Audited Financial Report for Fiscal Year Ending 30 June 2001 (Notes to Financial Statements)

INTERNET CORPORATION
FOR ASSIGNED NAMES AND NUMBERS
Notes to Financial Statements
June 30, 2001 and 2000

(1) Organization

Internet Corporation for Assigned Names and Numbers (ICANN) was established in September 1998 under the laws of the state of California. ICANN coordinates a select set of the internet's technical management functions such as the assignment of protocol parameters, the management of the domain name system, the allocation of internet protocol (IP) address space and the management of the root server system. Categories of internet domains include Generic Top Level Domains (gTLDs) which include the .com, .net, .org and .edu domains and Country Code Top Level Domains (ccTLDs), examples of which are .us, .uk and .fr. ICANN generates income from fees received from domain name registrars and related accreditation activities. Its primary sources of revenue are as follows:

• Domain name registry and registrar fees - Amounts contributed by organizations responsible for the registration and administration of Internet Domain Names
• Address registry fees - Amounts contributed by organizations responsible for the assignment and administration of Internet addresses
• Accreditation fees - Amounts paid in connection with initial and renewal accreditation of organizations engaged in the registration and administration of domain names in the .com, .net, .biz, .info, .museum, .name and .org Internet domains
• Application fees - Amounts paid in connection with processing of applications to become accredited domain name registrars or to become operators of new gTLD registries. (See note 2.)

ICANN also receives contributions and grants from other organizations.

ICANN has three supporting organizations which serve as advisory bodies to the ICANN board of directors with respect to internet policy issues and structure within three specialized areas, including the system of IP addresses, the domain name system and parameters for internet protocols. The supporting organizations are the primary source of substantive policy recommendations for matters lying within their respective specialized areas. The three supporting organizations are the Address Supporting Organization (ASO), Domain Name Supporting Organization (DNSO) and the Protocol Supporting Organization (PSO). The supporting organizations are not separately incorporated entities. The accounts of DNSO are included in the accompanying financial statements as ICANN, on behalf of DNSO, receives and processes the contributions that DNSO receives from its membership.

(2) Summary of Significant Accounting Policies

(a) Basis of Presentation

The accompanying financial statements are prepared on the accrual basis of accounting and present the accounts of ICANN and DNSO (collectively referred to herein as ICANN).

ICANN recognizes contributions, including unconditional promises to give, as revenue in the period received. Contributions and net assets are classified based on the existence or absence of donor-imposed restrictions. As such, the net assets of ICANN and changes therein are classified and reported as follows:

• Unrestricted net assets - Net assets that are not subject to donor-imposed stipulations and that may be expendable for any purpose in performing the objectives of ICANN.
• Temporarily restricted net assets - Net assets subject to donor-imposed stipulations that may or will be met either by actions of ICANN and/or the passage of time. As the restrictions are satisfied, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the accompanying financial statements as net assets released from restrictions.
• Permanently restricted net assets - Net assets subject to donor-imposed stipulations that resources be maintained in perpetuity. Investment income generated from these funds is available for general support of ICANN's programs and operations unless otherwise stipulated by the donor.

As of June 30, 2001 and 2000, ICANN had no permanently restricted net assets.

(b) Functional Allocation of Expenses

Expenses that can be identified with a specific program or supporting service are charged directly to the related program or supporting service. Expenses that are associated with more than one program or supporting service are allocated based on methods determined by management. As of and for the years ended June 30, 2001 and 2000, ICANN's expenses are classified as follows:

	2001	2000
Program services	$ 3,984,750	2,379,018
Supporting services:
Management and general	1,795,113	462,891
Fundraising	—	10,000
Total supporting services	1,795,113	472,891
Total	5,779,863	2,851,909

(c) Cash and Cash Equivalents

Cash and cash equivalents include deposits in bank and money market accounts.

(d) Property and Equipment

Property and equipment are stated at cost or, for contributed items, at fair market value at date of contribution. The equipment, furniture and fixtures are being depreciated using the straight-line method over estimated useful lives of five to seven years or the remaining lease term, whichever is shorter for fixtures.

(e) Deferred Revenue - Accreditation Fees

Accreditation fees attributable to future activities are included in cash and cash equivalents or accounts receivable and reflected as deferred revenue until earned.

(f) Promises to Give

Unconditional promises to give that are expected to be collected within one year are recorded at estimated net realizable value. Unconditional promises to give that are expected to be collected in future years are recorded at the present value of the estimated future cash flows. Conditional promises to give are not included as support until the conditions are substantially met.

(g) Contributed Services

Contributed services are recognized only if the services (a) create or enhance long-lived assets, or (b) require specialized skills, are provided by individuals possessing those skills and would typically need to be purchased if not provided by donation. For the years ended June 30, 2001 and 2000, contributed professional services totaling $182,195 and $216,667, respectively, are included in the accompanying statements of activities as contributed services and professional services expense.

(h) Application Fees

As described in note 1, application fees represent amounts paid to ICANN in connection with the processing of applications to either become accredited domain name registrars requiring an application fee of $1000, or to become an operator of a new gTLD. Each application to become an operator of a new gTLD requires a nonrefundable application fee of $50,000. During 2001, there were 47 gTLD applications processed and reviewed, resulting in seven new TLDs approved and selected for contract negotiation, including .biz, .info, .name, .pro, .museum, .coop and .aero. Application fees totaled $2,283,994 and $121,847 for the years ended June 30, 2001 and 2000, respectively.

(i) Income Taxes

ICANN is exempt from federal and state income taxes under the provisions of Section 501(c)(3) of the Internal Revenue Code and Section 23701(d) of the California Revenue and Taxation Code. Accordingly, no provision for income taxes has been made in the accompanying financial statements.

(j) Concentration of Credit Risk

ICANN holds a majority of its cash and cash equivalents at two financial institutions. Cash and cash equivalents consist of cash on deposit, money market accounts and commercial paper. ICANN is exposed to credit loss for the amount of cash in excess of the federally insured limit of $100,000 in the event of nonperformance by the counterparties. At June 30, 2001 and 2000, ICANN had cash in banks in excess of Federal Deposit Insurance Corporation (FDIC) insurance limits of approximately $556,038 and $684,000, respectively.

(k) Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(l) Reclassifications

Certain reclassifications may have been made to the 2000 financial data to conform with the 2001 presentation.

(3) Accounts Receivable

Accounts receivable include amounts receivable from the following constituencies for various registry and accreditation fees at June 30, 2001 and 2000:

	2001	2000
ccTLDs	$ 629,475	781,342
gTLDs	1,271,119	769,033
IP address registries	856,000	428,000
Other	61,513	—
	2,818,107	1,978,375
Less allowance for doubtful accounts	(27,381)	—
	$2,790,726	1,978,375

(4) Grants and Contributions Receivable

Included in grants and contributions receivable at June 30, 2000 were $100,000 of unconditional promises to give which were collected during the year ended June 30, 2001.

(5) Property and Equipment

Property and equipment at June 30, 2001 and 2000 consists of the following:

	2001	2000
Computer equipment	$261,362	128,200
Furniture and fixtures	88,470	22,764
Leasehold improvements	112,315	—
Construction in progress	—	7,764
Total	462,147	158,728
Less accumulated depreciation	(135,259)	(30,200)
	$326,888	128,528

Depreciation expense totaled $105,059 and $27,882 for the years ended June 30, 2001 and 2000, respectively.

(6) Notes Payable

As of June 30, 2001 and 2000, notes payable are summarized as follows:

	2001	2000
Note payable to Cisco Systems, Inc., dated August 2, 1999, bearing interest at 6.5%; principal and interest payable at maturity date on August 2, 2000; unsecured; the maturity date was extended to February 2, 2001	$       —	$ 150,000
Note payable to Deutsche Telekom AG, Inc., dated October 13, 1999, bearing interest at 6.6%; principal and unpaid interest due on demand; unsecured	200,000	200,000
Note payable to 3COM, dated August 23, 1999, bearing interest at 6.5%; principal and interest payable at maturity date on August 23, 2000; unsecured; the maturity date was extended to August 23, 2001	175,000	175,000
Note payable to MCI Worldcom, Inc., dated July 28, 1999, bearing interest at 6.5%; principal and interest payable at maturity date on July 28, 2000; unsecured; the maturity date was extended to July 28, 2001	500,000	500,000
	$     875,000	1,025,000

Subsequent to June 30, 2001, ICANN repaid all notes in full.

(7) Loans Payable

ICANN subleases office space from the University of Southern California (USC). Included in loans payable are two loans payable to USC totaling $43,700 for leasehold improvements made on ICANN's behalf by USC. Principal and interest at 8% per annum are payable monthly through September 2003.

(8) Commitments and Contingencies

(a) Lease Commitments

ICANN subleases real property under noncancelable operating leases that expire through September 2003. Future minimum lease payments under the operating lease as of June 30, 2001 are as follows:

Fiscal year ending June 30:
2002	$ 103,415
2003	103,415
2004	25,854
	$ 232,684

Rent expense totaled $134,137 and $41,904 for the years ended June 30, 2001 and 2000, respectively.

(b) Legal Matters

In the ordinary course of business, ICANN is subject to lawsuits and other potential legal actions. In the opinion of management, such matters will not have a material effect on the financial position of ICANN.

(9) Related Party Transactions

The services of ICANN's former president and chief executive officer were provided to ICANN through a professional services agreement with a company that is owned by the president and his spouse. Total payments for the 9 months ended March 31, 2001 and the 12 months ended June 30, 2000, including fees for professional services and reimbursed travel, were $218,819 and $287,595, respectively.

(10) Temporarily Restricted Net Assets

Temporarily restricted net assets totaled $179,648 and $135,000 at June 30, 2001 and 2000, repectively. These net assets were restricted by donors for specific activities and projects as follows:

Markle Foundation - At-Large project	$       —	100,000
Meeting sponsorships	—	35,000
Domain Name Supporting Organization sponsorships	179,648	—
	$ 179,648	135,000

Page Updated 01-Feb-2002
©2001, 2002  The Internet Corporation for Assigned Names and Numbers. All rights reserved.