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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period
ended June 30, 2000
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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
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Register.com, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 11-3239091
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
575 Eighth Avenue, 11th Floor, New York, New York 10018
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(Address of principal executive offices) (Zip Code)
(212) 798-9100
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(Registrant's telephone number, including area code)
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(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. |X| Yes |_| No
As of August 9, 2000, there were 31,991,411 shares of the registrant's
common stock outstanding.
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Register.com, Inc.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION Page Number
<S> <C> <C>
Item 1. Financial Statements 3
Balance Sheets at December 31, 1999 and
June 30, 2000 (unaudited) 3
Statements of Operations for the three months and
six months ended June 30, 1999 and 2000 (unaudited) 4
Unaudited Statements of Cash Flows for the six
months ended June 30, 1999 and 2000 (unaudited) 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 36
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 37
Item 6. Exhibits and Reports on Form 8-K 37
Item 7. Signatures 38
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Register.com, Inc.
Balance Sheet
<TABLE>
<CAPTION>
December 31, June 30,
---------------- ---------------
1999 2000
---------------- ---------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents ......................................... $ 40,944,122 $ 148,332,164
Short-term investments ............................................ 4,723,050 26,912,789
Accounts receivable, less allowance of $314,516 and
$804,576 (unaudited), respectively .............................. 2,516,186 6,259,784
Prepaid domain name registry fees ................................. 4,954,730 14,307,860
Deferred tax asset ................................................ 8,578,045 21,995,762
Prepaid income taxes .............................................. -- 1,608,000
Deferred offering costs ........................................... 390,000 --
Other current assets .............................................. 195,196 1,667,597
------------- -------------
Total current assets ........................................... 62,301,329 221,083,956
Fixed assets, net .................................................. 2,458,386 7,296,257
Prepaid domain name registry fees, net of current portion .......... 3,576,331 5,476,523
Investments ........................................................ -- 2,500,000
Goodwill and other intangibles, net ................................ -- 11,341,302
Other assets ....................................................... -- --
------------- -------------
Total assets ................................................... $ 68,336,046 $ 247,698,038
============= =============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses ............................. $ 8,513,079 $ 11,777,790
Income taxes payable .............................................. 5,608,198 --
Deferred revenue, net ............................................. 18,193,871 63,509,292
Capital lease obligations, current portion ........................ 5,967 --
Notes payable ..................................................... -- --
Other current liabilities ......................................... 166,857 927,430
------------- -------------
Total current liabilities ...................................... 32,487,972 76,214,512
------------- -------------
Deferred revenue, net of current portion ........................... 13,907,361 24,029,534
Capital lease obligations, net of current portion .................. 27,858 --
------------- -------------
Total liabilities .............................................. 46,423,191 100,244,046
------------- -------------
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 June
30, 2000 (liquidation preference of $16,094,844) ................ 469 --
Common stock -- $.0001 par value, 200,000,000 shares
authorized; 21,065,047 shares issued and outstanding at December
31, 1999, and 31,990,420 issued and outstanding at June 30, 2000. 2,106 3,199
Additional paid-in capital ........................................ 36,709,821 167,212,811
Unearned compensation ............................................. (2,647,770) (5,627,223)
Accumulated deficit ............................................... (12,151,771) (14,134,795)
------------- -------------
Total stockholders' equity ..................................... 21,912,855 147,453,992
------------- -------------
Total liabilities and stockholders' equity ..................... $ 68,336,046 $ 247,698,038
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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Register.com, Inc.
Statement of Operations
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------------- ----------------------------------
1999 2000 1999 2000
--------------- --------------- --------------- ----------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenues .................. $ 1,521,762 $ 20,249,886 $ 2,269,062 $ 32,667,756
Cost of revenues .............. 232,665 5,286,689 324,783 9,387,700
------------ ------------ ------------ ------------
Gross profit ............... 1,289,097 14,963,197 1,944,279 23,280,056
------------ ------------ ------------ ------------
Operating costs and expenses
Sales and marketing .......... 998,064 14,980,181 1,717,763 22,153,387
Research and development ..... 356,606 1,236,329 623,552 1,954,097
General and administrative
(exclusive of non-cash
compensation) .............. 199,732 1,644,058 402,325 3,342,079
Non-cash compensation ........ 3,945,248 458,320 4,530,815 1,290,093
Amortization of goodwill
and other intangibles ...... -- 298,455 -- 298,455
------------ ------------ ------------ ------------
Total operating cost and
expenses .................. 5,499,650 18,617,343 7,274,455 29,038,111
------------ ------------ ------------ ------------
Loss from operations .......... (4,210,553) (3,654,146) (5,330,176) (5,758,055)
Other income (expenses), net 70,552 2,662,014 83,173 3,775,031
------------ ------------ ------------ ------------
Net loss ................... $ (4,140,001) $ (992,132) $ (5,247,003) $ (1,983,024)
============ ============ ============ ============
Basic and diluted net loss
per share ................. $ (.23) $ (.03) $ (.30) $ (.07)
============ ============ ============ ============
Weighted average
common shares used in
basic and diluted net
loss per share ............ 18,193,318 31,623,494 17,747,079 27,901,444
============ ============ ============ ============
Pro forma basic and diluted
net loss per share
(unaudited) .................. $ (.03) $ (.07)
============ ============
Weighted average common
shares used in pro forma
basic and diluted net loss
per share (unaudited) ........ 31,623,494 29,526,406
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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Register.com, Inc.
Statement of Cash Flows
Six Months Ended
June 30,
--------------------------------
1999 2000
-------------- ----------------
(unaudited)
Cash flows from operating activities
Net loss .............................. $ (5,247,003) $ (1,983,024)
Adjustments to reconcile net loss
to net cash provided by (used
in) operating activities
Deferred revenues .................. 2,655,896 55,437,594
Depreciation and
amortization ..................... (3,314) 849,675
Compensatory stock options
and warrants expense ............. 4,530,815 1,290,093
Deferred income taxes .............. -- (13,417,717)
Changes in assets and liabilities
affecting operating cash flows
Accounts receivable ................. (1,195,679) (3,743,598)
Prepaid domain name registry
fees ............................... (1,820,584) (11,253,322)
Prepaid income taxes ................ -- (1,608,000)
Other current assets ................ (18,958) (1,472,401)
Other assets ........................ (852) --
Accounts payable and accrued
expenses ........................... 525,352 3,264,711
Accrued registry fees ............... -- --
Accrued advertising ................. -- --
Income taxes payable ................ -- (5,608,198)
Other current liabilities ........... -- 760,573
------------ -------------
Net cash provided by (used
in) operating activities ......... (574,327) 22,516,386
------------ -------------
Cash flows from investing activities
Purchases of fixed assets ............. (961,790) (5,389,091)
Deferred offering costs ............... -- 390,000
Purchases of investments .............. -- (24,689,739)
Acquisition of Inabox, net ............ -- (1,091,083)
------------ -------------
Net cash used in investing
activities ....................... (961,790) (30,779,913)
------------ -------------
Cash flows from financing activities
Proceeds from notes payable ........... -- --
Repayment of notes payable ............ -- --
Net proceeds from issuance of
common stock and warrants ........... 6,693,497 115,685,394
Net proceeds from issuance of
preferred stock and warrants ........ 13,030,500 --
Principal payments on capital
lease obligations ................... (3,135) (33,825)
------------ -------------
Net cash provided by
financing activities ............. 19,720,862 115,651,569
------------ -------------
Net increase in cash and cash
equivalents ........................... 18,184,745 107,388,042
Cash and cash equivalents at
beginning of period ................... 1,284,648 40,944,122
------------ -------------
Cash and cash equivalents at end of
period ................................ $ 19,469,393 $ 148,332,164
============ =============
Supplemental disclosure of cash
flow information
Cash paid for interest ................ $ 2,689 $ 15,493
Cash paid for income taxes ............ $ -- $ 20,687,509
The accompanying notes are an integral part of these financial statements.
5
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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
December 31, 1999 audited financial statements and notes thereto included in
Register.com's final prospectus filed with the SEC.
6
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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.
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.
5. Acquisitions
In June 2000, the Company, through a newly formed wholly owned
subsidiary, acquired all of the outstanding capital stock of Inabox, Inc. for $1
million cash and 280,019 shares of the Company's common stock. Upon meeting
certain criteria, the Company may be required to issue an additional 20,000
shares of its common stock to the previous shareholders of Inabox, Inc. The
total value of the transaction was approximately $11.7 million. The acquisition
has been accounted for using the purchase method of accounting, and accordingly
the purchase price has been allocated to assets acquired and liabilities assumed
based on their respective fair values. Intangible assets, representing the
unallocated excess of purchase price, plus transaction expenses, over the net
assets acquired and liabilities assumed based on their respective fair values.
Intangible assets, representing the unallocated excess of purchase price, plus
transaction expenses, over the net assets acquired, or approximately $11.6
million has been preliminarily allocated to goodwill and other intangibles and
is being amortized on a straight-line basis over a period of 39 months. The June
30, 2000 financial statements of the Company include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany transactions have
been eliminated in consolidation.
7
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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:
<TABLE>
<CAPTION>
<S> <C>
Products and Services Products and Services
Provided by Us Provided by Others
o domain name forwarding o email
o real-time domain name management o web hosting
o website-creation tools under the name FirstStepSite o submission of domain names to up
to 400 search engines
o trademark monitoring under the
name Trademark Guardian
</TABLE>
8
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Our goal is to become a one-stop resource through which our customers will
establish, maintain and enhance their presence on the Internet.
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.
In June 2000, we acquired all of the outstanding capital stock of Inabox,
Inc. through a merger for $1.0 million in cash and 280,019 shares of our common
stock. In the event contracts are signed with identified prospects, we may be
required to issue an additional 20,000 shares of our common stock to the
previous stockholders of Inabox. This transaction was accounted for using the
purchase method of accounting. As a result, Inabox's financial results are
consolidated with our financial results from the date of acquisition.
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,
renewal, extended and transferred registrations. 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. Renewal and extension registration periods can be from one to ten
years. 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, on our website, 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.
In addition to our standard registration fees, we have a number of
different fee structures for our domain registration services. Our Corporate
Services department delivers a diversified range of higher-priced services for
our corporate customers. We pay referral commissions based on a percentage of
the net registration revenues derived from registrations processed through the
participants in our network of co-brand websites and those we process though our
www.register.com website referred to us by participants in our affiliate
network. Participants in our network of private label websites pay us a fee per
registration, discounted off of our standard registration fee. We recently added
product and service offerings to expand into different
9
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segments of the domain name registration market we did not previously serve.
These include registrations offered at a substantial discount to our standard
registration fees targeted for bulk customers and the use of domain names for
consumers at no charge, limited to one name per customer as identified by a
unique email address for a duration of one year. Each of these new offerings
includes a reduced level of customer service and limited value-added products or
services. As a result of expanding into these new segments, we anticipate that
in the short-tem our overall gross margin will be negatively impacted, but will
improve over the long-term as we sell higher margin products and services to
these customers.
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 primarily consist of email, domain
name forwarding, web hosting and software, 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. Our
software revenues consist solely of software sales by our Inabox subsidiary. To
date, these software revenues have not been material and we do not expect these
revenues to be material for the foreseeable future. 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 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
10
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.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, direct, 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.
There are no material costs associated with our software revenues.
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, non-cash compensation expenses, and
amortization of goodwill and other intangible assets. 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 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 recorded a non-cash
compensation charge of $1.3 million for the six months ended June 30, 2000, and
will record approximately $5.6 million in additional non-cash compensation
charges through 2004 as follows: $900,000 for the remainder of 2000, $1.8
million in each of 2001 and 2002, and $714,000 in 2003 and $359,000 in 20004.
These charges primarily relate to the issuance through June 2000 of employee
stock options having exercise prices below fair market value on the date of
grant. The amortization of goodwill and other intangible assets is associated
with our acquisition of Inabox Inc. in June 2000. The transaction was valued at
approximately $11.7 million of which approximately $11.6 million has been
preliminarily allocated to goodwill and other intangible items. This amount is
being amortized on a straight-line basis over 39 months.
11
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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 $992,000 and $2.0 million for the three and six months
ended June 30, 2000, respectively, $8.8 million for the year ended December 31,
1999, $4.1 million and $5.2 million for the three and six months ended June 30,
1999, respectively, and $1.2 million for the year ended December 31, 1998. We
intend to spend more than $25.0 million in the second half of 2000 and more than
$70.0 million in 2001 on sales and marketing, and over $7.0 million in the
second half of 2000 and more than $20.0 million in 2001 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 second quarter and
first semester 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 table presents selected statement of operations data for
the periods indicated as a percentage of net revenues. The operating results in
any quarter are not necessarily indicative of the results to be expected for any
future period.
12
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<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues 100% 100% 100% 100%
Cost of revenues 15 26 14 29
----- ----- ----- -----
Gross Profit 85 74 86 71
----- ----- ----- -----
Operating expenses
Sales & marketing 66 82 76 68
Research & development 23 6 27 6
General & administrative 13 8 18 10
Non-cash compensation 259 2 200 4
Amortization of Goodwill and
other intangibles 0 1 0 1
----- ----- ----- -----
Total operating expenses 361 99 321 89
----- ----- ----- -----
Loss from operations (277) (25) (235) (18)
Other income (expenses), net 5 13 4 12
----- ----- ----- -----
Net income (loss) (272)% (12)% (231)% (6)%
===== ===== ===== =====
</TABLE>
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Six months ended June 30, 1999 and 2000
Net Revenues
Total net revenues increased from $2.3 million for the six months ended
June 30, 1999 to $32.7 million for the six months ended June 30, 2000.
Domain Name Registrations. Revenues from domain name registrations
increased from $376,000 for the six months ended June 30, 1999 to $25.6 million
for the six months ended June 30, 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
$2.4 million of deferred revenue, net from domain name registrations at June 30,
1999, while deferred revenue, net was $86.4 million at June 30, 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 market for domain name registrations, renewals and
transfers and the implementation of our business strategy. For the three months
ended December 31, 1999, we registered 308,000 domain names in the .com, .net
and .org domains, in the three months ended March 31, 2000, we registered
908,000 domain names in these domains, and in the three months ended June 30,
2000, we registered 678,000 domain names in these domains. We believe that the
number of domain name registrations for the first quarter of this year was
unusually high for various reasons which we believe include heightened awareness
of the opportunity to register domain names and the absence of significant
competition for domain name registrations other than from Network Solutions. We
believe that the growth experienced in domain name registrations in the first
quarter of this year is not an indication of anticipated future growth.
Online Products and Services. Revenues from online products and services
increased 45.9% from $1.0 million for the six months ended June 30, 1999 to
$1.5 million for the six months ended June 30, 2000 primarily from increased
sales of email and domain name 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 $879,000 for the six
months ended June 30, 1999 to $5.7 million for the six months ended June 30,
2000 primarily from the increased number of page views and the volume of
advertising and sponsorships sold on our www.register.com, FirstStepSite, 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 $325,000 for the six months ended
June 30, 1999 to $9.4 million for the six months ended June 30, 2000.
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<PAGE>
Cost of Domain Name Registrations. Cost of domain name registrations
increased from $183,000 for the six months ended June 30, 1999 to $9.3 million
for the six months ended June 30, 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
decreased from $142,000 for the six months ended June 30, 1999 to $104,000 for
the six months ended June 30, 2000. During the first quarter of 2000, there was
an increase in cost of online products and services primarily due to the
additional depreciation expense associated with the equipment dedicated to our
operations to support our growing online product and services offerings. During
the second quarter of 2000, we had renegotiations with vendors which resulted
in lower costs of sales and a one time adjustment to expenses. The decrease in
the cost of online products and services for the six months ended June 30, 1999
as compared to the six months ended June 30, 2000 was primarily a result of the
aforementioned negotiations with vendors. 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 $7.3 million for the six months
ended June 30, 1999 to $29.0 million for the six months ended June 30, 2000.
15
<PAGE>
Sales and Marketing. Sales and marketing expenses increased from $1.7
million for the six months ended June 30, 1999 to $22.2 million for the six
months ended June 30, 2000. The increase was primarily from the costs
associated with our radio, print media and television advertising campaigns.
The radio and print campaign was launched in September 1999, while the
television campaign was launched in May 2000. 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
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
$624,000 for the six months ended June 30, 1999 to $2.0 million for the six
months ended June 30, 2000. The increase resulted primarily from 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 $402,000 for the six months ended June 30, 1999 to $3.3 million for the
six months ended June 30, 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 decreased from $4.5
million for the six months ended June 30, 1999 to $1.3 million for the six
months ended June 30, 2000. For the six months ended June 30, 1999, the
non-cash compensation was primarily associated with the modification of
warrants previously granted to some of our stockholders and issuance of
warrants in connection with a financial consulting agreement, and a minimal
portion of the expense was the result of the amortization of deferred
compensation related to employee stock options. For the six months ended June
30, 2000, the non-cash compensation was primarily attributable to the
amortization of deferred compensation related to employee stock options.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill
and other intangible items was $298,000 for the six months ended June 30, 2000
and related to the goodwill and intangible items associated with our
acquisition of Inabox. We had no amortization of goodwill for the six months
ended June 30, 1999.
Other Income (Expenses), Net.
Other income, net consists primarily of interest income net of interest
expense. Other income, net increased from $83,000 for the six months ended June
30, 1999 to $3.8 million for the six months ended June 30, 2000. The increase
was primarily from interest earned on our cash balance as a result of our
equity financings, including our initial public offering and cash provided by
operations.
Net Loss
Net loss decreased $3.2 million to $2.0 million in the six months ended
June 30, 2000 from $5.2 million in the six months ended June 30, 1999.
16
<PAGE>
Three months ended June 30, 1999 and 2000
Net Revenues
Total revenues increased from $1.5 million for the three months ended
June 30, 1999 to $20.2 million for the three months ended June 30, 2000.
Domain Name Registrations. Revenues from domain name registrations
increased from $291,000 for the three months ended June 30, 1999 to $16.1
million for the three months ended June 30, 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,
our deferred revenue, net from domain name registrations at June 30, 1999, was
$2.4 million, while deferred revenue, net was $86.4 million at June 30, 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 market for domain name registrations, renewals and
transfers and the implementation of our business strategy. For the three months
ended December 31, 1999, we registered 308,000 domain names in the .com, .net
and .org domains, and in the three months ended March 31, 2000, we registered
908,000 domain names in these domains, and in the three months ended June 30,
2000, we registered 678,000 domain names in these domains. We believe that the
number of domain name registrations for the first quarter of this year was
unusually high for various reasons which we believe include heightened awareness
of the opportunity to register domain names and the absence of significant
competition for domain name registrations other than from Network Solutions. We
believe that the growth experienced in domain name registrations in the first
quarter of this year is not an indication of anticipated future growth.
Online Products and Services. Revenues from online products and
services increased 50.8% from $561,000 for the three months ended June 30, 1999
to $846,000 for the three months ended June 30, 2000 primarily from increased
sales of email and domain name 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 $670,000 for the
three months ended June 30, 1999 to $3.3 million for the three months ended June
30, 2000 primarily from the increased number of page views and the volume of
advertising and sponsorships sold on our www.register.com, FirstStep, 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 $233,000 for the three months
ended June 30, 1999 to $5.3 million for the three months ended June 30, 2000.
17
<PAGE>
Cost of Domain Name Registrations. Cost of domain name registrations
increased from $99,000 for the three months ended June 30, 1999 to $5.3 million
for the three months ended June 30, 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 decreased from $133,000 for the three months ended June 30, 1999 to
$11,000 for the three months ended June 30, 2000. The decrease was primarily due
to renegotiations with vendors which resulted in lower costs of sales and a one
time adjustment to expenses. 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 $5.5 million for the three
months ended June 30, 1999 to $18.6 million for the three months ended June 30,
2000.
Sales and Marketing. Sales and marketing expenses increased from
$998,000 for the three months ended June 30, 1999 to $15.0 million for the three
months ended June 30, 2000. The increase was primarily from the costs associated
with our radio, print media and television advertising campaign. The radio and
print campaign was launched in September 1999, while the television campaign was
launched in May 2000. 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 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 $357,000 for the three months ended June 30, 1999 to $1.2 million for the
three months ended June 30, 2000. The increase resulted primarily from 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 $200,000 for the three months ended June 30, 1999 to $1.6 million
for the three months ended June 30, 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.
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<PAGE>
Non-cash Compensation. Non-cash compensation expenses decreased from
$3.9 million for the three months ended June 30, 1999 to $458,000 for the three
months ended June 30, 2000. For the three months ended June 30, 1999, the
non-cash compensation was primarily associated with the modification of warrants
previously granted to some of our stockholders and issuance of warrants in
connection with a financial consulting agreement, and a minimal portion of the
expense was the result of the amortization of deferred compensation related to
employee stock options. For the three months ended June 30, 2000, the non-cash
compensation was primarily attributable to the amortization of deferred
compensation related to employee stock options.
Amortization of Goodwill and Other Intangible Items. Amortization of
goodwill and other intangible items was $298,000 for the three months ended June
30, 2000 and related to the goodwill and intangible items associated with our
acquisition of Inabox. We had no amortization of goodwill for the three months
ended June 30, 1999.
Other Income (Expenses), Net.
Other income, net consists primarily of interest income net of interest
expense. Other income, net increased from $71,000 for the three months ended
June 30, 1999 to $2.7 million for the three months ended June 30, 2000. The
increase was primarily from interest earned on our cash balance as a result of
our equity financings, including our initial public offering and cash provided
by operations.
Net Loss
Net loss decreased $3.1 million to $1.0 million in the three months ended
June 30, 2000 from $4.1 million in the three months ended June 30, 1999.
Liquidity and Capital Resources
Historically, 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.
19
<PAGE>
Net cash used in operating activities was $574,000 for the six months
ended June 30, 1999. The principal use of cash during this period was to fund
our losses from operations. Our business generated $22.5 million of cash from
operations during the six months ended June 30, 2000. This cash generated from
operations was primarily due to increased domain name registrations.
Net cash used for investing activities was $962,000 and $30.7 million for
the six months ended June 30, 1999 and 2000, respectively. For the six months
ended June 30, 1999, cash used for investing activities related primarily to
the purchase of property and equipment and investment in our systems
infrastructure. For the six months ended June 30, 2000, cash used for investing
activities related to the purchase of property plant and equipment, investment
in our systems infrastructure, our investment in GreatDomains.com, our
acquisition of Inabox, and our investment in short-term investments.
We generated $19.7 million and $115.7 million in cash from financing
activities for the six months ending June 30, 1999 and 2000, respectively. For
the six months ended June 30, 1999, substantially all of the financing
activities were private sales of equity securities. For the six months ended
June 30, 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
$25.0 million in the second half of 2000 on sales and marketing and over $7.0
million on capital expenditures in the second half of 2000 and over $20.0
million in 2001, 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.
20
<PAGE>
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 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 $2.0 million for the six months ended June 30,
2000. As of June 30, 2000, our accumulated losses totaled $14.1 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 six months ended June 30, 2000 we expect to incur
additional losses for the foreseeable future, primarily due to an increase in
our sales and marketing expenses to build our brand, which we expect to exceed
$25.0 million in the second half of 2000, and to exceed $70.0 million in 2001
and our capital expenditures, which we expect to exceed $7.0 million in the
second half of 2000, and to exceed $20.0 million in 2001. These losses are
expected to increase 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 six months ended June 30, 2000, we recorded a $1.3 million
non-cash compensation charge. Based
21
<PAGE>
principally on grants of common stock, stock options and warrants made to date,
we will record approximately $5.6 million of additional non-cash compensation
through 2003 as follows: $900,000 for the remainder of 2000, $1.8 million in
each of 2001 and 2002 and $714,000 in 2003 and $359,000 in 2004. 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;
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 July 26, 2000, Network Solutions
registered approximately 2.1 million net new registrations in the .com, .net
and .org domains for the three months ended June 30, 2000, representing
approximately 38% of all new registrations in these domains 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
22
<PAGE>
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.
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 acquisition of Network Solutions by VeriSign, Inc. will likely
strengthen Network Solutions' competitive advantage.
On June 9, 2000, Network Solutions was acquired by VeriSign, Inc. a
provider of Internet trust services. 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 include 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 July 20, 2000, ICANN had
accredited 119 competitive registrars, including us, to register domain names
in the .com, .net and .org domains. As of July 20, 2000, Network Solutions and
54 other registrars, not including us, were registering domain names in these
domains. An additional 63 registrars have been accredited to register but are
not yet registering domain names, and 10 registrars have qualified to register
domain names but have not yet signed 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 many companies that are not accredited registrars offer domain name
registrations through a competing accredited registrar's system; and
o ICANN will continue to 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
have entered the industry
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<PAGE>
have made it difficult for us to maintain our current market share and
contributed to a decline in the number of registrations we performed in the
second quarter of this year as compared to the first quarter. BulkRegister.com
has registered a significant number of domain names in the first half of 2000,
and, according to their press release dated July 28, 2000, they registered more
domain names in the .com, .net and .org domains than we did during the three
months ended June 30, 2000. If we continue to lose market share and experience a
decline in registrations it would materially adversely affect our business,
financial condition and results of operations. Also, as a result of increased
competition, our period-over-period growth rates are likely to fluctuate over
time.
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.
Competition in the domain name registration industry could force us to reduce
our prices for our core products and services which would negatively impact our
results of operations.
Because competition in the domain name registration industry is in its
early stages, we may be required, by market factors or otherwise, to reduce,
perhaps significantly, the prices we charge for our core domain name
registration and related products and services. Some of our competitors offer
domain name registration services at a wholesale price level minimally above the
$6 registry fee. Other competitors, including Network Solutions, have reduced
their pricing for domain name registrations during the past six months both for
short-term promotions and on a permanent basis. Further, some of our competitors
are offering domain name registrations for free and derive their revenues from
other sources. In response to competitive challenges, we are experimenting with
different price points for our products and services. In addition, we recently
added product and service offerings to expand into different segments of the
domain name registration market we did not previously serve. These include
registrations offered at a substantial discount to our standard registration
fees targeted for bulk customers and free domain names for consumers, limited to
one name per customer as identified by a unique email address. Each of these new
offerings also includes a reduced level of value-added services. Reducing the
prices we charge for domain name registration services in order to remain
competitive could materially adversely affect our results of operations.
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 development and we
cannot assure you that 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 as it did last quarter. For the three months ended,
June 30, 2000, we registered approximately 678,000 domain names in the .com,
.net and .org domains, representing a decrease of 25% over the approximately
908,000 domain names we registered in these domains, for the three months ended
March 31, 2000.
24
<PAGE>
If we fail to become accredited to offer domain names in additional generic top
level domains that are 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.
Based on actions taken at the July 2000 ICANN board meeting, we expect
that ICANN will approve the introduction of new generic top level domains, such
as .web, .firm or .store for introduction by the end of this year or the
beginning of next year. We cannot assure you that, once introduced, we will be
accredited to offer registrations in these domains or that customers will rely
on us to provide registration services within these 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.
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
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;
o potential disputes with the sellers of acquired businesses, technologies,
services or products; and
o alter or add to our business model in ways that might impact upon our
accreditation status with ICANN.
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
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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 78% of our
net revenues during the six months ended June 30, 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.
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 have only limited experience with registration
renewals for .com, .net and .org domains and for country code domain names. In
addition, we cannot predict the volume of registration renewals we should
expect or 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.
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 six months ended June 30, 2000, our number of
full-time employees grew from approximately 122 to approximately 211. We cannot
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.
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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, a letter agreement setting forth the terms of employment of Cindy E.
Horowitz, our Chief Financial Officer, and a severance agreement with Alan G.
Breitman, our Vice President of Finance and Accounting, 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.
We intend to enter the secondary market for domain names in the near future. We
cannot assure you that ICANN will not impose restrictions on the ability of
accredited registrars to conduct business in this sector or that we will be
able to generate revenues or profits from operations in this market.
The secondary market for domain names is still in its nascent stages of
development. ICANN may adopt measures that will restrict the ability of
accredited registrars to offer products and services in this area. As a result
of recent actions by ICANN we are uncertain as to what restrictions if any
ICANN would impose on us in terms of integrating new secondary market
operations with our current operations. Afternic.com operates a domain name
auction site. After initially refusing to approve the accreditation of
Afternic.com's affiliate as a registrar, ICANN entered into a settlement
agreement with Afternic.com whereby ICANN approved the accreditation of the
affiliate but limited the ability of Afternic.com and its affiliate to
integrate their operations.
In addition, because the industry is so new we cannot accurately predict
when or the extent to which we will be able to generate revenues from this
sector or if we would be profitable in this sector.
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 $25.0 million in
the second half of 2000 and more than $70.0 million in 2001, on sales and
marketing expenses. These expenditures may not result in an increase in net
revenues sufficient to cover these 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 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
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registrations. As of July 20, 2000, Network Solutions and 54 other registrars,
not including us, were registering domain names through the Shared Registration
System. The 63 other accredited registrars and the 10 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 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.
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 four 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
31, 2001 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 agreements will be enforceable.
In order to register a domain name, 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,
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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 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
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 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
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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.
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, and
if we become a participant in the secondary market for domain names 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 or secondary market activities we may undertake in the
future. If these claims against us are successful, our business, financial
condition and results of operations could be materially adversely affected.
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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
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, Globix
Corporation's hosting facility in New York, New York and AT&T Corp.'s hosting
facility in New York, New York. We are currently building out our systems
located at AT&T Corp.'s hosting facility and may in the future add a fourth
facility to make our systems geographically redundant. We cannot assure you
that when this build out is complete, if at all, our systems will be
geographically redundant. 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
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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.
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.
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 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 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
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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.
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.
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 17% of our net revenues for the six months ended June 30, 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.
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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;
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
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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.
In addition, although established case law and statutory law have, to
date, shielded us from liability relating to cybersquatting registrations on
our site in the primary registration market, no case law, statutory law or
accepted practice would shield us in the secondary market. If we enter the
secondary market as we intend, we cannot predict what our potential liabilities
may be with respect to allegations that our participation in that market
facilitates cybersquatting.
The Federal Trade Commission and other federal and state agencies have
been investigating Internet companies regarding their use of personal
information. The federal government recently enacted legislation protecting the
privacy of consumers' nonpublic personal information. We cannot assure you that
our current information-collection procedures and disclosure policies will be
found to be in compliance with existing or future laws or regulations. Our
failure to comply with existing laws, including those of foreign countries, or
the adoption of new laws or regulations that require us to change the way we
conduct our business, could make it cost-prohibitive to operate our business
and prevent us from pursuing our business strategies.
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
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.
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Our directors, executive officers and principal stockholders own a significant
percentage of our shares, which will limit your ability to influence corporate
matters.
As of June 30, 2000, our directors, executive officers and principal
stockholders beneficially owned approximately 42.5% of our common stock.
Accordingly, these stockholders could have significant influence over 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.
In addition to the shares sold in our initial public offering, 498,110
shares are currently eligible for resale in the public markets. After August 29,
2000, 23,929,086 additional shares will become available for sale in the
public markets upon the expiration of lock-up agreements executed in connection
with our initial public offering. Deutsche Bank Securities may waive the lock-up
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.
As of June 30, 2000 existing stockholders owning an aggregate of 17,901,300
shares of common stock and common stock issuable upon the exercise of warrants
had 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 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 June 30, 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.
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PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(a) N/A
(b) N/A
(c) Recent Sales of Unregistered Securities
In connection with our acquisition of Inabox, Inc. On June 6, 2000, we
acquired all of the outstanding capital stock of Inabox, Inc. through a merger
for $1.0 million in cash and we issued 280,019 shares of our common stock to the
stockholders of Inabox. The total value of the transaction was approximately
$11.7 million. An additional 20,000 shares may be issued in the event Inabox
meets conditions specified in the Merger Agreement.
These issuances were made in reliance upon exemptions from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"). No underwriters were involved with these transactions.
(d) Use of Proceeds
Through June 30, 2000, Register.com has used $58.4 million of the net
proceeds from the initial public offering for general working capital (including
the payment of taxes), $1.0 million as payment in the Inabox transaction and
$3.3 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 6. Exhibits and Report on Form 8-K
(a) Exhibits
Number Description
------ -----------
4.3.2 Registration Rights Agreement, dated June 4, 2000.
10.3.2 Registrar Accreditation Agreement, dated April 27, 2000, by and
between ICANN and Register.com.
10.11.2 Amendment No. 1, dated as of June 30, 2000, to Joint Marketing and
Distribution Agreement with Concentric Network Corporation.
10.14 Severance Agreement, dated June 9, 2000, with Alan G. Breitman.
10.15 Letter Agreement, dated July 7, 2000, with Cindy E. Horowitz.
27.1 Financial Data Schedule.
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(b) The following report on Form 8-K was filed during the quarter ended June
30, 2000:
On June 19, 2000, we filed a report on Form 8-K, pursuant to Item 2 of such
form, to report that on June 4, 2000, we acquired all of the outstanding capital
stock of Inabox Inc., a technology firm specializing in the design and
development of online building tools for Internet service providers (ISPs),
web-hosting companies and community sites.
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: August 14, 2000 By: /s/ Alan G. Breitman
---------------------
Name: Alan G. Breitman (Principal
Financial and Accounting Officer)
Title: Vice President of Finance and
Accounting
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