------------------------------------------------- Capital Expense[7] E85,877 E39,712 E20,477 E6,205 E24,820 E0 Interest E5,957 E5,585 E0 E0 E0 E0 Debt Repayment E0 E186,150 E0 E0 E0 E0 Total Debt and Capital Expense E91,958 E231,447 E20,477 E6,205 E24,820 E0 ---------------------------------------------------------------------------- Net Cash Flow After Capital and Debt -E251,675 E174,112 E258,376 E131,546 E119,136 E167,907 3.5 Analysis of Working Capital and Additional Expenses Once capital costs, debt, and the core operation of the registry are covered, we staff recommendations to the board of directors are considered for programs that meet our mission of running the .org TLD as a public trust and meets our core goals: 1. Providing service and differentiation to the .org registrants. 2. Providing public infrastructure that will promote the stable functioning of .org registry and other registries and will promote better service and more competition. Our goal for management of financial resources is to insure that a minimum of E62,050in working capital is available in addition to our E310.25 million line of credit. This insures that we are able to meet any unforeseen contingencies and still maintain the stable operation of the .org registry. Once these requirements are met, we attempt to use the remainder of the funds to meet those core goals. Three initial program proposals have been prepared by staff and the board has agreed that these are examples of the kinds of programs it would like to see developed and pursued. Final decisions on funding will occur once funds are available. The three initial programs are: 1. Provision of 8% of gross revenues to fund the IETF and IAB. 2. Funding of the development of BIND 9 with special emphasis on Internet Multicasting Service & Internet Software Consortium [Page 7] Consolidated Financials June 2002 secure DNS with an aim of providing a secure DNS function for the .org TLD. 3. Funding of the development of the ANANA protocols for automated namespace management and the development of identity management techniques for .org registrants. 3.6 Working Capital and Reserves at E745 and Debt Financing 2002 2003 2004 2005 2006 2007 ======= ========= ========= ========= ========= ========= Net Cash Flow After Capital and Debt w/out Endowment -E251,675 E232,191 E316,703 E180,069 E170,141 E224,125 ---------------------------------------------------------------------------- Internet Public Works Programs E0 E109,580 E110,945 E46,538 E48,771 E53,984 ---------------------------------------------------------------------------- Net Cash Flow After Public Works -E251,675 E122,487 E205,634 E133,532 E121,246 E170,141 ---------------------------------------------------------------------------- Debt at End of Year E186,150 E0 E0 E0 E0 E0 ---------------------------------------------------------------------------- Working Capital at End of Year E4,468 E127,078 E109,332 E81,658 E78,804 E44,180 Unallocated Reserves E0 E62,050 E279,225 E384,710 E508,810 E713,575 Cumulative Funding for IETF/IAB: E270,414 Cumulative Funding for BIND 9: E87,863 Cumulative Funding for ANANA: E11,790 3.7 Working Capital and Reserves at E682.55 This analysis assumes that startup debt of E186,150,000is back in February, 2003 and that the wholesale price is reduced to E682.55 per name." Internet Multicasting Service & Internet Software Consortium [Page 8] Consolidated Financials June 2002 2002 2003 2004 2005 2006 2007 ======= ========= ========= ========= ========= ========= Net Cash Flow After Capital and Debt -E251,675 E174,112 E258,376 E131,546 E119,136 E167,907 ---------------------------------------------------------------------------- Internet Public Works Programs E0 E104,120 E106,354 E42,690 E44,800 E49,392 ---------------------------------------------------------------------------- Net Cash Flow After Public Works -E251,675 E69,868 E152,023 E88,856 E74,336 E118,391 ---------------------------------------------------------------------------- Debt at End of Year E186,150 E0 E0 E0 E0 E0 ---------------------------------------------------------------------------- Working Capital at End of Year E4,468 E99,280 E120,998 E73,467 E73,467 E49,144 Unallocated Reserves E0 E322,660 E477,785 E552,245 E626,705 E769,420 Cumulative Funding for IETF/IAB: E247,952 Cumulative Funding for BIND 9: E87,863 Cumulative Funding for ANANA: E11,790 Internet Multicasting Service & Internet Software Consortium [Page 9] Consolidated Financials June 2002 4. Certification and Purpose These pro forma financials contain forward-looking projections of market conditions, expenses, and revenues. They are provided as a planning tool. Actual budgets will be developed by the program staff and approved by the IMS board of directors based on actual market conditions, expenses, and revenues. /Carl Malamud/ Signed Carl Malamud Chairman Internet Multicasting Service June 16, 2002 Internet Multicasting Service & Internet Software Consortium [Page 10] Consolidated Financials June 2002 URIs [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] Authors' Addresses Internet Multicasting Service P.O. Box 217 Stewarts Point, CA 95450 US Phone: +1.707.847.3720 Fax: +1.415.680.1556 URI: http://not.invisible.net/ Internet Software Consortium 950 Charter Street Redwood City, CA 94063 US Phone: +1.650.779.7000 Fax: +1.650.779.7055 URI: http://www.isc.org/ Internet Multicasting Service & Internet Software Consortium [Page 11] Consolidated Financials June 2002 Appendix A. Document Formats This document is available in the following formats: o [html [4]] HTML o [htm [5]] ICANN original form. o [xml [6]] XML o [txt [7]] This document. o [nroff [8]] NROFF o [word [9]] Word o [pdf [10]] PDF Internet Multicasting Service & Internet Software Consortium [Page 12]