<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
--------------------
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission file number: 0-29739
---------
Register.com, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-3239091
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
575 Eighth Avenue, 11th Floor, New York, New York 10018
- ------------------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
(212) 798-9100
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |_| Yes |X| No
As of March 31, 2000, there were 31,280,967 shares of the registrant's
common stock outstanding.
- --------------------------------------------------------------------------------
<PAGE>
Register.com, Inc.
FORM 10-Q
INDEX
PART I: FINANCIAL INFORMATION Page Number
Item 1. Financial Statements 3
Balance Sheets at December 31, 1999 and
March 31, 2000 (Unaudited) 3
Unaudited Statements of Operations for the
three months ended March 31, 1999 and 2000 4
Unaudited Statements of Cash Flows for the three
months ended March 31, 1999 and 2000 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation 8
Item 3. Quantitative and Qualitative Disclosure about Market Risk 33
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 33
Item 4. Submission of Matters to a Vote of Securities Holders 34
Item 6. Exhibits and Reports on Form 8-K 35
Item 7. Signatures 36
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Register.com, Inc.
Balance Sheet
<TABLE>
<CAPTION>
December 31, 1999 March 31, 2000
(Unaudited)
----------------- --------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents....................................... $ 40,944,122 $175,773,195
Short-term investments.......................................... 4,723,050 7,318,215
Accounts receivable, less allowance of $314,516 and $639,742,
respectively.................................................. 2,516,186 4,689,386
Prepaid domain name registry fees............................... 4,954,730 10,670,744
Deferred tax asset.............................................. 8,578,045 15,960,317
Deferred offering costs......................................... 390,000 -
Other current assets............................................ 195,196 606,530
------------ ------------
Total current assets.......................................... 62,301,329 215,018,387
Fixed assets, net.................................................. 2,458,386 3,002,300
Prepaid domain name registry fees, net of current portion.......... 3,576,331 5,390,262
Other investments.................................................. - 2,500,000
------------ ------------
Total assets................................................ $ 68,336,046 $225,910,949
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued expenses........................... $ 8,513,079 $ 13,121,676
Income taxes payable............................................ 5,608,198 5,265,034
Deferred revenue, net........................................... 18,193,871 47,096,803
Capital lease obligations, current portion...................... 5,967 -
Notes payable................................................... - -
Other current liabilities....................................... 166,857 190,341
------------ ------------
Total current liabilities..................................... 32,487,972 65,673,854
------------ ------------
Deferred revenue, net of current portion........................... 13,907,361 23,094,002
Capital lease obligations, net of current portion.................. 27,858 -
------------ ------------
Total Liabilities........................................... 46,423,191 88,767,856
------------ ------------
Commitments and contingencies
Stockholders' equity
Preferred stock--$.0001 par value, 5,000,000 shares authorized;
Series A convertible preferred; 4,694,333 issued and
outstanding at December 31, 1999 and none issued and
outstanding at March 31, 2000................................. 469 -
Common stock--$.0001 par value, 60,000,000 shares
authorized; 21,065,047 issued and outstanding at December
31, 1999 and 31,280,967 issued and outstanding at March 31,
2000.......................................................... 2,106 3,128
Additional paid-in capital...................................... 36,709,821 155,851,796
Unearned compensation........................................... (2,647,770) (5,569,168)
Accumulated deficit............................................. (12,151,771) (13,142,663)
------------ ------------
Total stockholders' equity.................................... 21,912,855 137,143,093
------------ ------------
Total liabilities and stockholders' equity......................... $ 68,336,046 $225,910,949
============ ============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
3
<PAGE>
Register.com, Inc.
Unaudited Statement of Operations
<TABLE>
<CAPTION>
Three months ended March 31,
1999 2000
----------- -----------
<S> <C> <C>
Net revenues....................................................... $ 747,300 $12,417,870
Cost of revenues................................................... 92,118 4,101,011
----------- -----------
Gross Profit.................................................. 655,182 8,316,859
----------- -----------
Operating costs and expenses
Sales and marketing............................................. 719,699 7,173,206
Research & development.......................................... 266,946 717,768
General & administrative (exclusive of non-cash compensation)... 202,593 1,698,021
Non-cash compensation........................................... 585,567 831,773
----------- -----------
Total operating costs and expenses............................ 1,774,805 10,420,768
----------- -----------
Loss from operations............................................... (1,119,623) (2,103,909)
Other income (expenses), net....................................... 12,621 1,113,017
----------- -----------
Net loss...................................................... $(1,107,002) $ (990,892)
=========== ===========
Basic and diluted net loss per share.......................... $ (0.06) $ (0.04)
=========== ===========
Weighted average shares used in basic and diluted net loss
per share................................................... 17,295,882 24,180,105
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
4
<PAGE>
Register.com, Inc.
Unaudited Statement of Cash Flows
<TABLE>
<CAPTION>
Three months ended March 31,
1999 2000
------ ------
<S> <C> <C>
Cash flows from operating activities
Net loss........................................................ $(1,107,000) $ (990,892)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities
Deferred revenues............................................. 161,136 38,089,573
Depreciation and amortization................................. (24,175) 221,578
Compensatory stock options and warrants expense............... 356,943 831,773
Deferred income taxes......................................... - (7,382,272)
Changes in assets and liabilities affecting operating cash flows
Accounts receivable............................................. (79,528) (2,173,200)
Prepaid domain name registry fees............................... - (7,529,945)
Other current assets............................................ (18,958) (411,334)
Other assets.................................................... (852) -
Accounts payable and accrued expenses........................... 292,213 4,608,597
Income taxes payable............................................ - (343,164)
Other current liabilities....................................... - 23,484
----------- ------------
Net cash provided by (used in) operating activities........... (420,221) 24,944,198
----------- ------------
Cash flows from investing activities
Purchases of fixed assets....................................... (258,863) (765,492)
Deferred offering costs......................................... - 390,000
Purchases of investments........................................ (245) (5,095,165)
----------- ------------
Net cash used in investing activities........................... (259,108) (5,470,657)
----------- ------------
Cash flows from financing activities
Net proceeds from issuance of common stock and warrants......... 3,228,625 115,389,357
Principal payments on capital lease obligations................. (4,345) (33,825)
----------- ------------
Net cash provided by financing activities..................... 3,224,280 115,355,532
----------- ------------
Net increase in cash and cash equivalents.......................... 2,544,951 134,829,073
Cash and cash equivalents at beginning of period................... 1,284,648 40,944,122
----------- ------------
Cash and cash equivalents at end of period......................... 3,829,599 175,773,195
=========== ============
Supplemental disclosure of cash flow information
Cash paid for interest.......................................... $ 1,138 $ 6,564
Cash paid for income taxes...................................... $ - $ 7,866,724
</TABLE>
The accompanying notes are an integral part of
these financial statements.
5
<PAGE>
Register.com, Inc.
Notes to Unaudited Financial Statements
1. Nature of Business and Organization
Nature of Business
Register.com, Inc. (the "Company" or "Register.com") provides Internet
domain name registration and other online services such as web-hosting, email,
domain name forwarding and advertising. The Company has also marketed software
for creation of Internet websites.
In April 1999, the Company was selected as one of the initial five
testbed registrars by the Internet Corporation for Assigned Names and Numbers
("ICANN"), an independent non-profit organization selected by the Department of
Commerce to manage and oversee the system for generic top level domain name
registration. In June 1999, the Company commenced online registration as an
ICANN-accredited registrar of .com, .net and .org domains.
Organization
The Company originally operated as Forman Interactive Corp. ("Forman"),
a New York Corporation that was formed in November 1994. Pursuant to a Merger
Agreement dated June 23, 1999 by and among Register.com, a Delaware Corporation
formed in May 1999 specifically for the purpose of this merger, and Forman, the
stockholders of Forman exchanged their shares for an equivalent number of shares
of Register.com. References herein to the operations and historical financial
information of the "Company" prior to the date of the merger refer to the
operations and historical financial information of Forman.
Stock Split
In January 2000, the Company effected a 3.5 to 1 stock split. All
common and preferred shares, options, warrants and related per-share data
reflected in the accompanying financial statements and notes thereto have been
adjusted to give retroactive effect to the stock split.
2. Summary of Significant Accounting Policies
Interim Financial Statements
The interim financial statements have been prepared by Register.com
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). In the opinion of management, financial statements
included in this report reflect all normal recurring adjustments which
Register.com considers necessary for fair presentation of the results of
operations for the interim periods covered and of the financial position of
Register.com at the date of the interim balance sheet. Certain information and
footnote disclosures normally included in the annual financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. However,
Register.com believes that the disclosures are adequate for understanding the
information presented. The operating results for interim periods are not
necessarily indicative of the operating results for the entire year. These
interim financial statements should be read in conjunction with Register.com's
6
<PAGE>
December 31, 1999 audited financial statements and notes thereto included in
Register.com's final prospectus filed with the SEC.
Revenue Recognition
The Company's revenues are primarily derived from domain name
registration fees, advertising and online products and services.
Domain name registration fees
Registration fees charged to end-users for registration services are
recognized on a straight-line basis over the life of the registration term.
Substantially all end-user subscribers pay for services with major credit cards
for which the Company receives daily remittances from the credit card carriers.
A provision for chargebacks from the credit card carriers is included in
accounts payable and accrued expenses. Such amounts are separately recorded and
deducted from gross registration fees in determining net revenues. Referral
commissions earned by our private label and co-brand partners are deducted from
gross registration fees in determining net revenues.
Online products and services
Revenue from online products and services is recognized over the period
in which services are provided, generally monthly. Payments received in advance
of services being provided are included in deferred revenue.
Advertising
Advertising revenues are derived principally from short-term
advertising contracts in which the Company typically guarantees a minimum number
of impressions or pages to be delivered to users over a specified period of time
for a fixed fee. Advertising revenues are recognized ratably in the period in
which the advertisement is displayed, provided that no significant obligations
remain, at the lesser of the ratio of impressions delivered over total
guaranteed impressions or the straight line basis over the term of the contract.
To the extent that minimum guaranteed impressions are not met, the Company
defers recognition of the corresponding revenues until the guaranteed
impressions are achieved.
3. Initial Public Offering
In March 2000, Register.com sold 5,222,279 shares of common stock
through its initial public offering including 222,279 shares through an over
allotment clause. Net proceeds from the offering and over allotment were
approximately $115.3 million, after deducting the discount granted to the
underwriters and other offering expenses. At the time of the initial public
offering, all of Register.com's preferred stock automatically converted into
4,694,333 shares of common stock.
7
<PAGE>
4. Investment
In February 2000, the Company purchased 476,784 shares of Series A
Convertible Preferred Stock and warrants to acquire an additional 95,357 shares
of Series A Convertible Preferred Stock of Great Domains.com, Inc ("Great
Domains"), representing approximately 10% of the outstanding voting stock of
Great Domains, for $2,500,000.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
This quarterly report on Form 10-Q contains forward-looking statements.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Statements
regarding the intent, belief or current expectations of Register.com are
intended to be forward-looking statements which may involve risk and
uncertainty. There are a number of factors that could cause Register.com's
actual results to differ materially from those indicated by such forward-looking
statements, including, but not limited to, those discussed in our final
prospectus, as filed with the SEC on March 3, 2000. In addition, "Risk Factors"
is a further discussion of certain of those risks as they relate to the period
covered by this report, Register.com's near term outlook with respect thereto,
and the forward-looking statements set forth herein; however, the absence in
this quarterly report of a complete recitation of or update to all risk factors
identified in our final prospectus should not be interpreted as modifying or
superseding any such risk factors, except to the extent set forth below.
Overview
We are a provider of Internet domain name registration services
worldwide. Domain names serve as part of the infrastructure for Internet
communications and registering a domain name is one of the first steps for
individuals and businesses seeking to establish an online identity. We believe
that we offer a quick and user-friendly registration process and responsive and
reliable customer support. We also offer a suite of value-added products and
services targeted to assist our customers in developing and maintaining their
online identities, including:
Products and Services Products and Services
Provided by Us Provided by Others
o domain name forwarding o email
o web hosting
o real-time domain name management o website-creation tools
Our goal is to become a one-stop resource through which our customers will
establish, maintain and enhance their presence on the Internet.
8
<PAGE>
We are the successor by merger to Forman Interactive Corp. Forman
Interactive commenced operations in 1994 as a developer of electronic commerce
software, and began offering web-hosting and related products and services in
1997. In February 1998, we began to distribute domain names either for free or,
to a lesser extent, were paid commissions for the domain names we distributed
for international registrars and registries. In April 1999, we commenced
offering registration services for country code domains and in June 1999, we
began offering registrations in the .com, .net and .org domains.
Net Revenues
We derive our net revenues from domain name registrations, online
products and services and advertising. Net revenues from domain name
registrations consist of fees paid by registrants over the course of the
registration period reduced by referral commissions and a provision for credit
card chargebacks. We currently earn registration fees in connection with new
registrations and transferred registrations. We pay referral commissions on
domain name registrations processed through the participants in our network of
co-brand and private label websites and those we process through our
www.register.com website that are referred to us by participants in our
affiliate network. From June 1999 until January 14, 2000, we offered two-year
registration periods for the initial domain name registration in the .com, .net
and .org domains with annual renewals and either one- or two-year registration
periods for domain names in the country code domains. As of January 15, 2000, we
have supplemented our registration period offerings to include one-, five- and
ten-year registration periods for both initial and renewal domain name
registrations in the .com, .net, and .org domains. For our .com, .net and .org
domain names, we currently charge $35 per year and offer registration terms of
one, two, five and ten years. For our country code domains, we currently charge
approximately $40 to $299 for one- or two-year registrations. We intend to
charge the same rates for renewals as we do for corresponding initial
registration periods. Because we only began operating as a registrar in April
1999, we have processed a limited amount of registration renewals. We anticipate
that registration renewals will contribute to our net revenues as our customers'
initial registrations reach the end of their terms.
Domain name registration revenues are deferred at the time of the
registration and are recognized ratably over the term of the registration
period. Under this subscription-based model, we recognize revenue when we
provide the registration services, including customer service and maintenance of
the individual domain name records. ICANN requires us to have reasonable
assurance of payment in order to register a domain name. Therefore, we require
prepayment via credit card for all online domain name registration sales, which
provides us with the full cash fee at the beginning of the registration period
while recognizing the revenues over the registration period. For some of our
customers who register domain names through our Corporate Services department,
we establish lines of credit based on credit worthiness, thereby reasonably
assuring payment.
Online products and services, which consist of email, domain name
forwarding and web hosting, are sold either as annual or monthly subscriptions,
depending on the product or service offering. These revenues are recognized
ratably over the period in which we provide our services. We offer web-hosting
through our own servers and through web-hosting services provided by third
parties. In 1999, we shifted our business model, and have chosen to direct our
9
<PAGE>
resources, toward our domain name registration business and not toward our own
web-hosting business. As such, while we continue to offer our own web-hosting
services, we do not actively promote this service and, therefore, do not
anticipate significant revenue growth from our own web-hosting service in future
periods. We intend, however, to continue actively promoting web-hosting services
provided by third parties.
Advertising revenues are derived from the sale of sponsorships and
banner advertisements under short-term contracts that range from one month to
one year in duration. We recognize these revenues ratably over the period in
which the advertisements are displayed provided that no significant company
obligation remains and collection of the resulting receivable is probable.
Cost of Revenues
Our cost of revenues consists of the costs associated with providing
domain name registrations and online products and services. Cost of revenues for
domain name registrations primarily consists of registry fees, depreciation on
the equipment used to process the domain name registrations, the fees paid to
the co-location facilities maintaining our equipment and fees paid to the
financial institutions to process credit card payments on our behalf. Through
January 14, 2000, we paid a $9 per year registry fee for each .com, .net and
.org domain name registration. This fee was reduced to $6 per year effective
January 15, 2000. We currently pay registry fees of approximately $5 to $150 for
one- or two-year country code domain name registrations. The largest component
of our cost of revenues is the registry fees which, while paid in full at the
time that the domain name is registered, are recorded as a prepaid expense and
recognized ratably over the term of the registration.
Cost of revenues for our online products and services consists of fees
paid to third party service providers, depreciation on the equipment used to
deliver the services, fees paid to the co-location facilities maintaining our
equipment and fees paid to the financial institutions to process credit card
payments on our behalf.
While we have no direct cost of revenues associated with our
advertising revenue, we do incur operational costs including salaries and
commissions, which are classified as operating expenses. We have no incremental
cost of revenues associated with advertising since we use the same equipment to
deliver the advertisements as we use for our domain name registration services.
Operating Expenses
Our operating expenses consist of sales and marketing, research and
development, general and administrative and non-cash compensation expenses. Our
sales and marketing expenses consist primarily of employee salaries, marketing
programs such as advertising and, to a lesser extent, commissions paid to our
sales representatives. Research and development expenses consist primarily of
employee salaries, fees for outside consultants and related costs associated
with the development and integration of new products and services, the
enhancement of existing products and services and quality assurance. General and
administrative expenses consist primarily of employee salaries and other
personnel related expenses for executive, financial and administrative
10
<PAGE>
personnel, as well as professional services fees and bad debt accruals. Non-cash
compensation expenses are related to grants of common stock, stock options and
warrants made to employees, directors, consultants and vendors. Facilities
expenses are allocated across our different operating expense categories. In
addition to the $4.9 million non-cash compensation charge taken in 1999, we will
be recording approximately $2.2 million in non-cash compensation charges in
2000, $1.8 million in each of 2001 and 2002, and $639,000 in 2003. These charges
primarily relate to the issuance through February 2000 of employee stock options
having exercise prices below fair market value on the date of grant.
Net Losses
We have incurred annual and quarterly losses from our operations since
our inception, and we expect to incur operating losses on both an annual and
quarterly basis for the foreseeable future. We have incurred significant net
losses in the past and expect these losses to continue to increase from current
levels as we grow our business by hiring additional employees, increasing our
marketing expenses to build our brand and increasing our capital expenditures.
We incurred net losses of $1.0 million for the three months ended March 31,
2000, $8.8 million for the year ended December 31, 1999, $1.1 million for the
three months ended March 31, 1999, and $1.2 million for the year ended December
31, 1998. We intend to spend over $25 million in 2000 on advertising and
promotional programs and approximately $13 million in capital expenditures.
Furthermore, given the rapidly evolving nature of our business and our limited
operating history as a competitive registrar, our operating results are
difficult to forecast, and period-to-period comparisons of our operating results
will not be meaningful and should not be relied upon as an indication of future
performance. Due to these and other factors, many of which are outside our
control, quarterly operating results may fluctuate significantly in the future.
Results of Operations
Because we began operating as a domain name registrar only in the
second quarter of 1999 and generated only limited revenues from domain name
registration services prior to this time, we believe that first quarter
comparisons of 1999 against 2000 are not meaningful and you should not rely upon
them as indications of our future performance.
We anticipate that in future periods net revenues from domain name
registrations will be the largest component of our net revenues and cost of
domain name registrations will be the largest component of our cost of revenues.
The following tables set forth are selected unaudited quarterly
statement of operations data, in dollar amounts and percentages of net revenue,
for the three months ended March 31, 1999 and 2000. In our opinion, this
information has been prepared substantially on the same basis as the audited
financial statements appearing in our final prospectus, and all necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts stated below to present fairly the unaudited quarterly results of
operations data. The operating results in any quarter are not necessarily
indicative of the results to be expected for any future period.
11
<PAGE>
Three months ended March 31,
1999 2000
---- ----
(in thousands)
Net revenues $ 747 $ 12,418
Cost of revenues 92 4,101
------- --------
Gross Profit 655 8,317
------- --------
Operating expenses
Sales & marketing 720 7,173
Research & development 267 718
General & administrative 202 1,698
Non-cash compensation 586 832
------- --------
Total operating expenses 1,775 10,421
------- --------
Loss from operations (1,120) (2,104)
Other income (expenses), net 13 1,113
------- --------
Net income (loss) $(1,107) $ (991)
======= ========
(as a percentage of net revenues)
Net revenues 100% 100%
Cost of revenues 12% 33%
------- --------
Gross Profit 88% 67%
------- --------
Operating expenses
Sales & marketing 96% 58%
Research & development 36% 6%
General & administrative 27% 14%
Non-cash compensation 78% 7%
------- --------
Total operating expenses 237% 84%
------- --------
Loss from operations (150%) (17%)
Other income (expenses), net (2%) (9%)
------- --------
Net income (loss) (148%) (8%)
======= ========
Three months ended March 31, 1999 and 2000
Net Revenues
Total revenues increased from $747,000 for the three months ended March
31, 1999 to $12.4 million for the three months ended March 31, 2000.
Domain Name Registrations. Revenues from domain name registrations
increased from $86,000 for the three months ended March 31, 1999 to $9.4 million
for the three months ended March 31, 2000. This increase was primarily from the
shift in our business from serving as a distributor of domain names to serving
as a generic top level domain name registrar in June 1999. Additionally, we had
no deferred revenue from domain name registrations at March 31, 1999, while
deferred revenue was $69.2 million at March 31, 2000. We anticipate that
revenues from domain name registrations will increase in absolute dollars in
future periods as a result of recognition of deferred revenues, growth in the
12
<PAGE>
market for domain name registrations, renewals and transfers and the
implementation of our business strategy.
Online Products and Services. Revenues from online products and
services increased 40% from $452,000 for the three months ended March 31, 1999
to $633,000 for the three months ended March 31, 2000 primarily from increased
sales of email and URL forwarding services. We anticipate that revenues from
online products and services will remain relatively flat in the near term as we
begin to introduce new online products and services and no longer actively
promote our own web-hosting services. We anticipate that these revenues will
increase over the long term as we expand our online product and service
offerings.
Advertising. Revenues from advertising increased from $209,000 for the
three months ended March 31, 1999 to $2.4 million for the three months ended
March 31, 2000 primarily from the increased number of page views and the volume
of advertising and sponsorships sold on our www.register.com, First Step, and
FutureSite websites. We anticipate that revenues from advertising in future
periods will increase in absolute dollars primarily for the same reasons.
Cost of Revenues
Total cost of revenues increased from $92,000 for the three months
ended March 31, 1999 to $4.1 million for the three months ended March 31, 2000.
Cost of Domain Name Registrations. Cost of domain name registrations
increased from $84,000 for the three months ended March 31, 1999 to $4.0 million
for the three months ended March 31, 2000. The increase was primarily from the
shift in our business from serving as a distributor of domain names to serving
as a generic top level domain name registrar in June 1999. As a distributor, we
generally passed through registry costs to the applicable registry or registrar.
We anticipate that cost of revenues for domain name registrations will increase
in absolute dollars primarily as a result of growth in our domain name
registrations and renewals.
Cost of Online Products and Services. Cost of online products and
services increased from $8,000 for the three months ended March 31, 1999 to
$94,000 for the three months ended March 31, 2000. The increase was primarily
from the additional depreciation expense associated with the equipment dedicated
to our operations to support our growing online product and services offerings.
We anticipate that these costs will increase in absolute dollars as we expand
our online products and services offerings.
Operating Expenses
Total operating expenses increased from $1.8 million for the three
months ended March 31, 1999 to $10.5 million for the three months ended March
31, 2000.
Sales and Marketing. Sales and marketing expenses increased from
$720,000 for the three months ended March 31, 1999 to $7.2 million for the three
months ended March 31, 2000. The increase was primarily from the costs
associated with our radio and print media advertising campaign which was not
launched until after the first quarter of 1999. The increase is also due to the
increase in salaries associated with newly hired sales, marketing and customer
service professionals. We anticipate that sales and marketing expenses will
increase substantially in absolute dollars as we expand our domestic and
13
<PAGE>
international marketing programs. Additionally, we anticipate increasing our
customer service staff and domain name registration sales force to support both
the demands of our customers as well as to further our direct and indirect sales
strategy for domain name registrations.
Research and Development. Research and development expenses increased
from $267,000 for the three months ended March 31, 1999 to $718,000 for the
three months ended March 31, 2000. The increase resulted primarily form salaries
associated with newly hired technology personnel to support our growth. We
anticipate that research and development expenses will continue to increase in
absolute dollars as we continue to invest in developing and modifying our
systems to grow our business.
General and Administrative. General and administrative expenses
increased from $203,000 for the three months ended March 31, 1999 to $1.7
million for the three months ended March 31, 2000. The increase was primarily
from salaries associated with newly hired personnel and related costs required
to manage our growth and facilities expansion. We expect that our general and
administrative expenses will increase in absolute dollars to support our overall
growth including increased expenses relating to our new responsibilities as a
public company.
Non-cash Compensation. Non-cash compensation expenses increased from
$586,000 for the three months ended March 31, 1999 to $832,000 for the three
months ended March 31, 2000. The expenses for the three months ended March 31,
1999 included costs associated with the one-time modification of warrants
previously granted to some of our stockholders and the issuance of warrants in
connection with a financial consulting agreement. The expense for the three
months ended March 31, 2000 included a one-time expense associated with the
transfer of certain warrants to Staples, Inc. by Capital Express LLC and
amortization of the unearned compensation.
Other Income (Expenses), Net.
Other income, net consists primarily of interest income net of interest
expense. Other income, net increased from $13,000 for the three months ended
March 31, 1999 to $1.1 million for the three months ended March 31, 2000. The
increase was primarily from interest earned on our cash balance as a result of
our equity financings and cash provided by operations.
Liquidity and Capital Resources
Through 1999, we funded our operations and met our capital expenditure
requirements primarily through private sales of equity securities, cash
generated from operations, and borrowings. We issued 5,222,279 shares of our
common stock to the public on March 3, 2000, which generated approximately
$115.3 million after deducting the underwriting discount and other offering
expenses.
Net cash used in operating activities was $420,000 for the three months
ended March 31, 1999. The principal use of cash during this period was to fund
our losses from operations. Our business generated $24.9 million of cash from
operations during the three months ended March 31, 2000. This cash generated
from operations was primarily due to increased domain name registrations.
14
<PAGE>
Net cash used for investing activities was $259,000 and $5.5 million
for the three months ended March 31, 1999 and 2000, respectively. For the three
months ended March 31, 1999, cash used for investing activities related
primarily to the purchase of property and equipment and investment in our
systems infrastructure. For the three months ended March 31, 2000, cash used for
investing activities related to the purchase of property plant and equipment,
investment in our systems infrastructure, our investment in Great Domains, and
our investment in short-term investments.
We generated $3.2 million and $115.4 million in cash from financing
activities for the three months ending March 31, 1999 and 2000, respectively.
For the three months ended March 31, 1999, substantially all of the financing
activities were private sales of equity securities. For the three months ended
March 31, 2000, substantially all of these financing activities were
attributable to our initial public offering.
Although we have no material commitments for capital expenditures or
other long-term obligations, we anticipate that we will substantially increase
our capital expenditures and lease commitments consistent with our anticipated
growth in operations, infrastructure and personnel, including the addition of
new products and services, implementation of additional co-location facilities
and various capital expenditures associated with expanding our facilities. We
currently anticipate that we will continue to experience significant growth in
our operating expenses for the foreseeable future and that our operating
expenses will be a material use of our cash resources. We intend to spend over
$25 million in 2000 on advertising and promotional programs and over $13 million
on capital expenditures in 2000, and we believe that our existing cash and cash
from operations will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months.
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should consider carefully the risks described below, together with the other
information contained in this report. If any of the following events actually
occurs, our business, financial condition and results of operations may suffer
materially. As a result, the market price of our common stock could decline, and
you could lose all or part of your investment in our common stock.
Risks Related to Our Industry and Our Business
We have a limited operating history as a domain name registrar and expect to
encounter difficulties faced by early-stage companies.
We only recently entered the domain name registration industry. In
February 1998, we began providing a consumer interface for registering domain
names in the .com, .net and .org domains and in country code domains by
forwarding the information we gathered from the consumer to Network Solutions or
the applicable country code registrars or registries. In June 1999, we began to
compete directly with Network Solutions for registrations in the .com, .net and
.org domains. Accordingly, we have only a limited operating history as a domain
name registrar upon which our current business and prospects can be evaluated,
and our operating results, since June 1999, are not comparable to our results
for prior periods. As a company operating in a newly competitive and rapidly
15
<PAGE>
evolving industry, we face risks and uncertainties relating to our ability to
implement our business plan successfully. We cannot assure you that we will
adequately address these risks and uncertainties or that our business plan will
be successful.
We have a history of losses and expect losses to continue for the foreseeable
future.
We have never been profitable. We incurred net losses of approximately
$1.2 million for the year ended December 31, 1998, $8.8 million for the year
ended December 31, 1999, and 1.0 million for the three months ended March 31,
2000. As of March 31, 2000, our accumulated losses totaled $13.1 million. We
anticipate that our operating expenses will increase substantially in the
foreseeable future as we develop new products and services, increase our sales
and marketing operations, develop new distribution channels and strategic
relationships, improve our operational and financial systems and broaden our
customer service capabilities. Accordingly, although we had positive cash flow
from operations for the three months ended March 31, 2000 we expect to incur
additional losses for the foreseeable future, primarily due to an increase in
our marketing expenses to build our brand, which we expect to exceed $25.0
million in 2000, and our capital expenditures, which we expect to exceed $13.0
million in 2000. These losses are expected to increase significantly from
current levels, which in turn will increase our accumulated losses. We cannot
assure you that we will become profitable or, if we become profitable, that we
will be able to sustain or increase our profitability in the future.
Our earnings will decrease because of stock-based compensation that we have
incurred.
Non-cash compensation expenses are related to grants of common stock,
stock options and warrants made to employees, directors, consultants and
vendors. For the three months ended March 31, 2000, we recorded a $832,000
non-cash compensation charge. Based principally on grants of common stock, stock
options and warrants made to date, we will record approximately $6.4 million of
non-cash compensation through 2003 as follows: $2.2 million in 2000, $1.8
million in each of 2001 and 2002 and $639,000 in 2003. These charges will reduce
our earnings in future periods.
We cannot predict with any certainty the effect that new governmental and
regulatory policies, or industry reactions to those policies, will have on our
business.
Before April 1999, the domain name registration system for the .com,
.net and .org domains was managed by Network Solutions pursuant to a cooperative
agreement with the U.S. government. In November 1998, the Department of Commerce
recognized the Internet Corporation for Assigned Names and Numbers, commonly
known as ICANN, to oversee key aspects of the Internet domain name registration
system. We cannot assure you that any future measures adopted by the Department
of Commerce or ICANN will benefit us or that they will not materially harm our
business, financial condition and results of operations. In addition, we
continue to face the risks that:
o the U.S. government may, for any reason, reassess its decision to
introduce competition into, or ICANN's role in overseeing, the domain
name registration market;
16
<PAGE>
o the Internet community may become dissatisfied with ICANN and refuse
to recognize its authority or support its policies, which could
create instability in the domain name registration system; and
o ICANN may attempt to impose additional fees on registrars if it fails
to obtain funding sufficient to run its operations.
We may not be able to maintain or improve our competitive position because of
strong competition from Network Solutions.
Network Solutions' authorization by the U.S. government to act as the
sole domain name registrar prior to April 1999 in the .com, .net and .org
domains gives it a significant competitive advantage in the domain name
registration industry.
Before the recent introduction of competition into the domain name
registration industry, Network Solutions was the sole entity authorized by the
U.S. government to serve as the registrar for domain names in the .com, .net and
.org domains. This position allowed Network Solutions to develop a substantial
customer base, which gives it advantages in securing customer renewals and in
developing and marketing ancillary products and services. We face significant
competition from Network Solutions as we seek to increase our overall share of
the market for domain name registration services, and we cannot assure you that
we will be able to maintain or improve our competitive position. Based on its
press release dated April 27, 2000, Network Solutions registered 2.0 million net
new registrations in the .com, .net and .org domains for the three months ended
March 31, 1999, representing approximately 40% of all new registrations for the
period.
Network Solutions' exclusive control over the registry for the .com,
.net and .org domains has given it an advantage over all competitive registrars.
The Internet domain name registration system is composed of two
principal functions: registry and registrar. Registries maintain the database
that contain names registered within the top level domains and their
corresponding Internet protocol addresses. Registrars act as intermediaries
between the registry and individuals and businesses, referred to as registrants,
seeking to register domain names. The agreements among Network Solutions, ICANN
and the U.S. Department of Commerce have given Network Solutions the exclusive
right to operate and maintain the registry for the .com, .net and .org domains
at least until November 30, 2003. Registrars other than Network Solutions are
known in the industry as "competitive registrars." As the exclusive registry for
these domains, Network Solutions receives from us, and every other competitive
registrar, $6 per domain name per year. Although registry fees may not be used
directly to fund Network Solutions' registrar business, the substantial net
revenues from these fees, and the certainty of receiving them, provide Network
Solutions significant advantages over any competitive registrar.
If Network Solutions sells the registry for the .com, .net and .org
domains and uses the proceeds to fund its registrar business or related product
and service offerings, it will have a substantial competitive advantage over all
competitive registrars.
17
<PAGE>
The agreements among Network Solutions, ICANN and the U.S. Department
of Commerce provide that if Network Solutions separates its registry and
registrar operations by May 9, 2001 and sells the registry assets to a third
party, the term of exclusivity for the third party extends for an additional
four years to November 30, 2007. If a sale of the registry occurs, Network
Solutions could use the proceeds of the sale, which we believe would be
substantial, to fund its registration operations and related product and service
offerings. We believe that the use of these proceeds to finance Network
Solutions' registrar business could have a material adverse effect on our
business, financial condition and results of operations.
The proposed merger of Network Solutions with VeriSign, Inc. will
likely result in the expansion of the range of products and services offered by
Network Solutions.
In March 2000, Network Solutions signed a merger agreement with
VeriSign, Inc. a provider of Internet trust services. Assuming it is consummated
successfully, in addition to facilitating cross-marketing between the two
companies, the merger will strengthen Network Solutions' competitive advantage
by enabling it to couple its registration services with an expanded range of
products and services that includes those offered by VeriSign.
We also face competition from other competitive registrars and others in the
domain name registration industry and expect this competition to continue to
intensify.
Competition in the domain name registration services industry will
continue to intensify as the number of entrants into the market increases.
When we began providing online domain name registrations in the .com,
.net and .org domains in June 1999, we were one of only five testbed competitive
registrars accredited by ICANN to interface with the Shared Registration System.
The Shared Registration System was designed to allow registrars to interface
directly with Network Solutions' registry for domain names. The testbed period
ended on November 30, 1999. As of May 9, 2000, ICANN had accredited 109
competitive registrars, including us, to register domain names in the .com, .net
and .org domains. As of May 9, 2000, 34 of these competitive registrars were
registering domain names, and the other 66, while accredited, had not begun
registering domain names, in the .com, .net and .org domains. An additional 9
companies have qualified for accreditation but have yet to sign the agreements
required by ICANN and Network Solutions. We face substantial competition from
competitive registrars and others in that:
o many accredited registrars that are not currently registering domain
names may begin to do so in the near future;
o companies that are not accredited registrars may offer domain name
registrations through a competing accredited registrar's system; and
o ICANN may accredit new registrars to register domain names in the
.com, .net and .org domains.
The continued introduction of competitive registrars into the domain name
registration industry as well as the growth of the competitive registrars who
18
<PAGE>
have entered the industry may make it difficult for us to maintain our current
market share which, in turn, would materially adversely affect our business,
financial condition and results of operation.
We face competition from other competitive registrars and others in the
domain name registration industry who may have longer operating histories,
greater name recognition or greater resources.
Our competitors in the domain name registration industry include
companies with strong brand recognition and Internet industry experience, such
as major telecommunications firms, cable companies, ISPs, web-hosting providers,
Internet portals, systems integrators, consulting firms and other registrars.
Many of these companies also possess core capabilities to deliver ancillary
services, such as customer service, billing services and network management. Our
market position could be harmed by any of these existing or future competitors,
some of which may have longer operating histories, greater name recognition and
greater financial, technical, marketing, distribution and other resources than
we do. Also, as a result of increased competition, our period-over-period growth
rates may decline.
If the market for domain names does not continue to grow at the same rate, our
net revenues from domain name registrations may fall below anticipated levels.
The domain name market is still in its early stages of growth and we
cannot assure you that as it continues to develop it will continue to experience
the same high level of growth it has experienced in the past. As a result, our
period-over-period growth rates may decline.
Competition in the domain name registration industry could force us to reduce
our prices for our products and services and would negatively impact our results
of operations.
Because competition in the domain name registration industry is in its
early stages, we cannot assure you that we will not be required, by market
factors or otherwise, to reduce, perhaps significantly, the prices we charge for
our domain name registration and related products and services. Further, some of
our competitors are offering domain name registrations for free and derive their
revenues from other sources. Reducing the prices we charge for domain name
registration services in order to remain competitive could materially adversely
affect our results of operations.
If we are unable to make suitable acquisitions and investments, our long-term
growth strategy could be impeded.
Our long-term growth strategy includes identifying and, from time to
time, acquiring or investing in suitable candidates on acceptable terms. In
particular, we intend over time to acquire or make investments in providers of
product offerings that complement our business and other companies in the domain
name registration industry. In pursuing acquisition and investment
opportunities, we may be in competition with other companies having similar
19
<PAGE>
growth and investment strategies. Competition for these acquisitions or
investment targets could also result in increased acquisition or investment
prices and a diminished pool of businesses, technologies, services or products
available for acquisition or investment. Our long-term growth strategy could be
impeded if we fail to identify and acquire or invest in promising candidates on
terms acceptable to us.
Our acquisition strategy could subject us to significant risks, any of which
could harm our business.
Acquisitions involve a number of risks and present financial,
managerial and operational challenges, including:
o diversion of management attention from running our existing business;
o increased expenses, including compensation expenses resulting from
newly hired employees;
o adverse effects on our reported operating results due to possible
amortization of goodwill associated with acquisitions; and
o potential disputes with the sellers of acquired businesses,
technologies, services or products.
In addition, we may not be successful in integrating the business,
technology, operations and personnel of any acquired company. Performance
problems with an acquired business, technology, service or product could also
have a material adverse impact on our reputation as a whole. In addition, any
acquired business, technology, service or product could significantly
under-perform relative to our expectations. For all these reasons, our pursuit
of an overall acquisition and investment strategy or any individual acquisition
or investment could have a material adverse effect on our business, financial
condition and results of operations.
If our customers do not find our expanded product and service offerings
appealing, among other things, we may remain dependent on domain name
registrations as a primary source of revenue and our net revenues may fall below
anticipated levels.
Part of our long-term strategy includes diversifying our revenue base
by offering value-added products and services, including website applications
that enable electronic commerce and other business services, to our customers.
We expect to incur significant costs in acquiring, developing and marketing
these new products and services. Domain name registration services generated
approximately 75.7% of our net revenues during the three months ended March 31,
2000. If we fail to offer products and services that meet our customers' needs,
or our customers elect not to purchase our products and services, our
anticipated net revenues may fall below expectations, we may not generate
sufficient revenue to offset these related costs and we will remain dependent on
domain name registrations as a primary source of revenue.
20
<PAGE>
Our failure to establish and maintain online business relationships that
generate a significant amount of traffic could limit the growth of our business.
We expect that in the future approximately 15% of our customers will
purchase their domain name registrations through our network of co-brand and
private label websites comprising our indirect distribution channel. We
currently have contractual agreements with participants in this network, and if
these third parties do not attract a significant number of visitors to their
websites, we may not receive a significant number of customers from these
network relationships and our net revenues may decrease or not grow. In
addition, we plan to expand our network of co-brand and private label websites.
Our net revenues may suffer if we fail to expand or maintain our network or if
our network does not result in a number of new customers sufficient to justify
the cost.
If our customers do not renew their domain name registrations through us, and we
fail to replace their business or develop alternative sources of revenue, our
business, financial condition and results of operations would be materially
adversely affected.
The growth of our business depends in part on our customers' renewal of
their domain name registrations through us. Having only recently become an
accredited registrar, we do not have any actual experience with registration
renewals for generic domain names and we have only limited experience with
registration renewals for country code domain names. In addition, we cannot
predict the volume of registration renewals we should expect and we cannot
assure you that all our customers will renew their registrations through us. If
our customers decide, for any reason, not to renew their registrations through
us, our business, financial condition and results of operations would be
materially adversely affected.
If we fail to become accredited to offer domain names in additional generic top
level domains that may be introduced, or our customers turn to other registrars
for these registration needs, our business, financial condition and results of
operations would be materially adversely affected.
ICANN or another approving entity may introduce new generic top level
domains, such as .web, .firm or .store. We cannot assure you that, if
introduced, we will be accredited to offer registrations in these domains or
that customers will rely on us to provide registration services within any new
generic top level domains. Our business, financial condition and results of
operations would be materially adversely affected if substantial numbers of our
customers turn to other registrars for these registration needs.
Rapid growth in our business could strain our managerial, operational,
financial, accounting and information systems, customer service staff and office
resources.
The anticipated future growth necessary to expand our operations will
place a significant strain on our resources. In order to achieve our growth
strategy, we will need to expand all aspects of our business, including our
computer systems and related infrastructure, customer service capabilities and
sales and marketing efforts. The demands on our network infrastructure,
technical staff and technical resources have grown rapidly with our expanding
customer base. During the three months ended March 31, 2000, our number of
full-time employees grew from approximately 122 to approximately 157. We cannot
21
<PAGE>
assure you that our infrastructure, technical staff and technical resources will
adequately accommodate or facilitate the anticipated growth of our customer
base. We also expect that we will need to continually improve our financial and
managerial controls, billing systems, reporting systems and procedures, and we
will also need to continue to expand, train and manage our workforce. If we fail
to manage our growth effectively, our business, financial condition and results
of operation could be materially adversely affected.
In addition, as we offer new products and services, we will need to
increase the size and expand the training of our customer service staff to
ensure that they can adequately respond to customer inquiries. If we fail to
provide our customer service staff training and staffing sufficient to support
new products and services, we may lose customers who feel that their inquiries
have not adequately been addressed.
If we are unable to attract and retain highly qualified management and technical
personnel, our business may be harmed.
Our success depends in large part on the contributions of our senior
management team and technology personnel and in particular Richard D. Forman,
our President and Chief Executive Officer. We face intense competition in hiring
and retaining personnel from a number of sectors, including technology and
Internet companies. Many of these companies have greater financial resources
than we do to attract and retain qualified personnel. In addition, although we
maintain employment agreements with Mr. Forman and Jack S. Levy, our General
Counsel, we have not in the past executed, and do not have any current plans to
execute, employment agreements with our other employees. As a result, we may be
unable to retain our employees or attract, integrate, train and retain other
highly qualified employees in the future. If we fail to attract new personnel or
retain and motivate our current personnel, our business, financial condition and
results of operations could be materially adversely affected.
Our business will suffer if we fail to build awareness of our brand name.
Building recognition of our brand is critical to attracting additional
traffic and customers to our website, new business alliances, acquisition
candidates, advertisers and employees. Accordingly, we intend to continue
pursuing an aggressive brand-enhancement strategy, which includes mass market
and multimedia advertising, promotional programs and public relations
activities. We intend to make significant expenditures, over $25 million in
2000, on advertising and promotional programs and activities. These expenditures
may not result in an increase in net revenues sufficient to cover our
advertising and promotional expenses. We cannot assure you that promoting our
brand name will increase our net revenues. Accordingly, if we incur expenses in
promoting our brand without a corresponding increase in our net revenues, our
business, financial condition and results of operations would be materially
adversely affected.
Our failure to respond to the rapid technological changes in our industry may
harm our business.
If we are unable, for technological, legal, financial or other reasons,
to adapt in a timely manner to changing market conditions or customer
requirements, we could lose customers, strategic alliances and market share. The
22
<PAGE>
Internet and electronic commerce are characterized by rapid technological
change. Sudden changes in user and customer requirements and preferences, the
frequent introduction of new products and services embodying new technologies
and the emergence of new industry standards and practices could render our
existing products, services and systems obsolete. The emerging nature of
products and services in the domain name registration industry and their rapid
evolution will require that we continually improve the performance, features and
reliability of our products and services. Our success will depend, in part, on
our ability:
o to enhance our existing products and services;
o to develop and license new products, services and technologies that
address the increasingly sophisticated and varied needs of our
current and prospective customers; and
o to respond to technological advances and emerging industry standards
and practices on a cost-effective and timely basis.
The development of additional products and services and other
proprietary technology involves significant technological and business risks and
requires substantial expenditures and lead time. We may be unable to use new
technologies effectively or adapt our websites, internally developed technology
and transaction-processing systems to customer requirements or emerging industry
standards. Updating our technology internally and licensing new technology from
third parties may require us to incur significant additional capital
expenditures.
Our business will be materially harmed if in the future the administration and
operation of the Internet no longer relies upon the existing domain name system.
The Internet is expected to continue to develop at a rapid rate. This
development may include changes in the administration or operation of the
Internet, which could include the creation and institution of alternate systems
for directing Internet traffic without the use of the existing domain name
system. While we are not aware of any alternative systems currently in use or
being developed widespread acceptance of any alternative systems would eliminate
the need to register a domain name to establish an online presence and could
materially adversely affect our business, financial condition and results of
operations.
Our ability to register domain names in the .com, .net and .org domains depends
upon the continued availability and functionality of the Shared Registration
System.
The success of our business as a competitive registrar depends upon the
continued availability and functionality of the Shared Registration System,
which is maintained by Network Solutions, and its ability to adapt to an
expanding market for domain name registrations. As of May 9, 2000, there were 34
registrars, including us and Network Solutions, registering domain names through
the Shared Registration System. The 66 other accredited registrars and the 9
registrars that have qualified for accreditation but not yet signed the
requisite agreements may begin using the system at any time. Because the Shared
Registration System has been in general use only since April 1999, we cannot
assure you that it will be able to handle the growing traffic generated by large
numbers of registrars or registrations. Our ability to provide domain name
23
<PAGE>
registration services in the .com, .net and .org domains would be materially
harmed by any failure of the Shared Registration System to accommodate our
registration needs.
Our ability to register domain names in the .com, .net and .org domains depends
upon our continued accreditation by ICANN.
We need to be an ICANN-accredited registrar in order to register domain
names in the .com, .net and .org domains. Our current ICANN accreditation
agreement expires on May 22, 2000. While we anticipate that ICANN will renew
this agreement for a five year term, we cannot assure you that it will do so. If
ICANN does not renew our accreditation, our business, financial condition and
results of operations would be materially adversely affected.
If we fail to comply with the regulations of the country code registries or are
unable to register domain names with those registries, our business would be
materially adversely affected.
Each of the country code registries requires registrars to comply with
specific regulations. Many of these regulations vary from country code to
country code. If we fail to comply with the regulations imposed by country code
registries, these registries will likely prohibit us from registering or
continuing to register names in their country codes. Further, in most cases, our
rights to provide country code domain name registration services are not
governed by written contract. In the case of our written contracts, there is
uncertainty as to what law may govern. As a result, we cannot be certain that we
will continue to be able to register domain names in the country code domains we
currently offer. Any restrictions on our ability to offer domain name
registrations in a significant number of country codes could materially
adversely affect our business, financial condition and results of operations.
If country code registries cease operations or otherwise fail to process
registrations or related information accurately, we would be unable to honor our
subscriptions relating to those country codes.
Country code registries may be administered by the host country,
entrepreneurs or other third parties. If these registry businesses cease
operations or otherwise fail to process domain name registrations or the related
information in country code domains, we would be unable to honor the
subscriptions of registrants who have registered, or are in the process of
registering, domain names in the applicable country code domain. If we are
unable to honor a substantial number of subscriptions for our customers for any
reason, our business, financial condition and results of operations would be
materially adversely affected.
We are restricted from entering into agreements with web-hosting service
providers as a result of an agreement we have with Concentric Network
Corporation.
As part of our marketing and distribution agreement with Concentric
Network Corporation, we have agreed that no more than three service providers,
one of which must be Concentric, may market, advertise or otherwise promote
their web-hosting services on our website. This agreement expires on December
24
<PAGE>
31, 2000 and may be renewed by the parties for an additional year. Accordingly,
we are severely restricted in our ability to enter agreements with other
providers of these services.
We cannot assure you that our standard registration agreement will be
enforceable.
All of our customers must execute our standard registration agreement
as part of the process of registering a domain name. This agreement contains a
number of provisions intended to limit our potential liability arising from our
registration of domain names for our customers including liability resulting
from our failure to register or maintain domain names. As most of our customers
register their domain names online, execution of the registration agreement by
these customers occurs electronically. If a court were to find that our
registration agreement is unenforceable, we could be subject to liability that
could have a materially adverse effect on our business, financial condition or
results of operations.
Our failure to register or maintain the domain names that we process on behalf
of our customers, may subject us to negative publicity, which could have a
material adverse effect on our business.
Clerical errors or systems failures, including failures of the Shared
Registration System, have resulted in our failure to properly register or to
maintain the registration of domain names that we process on behalf of our
customers. Our failure to properly register or to maintain the registration of
our customers' domain names may subject us to negative publicity, which could
have a material adverse effect on our business.
We may not be able to protect and enforce our intellectual property rights or
protect ourselves from the intellectual property claims of third parties.
We may be unable to protect and enforce our intellectual property
rights from infringement.
We rely upon copyright, trade secret and trademark law, invention
assignment agreements and confidentiality agreements to protect our proprietary
technology, including software and applications and trademarks, and other
intellectual property to the extent that protection is sought or secured at all.
We do not currently have patents on any of our technologies or processes. While
we typically enter into confidentiality agreements with our employees,
consultants and strategic partners, and generally control access to and
distribution of our proprietary information, we cannot ensure that our efforts
to protect our proprietary information will be adequate to protect against
infringement and misappropriation of our intellectual property by third parties,
particularly in foreign countries where laws or law enforcement practices may
not protect our proprietary rights as fully as in the United States.
Furthermore, because the validity, enforceability and scope of
protection of proprietary rights in Internet-related industries is uncertain and
still evolving, we cannot assure you that we will be able to defend our
proprietary rights. In addition to being difficult to police, once any
infringement is detected, disputes concerning the ownership or rights to use
intellectual property could be costly and time-consuming to litigate, may
distract management from operating the business and may result in our losing
significant rights and our ability to operate our business.
25
<PAGE>
We cannot assure you that third parties will not develop technologies
or processes similar or superior to ours.
We cannot ensure that third parties will not be able to independently
develop technology, processes or other intellectual property that is similar to
or superior to ours. The unauthorized reproduction or other misappropriation of
our intellectual property rights, including copying the look, feel and
functionality of our website, could enable third parties to benefit from our
technology without our receiving any compensation and could materially adversely
affect our business, financial condition and results of operations.
We may be subject to claims of alleged infringement of intellectual
property rights of third parties.
We do not conduct comprehensive patent searches to determine whether
our technology infringes patents held by others. In addition, technology
development in Internet-related industries is inherently uncertain due to the
rapidly evolving technological environment. As such, there may be numerous
patent applications pending, many of which are confidential when filed, with
regard to similar technologies. Third parties may assert infringement claims
against us and these claims and any resultant litigation, should it occur, could
subject us to significant liability for damages. Even if we prevail, litigation
could be time-consuming and expensive to defend, and could result in the
diversion of management's time and attention. Any claims from third parties may
also result in limitations on our ability to use the intellectual property
subject to these claims unless we are able to enter into agreements with the
third parties making these claims. Such royalty or licensing agreements, if
required, may be unavailable on terms acceptable to us, or at all. If a
successful claim of infringement is brought against us and we fail to develop
non-infringing technology or to license the infringed or similar technology on a
timely basis, it could materially adversely affect our business, financial
condition and results of operations.
As a registrar of domain names and a provider of web-hosting services,
we may be subject to various claims, including claims from third parties
asserting that their rights have been infringed by domain names registered or
websites hosted on behalf of other parties.
We may be subject to various claims, including trademark infringement,
unfair competition and violations of publicity and privacy rights, to the extent
that such parties consider their rights to be violated by the registration of
particular domain names by other parties or our hosting of third-party websites.
If these claims against us are successful, our business, financial condition and
results of operations could be materially adversely affected.
We may be held liable if third parties misappropriate our users' personal
information.
A fundamental requirement for online communications is the secure
transmission of confidential information over public networks. If third parties
succeed in penetrating our network security or otherwise misappropriate our
customers' personal or credit card information, we could be subject to
liability. Our liability could include claims for unauthorized purchases with
credit card information, impersonation or other similar fraud claims as well as
for other misuses of personal information, including for unauthorized marketing
purposes. These claims could result in litigation and adverse publicity which
26
<PAGE>
could have a material adverse effect on our business, financial condition and
results of operations, as well as our reputation.
In addition, the Federal Trade Commission and state agencies have been
investigating various Internet companies regarding their use of personal
information. We could have additional expenses if new regulations regarding the
use of personal information are introduced or if our privacy practices are
investigated.
We may incur significant expenses related to the security of personal
information online.
The need to securely transmit confidential information online has been
a significant barrier to electronic commerce and online communications. Any
well-publicized compromise of security could deter people from using online
services such as the ones we offer, or from using them to conduct transactions
that involve transmitting confidential information. Because our success depends
on the acceptance of online services and electronic commerce, we may incur
significant costs to protect against the threat of security breaches or to
alleviate problems caused by these breaches.
We may be held liable for Year 2000 problems relating to one of our former
product offerings.
From July 1995 until October 1998, we sold Internet Creator, a website
creation and management software program. We later offered this product to our
web-hosting customers at no cost. Although we have conducted usability tests to
confirm to our satisfaction that Internet Creator is Year 2000 compliant, we
cannot be certain that users of the product will not experience systems
failures, delays or miscalculations affecting their websites that result from
Year 2000 problems. If users of the product experience Year 2000 problems and
successfully assert actions against us, our business, financial condition and
results of operations could be materially adversely affected.
Risks Related to Our Technology and the Internet
Systems disruptions and failures could cause our customers and advertisers to
become dissatisfied with us and may impair our business.
Our customers, advertisers and business alliances may become
dissatisfied with our products and services due to interruptions in access to
our website.
Our ability to maintain our computer and telecommunications equipment
in working order and to reasonably protect them from interruption is critical to
our success. Our website must accommodate a high volume of traffic and deliver
frequently updated information. Our website has in the past experienced slower
response times as a result of increased traffic. We have conducted planned site
outages and experienced unplanned site outages with minimal impact on our
business. Currently, our systems operate, on average, at approximately 50%
capacity. If we were to experience a substantial increase in traffic and fail to
increase our capacity, our customers would experience slower response times or
disruptions in service. Our customers, advertisers and business alliances may
become dissatisfied by any systems failure that interrupts our ability to
provide our products and services to them. Substantial or repeated system
27
<PAGE>
failures would significantly reduce the attractiveness of our website and could
cause our customers, advertisers and business alliances to switch to another
domain name registration service provider.
Our customers, advertisers and business alliances may become
dissatisfied with our products and services due to interruptions in our access
to the Shared Registration System or country code registries.
We depend on the Shared Registration System and country code registries
to register domain names on behalf of our customers. We have in the past
experienced problems with the Shared Registration System, including outages,
particularly during its implementation phase. Any significant outages in the
Shared Registration System or country code registries would prevent us from
delivering or delay our delivery of our services to our customers. Prolonged or
repeated interruptions in our access to the Shared Registration System or
country code registries could cause our customers, advertisers and business
alliances to switch to another domain name registration service provider.
Delays or systems failures unrelated to our systems could harm our
business.
Our customers depend on ISPs, online service providers and others to
access our website. Many of these parties have experienced outages and could in
the future experience outages, delays and other difficulties due to systems
failures unrelated to our systems. Although we carry general liability
insurance, our insurance may not cover any claims by dissatisfied customers,
advertisers or strategic alliances, or may be inadequate to indemnify us for any
liability that may be imposed in the event that a claim were brought against us.
Our business could be materially harmed by any system failure, security breach
or other damage that interrupts or delays our operations.
Our business would be materially harmed if our computer systems become
damaged.
Our network and communications systems are located at Exodus
Communications' hosting facility in Jersey City, New Jersey and Globix
Corporation's hosting facility in New York, New York. We are currently adding
network capacity to our systems located at Globix Corporation's New York, New
York hosting facility and may add a third facility to make our systems
geographically redundant. Although we plan to complete this project by the end
of the third quarter of 2000 and may add a third facility, we cannot assure you
that our systems will be geographically redundant by this time. Fires, floods,
earthquakes, power losses, telecommunications failures, break-ins and similar
events could damage these systems. Computer viruses, electronic break-ins, human
error or other similar disruptive problems could also adversely affect our
systems. We do not carry business interruption insurance. Accordingly, any
significant damage to our systems would have a material adverse effect on our
business, financial condition and results of operations.
28
<PAGE>
Our ability to deliver our products and services and our financial condition
depend on our ability to license third-party software, systems and related
services on reasonable terms from reliable parties.
We depend upon various third parties for software, systems and related
services, including access to the Shared Registration System provided by Network
Solutions. Some of these parties have a limited operating history or may depend
on reliable delivery of services from others. If these parties fail to provide
reliable software, systems and related services on agreeable license terms, we
may be unable to deliver our products and services.
Failure by our third-party provider of credit card processing services to
process payments in a timely fashion will have a negative effect on our
business.
Under the terms of our accreditation agreement with ICANN, we are
required to obtain a reasonable assurance of payment of registration fees prior
to registering or renewing domain names. To satisfy this requirement, we have
engaged Cybersource to process credit card payments for our individual
customers. Therefore, if Cybersource or its system fails for any reason to
process credit card payments in a timely fashion, we may not be in compliance
with ICANN's requirement and as a result may not be allowed to process domain
name registrations. In addition, the domain name reservation process will be
delayed and customers may be unable to obtain their desired domain name.
If Internet usage does not grow, or if the Internet does not continue to expand
as a medium for commerce, our business may suffer.
Our success depends upon the continued development and acceptance of
the Internet as a widely used medium for commerce and communication. Rapid
growth in the uses of and interest in the Internet is a relatively recent
phenomenon and we cannot assure you that use of the Internet will continue to
grow at its current pace. A number of factors could prevent continued growth,
development and acceptance, including:
o the unwillingness of companies and consumers to shift their
purchasing from traditional vendors to online vendors;
o the Internet infrastructure may not be able to support the demands
placed on it, and its performance and reliability may decline as
usage grows;
o security and authentication issues may create concerns with respect
to the transmission over the Internet of confidential information,
such as credit card numbers, and attempts by unauthorized computer
users, so-called hackers, to penetrate online security systems; and
o privacy concerns, including those related to the ability of websites
to gather user information without the user's knowledge or consent,
may impact consumers' willingness to interact online.
Any of these issues could slow the growth of the Internet, which could have a
material adverse effect on our business, financial condition and results of
operations.
29
<PAGE>
If the use of the Internet as an advertising and marketing medium fails to
develop our future business could be materially adversely affected.
Our future success depends in part on a significant increase in the use
of the Internet as an advertising and marketing medium. Advertising revenues
constituted 19.2% of our net revenues for the three months ended March 31, 2000.
The Internet advertising market is new and rapidly evolving, and it cannot yet
be compared with traditional advertising media to gauge its effectiveness. As a
result, demand for and market acceptance of Internet advertising are uncertain.
Many of our current and potential customers have little or no experience with
Internet advertising and have allocated only a limited portion of their
advertising and marketing budgets to Internet activities. The adoption of
Internet advertising, particularly by entities that have historically relied
upon traditional methods of advertising and marketing, requires the acceptance
of a new way of advertising and marketing. These customers may find Internet
advertising to be less effective for meeting their business needs than
traditional methods of advertising and marketing. Furthermore, there are
software programs that limit or prevent advertising from being delivered to a
user's computer. Widespread adoption of this software by users would
significantly undermine the commercial viability of Internet advertising. These
factors could materially adversely affect our business, financial condition and
results of operations.
We depend on the technological stability and maintenance of the Internet
infrastructure.
Our success and the viability of the Internet as an information medium
and commercial marketplace will depend in large part upon the stability and
maintenance of the infrastructure for providing Internet access and carrying
Internet traffic. Failure to develop a reliable network system or timely
development and acceptance of complementary products, such as high-speed modems,
could materially harm our business. In addition, the Internet could lose its
viability due to delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet activity or due to
increased government regulation.
We may become subject to burdensome government regulations and legal
uncertainties affecting the Internet.
To date, government regulations have not materially restricted the use
of the Internet. The legal and regulatory environment pertaining to the
Internet, however, is uncertain and may change. Both new and existing laws may
be applied to the Internet by state, federal or foreign governments, covering
issues that include:
o sales and other taxes;
o user privacy;
o the expansion of intellectual property rights;
o pricing controls;
o characteristics and quality of products and services;
o consumer protection;
30
<PAGE>
o cross-border commerce;
o libel and defamation;
o copyright, trademark and patent infringement;
o pornography; and
o other claims based on the nature and content of Internet materials.
The adoption of any new laws or regulations or the new application or
interpretation of existing laws or regulations to the Internet could hinder the
growth in use of the Internet and other online services generally and decrease
the acceptance of the Internet and other online services as media of
communications, commerce and advertising. Our business may be harmed if any
slowing of the growth of the Internet reduces the demand for our services. In
addition, new legislation could increase our costs of doing business and prevent
us from delivering our products and services over the Internet, thereby harming
our business, financial condition and results of operations.
For example, in November 1999, the Anticybersquatting Consumer
Protection Act was enacted to curtail a practice commonly known in the industry
as "cybersquatting", a problem that could be exacerbated with any additional
top-level domain names that may be established by ICANN. A cybersquatter is
generally defined in this Act as one who registers a domain name that is
identical or similar to another party's trademark or the name of a living
person, in each case with the bad faith intent to profit from use of the domain
name. Although the Act states that registrars may not be held liable for
registering or maintaining a domain name for another person absent a showing of
the registrar's bad faith intent to profit from the use of the domain name,
registrars may be held liable if they fail to comply promptly with procedural
provisions. If we are held liable under this law, any liability could have a
material adverse effect on our business, financial condition and results of
operations.
We file tax returns in such states as required by law based on
principles applicable to traditional businesses. However, one or more states
could seek to impose additional income tax obligations or sales tax collection
obligations on out-of-state companies, such as ours, which engage in or
facilitate electronic commerce. A number of proposals have been made at state
and local levels that could impose such taxes on the sale of products and
services through the Internet or the income derived from such sales. Such
proposals, if adopted, could substantially impair the growth of electronic
commerce and materially adversely affect our business, financial condition and
results of operations.
Legislation limiting the ability of the states to impose taxes on
Internet-based transactions has been enacted by the United States Congress.
However, this legislation, known as the Internet Tax Freedom Act, imposes only a
three-year moratorium, which commenced October 1, 1998 and ends on October 21,
2001, on state and local taxes on electronic commerce. It is possible that the
tax moratorium could fail to be renewed prior to October 21, 2001. Failure to
renew this legislation would allow various states to impose taxes on
31
<PAGE>
Internet-based commerce. The imposition of such taxes could materially adversely
affect our business, financial condition and results of operations.
Investment Risks
Our stock price, like that of many Internet companies, is highly volatile.
The market price of our common stock has been and is likely to continue
to be highly volatile and significantly affected by factors such as:
o general market and economic conditions and market conditions
affecting technology and Internet stocks generally;
o limited availability of our shares on the open market;
o actual or anticipated fluctuations in our quarterly or annual
registrations or operating results;
o announcements of technological innovations, acquisitions or
investments, developments in Internet governance or corporate actions
such as stock splits, and;
o industry conditions and trends.
The stock market has experienced extreme price and volume fluctuations
that have particularly affected the market prices of the securities of
Internet-related companies. These fluctuations may adversely affect the market
price of our common stock.
Our directors, executive officers and principal stockholders own enough of our
shares to control Register.com, which will limit your ability to influence
corporate matters.
Our directors, executive officers and principal stockholders currently
beneficially own approximately 66.3%. Accordingly, these stockholders could
control the outcome of any corporate transaction or other matter submitted to
our stockholders for approval, including mergers, consolidations and the sale of
all or substantially all of our assets, and also could prevent or cause a change
in control. The interests of these stockholders may differ from the interests of
our other stockholders. In addition, third parties may be discouraged from
making a tender offer or bid to acquire us because of this concentration of
ownership.
Shares eligible for public sale could adversely affect our stock price.
A total of 26,880 and 23,245,177 shares of common stock may be sold in
the public market by existing stockholders 90 days and 180 days, respectively,
after March 2, 2000, the effective date of our initial public offering, subject
to applicable volume and other limitations imposed under federal securities
laws. The 180-day restriction on resales is the result of lock-up agreements
with our underwriters for this offering. Deutsche Bank Securities may release,
in its sole discretion, all or any portion of the securities subject to the
180-day lock-up agreements prior to the expiration of their term. Deutsche Bank
32
<PAGE>
Securities may waive these restrictions at our request or upon the request of a
stockholder. In evaluating whether to grant such a request, Deutsche Bank
Securities may consider a number of factors with a view toward maintaining an
orderly market for, and minimizing volatility in the market price of, our common
stock. These factors include, among other, the number of shares involved, recent
trading volume and prices of the stock, the length of time before the lock-up
expires and the reasons for, and the timing of, the request.
In addition, existing stockholders owning an aggregate of 29,375,875
shares of common stock and common stock issuable upon the exercise of
outstanding options and warrants have the right to require us to register their
shares under the Securities Act. If we register these shares, they can be sold
in the public market. The market price of our common stock could decline as a
result of sales by these existing stockholders of their shares of common stock
in the market after this offering, or the perception that these sales could
occur. These sales also might make it difficult for us to sell equity securities
in the future at a time and price that we deem appropriate.
Our charter documents and Delaware law may inhibit a takeover that stockholders
may consider favorable.
Provisions in our amended and restated certificate of incorporation,
our amended and restated bylaws and Delaware law could delay or prevent a change
of control or change in management that would provide stockholders with a
premium to the market price of their common stock. The authorization of
undesignated preferred stock, for example, gives our board the ability to issue
preferred stock with voting or other rights or preferences that could impede the
success of any attempt to change control of the company. If a change of control
or change in management is delayed or prevented, this premium may not be
realized or the market price of our common stock could decline.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our exposure to market risk is limited to interest income sensitivity,
which is affected by changes in the general level of U.S. interest rates. We
believe that we are not subject to any material interest rate risk because a
majority of our investments are in fixed-rate, short-term securities. The fair
value of our investment portfolio or related income would not be significantly
impacted by either a 100 basis point increase or decrease in interest rates due
mainly to the fixed-rate, short-term nature of the substantial majority of our
investment portfolio. We did not have any foreign currency hedging or derivative
instruments as of March 31, 2000.
We do not enter into financial instruments for trading or speculative
purposes and do not currently utilize derivative financial instruments. We have
no long term debt.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(a) N/A
(b) N/A
33
<PAGE>
(c) Recent Sales of Unregistered Securities
From time to time between January 1, 2000 and March 31, 2000
Register.com granted stock options to purchase an aggregate of 2,144,610 shares
of common stock at an average exercise price of $20.42 to employees and one
director, and during this period Register.com issued an aggregate of 84,607
shares of common stock upon the exercise of outstanding employee stock options
at an average exercise price of $.72. These grants and issuances were made in
reliance upon exemptions from registration pursuant to either (1) Section 4(2)
of the Securities Act of 1933, as amended (the "Securities Act"), or (2) Rule
701 under the Securities Act. No underwriters were involved with these
transactions.
(d) Use of Proceeds
In connection with Register.com's initial public offering of common
stock ("IPO"), the SEC declared its Registration Statement on Form S-1 (the
"Registration Statement") (Registration No. 333-93533) effective on March 2,
2000. Register.com consummated the IPO on March 8, 2000. Under the Registration
Statement all of the 5,750,000 shares (which includes 750,000 shares sold
pursuant to an over-allotment option granted to the underwriters), were sold at
an initial public offering price of $24.00 per share, 5,222,279 shares of which
were sold by Register.com and 527,721 shares of which are sold by the specified
Selling Stockholders. Deutsche Bank Alex. Brown, Thomas Weisel Partners LLC,
Legg Mason Wood Walker Incorporated and Wit SoundView were the managing
underwriters of the IPO. The offering did not terminate until after the sale of
all securities registered on the Registration Statement. The aggregate gross
proceeds from the shares sold by Register.com was $125.3 million and the
aggregate gross proceeds from the shares sold by the Selling Stockholders was
$12.7 million. The aggregate net proceeds to Register.com from the offering was
$115.3 million after deducting an aggregate of $8.8 million in underwriting
discounts and commissions paid to the underwriters and $1.3 million in other
expenses incurred in connection with the offering. None of the proceeds from the
offering were paid by Register.com, directly or indirectly, to any director or
officer of Register.com or any of their associates, or to any persons owning ten
percent or more of the outstanding stock of Register.com or to any affiliates of
Register.com.
Through March 31, 2000, Register.com has used $15.2 million of the net
proceeds for general working capital (including the payment of taxes), and
$322,000 million for capital expenditures. Register.com has invested the
remainder of the net proceeds in short-term, interest bearing, investment grade
obligations pending their use for other purposes.
Item 4. Submission of Matters to a Vote of Security Holders
On January 26, 2000, at the Annual Meeting of Stockholders of the
Company, the holders of the then outstanding shares of common stock of the
Company and the holders of the preferred stock of the Company, voting on an
as-converted basis, approved: (1) the election of Reginald Van Lee and the
re-election of the following individuals to the Company's Board of Directors to
serve until the next Annual Meeting of Stockholders: Richard D. Forman, Peter A.
Forman, Niles H. Cohen, Mark S. Hoffman, and Samantha McCuen; (2) the Company's
1999 Stock Option Plan; (3) the Company's 2000 Stock Incentive Plan; (4) an
34
<PAGE>
Amendment to the Certificate of Incorporation increasing the common stock
authorized for issuance in order to effect a 3.5-to-1 stock split of our common
stock; (5) the adoption and filing of our Amended and Restated Certificate of
Incorporation; and (6) the adoption of the Amended and Restated Bylaws of the
Company. Stockholders holding an aggregate of 24,490,023 shares, out of a total
of 25,906,517 shares outstanding voted in favor of these matters. In addition,
24,410,023 shares voted to ratify the Company's Employee Stock Purchase Plan.
All share totals treat the preferred stock on an as-converted basis.
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
Number Description
- ------ -----------
3.1 Amended and Restated Certificate of Incorporation
3.2 Certificate of Correction of Amended and Restated Certificate of
Incorporation
27.1 Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the three months
ended March 31, 2000.
35
<PAGE>
Item 7. Signatures
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGISTER.COM, INC.
Date: May 15, 2000 By: /s/ Alan G. Breitman
-----------------------------------------
Name: Alan G. Breitman (Principal Financial and
Accounting Officer)
Title: Vice President of Finance and Accounting
36
<PAGE>
EXHIBIT INDEX
Number Description
- ------ -----------
3.1 Amended and Restated Certificate of Incorporation
3.2 Certificate of Correction of Amended and Restated Certificate of
Incorporation
27.1 Financial Data Schedule
<PAGE>
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
REGISTER.COM, INC.
(Pursuant to Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware)
Register.com, Inc. (the "Corporation"), a corporation
organized and existing under the General Corporation Law of the State of
Delaware (the "General Corporation Law"),
DOES HEREBY CERTIFY:
FIRST: That the Corporation was originally incorporated in
Delaware, and the date of its filing of its original Certificate of
Incorporation with the Secretary of State of Delaware was May 11, 1999.
SECOND: That the Board of Directors duly adopted resolutions
proposing to amend and restate the Certificate of Incorporation of the
Corporation, declaring said amendment and restatement to be advisable and in the
best interests of the Corporation and its stockholders, and authorizing the
appropriate officers of the Corporation to solicit the consent of the
stockholders of the issued and outstanding Common Stock, $0.0001 par value, and
Preferred Stock, $0.0001 par value, voting as a single class and as separate
classes, all in accordance with the applicable provisions of Sections 228, 242
and 245 of the General Corporation Law of the State of Delaware;
THIRD: That the resolution setting forth the proposed
amendment and restatement is as follows:
RESOLVED, that the Amended and Restated of Certificate of
Incorporation of the Corporation be amended and restated in
its entirety as follows:
ARTICLE I
Name
The name of the Corporation is Register.com, Inc.
<PAGE>
ARTICLE II
Registered Office
The address of the registered office of the Corporation in the
State of Delaware is to be located at 9 East Loockerman Street, in the City of
Dover, in the County of Kent, in the State of Delaware 19901. The name of its
registered agent at such address is National Corporate Research, Ltd.
ARTICLE III
Powers/Term
The purpose of the Corporation is to engage in any lawful act
or activity for which a corporation may be organized under the General
Corporation Law. The Corporation is to have perpetual existence.
ARTICLE IV
Capital Stock
A. Classes of Stock. The total number of shares of stock which the
Corporation shall have authority to issue is two hundred million (205,000,000),
consisting of five million (5,000,000) shares of Preferred Stock, par value
$0.0001 per share (the "Preferred Stock"), and two hundred million (200,000,000)
shares of Common Stock, par value $0.0001 per share (the "Common Stock").
B. Preferred Stock. The Preferred Stock may be issued from time to time in
one or more series. The Board of Directors is hereby authorized to provide for
the issuance of shares of Preferred Stock in one or more series and, by filing a
certificate pursuant to the applicable law of the State of Delaware (the
"Preferred Stock Designation"), to establish from time to time the number of
shares to be included in each such series, and to fix the designation, powers,
preferences and rights of the shares of each such series and the qualifications,
limitations and restrictions thereof. The authority of the Board of Directors
with respect to each series shall include, but not be limited to, determination
of the following:
(a) The designation of the series, which may be by
distinguishing number, letter or title.
(b) The number of shares of the series, which number the Board
of Directors may thereafter (except where otherwise provided in the Preferred
Stock Designation) increase or decrease (but not below the number of shares
thereof then outstanding).
(c) The amounts payable on, and the preferences, if any, of
shares of the series in respect of dividends, and whether such dividends, if
any, shall be cumulative or noncumulative.
(d) Dates at which dividends, if any, shall be payable.
<PAGE>
(e) The redemption rights and price or prices, if any, for
shares of the series.
(f) The terms and amount of any sinking funds provided for the
purchase or redemption of shares of the series.
(g) The amounts payable on, and the preferences, if any, of
shares of the series in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation.
(h) Whether the shares of the series shall be convertible into
or exchangeable for shares of any other class or series, or any other security,
of the Corporation or any other corporation, and, if so, the specification of
such other class or series or such other security, the conversion or exchange
price or prices or rate or rates, any adjustments thereof, the date or dates at
which such shares shall be convertible or exchangeable and all other terms and
conditions upon which such conversion or change may be made.
(i) Restrictions on the issuance of shares of the same series
or of any other class or series.
(j) The voting rights, if any, of the holders of shares of the
series.
C. Common Stock; Voting. The Common Stock shall be subject to the express
terms of the Preferred Stock and any series thereof. Except as may otherwise be
provided in this Certificate of Incorporation, in a Preferred Stock Designation
or by applicable law, the holders of shares of Common Stock shall be entitled to
one vote for each such share upon all questions presented to the stockholders,
the Common Stock shall have the exclusive right to vote for the election of
directors and for all other purposes, and holders of Preferred Stock shall not
be entitled to vote at or receive notice of any meeting of stockholders.
The number of shares of authorized Common Stock may be
increased or decreased (but not below the number then outstanding) by the
affirmative vote of the holders of a majority in voting power of the outstanding
shares of capital stock of the Corporation entitled to vote thereon, voting
together as a single class notwithstanding the provisions of Section 242(b)(2)
of the General Corporation Law of the State of Delaware.
The Corporation shall be entitled to treat the person in whose
name any share of its stock is registered as the owner thereof for all purposes
and shall not be bound to recognize any equitable or other claim to, or interest
in, such share on the part of any other person whether or not the Corporation
shall have notice thereof, except as expressly provided by applicable law.
<PAGE>
ARTICLE V
Directors
A. Number. The number of directors of the Corporation shall be
such number, not less than five (5) nor more than nine (9) (exclusive of
directors, if any, to be elected by holders of preferred stock of the
Corporation, voting separately as a class), as shall be set forth from time to
time in the bylaws, provided that no action shall be taken to decrease or
increase the number of directors below five (5) or above nine (9) unless at
least 66.67% of the outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors (considered for this
purpose as one class) cast at a meeting of the stockholders called for that
purpose approve such decrease or increase, provided further that the limit on
the number of directors set forth herein shall increase each time the
Corporation makes an acquisition and adds a director or directors in connection
with such acquisition by the number of directors added at such time, but shall
in no event exceed fifteen (15) (exclusive of directors, if any, to be elected
by holders of preferred stock of the Corporation, voting separately as a class).
Vacancies in the Board of Directors of the Corporation, however caused, and
newly created directorships shall be filled by a vote of a majority of the
directors then in office, whether or not a quorum, and any director so chosen
shall hold office for a term expiring at the annual meeting of stockholders at
which the term of the class to which the director has been chosen expires and
when the director's successor is elected and qualified.
B. Removal of Directors. Notwithstanding any other provisions
of this Amended and Restated Certificate of Incorporation or the bylaws of the
Corporation, any director or the entire Board of Directors of the Corporation
may be removed, at any time, but only for cause and only by the affirmative vote
of the holders of not less than 66.67% of the outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of directors
(considered for this purpose as one class) cast at a meeting of the stockholders
called for that purpose. Notwithstanding the foregoing, whenever the holders of
any one or more series of preferred stock of the Corporation shall have the
right, voting separately as a class, to elect one or more directors of the
Corporation, the preceding provisions of this ARTICLE V shall not apply with
respect to the director or directors elected by such holders of preferred stock.
ARTICLE VI
Stockholder Meetings
Meetings of stockholders may be held within or without the
State of Delaware, as the bylaws may provide. The books of the Corporation may
be kept (subject to any provision contained in the statutes) outside the State
of Delaware at such place or places as may be designated from time to time by
the Board of Directors or in the bylaws of the Corporation. The stockholders of
the Corporation may not take any action by written consent in lieu of a meeting.
<PAGE>
ARTICLE VII
Limitation of Directors' Liability
A director of the Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption from liability or
limitation thereof is not permitted under the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended. Any amendment,
modification or repeal of the foregoing sentence shall not adversely affect any
right or protection of a director of the Corporation hereunder in respect of any
act or omission occurring prior to the time of such amendment, modification or
repeal. If the General Corporation Law of the State of Delaware is amended after
approval by the stockholders of this ARTICLE VII to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director shall be eliminated or limited to the fullest extent
permitted by the General Corporation Law of the State of Delaware, as so
amended.
ARTICLE VIII
Indemnification
A. Right to Indemnification. The Corporation shall indemnify
and hold harmless, to the fullest extent permitted by applicable law as it
presently exists or may hereafter be amended, any person (a "Covered Person")
who was or is made is threatened to be made a party or is otherwise involved in
any action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding"), by reason of the fact that he, or a person for
whom he is the legal representative, is or was a director or officer of the
Corporation or, while a director or officer of the Corporation, is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust,
enterprise or nonprofit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and expenses (including
attorneys' fees) reasonably incurred by such Covered Person. Notwithstanding the
preceding sentence, except as otherwise provided in this Article VIII, the
Corporation shall be required to indemnify a Covered Person in connection with a
proceeding (or part thereof) commenced by such Covered Person only if the
commencement of such proceeding (or part thereof) by the Covered person was
authorized by the Board of Directors of the Corporation.
B. Prepayment of Expenses. The Corporation shall pay the
expenses (including attorneys' fees) incurred by a Covered person in defending
any proceeding in advance of its final disposition, provided, however, that, to
the extent required by law, such payment of expenses in advance of the final
disposition of the proceeding shall be made only upon receipt of an undertaking
by the Covered Person to repay all amounts advanced if it should be ultimately
determined that the Covered person is not entitled to be indemnified under this
Article VIII or otherwise.
C. Claims. If a claim for indemnification or advancement of
expenses under this Article VIII is not paid in full within thirty days after a
written claim therefor by the Covered Person has been received by the
Corporation, the Covered Person may file suit to recover the unpaid amount of
such claim and, if successful in whole or in part, shall be entitled to be paid
the expense of prosecuting such claim. In any such action the corporation shall
have the burden of proving that the Covered Person is not entitled to the
requested indemnification or advancement of expenses under applicable law.
<PAGE>
D. Nonexclusivity of Rights. The rights conferred on any
Covered Person by this Article VIII shall not be exclusive of any other rights
which such Covered Person may have or hereafter acquire under any statute,
provision of the certificate of incorporation, these bylaws, agreement, vote of
stockholders or disinterested directors or otherwise.
E. Other Sources. The Corporation's obligation, if any, to
indemnify or to advance expenses to any Covered person who was or is serving at
its request as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, enterprise or nonprofit entity shall be
reduced by any amount such Covered Person may collect as indemnification or
advancement of expenses from such other corporation, partnership, joint venture,
trust, enterprise or non-profit enterprise.
F. Amendment or Repeal. Any repeal or modification of the
foregoing provisions of this Article VIII shall not adversely affect any right
or protection hereunder of any Covered Person in respect of any act or omission
occurring prior to the time of such repeal or modification.
G. Other Indemnification and Prepayment of Expenses. This
Article VIII shall not limit the right to the Corporation to the extent and in
the manner permitted by law, to indemnify and to advance expenses to persons
other than Covered Persons when and as authorized by appropriate corporate
action.
ARTICLE IX
Amendment of Bylaws
In furtherance of and not in limitation of powers conferred by
statute, the Board of Directors of the Corporation is expressly authorized to
adopt, repeal, alter, amend and rescind the bylaws of the Corporation by vote of
66.67% of the Board of Directors.
<PAGE>
ARTICLE X
Amendment of Certificate of Incorporation
The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute and this
Amended and Restated Certificate of Incorporation, and all rights conferred upon
stockholders herein are granted subject to this reservation. Notwithstanding the
foregoing, the provisions set forth in ARTICLES V, VI, VII, VIII, IX and this
ARTICLE X may not be repealed, altered, amended or rescinded in any respect
unless the same is approved by the affirmative vote of the holders of not less
than 66.67% of the outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors (considered for this
purpose as a single class) cast at a meeting of the stockholders called for that
purpose (provided that notice of such proposed repeal, alteration, amendment or
rescission is included in the notice of such meeting).
* * *
FOURTH: That said amendments were duly adopted in accordance
with the provisions of Sections 242 and 245 of the General Corporation Law.
<PAGE>
IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation has been signed by the President and the Secretary of the
Corporation this 2nd day of March, 2000.
/s/ Richard D. Forman
------------------------------
Richard D. Forman,
President and Chief Executive
Officer
/s/ Jack S. Levy
------------------------------
Jack S. Levy, Secretary
<PAGE>
CERTIFICATE OF CORRECTION
FILED TO CORRECT A CERTAIN ERROR IN THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
REGISTER.COM, INC.
FILED IN THE OFFICE OF THE SECRETARY OF STATE OF DELAWARE ON
MARCH 2, 2000
Register.com, Inc., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware, DOES
HEREBY CERTIFY:
First: The name of the corporation is Register.com, Inc.
Second: That the Amended and Restated Certificate of
Incorporation (the "Certificate") was filed by the
Secretary of State of Delaware on March 2, 2000, and
that the Certificate requires correction as permitted
by Section 103(f) of the General Corporation Law of
the State of Delaware.
Third: The inaccuracy or defect of said Certificate to be
corrected is the inadvertent typographical error
found within the "Capital Stock" section of the
Certificate. The error is in the amount of the total
number of shares of stock which the Corporation shall
have authority to issue. The specific error is found
in ARTICLE IV under paragraph A. which provides: A.
"The total number of shares of stock which the
Corporation shall have authority to issue is two
hundred million (205,000,000), consisting of five
million (5,000,000) shares of Preferred Stock, par
value $0.0001 per share (the "Preferred Stock"), and
two hundred million (200,000,000) shares of Common
Stock, par value $0.0001 per share (the "Common
Stock").
Fourth: The Certificate is hereby corrected to reflect that
the Corporation shall have authority to issue two
hundred five million (205,000,000). The change shall
be made in the "Capital Stock" section of the
Certificate under ARTICLE IV paragraph A to delete
the first sentence in its entirety and replace with
the following: "The total number of shares of stock
<PAGE>
which the Corporation shall have authority to issue
is two hundred five million (205,000,000), consisting
of five million (5,000,000) shares of Preferred
Stock, par value $0.0001 per share (the "Preferred
Stock"), and two hundred million (200,000,000) shares
of Common Stock, par value $0.0001 per share (the
"Common Stock")."
Fifth:
IN WITNESS WHEREOF, said Register.com, Inc. has caused this
Certificate to be signed by the undersigned on this 6th day of March, 2000.
REGISTER.COM, INC.
By: /s/ Jack S. Levy
-----------------------
Jack S. Levy, Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
REGISTER.COM, INC. FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 175,773
<SECURITIES> 7,318
<RECEIVABLES> 5,329
<ALLOWANCES> (640)
<INVENTORY> 0
<CURRENT-ASSETS> 215,018
<PP&E> 3,760
<DEPRECIATION> (758)
<TOTAL-ASSETS> 225,911
<CURRENT-LIABILITIES> 65,674
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 137,140
<TOTAL-LIABILITY-AND-EQUITY> 225,911
<SALES> 12,418
<TOTAL-REVENUES> 12,418
<CGS> 4,101
<TOTAL-COSTS> 4,101
<OTHER-EXPENSES> 10,421
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> (991)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (991)
<EPS-BASIC> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
