<PAGE>
As filed with the Securities and Exchange Commission on July 27, 2000.
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
Register.com, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 7379 11-3239091
<S> <C> <C>
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification number)
</TABLE>
---------------
575 Eighth Avenue, 11th Floor
New York, NY 10018
Telephone: (212) 798-9100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Richard D. Forman
President and Chief Executive Officer
Register.com, Inc.
575 Eighth Avenue, 11th Floor
New York, NY 10018
Telephone: (212) 798-9100
(Name, address, including zip code, and telephone number, including area code
of agent for service)
---------------
Copies to:
Ellen B. Corenswet, Esq. Stacy J. Kanter, Esq.
Scott L. Kaufman, Esq. Skadden, Arps, Slate, Meagher & Flom LLP
Brobeck, Phleger & Harrison LLP Four Times Square
1633 Broadway, 47th Floor New York, NY 10036
New York, NY 10019 (212) 735-3000
(212) 581-1600
---------------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
---------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================================================
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Aggregate Amount of
Securities to be Registered Registered(1) Price Per Share (2) Offering Price (2) Registration Fee
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, par value $0.0001
per share .................... 4,600,000 $ 32.0625 $147,487,500 $38,937
================================================================================================================
</TABLE>
(1) Includes 600,000 shares of common stock to cover the over-allotment option
granted to the underwriters.
(2) Based on the average of the high and low prices of Register.com's common
stock on The Nasdaq National Market on July 25, 2000, and is set forth
solely for purposes of calculating the registration fee in accordance with
Rule 457(c).
---------------
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
================================================================================
<PAGE>
The information in this preliminary prospectus is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell and is not soliciting an offer
to buy these securities in any jurisdiction where the offer or sale is not
permitted.
Subject to Completion, Dated July 27, 2000
[GRAPHIC OMITTED]
--------------------------------------------------------------------------------
Register.com, Inc.
4,000,000 Shares
Common Stock
--------------------------------------------------------------------------------
We are offering 500,000 shares and the selling stockholders identified in this
prospectus are offering 3,500,000 shares of our common stock in this offering.
We will not receive any of the proceeds from the sale of common stock by the
selling stockholders.
Our common stock is quoted on The Nasdaq National Market under the symbol
"RCOM." The last reported sale price of our common stock on July 26, 2000 was
$30.75 per share.
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 8.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED OR
PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
Per Share Total
----------- ------
Public offering price
Underwriting discounts and commissions
Proceeds, before expenses, to Register.com
Proceeds to selling stockholders
The underwriters have the right to purchase up to an additional 600,000 shares
from us at the public offering price within 30 days from the date of this
prospectus to cover over-allotments.
Deutsche Banc Alex. Brown
Thomas Weisel Partners LLC
Banc of America Securities LLC
Legg Mason Wood Walker
Incorporated
The date of this prospectus is , 2000.
<PAGE>
[Inside Front Cover]
Internet screen shot of Register.com home page.
"Value-Added Products and Services" above seven button links for online products
and services featured on the Register.com website.
"Co-Branded Websites" above the register.com and Net Objects logo taken from a
co-branded website.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering, including the risk factors and our financial statements and related
notes, included elsewhere in this prospectus.
Register.com, Inc.
Our Business
We are a provider of Internet domain name registration services worldwide.
Domain names, such as mybrand.com, are the equivalent of addresses on the
Internet and are registered through companies known as registrars. Domain names
serve as part of the infrastructure for Internet communications and registering
a domain name is one of the first steps for individuals and businesses seeking
to establish an online identity. We believe that we offer a quick and
user-friendly registration process and responsive and reliable customer
support. We also offer a suite of value-added products and services targeted to
assist our customers in developing and maintaining their online identities,
including:
Products and Services Products and Services
Provided by Us Provided by Others
o domain name forwarding, which o email
allows customers to link their new
domain names to their existing o maintaining, storing and connecting
websites websites to the Internet, also
known as web hosting
o real-time domain name management,
which allows customers to view o submission of domain names to up
online and change, on an 400 search engines
instantaneous basis, domain name
information o monthly alerts of potentially
conflicting trademark and
o template-driven website-creation domain name activity around the
tools under the name FirstStepSite world, under the name Trademark
Guardian
Our goal is to become a one-stop resource through which our customers will
establish, maintain and enhance their presence on the Internet.
In June 1999, we became the first registrar other than Network Solutions,
Inc., a subsidiary of VeriSign, Inc., to register domain names in the .com,
.net and .org domains directly on behalf of customers. For the six months ended
June 30, 2000, we registered approximately 1.6 million domain names in these
domains, representing an increase of 240% over the approximately 470,000 domain
names we registered in these domains for the six months ended December 31,
1999.
We face a number of risks that you should consider before you decide to
buy our common stock. These risks include, among other things, that our
operating history is limited and our market is still in its early stages of
development, that we have never been profitable and anticipate incurring
additional losses in the foreseeable future and that our accumulated losses
totaled $14.1 million as of June 30, 2000. In addition, we face substantial
competition from Network Solutions in particular and in the industry in
general. In response to competition in some of our market sectors, we
anticipate reducing the prices we charge for products and services targeted to
those sectors. 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%
3
<PAGE>
of new registrations in these domains for the period. 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 for registering domain names, in the .com, .net and .org domains.
We derive our revenues from domain name registration fees, online products
and services and advertising. Our 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. Our 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. Our
net loss decreased 62% from $5.2 million for the six months ended June 30, 1999
to $2.0 million for the six months ended June 30, 2000.
Market Opportunity
As a result of the growth of the Internet and the introduction of
competition into the domain name registration industry, we believe there is
great potential for growth in the market for domain name registrations. We also
believe that this growth will be driven by individuals' and businesses' desire
for an online identity and brand, as well as the need to promote products,
services and events. We estimate that growth in global domain name
registrations will accelerate over the next few years from over 20 million
domain names registered through June 30, 2000 to approximately 140 million
domain names by the end of 2003, based on our internal calculations.
Our Solution
Registration Services. Our core expertise is providing domain name
registration services. Domain names are generally classified according to
industry custom either as "generic" for the .com, .net, .org, .gov, .edu and
.mil domains or as "country code" if they are associated with a particular
country. In addition, the domain name system is organized according to industry
custom by levels so that, for example, in the domain name mybrand.com, .com is
the top level domain and mybrand is the second level domain. We register domain
names in the .com, .net and .org generic domains and are able to register
domain names in over 160 country code domains, of which 27 may currently be
registered directly through our www.register.com website.
In addition, through a dedicated team of account managers, our Corporate
Services department which targets the needs of corporate customers provides
domain name registration and other services, such as multiple domain name
registrations and registrar transfers, trademark monitoring and international
brand protection.
Online Products and Services. We have assembled a suite of targeted
products and services to assist our customers with their online identities,
which we believe differentiates us from other registrars. For example, in June
2000, we acquired Inabox, Inc., a provider of template-driven website-creation
tools. This product, which we market under the name FirstStepSite, provides our
customers with an easy-to-use application to build their own websites.
Customer Service. Our customer support group seeks to provide dependable
and timely resolution of customer inquiries, 24 hours per day, seven days per
week. We manage and respond to customer inquiries through our internally
developed Internet-based customer care tracking system which is complemented by
our customer service phone system. We have teams of customer service
representatives who specialize in key aspects of our business, and who are
informed about our products, services and technology through our ongoing
training.
4
<PAGE>
Distribution. We believe that our direct and indirect distribution
channels enable us to reach a broad range of potential customers with products
and services targeted to their needs and to increase our exposure across the
market. We provide our products and services directly to our customers through
our www.register.com website as well as through our Corporate Services
department. We also offer domain name registration services indirectly through
our network of co-brand and private label websites, which include Internet
service providers, also known as ISPs, web-hosting companies and other
companies whose websites may appeal to our target customers. A co-brand network
participant offers our domain name registration services through a website
similar in appearance to our www.register.com website, but branded with the
participant's and our logos. A customer typically accesses a co-brand website
through the participant's home page. A co-brand website also typically provides
links back to the participant's website to facilitate the sale of products and
services by the participant. A private label network participant offers our
domain name registration and other services through a website of its own design
but the actual domain name registrations are processed through our systems.
Private label websites may also include the language "powered by register.com."
We recently introduced our Best SRS product through which we can provide our
private label network participants with a domain name registration solution
which is easier and less expensive to implement than our original private label
product.
Our Strategy
Our objectives are to continue to increase our share of domain name
registrations, to differentiate our products and services and to develop
long-term relationships with our customers by helping them to establish,
maintain and enhance their online presence. Our key strategies for achieving
these objectives include:
o introducing new products and services, including the following that we
anticipate introducing this year:
o account masking, to allow the domain name registrant to remain
anonymous;
o a FirstStepSite product with e-commerce capabilities to be offered
through our indirect distribution channel;
o enhancing awareness of our brand;
o extending our distribution channels;
o expanding our Corporate Services department;
o pursuing and integrating strategic acquisitions;
o offering names in additional domains; and
o expanding internationally.
Our History
We were founded by Richard D. Forman, Peter A. Forman and Dan B. Levine as
Forman Interactive Corp., a New York corporation, on November 23, 1994. Forman
Interactive merged with and into Register.com, Inc., a Delaware corporation, on
June 23, 1999. Our principal executive offices are located at 575 Eighth
Avenue, 11th Floor, New York, New York 10018. Our telephone number at that
location is (212) 798-9100. References in this prospectus to "Register.com,"
"we," "our" and "us" refer to Register.com, Inc. and Forman Interactive.
--------------------
We maintain a corporate website at www.register.com. The contents of our
website are not part of this prospectus.
5
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by Register.com ...................... 500,000 shares
Common stock offered by the selling stockholders .......... 3,500,000 shares
Common stock to be outstanding after the offering ......... 32,490,420 shares
Use of proceeds by Register.com ........................... We plan to use the proceeds from
this offering for marketing, capital
expenditures, working capital,
development of new products and
services, acquisitions, investments and
general corporate purposes. Please
see "Use of Proceeds."
Nasdaq National Market symbol ............................. RCOM
</TABLE>
The foregoing information is based on 31,990,420 shares outstanding as of
June 30, 2000. The total number of shares of common stock that we assume will
be outstanding after the offering excludes:
o 5,866,027 shares of common stock issuable upon the exercise of stock
options outstanding as of June 30, 2000, with a weighted average exercise
price of $1.80 per share;
o 2,971,782 shares of common stock available for issuance under our stock
option plans for options not yet granted;
o 350,000 shares reserved for issuance under our employee stock purchase
plan; and
o 5,894,067 shares of common stock issuable upon exercise of outstanding
warrants with a weighted average exercise price of $1.45 per share.
Unless otherwise noted, the information in this prospectus assumes no
exercise of the underwriters' over-allotment option.
6
<PAGE>
Our Summary Financial Data
The following table summarizes financial data for our business. You should
read the summary financial data in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
financial statements and the notes to those financial statements included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
-------------- ---------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues .............. $ 87,696 $ 868,018 $ 713,263 $ 1,319,359 $ 9,644,552
Gross profit .............. 75,297 525,878 521,724 858,207 6,562,053
Operating expenses:
Sales and marketing ..... 166,330 935,495 366,975 863,720 7,149,693
Research and
development ............ 102,901 390,814 71,471 276,687 1,767,158
General and
administrative
(exclusive of
non-cash
compensation) .......... 94,704 743,609 263,017 795,425 2,380,190
Non-cash
compensation ........... -- -- -- 149,682 4,929,200
Amortization of
goodwill and other
intangibles ............ -- -- -- -- --
---------- ------------ ---------- ------------ ------------
Total operating
expenses .............. 363,935 2,069,918 701,463 2,085,514 16,226,241
Net loss .................. $ (288,638) $ (1,714,076) $ (205,526) $ (1,160,748) $ (8,776,918)
========== ============ ========== ============ ============
Basic and diluted net
loss per share .......... $ (0.07) $ (0.26) $ (0.02) $ (0.07) $ (0.46)
========== ============ ========== ============ ============
Weighted average
common shares used
in basic and diluted
net loss per share ...... 4,429,859 6,633,905 8,884,709 15,697,013 19,117,027
========== ============ ========== ============ ============
Pro forma basic and
diluted net loss per
share ................... $ (0.40)
============
Weighted average
shares used in pro
forma basic and
diluted net loss per
share ................... 22,112,252
============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------------------------
1999 2000
---------------- ----------------
<S> <C> <C>
Statement of Operations
Data:
Net revenues .............. $ 2,269,062 $ 32,667,756
Gross profit .............. 1,944,279 23,280,056
Operating expenses:
Sales and marketing ..... 1,717,763 22,153,387
Research and
development ............ 623,552 1,954,097
General and
administrative
(exclusive of
non-cash
compensation) .......... 402,325 3,342,079
Non-cash
compensation ........... 4,530,815 1,290,093
Amortization of
goodwill and other
intangibles ............ -- 298,455
------------ ------------
Total operating
expenses .............. 7,274,455 29,038,111
Net loss .................. $ (5,247,003) $ (1,983,024)
============ ============
Basic and diluted net
loss per share .......... $ (0.30) $ (0.07)
============ ============
Weighted average
common shares used
in basic and diluted
net loss per share ...... 17,747,079 27,901,444
============ ============
Pro forma basic and
diluted net loss per
share ................... $ (.07)
============
Weighted average
shares used in pro
forma basic and
diluted net loss per
share ................... 29,526,406
============
</TABLE>
The following table is a summary of our balance sheet at June 30, 2000.
The as adjusted data reflect the sale of 500,000 shares of common stock offered
by us hereby at an assumed public offering price of $30.75 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses payable by us.
June 30, 2000
---------------------------------
Actual As Adjusted
--------------- ---------------
Balance Sheet Data:
Cash and cash equivalents ......... $148,332,164 $162,488,414
Working capital ................... 144,869,444 159,025,694
Total assets ...................... 247,698,038 261,854,288
Total deferred revenue ............ 87,538,826 87,538,826
Total liabilities ................. 100,244,046 100,244,046
Stockholders' equity .............. 147,453,992 161,610,242
7
<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 prospectus, before you decide to buy our common
stock. 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
8
<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
9
<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
10
<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. We believe that
BulkRegister.com has registered a significant number of domain names in the
first half of 2000, and may have registered more domain names in the .com, .net
and .org domains than we have 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 products and services and would negatively impact our
results of operations.
Because competition in the domain name registration industry is in its
early stages, we may be required, by market factors or otherwise, to reduce,
perhaps significantly, the prices we charge for our domain name registration
and related products and services. 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 have
experimented with different price points for our products and services. In
addition, in the near future we plan on adding product and service offerings to
expand into different segments of the domain name registration market we do not
currently serve. These include bulk registrations offered at a substantial
discount to our standard registration fees and free domain names for consumers,
limited to one name per customer as identified by a unique email address, each
of which would also include 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.
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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, Cindy E. Horowitz,
our Chief Financial Officer, and Jack S. Levy, our General Counsel, 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
21
<PAGE>
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.
22
<PAGE>
Our directors, executive officers and principal stockholders own a significant
percentage of our shares, which will limit your ability to influence corporate
matters.
Our directors, executive officers and principal stockholders beneficially
own approximately 42.5% of our common stock prior to this offering and will
beneficially own approximately 36.3% upon consummation. 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 and this
offering, 496,360 shares are currently eligible for resale in the public
markets. After August 29, 2000, 10,215,300 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. Please see
"Shares Eligible for Future Sale" for a description of the timing of the
availability for sale in the public markets of our other shares of common
stock, including the shares covered by lock-up agreements executed in
connection with this 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.
Existing stockholders owning an aggregate of 15,162,833 shares of common
stock and common stock issuable upon the exercise of warrants have the right to
require us to register their shares under the Securities Act. If we register
these shares, they can be sold in the public market. The market price of our
common stock could decline as a result of sales by these existing stockholders
of their shares of common stock in the market after this offering, or the
perception that these sales could occur. These sales also might make it
difficult for us to sell equity securities in the future at a time and price
that we deem appropriate.
Our charter documents and Delaware law may inhibit a takeover that stockholders
may consider favorable.
Provisions in our amended and restated certificate of incorporation, our
amended and restated bylaws and Delaware law could delay or prevent a change of
control or change in management that would provide stockholders with a premium
to the market price of their common stock. The authorization of undesignated
preferred stock, for example, gives our board the ability to issue preferred
stock with voting or other rights or preferences that could impede the success
of any attempt to change control of the company. If a change of control or
change in management is delayed or prevented, this premium may not be realized
or the market price of our common stock could decline.
You will incur immediate and substantial dilution.
The public offering price per share will significantly exceed the net
tangible book value per share. Accordingly, investors purchasing shares in this
offering will suffer immediate dilution of their investment equal to $26.80 per
share, based on an assumed initial public offering price of $30.75. If we issue
additional shares of common stock in the future, investors purchasing shares in
this offering may experience further dilution. Any further dilution could
adversely affect the trading price of our stock.
23
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Many statements made in this prospectus under the captions "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere in this
prospectus are forward-looking statements that are not based on historical
facts. We use words such as "believes," "anticipates," "future," "intends,"
"plans," "expects" and similar expressions to identify forward-looking
statements. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this prospectus. Because these
forward-looking statements involve risks and uncertainties, there are important
factors that could cause actual results to differ materially from those
expressed or implied by these forward-looking statements, including those
discussed under "Risk Factors." We undertake no obligation, except as required
by law, to update any forward-looking statement to reflect events or
circumstances after the date on which the statement is made or to reflect the
occurrence of unanticipated events.
24
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of the shares
of common stock sold by us in this offering of approximately $14.2 million,
based upon an assumed public offering price of $30.75 per share and after
deducting underwriting discounts and commissions and estimated offering
expenses. If the underwriters exercise their over-allotment option in full, we
estimate that our net proceeds will be approximately $31.7 million. We will not
receive any proceeds from the sale of shares being sold by the selling
stockholders.
We plan to use the proceeds from this offering for marketing, capital
expenditures, working capital, development of new products and services,
acquisitions of and investments (where we acquire less than a controlling
interest) in companies whose businesses, products or services complement our
own and general corporate purposes. We intend to spend over $25.0 million in
the second half of 2000 and over $70.0 million in 2001 on sales and marketing
and over $7.0 million in the second half of 2000 and over $20.0 million in 2001
for capital expenditures, including expenditures for servers, co-location
equipment and other hardware and software necessary to support our registration
systems. As of the date of this prospectus, we have not made any other specific
expenditure plans with respect to the proceeds of this offering. Therefore, we
cannot specify with certainty the particular uses for the remaining net
proceeds to be received upon completion of this offering. Accordingly, our
management will have significant flexibility in applying the net proceeds of
this offering. Pending any use, we intend to invest the net proceeds of this
offering in short-term, investment-grade, interest-bearing securities.
The principal purpose of this offering is to assist in the orderly
distribution of shares after the lock-up period following our initial public
offering. In addition, proceeds that we receive in the offering will be used
for marketing, capital expenditures, working capital, development of new
products and services, acquisitions, investments and general corporate
purposes. Although we engage in discussions with potential acquisition and
strategic investment candidates from time to time, we have no present
commitments with respect to any acquisition or investment.
PRICE RANGE OF COMMON STOCK
Our common stock is listed on The Nasdaq National Market under the symbol
"RCOM." Public trading of our common stock commenced on March 3, 2000. Prior to
that date, there was no public market for our common stock. The following table
sets forth, for the periods indicated, the high and low sale price per share of
the common stock on The Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
------------ -----------
<S> <C> <C>
Year Ending December 31, 2000
First Quarter (from March 3, 2000) ............ $ 116.00 $ 24.00
Second Quarter ................................ 69.625 18.875
Third Quarter (through July 26, 2000) ......... 39.25 29.00
</TABLE>
On July 26, 2000, the last sale price reported on The Nasdaq National
Market for our common stock was $30.75 per share. As of July 20, 2000, there
were 104 holders of record of our common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently anticipate retaining any future earnings for the development and
operation of our business. Accordingly, we do not anticipate declaring or
paying any cash dividends in the foreseeable future.
25
<PAGE>
CAPITALIZATION
The following table shows our capitalization as of June 30, 2000 on an
actual basis, and as adjusted basis. The as adjusted column reflects our sale
of 500,000 shares of common stock in this offering at an assumed public
offering price of $30.75 per share, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us.
You should read the following table in conjunction with our financial
statements and the notes to those financial statements included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
June 30, 2000
-----------------------------------
Actual As Adjusted
---------------- ----------------
(unaudited)
<S> <C> <C>
Stockholders' equity:
Preferred Stock, $.0001 par value; 5,000,000 shares
authorized, no shares issued and outstanding
(actual and as adjusted) ......................... $ -- $ --
Common Stock, $.0001 par value; 200,000,000
shares authorized; 31,990,420 shares issued and
outstanding (actual); 32,490,420 shares issued and
outstanding (as adjusted) ........................ 3,199 3,249
Additional paid-in capital ........................ 167,212,811 181,369,011
Unearned compensation ............................. (5,627,223) (5,627,223)
Accumulated deficit ............................... (14,134,795) (14,134,795)
------------
Total stockholders' equity ....................... 147,453,992 161,610,242
------------ ------------
Total capitalization ........................... $147,453,992 $161,610,242
============ ============
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of June 30, 2000. It excludes:
o 5,866,027 shares of common stock issuable upon the exercise of stock
options outstanding as of June 30, 2000, with a weighted average exercise
price of $1.80 per share;
o 2,971,782 shares of common stock available for issuance under our stock
option plans for options not yet granted;
o 350,000 shares reserved for issuance under our employee stock purchase
plan; and
o 5,894,067 shares of common stock issuable upon exercise of outstanding
warrants with a weighted average exercise price of $1.45 per share.
26
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma net tangible book value per share of our common
stock after this offering. We calculate pro forma net tangible book value per
share by dividing the net tangible book value (total tangible assets less total
liabilities) by the pro forma number of outstanding shares of common stock.
Our net tangible book value at June 30, 2000 was $114.1 million or $3.57
per share, based on 31,990,420 shares of our common stock outstanding as of
June 30, 2000.
After giving effect to the issuance and sale of the shares of common stock
that we are offering (less the underwriting discounts and estimated offering
expenses payable by us), our net tangible book value at June 30, 2000 would be
$128.3 million or $3.95 per share or if the underwriters exercise their
over-allotment option in full, $145.8 million or $4.41 per share. This
represents an immediate increase in net tangible book value of $0.38 per share
to existing stockholders or $0.84 per share if the underwriters exercise their
over-allotment option in full, and an immediate dilution of $26.80 per share
or, if the underwriters exercise their over-allotment option in full, $26.34
per share to investors purchasing shares in the offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Estimated public offering price per share ........................ $ 30.75
Net tangible book value per share at June 30, 2000 ............... $ 3.57
Increase in net tangible book value per share attributable to this
offering ....................................................... 0.38
------
Net tangible book value per share after this offering ............ 3.95
-------
Dilution per share to new investors .............................. $ 26.80
=======
</TABLE>
The above information is based on shares outstanding as of June 30, 2000.
It excludes:
o 5,866,027 shares of common stock issuable upon the exercise of stock
options outstanding as of June 30, 2000, with a weighted average exercise
price of $1.80 per share;
o 2,971,782 shares of common stock available for issuance under our stock
option plans for options not yet granted;
o 350,000 shares reserved for issuance under our employee stock purchase
plan; and
o 5,894,067 shares of common stock issuable upon exercise of outstanding
warrants with a weighted average exercise price of $1.45 per share.
To the extent that any of these stock options or warrants are exercised,
new investors will experience further dilution.
27
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data below as of December 31, 1998 and 1999 and for
the years ended December 31, 1997, 1998 and 1999 have been derived from our
financial statements included in this prospectus, which have been audited by
PricewaterhouseCoopers LLP, independent accountants. The selected financial
data as of December 31, 1997 have been derived from our audited financial
statements not included in this prospectus. The selected financial data below
as of and for the years ended December 31, 1995 and 1996 have been derived from
our unaudited financial statements. The statement of operations data for each
of the six month periods ended June 30, 1999 and 2000, and the balance sheet
data at June 30, 2000, are derived from our unaudited interim financial
statements included elsewhere in this prospectus. These unaudited financial
statements have been prepared on the same basis as our audited financial
statements and, in our opinion, include all adjustments, consisting of normal
recurring adjustments, necessary for the fair presentation of our financial
position and results of operations. Historical results are not necessarily
indicative of results to be expected for the full year or any future period.
You should read the data below together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the notes to those statements included in this prospectus. The
pro forma basic and diluted net loss per share data give effect to the
conversion of our Exchangeable Preferred Stock and the Series A Convertible
Preferred Stock at the date of original issuance.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------- --------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues ...................... $ 87,696 $ 868,018 $ 713,263 $ 1,319,359 $ 9,644,552
Cost of revenues .................. 12,399 342,140 191,539 461,152 3,082,499
---------- ------------ ---------- ------------ ------------
Gross profit ...................... 75,297 525,878 521,724 858,207 6,562,053
Operating expenses:
Sales and marketing .............. 166,330 935,495 366,975 863,720 7,149,693
Research and development ......... 102,901 390,814 71,471 276,687 1,767,158
General and administrative
(exclusive of non-cash
compensation) ................... 94,704 743,609 263,017 795,425 2,380,190
Non-cash compensation ............ -- -- -- 149,682 4,929,200
Amortization of goodwill and
other intangibles ............... -- -- -- -- --
---------- ------------ ---------- ------------ ------------
Total operating expenses ......... 363,935 2,069,918 701,463 2,085,514 16,226,241
---------- ------------ ---------- ------------ ------------
Loss from operations .............. (288,638) (1,544,040) (179,739) (1,227,307) (9,664,188)
Other income (expenses), net ...... -- (170,036) (25,787) 66,559 887,270
---------- ------------ ---------- ------------ ------------
Net loss .......................... $ (288,638) $ (1,714,076) $ (205,526) $ (1,160,748) $ (8,776,918)
========== ============ ========== ============ ============
Basic and diluted net loss per
share ............................ $ (0.07) $ (0.26) $ (0.02) $ (0.07) $ (0.46)
========== ============ ========== ============ ============
Weighted average shares used
in basic and diluted net loss
per share ........................ 4,429,859 6,633,905 8,884,709 15,697,013 19,117,027
========== ============ ========== ============ ============
Pro forma basic and diluted net
loss per share ................... $ (0.40)
============
Weighted average shares used
in pro forma basic and
diluted net loss per share ....... 22,112,252
============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Months
Ended
June 30,
---------------------------------
1999 2000
--------------- ----------------
<S> <C> <C>
Statement of Operations Data:
Net revenues ...................... $ 2,269,062 $ 32,667,756
Cost of revenues .................. 324,783 9,387,700
------------ ------------
Gross profit ...................... 1,944,279 23,280,056
Operating expenses:
Sales and marketing .............. 1,717,763 22,153,387
Research and development ......... 623,552 1,954,097
General and administrative
(exclusive of non-cash
compensation) ................... 402,325 3,342,079
Non-cash compensation ............ 4,530,815 1,290,093
Amortization of goodwill and
other intangibles ............... -- 298,455
------------ ------------
Total operating expenses ......... 7,274,455 29,038,111
------------ ------------
Loss from operations .............. (5,330,176) (5,758,055)
Other income (expenses), net ...... 83,173 3,775,031
------------ ------------
Net loss .......................... $ (5,247,003) $ (1,983,024)
============ ============
Basic and diluted net loss per
share ............................ $ (0.30) $ (0.07)
============ ============
Weighted average shares used
in basic and diluted net loss
per share ........................ 17,747,079 27,901,444
============ ============
Pro forma basic and diluted net
loss per share ................... $ (0.07)
============
Weighted average shares used
in pro forma basic and
diluted net loss per share ....... 29,526,406
============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents .............. $226,995 $ 21,074 $ 60,845 $1,284,684 $40,944,122
Working capital (deficiency) ........... 179,345 (949,383) (1,131,173) 569,616 29,813,357
Total assets ........................... 260,002 141,774 180,786 1,611,025 68,336,046
Total deferred revenues ................ -- -- 32,038 113,527 32,101,232
Total liabilities ...................... 147,451 1,002,920 1,243,457 788,245 46,423,191
Stockholders' equity (deficit) ......... 112,551 (861,146) (1,062,671) 822,780 21,912,855
<CAPTION>
June 30,
---------------
2000
---------------
<S> <C>
Balance Sheet Data:
Cash and cash equivalents .............. $148,332,164
Working capital (deficiency) ........... 144,869,444
Total assets ........................... 247,698,038
Total deferred revenues ................ 87,538,826
Total liabilities ...................... 100,244,046
Stockholders' equity (deficit) ......... 147,453,992
</TABLE>
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and
results of operations together with "Selected Financial Data," our financial
statements, the notes to those statements and the other information appearing
elsewhere in this prospectus.
Overview
We are a provider of Internet domain name registration services worldwide.
Domain names serve as part of the infrastructure for Internet communications
and registering a domain name is one of the first steps for individuals and
businesses seeking to establish an online identity. We believe that we offer a
quick and user-friendly registration process and responsive and reliable
customer support. We also offer a suite of value-added products and services
targeted to assist our customers in developing and maintaining their online
identities, including:
Products and Services Products and Services
Provided by Us Provided by Others
o domain name forwarding o email
o real-time domain name management o web hosting
o website-creation tools under the name o submission of domain names to
FirstStepSite up to 400 search
engines
o trademark monitoring, under
the name Trademark Guardian
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
29
<PAGE>
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 through
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. In the near
future, we plan to add product and service offerings to expand into different
segments of the domain name registration market we do not currently serve.
These include bulk registrations offered at a substantial discount to our
standard registration fees 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 which would also include 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-term 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.
30
<PAGE>
Cost of Revenues
Our cost of revenues consists of the costs associated with providing
domain name registrations and online products and services. Cost of revenues
for domain name registrations primarily consists of registry fees, depreciation
on the equipment used to process the domain name registrations, the fees paid
to the co-location facilities maintaining our equipment and fees paid to the
financial institutions to process credit card payments on our behalf. Through
January 14, 2000, we paid a $9 per year registry fee for each .com, .net and
.org domain name registration. This fee was reduced to $6 per year effective
January 15, 2000. We currently pay registry fees of approximately $5 to $150
for, direct, one- or two-year country code domain name registrations registered
through our website. 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 and non-cash compensation expenses and
amortization of goodwill and other intangibles. 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, $714,000 in 2003
and $359,000 in 2004. 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. Amortization of goodwill and other intangible items
is related to the goodwill and intangible items associated with our acquisition
of Inabox 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.
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
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<PAGE>
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 $2.0 million for
the six months ended June 30, 2000, $8.8 million for the year ended December
31, 1999, 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 year-to-year
comparisons of 1997 against 1998 and 1998 against 1999 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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Year Ended December 31, June 30, June 30,
--------------------------------- -------------------- ------------------------
1997 1998 1999 1999 2000 1999 2000
----------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues ............................ 100% 100% 100% 100% 100% 100% 100%
Cost of revenues ........................ 27 35 32 15 26 14 29
--- --- --- --- --- --- ---
Gross profit ............................ 73 65 68 85 74 86 71
--- --- --- --- --- --- ---
Operating expenses
Sales and marketing .................... 51 66 74 66 82 76 68
Research and development ............... 10 21 18 23 6 27 6
General and administrative (exclusive of
non-cash compensation) ............... 37 60 25 13 8 18 10
Non-cash compensation .................. -- 11 51 259 2 200 4
Amortization of goodwill and other
intangibles .......................... -- -- -- -- 1 -- 1
--- --- --- --- --- --- ---
Total operating expenses ................ 98 158 168 361 99 321 89
--- --- --- --- --- --- ---
Loss from operations .................... (25) (93) (100) (277) (25) (235) (18)
Other income (expenses), net ............ (4) 5 9 5 13 (4) (12)
--- --- --- --- --- --- ---
Net loss ................................ (29)% (88)% (91)% (272)% (12)% (231)% (6)%
===== === ==== ==== === ====== ====
</TABLE>
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 from domain name registrations at June 30,
1999, while deferred revenue was $86.4 million at June 30, 2000. We anticipate
that
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<PAGE>
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.
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.
33
<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.
Years Ended December 31, 1998 and 1999
Net Revenues
Total net revenues increased from $1.3 million for 1998 to $9.6 million
for 1999.
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<PAGE>
Domain Name Registrations. Revenues from domain name registrations
increased from $37,000 for 1998 to $4.5 million for 1999. Domain name
registrations represented 3% of 1998 net revenues and 46% of 1999 net revenues.
This increase was primarily from the shift in our business from serving as a
distributor of domain names to serving as a generic top level domain name
registrar in June 1999. Additionally, we had no deferred revenue from domain
name registrations in 1998 while deferred revenue was $32.1 million in 1999. We
anticipate that revenues from domain name registrations will increase in
absolute dollars and as a percentage of our net revenues in future periods as a
result of growth in the market for domain name registrations, renewals and
transfers and the implementation of our business strategy.
Online Products and Services. Revenues from online products and services
increased 91% from $1.1 million in 1998 to $2.1 million for 1999 primarily from
increased sales of web hosting provided through our servers. Online products
and services represented 87% of 1998 net revenues and 22% of 1999 net revenues.
We anticipate that revenues from online products and services will remain 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 longer term as we expand our online
product and service offerings.
Advertising. Revenues from advertising increased from $133,000 for 1998 to
$3.1 million for 1999 primarily from the increased number of page views and the
volume of advertising and sponsorships sold on our www.register.com and
FutureSite websites. Advertising represented 10% of 1998 net revenues and 32%
of 1999 net revenues. We anticipate that revenues from advertising will
increase in absolute dollars but decrease as a percentage of total net
revenues.
Cost of Revenues
Total cost of revenues increased from $461,000 for 1998 to $3.1 million
for 1999.
Cost of Domain Name Registrations. Cost of domain name registrations
increased from $19,000 for 1998 to $2.5 million for 1999. The increase was
primarily from the shift in our business from serving as a distributor of
domain names to serving as a generic top level domain name registrar in June
1999. As a distributor, we generally passed through registry costs to the
applicable registry or registrar. We anticipate that cost of revenues for
domain name registrations will increase in absolute dollars primarily as a
result of growth in our domain name registrations and renewals.
Cost of Online Products and Services. Cost of online products and services
increased 24% from $442,000 for 1998 to $548,000 for 1999. The increase was
primarily from the additional depreciation expense associated with the
equipment dedicated to our operations to support our growing online product and
service offerings. We anticipate these costs will increase in absolute dollars
as we expand our online product and service offerings.
Operating Expenses
Total operating expenses increased from $2.1 million for 1998 to $16.2
million for 1999.
Sales and Marketing. Sales and marketing expenses increased from $864,000
for 1998 to $7.1 million for 1999. The increase was primarily from the costs
associated with the launch of our radio and print media advertising campaign in
September 1999 and from 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 further our
marketing programs and international expansion. 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.
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<PAGE>
Research and Development. Research and development expenses increased from
$277,000 for 1998 to $1.8 million for 1999. 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 $795,000 for 1998 to $2.4 million for 1999. The increase was primarily
from salaries associated with newly hired personnel and related costs required
to manage our growth and facilities expansion. We expect that our general and
administrative expenses will increase in absolute dollars to support our
overall growth including increased expenses relating to our new
responsibilities as a public company.
Non-cash Compensation. Non-cash compensation expenses increased from
$150,000 for 1998 to $4.9 million for 1999. The increase in non-cash
compensation was primarily associated with the modification of warrants
previously granted to some of our stockholders and the issuance of warrants in
connection with a financial consulting agreement. Non-cash compensation expense
included $18,000 in 1998 and $329,000 in 1999 of amortization of deferred
compensation related to employee stock options. Amortization of deferred
compensation primarily related to employee stock options issued through June
2000 will be $900,000 for the remainder of 2000, $1.8 million in each of 2001
and 2002, $714,000 in 2003 and $359,000 in 2004.
Other Income (Expenses), Net.
Other income (expenses), net consists primarily of interest income net of
interest expense. Other income (expenses), net increased from $67,000 for 1998
to $887,000 for 1999. The increase was primarily from interest earned on our
cash balance as a result of our equity financings and cash provided by
operations.
Net Loss
Net loss increased $7.6 million to $8.8 million in 1999 from $1.2 million
in 1998.
Years Ended December 31, 1997 and 1998
Net Revenues
Total net revenues increased 85% from $713,000 for 1997 to $1.3 million
for 1998.
Domain Name Registrations. We had no revenues from domain name
registrations for 1997 as we did not distribute domain names until February
1998. Revenues from commissions earned from distributing domain name
registrations was $37,000 in 1998 and represented 3% of 1998 net revenues.
Online Products and Services. Revenues from online products and services
increased 54% from $713,000 for 1997 to $1.1 million for 1998. Online products
and services represented 100% of 1997 net revenues and 87% of 1998 net
revenues. The increase in net revenues from 1997 to 1998 was attributable to
the growth of our web-hosting service.
Advertising. We had no revenues from advertising for 1997. Revenues from
advertising were $133,000 for 1998 and represented 10% of 1998 net revenues.
The increase in net revenues from 1997 to 1998 was attributable to the launch
of our www.register.com website and our initial advertising sales efforts.
Cost of Revenues
Total cost of revenues increased 141% from $192,000 for 1997 to $461,000
for 1998.
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<PAGE>
Cost of Domain Name Registrations. We incurred no cost of domain name
registrations for 1997 because we did not begin to distribute domain names
until February 1998. As a distributor of domain names, we simply forwarded a
registration request to the appropriate registrar without paying any registry
fees. Cost of domain name registrations was $19,000 for 1998.
Cost of Online Products and Services. Cost of online products and services
increased 131% from $192,000 for 1997 to $442,000 for 1998. The increase
resulted primarily from the depreciation expense associated with the equipment
dedicated to our operations to support our web-hosting business.
Operating Expenses
Total operating expenses increased 197% from $701,000 for 1997 to $2.1
million for 1998.
Sales and Marketing. Sales and marketing expenses increased 135% from
$367,000 for 1997 to $864,000 for 1998. The increase was primarily attributable
to costs associated with additional customer service personnel, marketing
personnel and telemarketers for our web-hosting business as well as limited
advertising campaigns.
Research and Development. Research and development expenses increased 287%
from $71,000 for 1997 to $277,000 for 1998. The increase was primarily
attributable to the salaries associated with newly hired technology personnel.
General and Administrative. General and administrative expenses increased
202% from $263,000 for 1997 to $795,000 for 1998. The increase was primarily
due to salaries of newly hired executive and financial personnel to help manage
our growth.
Non-cash Compensation. We had no non-cash compensation expenses for 1997.
Non-cash compensation expenses were $150,000 for 1998, which was primarily from
our issuance of non-plan options at exercise prices below fair market value.
Other Income (Expenses), Net.
Other income (expenses), net increased from ($26,000) for 1997 to $67,000
for 1998, which was primarily from interest earned on our cash balance as a
result of our equity financings.
Net Loss
Net loss increased $1.0 million to $1.2 million in 1998 from $206,000 in
1997.
Summary of Recent Quarterly Performance: Three Months Ended March 31, 2000 and
June 30, 2000
Total net revenues increased 63% from $12.4 million for the three months
ended March 31, 2000 to $20.2 million for the three months ended June 30, 2000.
As of June 30, 2000, we had $87.5 million in total deferred revenue, a 25%
increase over the $70.2 million of deferred revenue as of March 31, 2000.
Short-term deferred revenue as of June 30, 2000 was $63.5 million, a 35%
increase over the $47.1 million of deferred revenue as of March 31, 2000. Our
net loss was $992,000 for the three months ended June 30, 2000 as compared to
our net loss of $991,000 for the three months ended March 31, 2000. For the
three months ended June 30, 2000, our basic and diluted net loss per share was
$0.03.
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.
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<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 $994,000 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.
Concentric has agreed to purchase advertising space on our website through
December 2001 at a rate of $350,000 per month for the three months ended March
2001, $400,000 per month for the three months ended June 2001, $450,000 per
month for the three months ended September 2001, and $500,000 per month for the
three months ended December 2001.
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.
Recent Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" ("SOP 98-5"). SOP 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start up
activities and organization costs to be expensed as incurred. As we have
expensed these costs historically, the adoption of this standard did not have a
significant impact on our results of operations or financial position.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities" ("SFAS 133"), which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts, (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. We do not expect the adoption of this statement
to have a significant impact on our results of operations or financial
position.
In December 1999, the staff of the Securities and Exchange Commission
released Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition."
SAB 101 provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. The additional guidance provided by SAB 101
had no effect on our financial statements.
38
<PAGE>
BUSINESS
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>
Products and Services Products and Services
Provided by Us Provided by Others
<S> <C>
o domain name forwarding o email
o real-time domain name management o web hosting
o website-creation tools, under the name o submission of domain names to up
FirstStepSite to 400 search engines
o trademark monitoring, under the
name Trademark Guardian
</TABLE>
Our goal is to become a one-stop resource through which our customers
establish, maintain and enhance their presence on the Internet.
We offer our products and services directly through our www.register.com
website and through our Corporate Services department, and indirectly through
our network of co-brand and private label websites, which include ISPs,
web-hosting companies and other companies whose websites may appeal to our
target customers. These distribution channels enable us to reach a broad range
of potential customers with products and services targeted to their needs and
to increase our exposure across the market. We seek to enter into business
alliances, which are important sources for new customer opportunities, brand
building, revenue growth and increased product and service offerings. We derive
our revenues from domain name registration fees, online products and services
and advertising. Our net revenues for the six months ended June 30, 2000, were
approximately $32.7 million, representing a 1,340% increase over the six months
ended June 30, 1999.
We have been an active participant in the domain name registration
industry since February 1998. In June 1999, we became the first competitive
registrar to register domain names in the .com, .net and .org domains directly
on behalf of customers. For the six months ended June 30, 2000, we registered
approximately 1.6 million new domain names in the .com, .net and .org domains,
representing an increase of 240% from the approximately 420,000 domain names we
registered in the same domains for the six months ended December 31, 1999.
Since June 1999, we have registered over 2.1 million domain names. We estimate,
based on our internal calculations, that growth in global domain name
registrations in all top level domains will accelerate over the next few years
from over 20 million domain names registered through June 30, 2000, to
approximately 140 million domain names registered through the end of 2003.
39
<PAGE>
Industry Background and Market Opportunity
The Internet and Electronic Commerce
The Internet has emerged as a significant global communications medium,
enabling businesses and individuals to conduct business and communicate
electronically. According to International Data Corporation, a technology and
Internet research consulting company commonly known as IDC, the number of
Internet users worldwide will grow from an estimated 144.0 million in 1998 to
approximately 602.4 million by the end of 2003. IDC also expects the number of
web pages to grow from 1.0 billion in 1998 to 16.5 billion by 2003. We believe
that any growth in the number of Internet users and web pages will result in a
corresponding growth in the demand for domain name registration services. In
addition, IDC estimates that worldwide electronic commerce will grow from $60.4
billion in 1998 to $1.6 trillion in 2003. We believe that this rapid growth of
electronic commerce will contribute to the growth in demand for domain name
registration services as businesses around the world establish an Internet
presence in order to remain competitive.
There is also a growing demand for products and services that enable
individuals and companies to establish and maintain their Internet presence.
IDC forecasts that the market for Internet and electronic commerce services
worldwide will grow from $7.4 billion in 1998 to $43.7 billion in 2002.
Businesses and individuals in the early stages of establishing their Internet
identities are seeking products and services such as website creation and
development tools, interactive capabilities, electronic commerce capabilities,
web hosting, website content and infrastructure. We believe that many of the
businesses and individuals registering domain names would appreciate the
convenience of being able to purchase these products and services through a
single source.
The Internet is evolving into an important medium for advertisers due to
its interactive nature, global reach, rapidly growing audience and the
significant increase in electronic commerce. IDC estimates that spending on
Internet advertising will grow from $3.4 billion in 1999 to approximately $10.8
billion in 2003.
Domain Name Registration System
The domain name system is organized according to industry custom by
levels, so that, for example, in the domain name mybrand.com, .com is the top
level domain and mybrand is the second level domain. Top level domains are
classified as either generic or country code. The most common generic top level
domains are .com, .net and .org.
There are over 250 different country code top level domains, such as
.co.uk and org.uk for the United Kingdom and .md for Moldova representing over
190 countries. Each registry for country code domain names is responsible for
maintaining and operating its own database of registered domain names. Some
country code domains are unrestricted and allow anyone, from anywhere, to
register their domain names on a first-come, first-served basis. Currently,
over 90 countries follow this unrestricted practice. Others require that
prospective registrants have a local presence in the country to be able to
register for domain names in that country. While there have been movements
directed at creating uniform domain name registration rules and registrar
administration guidelines, to date there is no international uniformity.
From January 1993 until April 1999, Network Solutions was the sole entity
authorized by the U.S. government to act as registrar and registry for domain
names in the .com, .net and .org top level domains. Network Solutions continues
to act as sole registry, maintaining the files in the Shared Registration
System for the .com, .net and .org domains and the directory databases listing
these domain names and their numerical addresses.
In October 1998, the Department of Commerce called for the formation of a
non-profit corporation to oversee the management of the .com, .net and .org
domains and in November 1998, ICANN was recognized as this non-profit
corporation. In April 1999, as a preliminary
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step to introducing competition into the domain name registration system for
.com, .net and .org domains, ICANN selected five registrars to participate in a
testbed to evaluate whether the Shared Registration System could accommodate
multiple registrars. On June 2, 1999, we were the first of these five
competitive registrars to launch our registration services. On November 30,
1999, the testbed was completed, and all registrars meeting ICANN's standards
for accreditation were permitted to register domain names in the .com, .net and
.org domains. As of July 20, 2000, there were 119 ICANN-accredited registrars,
including Network Solutions. Of these, only 56 are connected to the Shared
Registration System, and the remaining accredited registrars are still in the
development phase with respect to offering registration services. An additional
10 companies have qualified for accreditation but have yet to sign the
agreements required by ICANN and Network Solutions.
For a detailed discussion of the regulatory background of the domain name
registration system, see "Administration of the Internet; Government Regulation
and Legal Uncertainties."
Domain Name Registration Market
As a result of the growth of the Internet and the introduction of
competition in the domain name registration industry, we believe there is great
potential for growth in the market for domain name registrations. We estimate,
based on our internal calculations, that growth in global domain name
registrations in all top level domains will accelerate over the next few years
from over 20 million domain names registered through June 30, 2000 to
approximately 140 million domain names through the end of 2003.
Although there has been a market for domain name registrations for over
six years, a substantial percentage of the growth in domain name registrations
has occurred more recently. The following industry statistics related to domain
name registrations are based on information contained in press releases issued
by Network Solutions. As of June 30, 2000, over 19 million domain names had
been registered in the generic top level domains. During the six months ended
June 30, 2000, a total of approximately 10.6 million new domain names in the
.com, .net and .org domains were registered, an increase of 43% over
approxiamtely 7.4 million new domain names registered in all of 1999. During
the 12 months ended December 31, 1999, a total of approximately 7.4 million new
domain names in the .com, .net and .org domains were registered, an increase of
290% over approximately 1.9 million new domain names registered in all of 1998.
We believe that the market for domain name registrations will continue to grow
and that this growth will be driven primarily by:
Individuals. As more people begin to use the Internet and as online
activities become a greater part of family communications and identities, they
will want to establish their own unique presence on the Internet.
Corporations. As a result of the significant growth in electronic
commerce, as well as the increasing focus on the global promotion and
protection of their corporate identities, corporations will continue to be
significant users of domain name registration services.
Small offices and home offices. As small offices and home offices
increasingly move their businesses online, demand for domain name registration
and related online products and services will increase.
Further, we believe that businesses will use domain names for a number of
distinct purposes, including:
Products and services. Registering products and services as domain names
and establishing web identities related to particular products and services,
which are key components of a global promotional, marketing and brand
protection strategy.
One-time events. One-time events, such as sporting events and elections,
which represent additional domain name registration opportunities as sponsors
increasingly turn to the Internet to differentiate and promote their events.
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New Top Level Domain Names. 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 .firm, .web and .store for introduction by
the end of this year or the beginning of next year. As the supply of potential
domain names increases, we believe that the demand for these domain names will
develop as well.
The Register.com Solution
We offer products and services that assist individuals and businesses in
establishing, maintaining and enhancing their Internet presence. We believe
that our industry experience and our emphasis on, and ability to respond to,
the needs of our customers have positioned us to capitalize on the growing
market for domain name registration and related products and services. Our
competitive advantages include:
Substantial Industry Experience. We have been active in the domain name
registration industry since February 1998, when we began offering domain names
to customers throughout the world. We were one of five registrars selected by
ICANN to participate in the testbed process and, in June 1999, were the first
of these registrars to register domain names in the .com, .net and .org domains
directly on behalf of customers. Our experience in providing a consumer
interface for registrations prior to June 1999, our participation in the
testbed and our involvement with the development of ICANN's policies contribute
to our substantial operational experience in, and knowledge of, the domain name
registration industry.
Customer Service Focus. Our customer support group seeks to provide
dependable and timely resolution of customer inquiries, 24 hours per day, seven
days per week. In May 2000, we upgraded our customer care center to provide
enhanced customer service and customer support. We manage and respond to
customer inquiries through our internally developed Internet-based customer
care tracking system which is complemented by our customer service telephone
system. We have teams of customer service representatives who specialize in key
aspects of our business, and who are informed about our products, services and
technology through our ongoing training. We handled over 70,000 customer
inquiries in June 2000.
Value-Added Products and Services. We have assembled a suite of targeted
products and services to assist our customers with their online identities. In
addition to our quick and easy-to-use domain name registration services, we
offer a range of value-added products and services that we provide or that are
provided by third parties, including advertisers. These products and services
include real-time domain management, template-driven website building tools,
domain name forwarding, trademark protection and monitoring services. We also
offer services to participants in our network of co-brand and private label
websites to enable them to manage their customers' domain names.
Broad and Efficient Distribution Channels. We believe that our direct and
indirect distribution channels enable us to reach a broad range of potential
customers with products and services targeted to their needs and to increase
our exposure across the market. We sell our services directly through our www.
register.com website and dedicated Corporate Services account managers. We also
offer domain name registration services indirectly through our network of
co-brand and private label websites. This network currently consists of over
450 participants. We serve as the exclusive registrar for a majority of these
participants.
Scalable, Reliable and Secure Technological Platform. We designed and
developed our technological infrastructure with a view toward ensuring the
scalability, reliability and security essential to support the growth expected
in the domain name registration industry. Our selection by ICANN as a testbed
registrar was based in part on our technological plans.
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The Register.com Strategy
Our objectives are to increase our share of domain name registrations, to
differentiate our service and to develop a long-term relationship with our
customers by helping them to establish, maintain and enhance their online
presence. Our key strategies for achieving these objectives include:
Introducing New Products and Services. We will continue to introduce new
products and services in order to empower our customers as they develop their
online presence. We have introduced the following new products and services
this year:
o template-driven web site creation software;
o three versions of domain name forwarding;
o domain transfer escrow service;
o alternative domain name search through our Domain FastFind service; and
o multi-name registration.
We anticipate that we will introduce the following new products and
services this year:
o account masking, to allow the domain name registrant to remain
anonymous; and
o FirstStepSite product with e-commerce capabilities to be offered through
our indirect distribution channel.
As part of this strategy, we will continue to enter into new business
alliances, develop new applications and website features and invest in our
technologies. We believe that these enhancements will increase traffic to our
website and strengthen customer loyalty, as well as position us as a preferred
registrar for ISPs, web-hosting companies and other companies whose websites
may appeal to our target customers.
In addition, in the near future, we intend to increase our participation
in the secondary market for domain name registrations. We currently offer
domain transfer escrow services. We are also surveying our customers to
determine interest in secondary market products and services including the
possibility of listing their domain names for resale.
Enhancing Brand Awareness. We will continue to build our brand awareness
and reputation in order to drive additional traffic to our www.register.com
website and attract new strategic alliances, acquisition candidates,
advertisers and talented employees. Our brand building efforts include general
campaigns as well as campaigns dedicated to Corporate Services customers and
participants in our co-brand and private label network. We are promoting our
brand through a marketing campaign, including print, radio and television
advertisements, increasing our distribution channels and adding and improving
our products and services. We promote our brand through speaking engagements,
interviews and industry conferences. We have also embarked on a direct mail
campaign to increase our visibility and name recognition with the general
public and to sell additional products and services to our existing customer
base.
Extending Distribution Channels. We will continue to extend our
distribution channels in order to further broaden our potential customer base.
We are focusing on expanding the participants in our co-brand and private label
network and, in particular, to include companies that have significant
subscriber or user bases. In addition, in the near future we intend to add
product and service offerings to expand into different segments of the domain
name registration market we do not currently serve. These include bulk
registrations offered at a substantial discount to our standard registration
fees and the use of domain names for consumers, limited to one name per
customer as identified by a unique email address for a duration of one year.
Both of these would offer a reduced level of customer service and limited
value-added products or services.
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Expanding Corporate Services Department. We will continue to expand our
Corporate Services department by offering new products and services and by
increasing our targeted marketing to our potential customers. In the past year,
we introduced Corporate Services products including trademark monitoring
through our Trademark Guardian Service and domain name security services
through our Domain Lock Down service. Our dedicated Corporate Services account
managers focus on servicing large corporate customers with offerings such as
multiple domain name registrations, multiple registration and registrar
transfers and international brand protection.
Pursuing and Integrating Acquisitions and Investments. We intend to
selectively pursue acquisitions of, and investments in, companies, including
other domain name registrars and developers of web-based applications and
services. We will target companies that offer complementary products, services
and technologies that can expand our business. For example, we recently
completed the acquisition of Inabox, Inc. whose WebsiteNow!(TM) software powers
our FirstStepSite product.
Offering Names in Additional Top Level Domains. We intend to expand the
number of country codes in which our customers can register domains through us
to meet their global needs. We also intend to register names in new generic top
level domains, such as .web, .firm and .store, if and when such domains become
available, and we are authorized to do so by ICANN.
Expanding Internationally. We are expanding our relationships with foreign
ISPs and other foreign companies in order to offer our products and services to
the growing international Internet market. We also intend to pursue alliances
to create local language websites to provide domain name registration and
value-added products and services to non-English speaking people.
Products and Services
Registration Services. Our core expertise is providing domain name
registration services. We register domain names in the .com, .net and .org
domains and are able to register domain names in over 160 country code domains,
of which 27 may currently be registered through our www.register.com website.
We offer one-, five- and ten-year registration periods for both the initial and
renewal domain name registration in the .com, .net and .org domains. We provide
the following basic products and services, for no additional fee, together with
our registration services:
o FirstStepSite. We provide customers who have registered domain names
through us the ability to create a three-page website and post it on the
Internet. Customers can select from a multitude of layouts, themes and
colors and also upload images to customize their FirstStepSites. As of
June 30, 2000, our customers had set up over 120,000 FirstStepSites.
o FutureSite. For customers who do not take advantage of FirstStepSite, we
provide a presence on the Internet immediately following registration
until they launch their own website. Entering a customer's new domain name
will bring up a webpage stating: "Coming Soon! We recently registered our
domain name at register.com."
o Domain Manager. This quick and easy-to-use service enables our customers
to view and modify important domain name information online, on a
real-time basis, including their email address, the location of the server
that hosts their website and all billing information, as well as enable
customers to renew their registrations.
o One-Step Registration. We provide our existing users the ability to
register additional domain names through a one-step registration process
using Domain Manager.
o Domain FastFind. This application, based on key word searches, helps
potential registrants find alternatives if their desired domain is already
taken.
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o Multi-Name Registration. This application allows customers to register up
to 30 domain names simultaneously.
Corporate Services. Through our Corporate Services department, we offer:
o Multiple Domain Registrations. We register large numbers of domain names,
typically greater than 30 per customer.
o International Brand Protection. We are able to register domain names in
over 160 country code domains, thereby assisting customers in protecting
their brands.
o Domain Name and Registrar Transfers. We facilitate the processing of
domain name transfers between registrants. Also, if we were not the
original registrar for a customer's domain names, we will facilitate our
designation as the new registrar for those domain names.
o Billing Consolidation. We provide customers a single consolidated billing
statement for all of their domain name services.
o Trademark Guardian. We provide brand-holders with monthly alerts of
potentially conflicting trademark and domain name activity from relevant
sources around the world.
o Domain Lock Down. We offer domain name security services that "lock"
names at the registry level, which significantly reduces the risk of
unauthorized alterations to key registrar information and blocks the
deletion of a domain name for the duration of the registration term.
Online Products and Services. We offer value-added products and services,
some of which we provide and some of which are provided by third parties
including advertisers. These products and services include:
o Email. We resell comprehensive email services to our customers. These
email services enable our customers to use their unique domain names to
create branded email addresses, such as [email protected].
o Domain Name Forwarding. Our domain name forwarding service allows
customers to point their domain names to existing sites on the Internet.
We offer three levels of service, one of which is offered for no
additional charge.
o Web Hosting. We offer web hosting to our customers primarily through
Concentric Network Corporation and advertisers.
o Search Engine Submission. We submit domain names to up to 400 search
engines.
o Escrow Services. We facilitate transfers between customers selling domain
name registrations by serving as an escrow agent in connection with the
domain names to be transferred.
In addition, we pursue advertisers for our website to offer additional products
and services that are complementary to our own offerings and appeal to our
customers. These include:
o trademark services;
o incorporation services;
o web hosting;
o online marketing;
o computer hardware and equipment; and
o virtual intranet applications for the small office and home office
market.
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Customer Service
We believe that our ability to establish and maintain long-term
relationships with our customers depends, in part, on the strength of our
customer support operations and staff. Furthermore, we value frequent
communication with and feedback from our customers in order to continually
improve the quality of care provided by our customer service representatives.
Our customer service representatives handle general inquiries, investigate the
status of orders and payments and answer technical questions about the Internet
and domain name management. In May 2000, we upgraded our customer care center
to provide enhanced customer service and technical support, including a
complementary online and telephone ticketing system, a new toll-free call-in
number, and an increased staff, to provide faster and more specialized
attention to customer inquiries. In addition, with the launch of our
Register.com Espanol website, we have added a team of Spanish-speaking customer
service and technical support representatives, accessible 24 hours a day, seven
days a week, in order to provide our Spanish-speaking customers the same level
of service as we provide our English-speaking customers. We handled over 70,000
customer inquiries in June 2000.
Our technology team developed our Internet-based customer service inquiry
tracking system, which we use to respond to substantially all customer service
inquiries. This system enables our customer service representatives to access
customer account information efficiently, including all past requests and our
responses. Additionally, based on information provided by our customers at the
time of their inquiry, our system automatically routes the inquiry to the
appropriate team of customer service representatives. This system also allows
our management to monitor the efficiency and effectiveness of our
representatives. We solicit feedback from our customers by emailing
quality-of-service surveys to them after we have resolved their inquiries. We
analyze the survey results on a quantitative and qualitative basis. These
responses provide us with real-time feedback on the quality of our customer
service.
Distribution
We believe that our direct and indirect distribution channels enable us to
reach a broad range of potential customers with products and services targeted
to their needs and to increase our exposure across the market. We believe that
we provide our customers quick, easy-to-use, value-added and flexible solutions
across both of our distribution channels. During the six months ended June 30,
2000, our direct distribution channels accounted for approximately 88% of our
net revenues and our indirect distribution channels accounted for approximately
12% of our net revenues.
Direct. We provide our products and services directly to our customers
through our www.register.com website. We also offer services to corporate
customers through our Corporate Services department.
o Website. Through our www.register.com website, customers may register a
domain name in six quick, easy-to-follow steps and access the value-added
products and services we offer to establish, maintain and enhance their
Internet presence. Through our affiliate program, we pay a commission for
customer referrals that result in domain name registrations to encourage
others to provide links to our website. Recently, we launched Register.com
Espanol which allows users to register and manage domain names through a
Spanish language interface, allowing Spanish speakers to receive the same
level of service as our English-speaking customers receive.
o Corporate Services. We launched this department to meet the needs of our
corporate customers. Many companies currently rely on internal brand
managers and attorneys to register domain names related to their
trademarks and brand names. We believe that we can provide these services
more efficiently through our dedicated team of account managers.
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Indirect. We offer our products and services indirectly through our
network of co-brand and private label websites, which include ISPs, web-hosting
companies and other companies whose websites may appeal to our target
customers. In addition, we provide ISP Manager, a real-time domain management
tool that allows these companies to control aspects of the domain name for
their customers directly and to monitor their customers' domain name
registration activity. We currently have over 450 participants in our network
of co-brand and private label websites of which over 30 are private label and
the remaining are co-brand participants.
o Co-brand. We provide our network participants with the opportunity to
earn incremental revenue with minimal cost or effort on their part by
providing them a co-branded website through which they can offer our
services. In less than one day, we can construct and deliver a customized,
co-branded website that offers the same quick, easy-to-use, six-step
registration process available on our website. Typically, a co-branded
website is accessed through the participant's home page and provides one
or more links back to its website to facilitate the sale of additional
products and services. Our "register.com" logo usually appears side by
side with our co-brand participant's logo, providing us with additional
brand visibility. We also typically manage all of the domain name support
services, including notification, billing, collections and customer
service. Co-brand participants typically enter into one-to-three year
contracts with renewal options and receive commissions depending upon the
volume of registrations and the nature of the relationship. A majority of
these contracts provide for us to act as exclusive domain name registrar
for the co-brand participant.
o Private Label. We offer companies that we expect will provide a large
volume of registrations the opportunity to interface directly with our
domain name registration system through which they can offer our services.
This distribution channel allows an end-user to register a domain name and
purchase other products and services on a webpage that maintains the look
and feel of the website of our private label participant. Private label
websites may also include the language "powered by register.com." We also
offer our private label participants a range of billing, notification and
customer support options. In addition, we recently introduced our Best SRS
product. This product is a domain name registration application which is
easier and less expensive to implement than our original private label
product.
We intend to leverage our expertise in the management of DNS (Domain Name
Servers) to develop products and services for participants in our indirect
distribution channel. DNS provide the Internet and Internet users with
authoritative routing information for domain names. We are responsible for
managing the DNS for approximately 1.8 million domain names which we believe
positions us as the largest authoritative DNS provider in the world.
In addition to our co-brand and private label distribution channels, we
have entered into and will continue to seek marketing, sales and distribution
arrangements with third parties that we believe may further our strategy of
increasing our share of the domain name registration market.
In addition, in the near future we plan to add product and service
offerings to expand into different segments of the domain name registration
market we do not currently serve. These include bulk registrations offered at a
substantial discount to our standard registration fees 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. Both of these
would offer a reduced level of customer service and limited value-added
products or services.
International. Our direct and indirect distribution channels are
accessible through Internet access worldwide. We currently offer our customers
the ability to register domain
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names in over 160 country code domains and have over ten co-brand network
participants with principal places of business outside the United States. Based
on our internal calculations, for the three months ended June 30, 2000,
approximately 30% of the domain names registered by us were registered by
customers located outside of the United States.
Marketing
Our marketing efforts focus on attracting customers by emphasizing our
simplified registration process and customer service. We use a combination of
Internet, print, radio and television advertisements. We believe this
combination of online and offline advertising is particularly effective in
targeting individuals and small- to medium-sized businesses. We have also
embarked on a direct mail campaign to increase our visibility and name
recognition with the general public and to market additional products and
services to our existing customer base.
Business Alliances
We seek to enter into business alliances to expand our business. These
alliances are important sources for new customer opportunities, brand building,
revenue growth and increasing our product and service offerings.
Advertising Sales
We believe that our growing user base provides advertisers and merchants
with an attractive platform from which to reach their target audience. During
the six-month period ended June 30, 2000, our advertising revenues increased by
159% over the prior six-month period ended December 31, 1999. Because we
attract visitors to our website with the products and services we offer, as
compared to other sites that attract visitors with their content, we believe
these visitors are more likely to purchase goods or services through our
website. In addition, we sell advertising space on FirstStepSite and FutureSite
pages.
Technology
Our technology infrastructure is built and maintained for reliability,
scalability, flexibility and security and is administered by our skilled
technical staff.
Facilities. Our online 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 the AT&T Corp.
facility to add redundancy and capacity. We believe each facility has ample
power redundancy, fire suppression, peering to other ISPs, bandwidth and
backbone redundancy to support the current and anticipated growth of our
business.
Reliability. Our technology platform uses technologies to maximize
reliability. All hardware components are redundant through highly available
systems. We provide software and data reliability through a variety of
processes and quality-assurance procedures. Our standard procedures include
daily database backups, offsite storage of critical information and incremental
backups of ongoing database modifications. Additional reliability is provided
by our fault-tolerant and redundant platform architecture, which utilizes
clustering technology that is designed to ensure uninterrupted service.
Scalability and Flexibility. We designed our systems to handle a large
volume of domain name registrations, general website traffic and domain name
server queries in an efficient, scalable and fault-tolerant manner. Our
application servers are clustered and use a shared file system which allows us
to add additional capacity. Our system is designed to scale easily and to
support rapid growth without the need to redesign the network.
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Security. Our technology incorporates a variety of security techniques to
protect domain name registration data, including limiting access to users that
are authenticated through a Virtual Private Network (VPN) and encrypting user
passwords at the time of account creation. We have initiated processes to
maintain internal server passwords as well as to ensure limited accessibility
to critical components on the network. Our network is protected by a suite of
industry-leading hardware/software security solutions.
Ongoing Improvements. We are in the process of adding new equipment to our
AT&T Corp. facility to help protect our network and further improve
scalability. We expect to add network operation centers in other locations,
which will help add redundancy and intelligent load balancing to our systems.
We believe that introducing geographic redundancy will enable us to maintain
systems that are less susceptible to regional Internet outages.
Technology Staff. Our technology team is skilled in developing scalable,
reliable and critical applications and solutions. Many of our technologies,
including our web-based customer care tracking system, were developed in-house.
Our team of engineers monitors our systems 24 hours per day, seven days per
week.
In 1997, 1998, 1999 and the six months ended June 30, 2000, we spent
$71,000, $277,000, $1.8 million and $2.0 million, respectively, on our research
and development activities.
Historical Operations
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. Forman Interactive's principal software product was Internet Creator, a
website management software program. We have not sold Internet Creator since
October 1998 and ceased distributing it to our web-hosting customers at no cost
in spring 1999. We continue to operate our web-hosting service. However, since
its development is not part of our business strategy, we are not actively
promoting this service. In February 1998, we began to distribute domain names,
in most cases without charge and in a few cases on commission basis when we
distributed domain names 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.
Administration of the Internet; Government Regulation and Legal Uncertainties
The Internet domain name registration system is composed of two principal
functions: registry and registrar. The registry maintains the database that
contains the domain names registered in the top level domains and their
corresponding Internet protocol addresses. The registrar acts as an
intermediary between the registry and individuals and businesses, referred to
as registrants, seeking to register domain names.
Under a 1993 cooperative agreement with the U.S. Department of Commerce,
Network Solutions was authorized to act as the sole registry and sole registrar
for domain names in the .com, .net and .org top level domains. On July 1, 1997,
President Clinton approved and released a report entitled A Framework for
Global Electronic Commerce, in which he authorized the creation of an
inter-agency working group under the leadership of the Department of Commerce
to study domain name system registration and administration issues,
specifically the issue of privatizing the management of the domain name system.
In October 1998, in response to this report, the Department of Commerce amended
the Network Solutions cooperative agreement to call for the formation of a
not-for-profit corporation to oversee the management of, and create policies
regarding, domain names in the .com, .net and .org top level domains. The
Department of Commerce also proposed that additional registrars be authorized
to register domain names in these domains based upon the idea that competitive
registrars would benefit consumers and businesses. ICANN was recognized as this
not-for-profit corporation by the Department of Commerce in November 1998.
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ICANN's authority is based upon voluntary compliance with its consensus
policies. While these policies do not constitute law in the United States or
elsewhere, they are expected to have a significant influence on the future of
the domain name registration system.
In April 1999, ICANN selected five testbed companies to act as registrars
to register domain names in the .com, .net and .org domains and compete with
Network Solutions. These five entities were Register.com, America Online, Inc.,
France Telecom, Melbourne IT and CORE, which is a worldwide consortium of
registrars. Each registrar was required to execute a one-year accreditation
agreement with ICANN. Register.com was the first of the testbed companies to
begin directly registering domain names. The testbed registrars were the first
registrars provided with access to the Shared Registration System, which
allowed them to interface directly with Network Solutions' registry. The
testbed period ended on November 30, 1999. As of July 20, 2000, 119 companies
were accredited by ICANN to act as registrars.
On November 10, 1999, ICANN, Network Solutions and the Department of
Commerce executed a set of agreements that were intended to amend the 1993
cooperative agreement and make Network Solutions an ICANN-accredited registrar.
These agreements also provided for Network Solutions to act as the registry
until November 30, 2003. 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 the agreement for the purchaser of the registry operations
will be extended for an additional four years until November 30, 2007. These
agreements provide that:
o Network Solutions is prohibited until approximately October 2000 from
entering into exclusive agreements with any third-party partners,
including web-hosting companies and ISPs. This provision is intended to
provide us and other competitive registrars with the ability to enter into
agreements with these third parties;
o the annual fee that a registrar must pay to the registry for each domain
name registered in a generic top level domain is $6 per year during the
term of the agreement;
o the registry for the .com, .net and .org domain names will no longer
limit registrations to an initial period of two years. Since January 15,
2000, the registry has accepted domain name registrations in the .com,
.net and .org domains for periods from one to ten years; and
o the InterNIC website www.internic.net, formerly controlled by Network
Solutions, will be turned over to ICANN on May 31, 2000. This website
links to a directory of domain names in the Network Solutions registry,
and now contains information regarding the introduction of competitive
registrars and includes the names of the operational, ICANN-accredited
registrars.
On December 1, 1999, ICANN's first substantive policy, the Uniform Dispute
Resolution Policy, became effective. This dispute resolution policy was created
to address the problem of cybersquatting, or registering the trademark of
another as a domain name with the intent to wrongfully profit from the goodwill
in that name created by the trademark holder. ICANN intends to create
additional policies governing the domain name registration system, and we will
be affected by any of these policies. We played a leading role in the drafting
and implementation of the Uniform Dispute Resolution Policy, and we intend to
continue to play an active role in the development of ICANN policies.
Based on actions taken at the July 2000 ICANN board meeting, we expect
that ICANN will approve new top level domains, such as .firm, .web and .store.
The timing of the introduction of these new top level domains depends on a
number of factors, including reaching a consensus among the international
Internet community on what the domains will be, and what type of registry will
be established to serve as the repository for such domains. If and when these
domains become available, we intend to petition ICANN for authorization to act
as a registrar for these domains.
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There have been ongoing legislative developments and judicial decisions
with respect to trademark infringement claims, unfair competition claims, and
dispute resolution policies relating to the registration of domain names. To
help protect ourselves from liability in the face of these ongoing legal
developments, we have taken the following precautions:
o in our standard registration agreement, we require that each registrant
indemnify, defend and hold us harmless for any dispute arising from the
registration or use of a domain name registered in that person's name; and
o on December 1, 1999, we implemented the Uniform Domain Name Dispute
Resolution Policy as approved by ICANN.
Despite these precautions, we cannot assure you that our indemnity and dispute
resolution policies will be sufficient to protect us against claims asserted by
various third parties, including claims of trademark infringement and unfair
competition in our capacity as registrar.
New laws or regulations regarding domain names and domain name registrars
may be adopted at any time. Our responses to uncertainty in the industry or new
regulations could increase our costs or prevent us from delivering our services
over the Internet, which could delay growth in demand for our services and
limit the growth of our revenues. New and existing laws may cover issues such
as:
o pricing controls;
o the creation of additional generic top level domains and country code
domains;
o consumer protection;
o cross-border domain name registration;
o trademark, copyright and patent infringement;
o domain name dispute resolution; and
o other claims based on the nature of content of domain names and domain
name registration.
In November 1999, the Anticybersquatting Consumer Protection Act was
enacted by the United States government. This law seeks to curtail a practice
commonly known in the domain name registration industry as "cybersquatting." A
cybersquatter is generally defined in the Act as one who registers a domain
name that is identical or similar to another party's trademark, or the name of
another living person, in each case with the bad faith intent to profit from
use of the domain name. The law states that registrars may not be held liable
for registration or maintenance of a domain name for another person absent a
showing of the registrar's bad faith intent to profit from the use of the
domain name. Registrars may be held liable, however, if they do not comply
promptly with procedural provisions of the law. For example, if there is a
litigation involving a domain name, the registrar is required to deposit a
certificate representing the domain name registration with the court. To date,
there is no precedent to specify under what circumstances we may suffer
liability as a registrar under this law. 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.
Competition
We believe that our industry experience, product and service offerings,
customer service focus, quick and easy to use registration process and broad
and efficient distribution policies enable us to compete favorably in providing
domain name registration services and ancillary products and services and in
attracting advertisers. However, our competitors may have greater name
recognition, longer operational histories and greater financial, technical and
managerial resources and may undertake extensive marketing campaigns for their
brands and services, adopt aggressive pricing policies and make more attractive
offers to potential distribution partners, advertisers and customers.
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Competition in the Domain Name Registration Industry. As of July 20, 2000,
Network Solutions and 54 other registrars, not including us, were registering
domain names in the .com, .net and .org domains. An additional 63 registrars
have been accredited by ICANN but are not yet registering domain names, and 10
registrars have qualified to register domain names in these domains but have
not yet signed the agreements required for registering domain names in these
domains. Our principal competitor in the market for domain name registration
services is Network Solutions. The barriers for other competitors seeking to
enter the market as domain name registrars include developing the requisite
technological infrastructure and meeting ICANN's accreditation requirements. In
addition to other registrars, we face competition from companies who align
themselves with accredited registrars to offer domain name registration
services, including ISPs, web-hosting companies, telecommunications firms and
Internet professional service firms. 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. The continued introduction of
competitive registrars into the domain name registration industry and the
growth of the competitive registrars who have entered the industry have made it
difficult for us to maintain 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.
The decline in our market share is also a result of recent entrants into
the domain name registration industry offering domain name registration at
prices lower than our own with minimal or no value-added products and services.
These recent entrants have included competitors who offer domain name
registration through bulk registrations, such as BulkRegister.com, a subsidiary
of Alabanza, Inc., and registrars that target indirect and wholesale channels
such as, Tucows.com, Inc., and Melbourne IT. We believe that BulkRegister.com
has registered a significant number of domain names in the first half of
2000, and may have registered more domain names in the .com, .net and .org
domains than we have during the three months ended June 30, 2000.
Competition with Respect to Our Online Products and Services. A key
component of our business strategy is to offer value-added products and
services that encourage customers to use our website for the development and
maintenance of their online presence. The markets for our products and services
are highly competitive. Other registrars may develop or enter into strategic
relationships to offer products and services similar to those that we now
provide, including our email, domain-forwarding, website-hosting, domain-name
auctioning and brokering features, or products and services that we anticipate
offering in the future, including facilitating the resale of domain names. On
June 9, 2000, Network Solutions was acquired by VeriSign, 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 includes those offered by VeriSign. In
addition to competing with other registrars, we also compete with many other
providers of these products and services, including application service
providers, Internet professional services firms, and domain name resellers.
Competition for Advertisers. We compete for Internet advertising and
sponsorship revenues with other domain name registrars, content-based websites,
ISPs, Internet content providers, large web-based publishers, Internet search
engines and portal companies and various other companies that facilitate
Internet advertising. We also compete with traditional offline media for a
share of advertisers' total advertising budgets.
Intellectual Property and Proprietary Rights
We believe that we are well positioned in the domain name registration and
shared Internet web-hosting markets in part due to our highly recognized brand,
register.com. We
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regard our trademarks, copyrights, trade secrets and other intellectual
property as critical to our success. We rely on trademark and copyright law,
trade secret protection and confidentiality and/or license agreements with our
employees, customers, partners and others to protect our intellectual property
rights. Despite our precautions, third parties could obtain and use our
intellectual property without authorization. Furthermore, the validity,
enforceability and scope of protection of intellectual property in
Internet-related industries is uncertain and still evolving. The laws of some
foreign countries do not protect intellectual property to the same extent as do
the laws of the United States. Our trademark registration applications are
pending for "The First Step on the Web" and "SiteAmerica." All other trademarks
and service marks used in this prospectus are the property of their respective
owners.
We have received initial rejections from the U.S. Patent and Trademark
Office on our trademark applications for "register" and "register.com" based on
descriptiveness. We have responded to these initial rejections arguing that
these brands have become widely known through extensive use in commerce and are
valid trademarks. While we will be taking all reasonable measures to secure
trademark registrations for the "register" and "register.com" marks, we cannot
assure you that we will be able to obtain these registrations.
Effective trademark, service mark, copyright and trade secret protection
may not be available in every country in which our services are or will be made
available. We also expect to license proprietary rights such as trademarks or
copyrighted material to strategic partners in the course of planned national
and international expansion. While we will attempt to ensure in our agreements
that licensees will maintain the quality of our service, we cannot assure you
that they will not take actions that might diminish the value of our
proprietary rights or reputation and that could thereby materially harm our
business.
We also rely on certain technologies that we license from other parties.
For instance, Network Solutions has licensed us the right to use key software
products and database technology. We cannot assure you that these third-party
technology licenses will not infringe on the proprietary rights of others or
will continue to be available to us on commercially reasonable terms, if at
all. The loss of such technology could require us to obtain substitute
technology of lower quality or performance standards or at greater cost, which
could materially harm our business.
To date, we have not been notified that our technologies infringe the
proprietary rights of any third parties. There can be no assurance that others
will not claim that we have infringed their proprietary rights with respect to
past, current or future technologies. We expect that the number of infringement
claims in our market will increase as the number of services and competitors in
our industry grows. Any of those claims, whether meritorious or not, could be
time consuming, result in costly litigation, or require us to enter into
royalty or licensing agreements. Royalty or licensing agreements might not be
available on terms we find acceptable or at all. As a result, any such claim
could materially harm our business.
Employees
As of June 30, 2000, we had approximately 211 full-time employees. None of
our employees are represented by a labor union or are subject to
collective-bargaining agreements. We believe that we maintain good
relationships with our employees.
Facilities
We currently lease approximately 20,000 square feet of space in one
location in New York, New York under a ten-year contract that expires in 2009.
We believe that our current space will meet our needs for approximately six
months and we are currently looking for additional space.
Legal Proceedings
We are not party to any material legal proceedings and are not aware of
any pending or threatened litigation that would materially and adversely affect
our business.
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MANAGEMENT
Our executive officers and directors
The following table sets forth our executive officers and directors, their
ages and the positions they hold:
<TABLE>
<CAPTION>
Name Age Position
--------------------------------- ----- -------------------------------------------
<S> <C> <C>
Richard D. Forman ............... 36 President, Chief Executive Officer
and Chairman of the Board of Directors
Cindy E. Horowitz ............... 45 Vice President and Chief Financial Officer
Alan G. Breitman ................ 30 Vice President of Finance and
Accounting; Treasurer
Robert D. Gardos ................ 28 Vice President of Technology
Sascha A. Mornell ............... 32 Senior Vice President, Sales and
Marketing
Jack S. Levy .................... 30 General Counsel and Secretary
Lauren M. Gaviser ............... 29 Director of Strategic Initiatives
Niles H. Cohen (1)(2) ........... 40 Director
Peter A. Forman ................. 38 Director
Mark S. Hoffman (1)(2) .......... 39 Director
Samantha McCuen (2) ............. 32 Director
Reginald Van Lee (1) ............ 42 Director
</TABLE>
-------------
(1) Member of compensation committee.
(2) Member of audit committee.
Richard D. Forman has been our Chief Executive Officer since March 1996
and our President since March 1998. He has served as one of our Directors since
our inception and as Chairman of the Board since May 1999. Since 1994, Mr.
Forman has also been the President of Lease On Line, Inc., a real estate
brokerage and management firm. In addition, Mr. Forman has managed real estate
in the New York City area since August 1992. Mr. Forman was formerly a
consultant with Booz Allen & Hamilton, Inc. in its New York City and Sydney,
Australia offices. Mr. Forman is the brother of Peter A. Forman, one of our
directors and co-founders. In 1987, Mr. Forman graduated from the University of
Pennsylvania's Management and Technology Program, and received his B.S. in
Economics from the Wharton School of Business and B.S. in Electrical
Engineering from the Moore School of Electrical Engineering. In 1992, Mr.
Forman received his M.S. in Real Estate from New York University.
Cindy E. Horowitz was named our Chief Financial Officer in July 2000 and
will assume operational responsibility in September 2000. From July 1999 until
July 2000, Ms. Horowitz served as Executive Vice President and Chief Financial
Officer of Hollinger International, Inc., a newspaper publishing company. From
1994 to 1999, Ms. Horowitz was Vice President and Chief Financial Officer of
Primedia Inc.'s Information Group. From 1986 to 1994, Ms. Horowitz was a Vice
President of Citibank, N.A. where she served in various financial management
positions including Chief Financial Officer of the Consumer Development
Division. Ms. Horowitz received an A.B. in Statistics, cum laude from Princeton
University in 1977 and an M.B.A. from Harvard Business School in 1981.
Alan G. Breitman has served as our Vice President of Finance and
Accounting since November 1998 and was appointed our Treasurer in December
1998. From December 1998 until October 1999, Mr. Breitman served as our
Secretary. From September 1998 through October 1998, Mr. Breitman served as the
Chief Financial Officer of Metro Lights Advertising, a domestic outdoor
advertising company. From August 1997 through August 1998, Mr. Breitman was the
Manager of Financial Planning and Analysis at Allaire Corporation, a developer
of Internet development tools. From May 1997 to July 1997, Mr. Breitman was the
Manager of Financial Planning and Analysis for Datamedic, a developer of
integrated point of
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care computerized patient record and practice management solutions. From May
1996 to May 1997, Mr. Breitman worked as both the accounting manager and
financial analyst for Visibility, Inc., a developer of manufacturing accounting
systems. From 1995 to 1996, Mr. Breitman was the Manager of Internal Financial
Reporting for Xtra Corp. From 1992 to 1995, Mr. Breitman was an auditor at
Coopers & Lybrand, where he worked primarily with high technology and financial
services companies. Mr. Breitman received his B.S. in Business from Skidmore
College in 1992.
Robert D. Gardos has served as our Vice President of Technology since June
1999. From June 1998 until June 1999, Mr. Gardos served as our Director of
Information Systems. From May 1997 to May 1998, Mr. Gardos was the Chief
Financial Officer for Touchlink, a privately held company that he co-founded to
provide public Internet kiosks. From December 1994 to April 1997, Mr. Gardos
was a Senior Consultant for Ernst & Young where he managed system selection and
implementation projects. From January 1994 to December 1994, Mr. Gardos was an
analyst for UMS Management group, a firm specializing in utility consulting.
Mr. Gardos received his B.S. in Economics from the Wharton School of Business,
with a concentration in Finance in 1993.
Sascha A. Mornell has served as our Senior Vice President, Sales and
Marketing since June 2000, as Vice President of Marketing from June 1999 until
June 2000 and from May 1998 until June 1999, Mr. Mornell served as our Director
of Online Products and Marketing. From August 1997 to March 1998, Mr. Mornell
was Manager of International Business Development and Marketing at the National
Basketball Association in New York. From August 1992 to December 1995, Mr.
Mornell was the New Product Development Manager for Dreyer's Brand Ice Cream in
Tokyo, Japan. Mr. Mornell received his B.A. in History from the University of
California at Berkeley in 1990 and received his M.B.A. from Harvard Business
School in 1997.
Jack S. Levy has served as our General Counsel and Secretary since October
1999. From September 1996 until October 1999, Mr. Levy was an associate in the
corporate department of Willkie Farr & Gallagher. Mr. Levy received his B.A. in
Government from Harvard College in 1992 and his J.D. from Columbia Law School
in 1996.
Lauren M. Gaviser has served as our Director of Strategic Initiatives
since April 1999. From August 1996 until April 1999, Ms. Gaviser was a senior
associate at Booz Allen & Hamilton, Inc., in its Communications, Media and
Technology Practice in New York and from December 1992 until May 1994 was in
the Sales and Marketing division of Alcatel Bell Telephone in Antwerp, Belgium.
Ms. Gaviser received her B.A. in Spanish and Comparative Area Studies from Duke
University in 1992 and received her M.B.A. from Columbia University in 1996.
Niles H. Cohen has served as one of our Directors since November 1995.
Since 1994, Mr. Cohen has been the Managing Member of Capital Express, LLC, a
New Jersey-based venture capital firm that he founded. Mr. Cohen is a member of
the boards of directors of several privately held companies, including
Awards.com, Inc., 1-800 BIRTHDAY.com, Inc., Poster.com, Inc. and MoneyHunt
Properties, Inc. Since December 1988, Mr. Cohen has been the President of Nihco
Equities, Inc., an investment and consulting firm that he founded. Mr. Cohen
received his B.S. in Economics from the Wharton School of Business in 1982.
Peter A. Forman, our co-founder, has served as one of our Directors since
our inception in 1994. Mr. Forman served as our President from our inception in
1994 until March 1998 and as Chairman of the Board from our inception in 1994
until May 1999. Since January 1998, Mr. Forman has been a Managing Member of
Forman Capital Management, which specializes in early stage internet and
technology companies. Since February, 1999, Mr. Forman has served as President
of WellSet, a consumer and commercial products manufacturing, marketing, and
distribution company. From August 1983 until February 1999, Mr. Forman served
as the Chief
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Executive Officer of Ben Forman & Sons, Inc., a wholesale consumer products
manufacturer. Mr. Forman is the brother of the Company's President and Chief
Executive Officer, Richard D. Forman. Mr. Forman received his B.S. in Economics
from the Wharton School of Business in 1983.
Mark S. Hoffman has served as one of our Directors since March 1999. Since
October 1994, he has been a Member of Palisade Capital Management, LLC, the
investment manager of Palisade Private Partnership, L.P. Mr. Hoffman is a
director of several privately held companies, including C3i, Inc., Show
Digital, Inc., Berdy Medical Systems, Inc. and comstar.net, inc. Mr. Hoffman
received his B.S. in Economics from the Wharton School of Business in 1983.
Samantha McCuen has served as one of our Directors since June 1999. She is
a Managing Director of Sandler Capital Management. Ms. McCuen joined Sandler in
January 1996 and is currently responsible for analyzing, structuring and
managing Sandler's investments in Internet and technology companies in the
public and private sectors. She has been a principal of Sandler Internet
Partners, L.P. since October 1999. From 1990 to 1996, Ms. McCuen held both
equity research and investment banking positions at Morgan Stanley Dean Witter
where she specialized in Internet and PC software companies. Ms. McCuen
received her B.A. in Economics from Lehigh University in 1990.
Reginald Van Lee has served as one of our Directors since January 2000.
Mr. Van Lee joined Booz Allen & Hamilton, Inc. in 1984 and has been a Partner
there since 1993. Mr. Van Lee, who specializes in international business
strategy and management of technology-driven companies in the global
communications, media and technology industries, is currently the Managing
Partner of Booz Allen & Hamilton's New York City office. Mr. Van Lee received
his B.S. in Civil Engineering in 1979 and his M.S. in Civil Engineering in 1980
from the Massachusetts Institute of Technology. In 1984, Mr. Van Lee received
his M.B.A. from Harvard Business School.
Each of our directors was nominated and elected in accordance with our
Stockholders Agreement, as amended, and will hold office until the next annual
meeting of our stockholders. The Stockholders Agreement terminated upon the
consummation of our initial public offering in March 2000 in accordance with
its terms.
The Stockholders Agreement provided that we maintain a seven-member board
of directors and that each of the parties to the agreement vote all voting
stock in favor of the following:
o Three director nominees designated by Richard D. Forman, Peter A. Forman
and Dan B. Levine, subject to their collectively owning a specified
minimum percentage of our shares and rights to acquire our shares. Richard
D. Forman, Peter A. Forman and Reggie Van Lee serve as the directors
designated by this group.
o One director nominee designated by Capital Express, LLC, subject to its
owning a specified minimum percentage of our shares and rights to acquire
our shares. Niles H. Cohen currently serves as the director designated by
Capital Express, LLC.
o One director nominee designated by Internet Web Builders, LLC, subject to
its owning a specified minimum percentage of our shares and rights to
acquire our shares. Zachary Prensky initially served as the director
designated by Internet Web Builders, LLC. Internet Web Builders, LLC does
not have a designee currently serving on the board.
o One director nominee designated by Palisade Private Partnership, LP,
subject to its owning a specified minimum percentage of our shares and
rights to acquire our shares. Mark Hoffman currently serves as the
director designated by Palisade Private Partnership, LP. Palisade Private
Partnership, LP may also designate a representative to attend board of
directors' meetings in a non-voting observer capacity.
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o One director nominee designated by the holders of at least 50% of the
outstanding Series A Preferred Stock, for as long as the Series A
Preferred Stock represents at least 6% of our outstanding common stock and
rights to acquire our common stock. Samantha McCuen currently serves as
the director designated by the Series A Preferred Stock.
In January 2000, Internet Web Builders, LLC forfeited its right under the
Stockholders Agreement to designate a board member.
Executive Officers
Our executive officers are elected by our board of directors on an annual
basis and serve until the next annual meeting of the board or until their
successors have been duly elected and qualified.
Board Committees
Audit Committee. The audit committee reports to the board of directors
regarding the appointment of our independent public accountants, the scope and
results of our annual audits, compliance with our accounting and financial
policies and management's procedures and policies relative to the adequacy of
our internal accounting controls. The current members of the audit committee
are Mark S. Hoffman, Niles H. Cohen and Samantha McCuen.
Compensation Committee. The compensation committee of the board of
directors reviews and makes recommendations to the board regarding our
compensation policies and all forms of compensation to be provided to our
executive officers and directors. In addition, the compensation committee
reviews bonus and stock compensation arrangements for all of our other
employees. The current members of the compensation committee are Reginald Van
Lee, Mark S. Hoffman and Niles H. Cohen.
Director Compensation
We will pay our non-employee directors an annual fee of $4,000. We
reimburse our directors for expenses incurred in connection with their
attendance at board and committee meetings. We currently do not provide
additional compensation for committee participation or special assignments of
the board of directors.
Reginald Van Lee received options to purchase 35,000 shares of our common
stock with an exercise price of $24.00 upon his joining our board. Subject to
his continuing service as a director, 50% of these options will vest on the
first anniversary of his becoming a director and the remaining 50% will vest on
the second anniversary. In addition, in consideration for consulting services
that Mr. Van Lee provides to us, we have granted to him options to purchase an
additional 9,450 shares of our common stock, with an exercise price of $24.00
and a vesting schedule identical to the vesting schedule for his other options.
Each future non-employee director who is otherwise not affiliated with a
stockholder who held shares prior to our initial public offering, upon becoming
a director, will receive a grant of options to purchase 35,000 shares of our
common stock with an exercise price equal to the fair market value of our
common stock on the close of business on the date of grant. Subject to the
option holder's continuing service as a director, 50% of these options will
vest upon the first anniversary of the individual's becoming a director and 50%
will vest upon the second anniversary.
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No interlocking relationships currently exist between our board of
directors or compensation committee and the board of directors or compensation
committee of any other company, nor has any interlocking relationship existed
in the past.
Limitation on Directors' Liability and Indemnification
Our amended and restated certificate of incorporation limits the liability
of directors to the maximum extent permitted by Delaware law. Delaware law
provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability for:
o any breach of their duty of loyalty to the corporation or its
stockholders;
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
o any transaction from which the director derived an improper personal
benefit.
In accordance with applicable law, this limitation of liability does not apply
to liabilities arising under the federal securities laws and does not affect
the availability of equitable remedies such as injunctive relief or rescission.
Our amended and restated certificate of incorporation and our amended and
restated bylaws provide that we will indemnify our directors and officers and
may indemnify our employees and other agents to the fullest extent permitted by
law. We believe that indemnification under our amended and restated bylaws
covers at least negligence and gross negligence on the part of indemnified
parties. Our amended and restated bylaws also permit us to secure insurance on
behalf of any officer, director, employee or other agent for any liability
arising out of his or her actions in his or her capacity as an officer,
director, employee or other agent, regardless of whether the amended and
restated bylaws would permit indemnification.
The limited liability and indemnification provisions in our amended and
restated certificate of incorporation and amended and restated bylaws may
discourage stockholders from bringing a lawsuit against our directors for
breach of their fiduciary duty and may reduce the likelihood of derivative
litigation against our directors and officers, even though a derivative action,
if successful, might otherwise benefit us and our stockholders. A stockholder's
investment in us may be adversely affected to the extent we pay the costs of
settlement or damage awards against our directors and officers under these
indemnification provisions.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees in which indemnification is sought, nor
are we aware of any threatened litigation that may result in claims for
indemnification.
Employment Agreements
We have entered into employment agreements with each of Richard D. Forman,
our President and Chief Executive Officer and Jack S. Levy, our General
Counsel. In addition, we have entered into a severance agreement with Alan G.
Breitman, our Vice President of Finance and Accounting.
We have a letter agreement with Cindy E. Horowitz, our Vice President and
Chief Financial Officer confirming the terms of her employment.
Richard D. Forman.
Mr. Forman's employment agreement with us became effective as of February
27, 2000 and has an initial term of 42 months, with automatic renewal for
successive one-year terms
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unless we or Mr. Forman give notice of cancellation at least 90 days prior to
the expiration of the agreement. The agreement entitles Mr. Forman to receive a
base salary of $200,000 per year, discretionary annual bonuses and fringe
benefits such as medical and dental coverage, short and long term disability
and life insurance.
In addition, we granted Mr. Forman stock options under our 2000 Stock
Incentive Plan to purchase up to 525,000 shares of common stock, of which:
o options to purchase 175,000 shares will have an exercise price of
$26.40;
o options to purchase 175,000 shares will have an exercise price of
$33.60; and
o options to purchase 175,000 shares will have an exercise price of
$38.40.
These stock options are to vest in equal monthly amounts over a 42-month
period, as long as Mr. Forman is employed by us. The options with an exercise
price of $26.40 will vest first, over a 14-month period beginning on the date
of the grant; the options with an exercise price of $33.60 will vest over the
following 14 months; and the option with an exercise price of $38.40 will vest
over the remaining 14 months of the 42-month period.
The vesting of Mr. Forman's stock option will accelerate in full upon the
termination of Mr. Forman's employ by us without cause or by him for good
reason. In addition, if his employment is terminated without cause or for good
reason, Mr. Forman will be entitled to a lump-sum severance payment in an
amount equal to one month's base salary multiplied by the number of months
remaining in the contract term or 12 months, whichever number is greater. He
would also be entitled to medical and dental benefits for himself and his
eligible dependents under COBRA for a period of 18 months following the date of
termination. Mr. Forman is also entitled to an additional payment in order to
compensate him for any "golden parachute" excise tax that he incurs as a result
of receiving the severance payments and benefits provided for in the employment
agreement.
In addition, if Mr. Forman's employment is terminated without cause or for
good reason, or due to his death or disability, he will be entitled to any
earned but unpaid salary, as well as accrued but unused vacation, any unpaid
bonus accrued prior to the date of termination, a pro rata bonus for the year
in which the termination occurs, reimbursement for business expenses and any
payments or benefits due under our policies or benefit plans. Mr. Forman may
terminate his employment upon one month's written notice to us.
Mr. Forman is prohibited under his employment agreement from using or
disclosing any of our confidential information at any time in the future and
has assigned to us all rights to any inventions he develops during his
employment that pertain to our business or that are developed during work time
or using our material or facilities. Mr. Forman is also prohibited from
competing with us or soliciting any of our customers or employees during his
employment and for a period of one year thereafter.
In connection with Mr. Forman's prior employment agreement with us, he
received options to purchase up to 1,750,000 shares of common stock, of which:
o options to purchase 525,000 shares have an exercise price of $0.17 per
share;
o options to purchase 350,000 shares have an exercise price of $0.46 per
share;
o options to purchase 350,000 shares have an exercise price of $0.86 per
share; and
o options to purchase 525,000 shares have an exercise price of $1.71 per
share.
All of Mr. Forman's options under his prior employment agreement are fully
vested and are exercisable at any time prior to January 4, 2003.
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<PAGE>
Cindy E. Horowitz
We have a letter agreement dated July 7, 2000 with Ms. Horowitz offering
employment and confirming the terms of her employment. The letter provides that
the employment will be "at will" and may be terminated at any time by either
party. Ms. Horowitz will be entitled to an annual salary of $200,000 and a
guaranteed annual bonus of $100,000 to be paid on a monthly basis. In addition,
Ms. Horowitz may also receive discretionary bonuses. Subject to the approval of
our Compensation Committee, we will grant Ms. Horowitz options to purchase
155,000 shares of our common stock at an exercise price of $34.50 per share.
Ms. Horowitz options will begin to vest in 42 monthly installments of 3,690
shares beginning in January 2001.
Despite Ms. Horowitz's "at will" employee status, in the event we
terminate Ms. Horowitz's employment without cause, she will be entitled to one
year's base salary and guaranteed bonus, and the vesting period of any options
that would have vested during the one year following her termination will be
accelerated to the date of termination. However, in the event that Ms.
Horowitz's employment is terminated due solely to a disability which prevents
her from being able to perform her duties, she will be entitled to a maximum of
six months' salary and guaranteed bonus.
Alan G. Breitman
Mr. Breitman's severance agreement with us became effective as of June 9,
2000. The agreement provides that if Mr. Breitman's employment with us is
terminated without cause at any time prior to August 31, 2001, he will receive
a termination payment equal to the difference between his annual base salary
and the aggregate amount of base salary already paid to him between the
effective date of the agreement and August 31, 2001. In addition, upon the
termination of Mr. Breitman's employ with us without cause, the vesting of any
options that would have vested through August 31, 2001 will be accelerated
through the date of his termination.
Jack S. Levy
Mr. Levy's employment agreement with us became effective as of October 11,
1999. The agreement provides for a one-year term, at which time the term will
be extended for consecutive 45-day periods, unless terminated by either party.
Mr. Levy is entitled to an annual salary of at least $116,327 and received a
signing bonus of $25,000. Mr. Levy also received a $50,000 cash bonus within 15
days of the closing of our initial public offering and is entitled to receive a
$25,000 cash bonus at the one-year anniversary of the closing of our initial
public offering or the six-month anniversary of our change in control. We have
also granted Mr. Levy options to purchase up to 122,500 shares of our common
stock at an exercise price of $1.43 per share. These options began to vest in
January 2000 in 41 monthly installments of 2,916 shares and a final monthly
installment of 2,944 shares.
We also granted Mr. Levy options to purchase 52,500 shares of our common
stock at an exercise price per share of $24.00. These options vest on a monthly
basis for a period of 42 months beginning on the closing of our initial public
offering. The vesting of Mr. Levy's options will accelerate upon the earlier
of:
o our change in control, in which case vesting will accelerate to the
six-month anniversary of the closing of the transaction; or
o the termination of Mr. Levy's employ by us without cause or by him for
good reason following our change in control, in which case vesting will
accelerate to the date of his termination.
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<PAGE>
If Mr. Levy's employment is terminated by us without cause or by him for
good reason following our change in control, the vesting of any options that
would have vested through the expiration of the employment term had the
termination not occurred will be accelerated to the date of the termination.
This provision will apply to Mr. Levy's options to purchase 52,500 shares of
common stock. In addition, we would be required to pay Mr. Levy the bonuses
applicable to these transactions, as well as pay his salary until the scheduled
expiration of the employment agreement. If Mr. Levy's employment is terminated
due to death or for good cause, or a voluntary resignation, he will not be
entitled to any compensation from us in addition to the payment of any accrued
base salary, bonuses and benefits.
Executive Compensation
The following table sets forth the total compensation paid or accrued for
the years ended December 31, 1999 and 1998 to our Chief Executive Officer and
to each of our most highly compensated executive officers other than our Chief
Executive Officer whose salary and bonus for 1999 exceeded $100,000. We refer
to the Chief Executive Officer and these other officers as named executive
officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------ -------------
Securities
Underlying
Name and Principal Position Year Salary($) Bonus($) Options (#)
----------------------------------------------- ------ ----------- ---------- -------------
<S> <C> <C> <C> <C>
Richard D. Forman ............................. 1999 $162,737 $30,000 --
Chief Executive Officer and President ......... 1998 114,462 20,000 1,750,000
Alan G. Breitman (1) .......................... 1999 97,019 60,000 175,000
Vice President Finance and Treasurer .......... 1998 10,096 -- --
Sascha A. Mornell (2) ......................... 1999 102,000 50,000 17,500
Vice President Marketing ...................... 1998 47,500 -- 210,000
Robert D. Gardos (3) .......................... 1999 88,538 50,000 105,000
Vice President Technology ..................... 1998 45,923 -- 105,000
</TABLE>
(1) Alan G. Breitman started with us in November 1998.
(2) Sascha A. Mornell started with us in May 1998.
(3) Robert D. Gardos started with us in June 1998.
Option Grants in Last Fiscal Year
The following table sets forth grants of stock options for the year ended
December 31, 1999 to each of our named executive officers. The potential
realizable value is calculated based on the term of the option at its time of
grant. It is calculated assuming that the fair market value of common stock on
the date of grant appreciates at the indicated annual rate compounded annually
for the entire term of the option and that the option is exercised and sold on
the last day of its term for the appreciated stock price. These numbers are
calculated based on the requirements of the Securities and Exchange Commission
and do not reflect our estimate of future stock price growth. The percentage of
total options granted to employees in the last fiscal year is based on options
to purchase an aggregate of 1,063,510 shares of common stock granted under our
plans.
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<PAGE>
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------
% of Potential Realizable
Total Value at Assumed
Options Annual Rates of
Number Granted Stock Price
of Shares to Appreciation
Option Term
Underlying Employees Exercise ------------------------------------
Options in Fiscal Price Per Expiration
Name Granted Year Share Date 0% 5% 10%
--------------------------- ------------ ----------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Alan G. Breitman .......... 105,000 10% 0.86 2/1/2009 $67,500 $156,514 $318,514
70,000 7% 1.43 5/1/2009 78,800 191,246 363,761
Sascha A. Mornell ......... 17,500 2% 0.86 6/1/2009 29,700 57,812 100,940
Robert D. Gardos .......... 35,000 3% 1.14 1/1/2009 2,500 29,228 70,234
35,000 3% 1.43 5/1/2009 20,000 64,023 131,562
35,000 3% 1.43 6/1/2009 39,400 95,623 181,881
</TABLE>
Aggregated Option Exercises in the Year Ended December 31, 1999 and Year-End
Option Values
The following table sets forth information concerning the options held by
each of our named executive officers at December 31, 1999. There was no public
trading market for the common stock as of December 31, 1999. Accordingly, the
values set forth below have been calculated on the basis of our initial public
offering price of $24.00 per share, less the applicable exercise price per
share, multiplied by the number of shares underlying the options.
<TABLE>
<CAPTION>
Number of Shares Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year End at Fiscal Year End ($)
------------------------------- ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
--------------------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Richard D. Forman ......... 1,750,000 -- $40,550,000 --
Alan G. Breitman .......... 39,584 135,416 908,467 $3,101,533
Sascha A. Mornell ......... 109,375 118,125 2,568,750 2,771,250
Robert D. Gardos .......... 74,583 135,417 1,735,945 3,114,055
</TABLE>
Stock Option Plans
We adopted our stock option plans for the purpose of promoting our
long-term growth and profitability by providing key persons the incentive to
improve stockholder value and to contribute to our growth and success, as well
as to enable us to attract and retain talented and skilled persons for
positions of substantial responsibility. We have used stock options as a
component of compensation for our officers and key employees.
1997 Stock Option Plan.
Our predecessor company, Forman Interactive Corp., adopted our 1997 Stock
Option Plan in December 1997. We assumed the 1997 plan in our merger with
Forman Interactive. A total of 1,750,000 shares of common stock have been
authorized for issuance under the plan. As of July 15, 2000, options to
purchase an aggregate of 1,216,534 shares of common stock were outstanding
under the plan. The number and price of shares covered by outstanding stock
options and the number of shares authorized under the plan will be
proportionately adjusted, as determined by the board, to take into account any
stock split, reverse stock split, stock dividend, combination, recapitalization
or similar event.
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<PAGE>
Our officers, employees, non-employee directors and consultants are
eligible to participate in the plan. As plan administrator, our board of
directors has the sole discretion to determine which eligible individuals may
receive awards, the type of awards to be made and the terms and conditions of
each award.
If we merge with another company and do not survive the merger, or we sell
substantially all of our common stock to another person, or enter into any
similar transaction, all outstanding options must be assumed by the surviving
company, unless the board determines in its sole discretion to terminate all
outstanding options effective at the closing of the transaction by delivering a
notice of termination to each optionholder at least 20 days prior to the
closing. Each optionholder would, however, have the right to exercise the
vested portion of the option during the period from the delivery of the notice
until the closing.
No options may be granted under the plan after December 2007, but options
granted prior to that date may continue to be exercised until their stated
terms.
1999 Stock Option Plan.
In April 1999, our board of directors adopted our 1999 Stock Option Plan,
which was approved by our stockholders in January 2000. A total of 2,275,000
shares of common stock have been authorized for issuance under the plan, and no
more than 1,750,000 shares may be issued under the plan to any one individual.
As of July 15, 2000, options to purchase 805,914 shares of common stock were
outstanding under the plan. The number and price of shares covered by
outstanding stock options and the number of shares authorized under the plan
will be proportionately adjusted, as determined by the board, to take into
account any stock split, reverse stock split, stock dividend, combination,
recapitalization or similar event.
Our directors, officers, employees and consultants and other advisors are
eligible to participate in the plan. As plan administrator, the compensation
committee of our board of directors has the sole discretion to determine which
eligible individuals may receive awards, the type of awards to be made and the
terms and conditions of each award. Unless otherwise fixed by the plan
administrator, each option shall expire ten years from the date of grant. No
options may be granted under the plan after April 2009, but options granted
prior to that date may continue to be exercised until their stated terms.
2000 Stock Incentive Plan.
In January 2000, our board of directors adopted and our stockholders
approved our 2000 Stock Incentive Plan. Our 2000 Stock Incentive Plan is
intended to serve as the successor equity incentive program to our 1997 Stock
Option Plan and our 1999 Stock Option Plan. Outstanding options under the
predecessor plans were incorporated into the 2000 Stock Incentive Plan upon the
consummation of our initial public offering, and the incorporated options
continue to be governed by their existing terms.
We have authorized the issuance of up to 7,350,000 shares of common stock
under the 2000 Stock Incentive Plan. This share reserve consists of the shares
issuable under the predecessor plans on the effective date of the 2000 Stock
Incentive Plan plus an additional increase of 3,500,000 shares. The share
reserve will automatically be increased on the first trading day of January of
each calendar year, beginning in January 2001, by a number of shares equal to
2% of the total number of shares of common stock outstanding on the last
trading day of the prior calendar year, but no such annual increase will exceed
1,750,000 shares. In no event may any one participant receive option grants or
direct stock issuances for more than 1,750,000 shares in the aggregate per
calendar year. As of June 30, 2000, options to purchase 2,058,579 shares of
common stock were outstanding under the plan.
Except as otherwise noted below, the outstanding options under the
predecessor plans contain substantially the same terms and conditions
summarized below for the discretionary option grant program under the 2000
Stock Incentive Plan. The 2000 Stock Incentive Plan has five separate programs:
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o the discretionary option grant program under which eligible individuals
in our employ or service (including officers, non-employee board members
and consultants) may be granted options to purchase shares of our common
stock;
o the stock issuance program under which such individuals may be issued
shares of common stock directly, through the purchase of such shares or as
a bonus tied to the performance of services;
o the salary investment option grant program under which executive officers
and other highly compensated employees may elect to apply a portion of
their base salary to the acquisition of special below-market stock option
grants;
o the automatic option grant program under which option grants will
automatically be made at periodic intervals to eligible non-employee board
members; and
o the director fee option grant program under which non-employee board
members may elect to apply a portion of their retainer fee to the
acquisition of special below-market stock option grants.
The discretionary option grant and stock issuance programs will be
administered by our compensation committee. This committee will determine which
eligible individuals are to receive option grants or stock issuances, the time
or times when the option grants or stock issuances will be made, the number of
shares subject to each grant or issuance, exercise or purchase price for each
grant or issuance (which may be less than, equal to or greater than the fair
market value of the shares), the status of any granted option as either an
incentive stock option or a non-statutory stock option under the federal tax
laws, the vesting schedule to be in effect for the option grant or stock
issuance and the maximum term for which any granted option is to remain
outstanding. The committee will also select the executive officers and other
highly compensated employees who may participate in the salary investment
option grant program in the event that the program is activated for one or more
calendar years. Neither the compensation committee nor the board will exercise
any administrative discretion with respect to option grants made under the
salary investment option grant program or under the automatic option grant
program or director fee option grant program for the non-employee board
members.
The exercise price for the options may be paid in cash or in shares of our
common stock valued at fair market value on the exercise date. The option may
also be exercised through a same-day sale program without any cash outlay by
the optionee. In addition, the compensation committee may allow a participant
to pay the option exercise price or direct issue price and any associated
withholding taxes incurred in connection with the acquisition of shares with a
full-recourse, interest-bearing promissory note.
If we are acquired, each outstanding option under the discretionary option
grant program that is not to be assumed by the successor corporation or
otherwise continued will automatically accelerate in full, and all unvested
shares under the discretionary option grant and stock issuance programs will
immediately vest, except to the extent the repurchase rights with respect to
those shares are to be assigned to the successor corporation or otherwise
continued in effect. The compensation committee may grant options and issue
shares that will accelerate
o in connection with an acquisition even if the options are assumed and
repurchase rights are assigned;
o in connection with a hostile change in control (effected through a
successful tender offer for more than 50% of our outstanding voting stock
or by proxy contest for the election of board members); or
o upon a termination of the individual's service following a change in
control or hostile takeover.
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<PAGE>
If we are acquired, options currently outstanding under the 1997 and 1999
plans may be assumed by the successor corporation or the options may terminate.
The compensation committee may provide for acceleration of any options that
terminate in connection with the acquisition. These options are not by their
terms subject to acceleration in connection with any other change in control or
hostile takeover.
Stock appreciation rights may be issued under the discretionary option
grant program that will permit holders to elect to surrender their outstanding
options for an appreciation distribution from us equal to the fair market value
of the vested shares subject to the surrendered option less the aggregate
exercise price payable for the shares. This appreciation distribution may be
made in cash or in shares of common stock. There are currently no outstanding
stock appreciation rights under the predecessor plans.
The compensation committee has the authority to cancel outstanding options
under the discretionary option grant program, including options incorporated
from the predecessor plans, in return for the grant of new options for option
shares with an exercise price per share based upon the fair market value of the
common stock on the new grant date.
If the compensation committee elects to activate the salary investment
option grant program for one or more calendar years, each of our executive
officers and other highly compensated employee selected for participation may
elect to reduce his or her base salary for that calendar year by a specified
dollar amount not less than $10,000 nor more than $50,000. In return, the
individual will automatically be granted, on the first trading day in the
calendar year for which the salary reduction is to be in effect, a
non-statutory option to purchase that number of shares of common stock
determined by dividing the salary reduction amount by two-thirds of the fair
market value per share of our common stock on the grant date. The option
exercise price will be equal to one-third of the fair market value of the
option shares on the grant date. As a result, the fair market value of the
option shares on the grant date less the exercise price payable for those
shares will be equal to the salary reduction amount. The option will become
exercisable in a series of 12 equal monthly installments over the calendar year
for which the salary reduction is to be in effect and will be subject to full
and immediate vesting in the event of our acquisition or change in control.
Under the automatic option grant program, each individual who joins the
board on or after January 26, 2000, and who is not an employee board member or
an affiliate or representative of a beneficial owner of 3% or more of our
common stock, will automatically be granted an option for 35,000 shares of our
common stock at the time of his or her commencement of board service, unless
the individual has previously been in our employ. In addition, each individual
who continues to serve as a non-employee board member after an annual
stockholders meeting will receive an option grant to purchase 5,250 shares of
common stock on the date of the annual stockholders meeting beginning with the
first annual stockholders meeting held after the initial 35,000-share grant
under the automatic option grant program is fully vested. Each automatic grant
will have an exercise price equal to the fair market value per share of our
common stock on the grant date and will have a maximum term of 10 years,
subject to earlier termination following the optionee's cessation of board
service. Each option will be immediately exercisable, subject to our right to
repurchase any unvested shares, at the original exercise price, at the time of
the board member's cessation of service. Each 35,000-share option grant will
vest, and the repurchase right will lapse, in a series of two equal successive
annual installments upon the optionee's completion of each year of board
service over the two-year period measured from the grant date. Each 5,250-share
option grant will vest, and the repurchase right will lapse, upon the
optionee's completion of one year of board service measured from the grant
date. However, each such outstanding option will immediately vest upon a change
in control, a hostile takeover or the death or disability of the optionee while
serving as a board member.
If the director fee option grant program is put into effect in the future,
then each non-employee board member may elect to apply all or a portion of any
cash retainer fee for the year to the acquisition of a below-market option
grant. The option grant will automatically
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<PAGE>
be made on the first trading day in January in the year for which the
non-employee board member would otherwise be paid the cash retainer fee in the
absence of his or her election. The option will have an exercise price per
share equal to one-third of the fair market value of the option shares on the
grant date, and the number of shares subject to the option will be determined
by dividing the amount of the retainer fee applied to the program by two-thirds
of the fair market value per share of our common stock on the grant date. As a
result, the fair market value of the option shares on the grant date less the
exercise price payable for those shares will be equal to the portion of the
retainer fee applied to that option. The option will become exercisable in a
series of 12 equal monthly installments over the calendar year for which the
election is in effect. However, the option will become immediately exercisable
for all the option shares upon the death or disability of the optionee while
serving as a board member.
Limited stock appreciation rights will automatically be included as part
of each grant made under the automatic option grant and salary investment
option grant programs and may be granted to one or more officers as part of
their option grants under the discretionary option grant program. Options with
such a limited stock appreciation right may be surrendered to us upon the
successful completion of a hostile tender offer for more than 50% of our
outstanding voting stock. In return for the surrendered option, the optionee
will be entitled to a cash distribution from us in an amount per surrendered
option share equal to the highest price per share of common stock paid in
connection with the tender offer less the exercise price payable for such
share.
The board may amend or modify the 2000 Stock Incentive Plan at any time,
subject to any required stockholder approval. The 2000 Stock Incentive Plan
will terminate no later than January 25, 2010.
Employee Stock Purchase Plan.
Our Employee Stock Purchase Plan was adopted by the board and approved by
the stockholders on January 26, 2000. The plan became effective in March 2000.
The plan is designed to allow our eligible employees and participating
subsidiaries, if any, to purchase shares of our common stock, at semi-annual
intervals, through their periodic payroll deductions. A total of 350,000 shares
of our common stock will initially be authorized for issuance under the plan.
The share reserve will automatically increase on the first trading day of
January of each year beginning in January 2001, by 0.25% of the total shares of
common stock outstanding on the last trading day of the prior calendar year,
but no such annual increase will exceed 140,000 shares. In no event may any
participant purchase more than 700 shares, nor may all participants in the
aggregate purchase more than 122,500 shares on any one semi-annual purchase
date.
The plan will have a series of successive offering periods, each with a
maximum duration of 24 months, except that the initial offering period will
begin on the date that the underwriting agreement is executed in connection
with this offering and will end on the last business day in April 2002. The
next offering period will begin on the first business day in May 2002, and
subsequent offering periods will be set by the compensation committee. Shares
will be purchased for the participants semi-annually during the offering
period. The first purchase date will occur on October 31, 2000. If the fair
market value of our common stock on any semi-annual purchase date is less than
the fair market value on the first day of the offering period, then the current
offering period will automatically end and a new offering period will begin,
based on the lower fair market value.
Individuals who are eligible employees on the start date of any offering
period may enter the plan on that start date or on any subsequent semi-annual
entry date. Individuals who become eligible employees after the start date of
the offering period may join the plan on any subsequent semi-annual entry date
within that period.
A participant may contribute up to 10% of his or her cash compensation
through payroll deductions and the accumulated payroll deductions will be
applied to the purchase of shares
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on the participant's behalf on each semi-annual purchase date. The purchase
price per share will be 85% of the lower of the fair market value of our common
stock on the participant's entry date into the offering period or the fair
market value on the semi-annual purchase date.
Generally, the board may at any time amend or modify the plan. The plan
will terminate no later than the last business day in April 2010.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Equity Issuances and Financings
In August 1996, we borrowed an aggregate of $100,000 from our co-founders,
Richard D. Forman, our President, Chief Executive Officer and Chairman of our
board of directors, Peter A. Forman, one of our directors, and Dan B. Levine, a
director at the time of the transaction, to fund our operations. In connection
with this transaction, we issued warrants to purchase shares of our common
stock at an exercise price of $0.24 per share as follows:
Value of
Underlying Shares
Common Stock Net of Exercise Price
Name of Investor Underlying Warrants at $30.75 per share
--------------------------- --------------------- ----------------------
Richard D. Forman ......... 156,244 $4,767,004
Peter A. Forman ........... 156,244 4,767,004
Dan B. Levine ............. 99,278 3,028,972
In January 1998, each exercised in full his warrants and used the amount
due from us under the loan to pay the exercise price.
In September 1996, pursuant to a letter agreement among Capital Express,
LLC, Peter A. Forman, Richard D. Forman and Dan B. Levine, and in consideration
for personally guaranteeing a commercial loan to us in the amount of $162,000
from Citibank, N.A., we issued to each of Richard D. Forman and Peter A. Forman
warrants to purchase 472,500 shares of our common stock at an exercise price of
$0.17 per share. In January 1998, each forfeited accrued but unpaid
compensation in order to effect a cashless conversion of these warrants. The
aggregate value of these shares based on an assumed public offering price of
$30.75 per share would be $14,529,375.
In December 1997, we borrowed an aggregate of $80,000 at an annual rate of
10% from Kenneth Greif, the managing member of Internet Web Builders, LLC. In
connection with this transaction, we issued 11,200 shares of our common stock
to Mr. Greif for no additional consideration. The value of these shares based
on an assumed public offering price of $30.75 per share would be $344,400. We
repaid this loan in January 1998.
Also, in January 1998, we sold 2,800,000 shares of our common stock at a
price of $0.36 per share to Internet Web Builders, LLC for a purchase price of
$1.0 million. The aggregate value of these shares based on an assumed public
offering price of $30.75 per share would be $86,100,000. Concurrently with the
closing of this transaction, we issued warrants to purchase up to an aggregate
of 2,450,001 shares of our common stock at an exercise price of $0.36 per share
based upon our reaching specified revenue targets. In June 1999, we modified
the terms of the warrants to remove the revenue targets, to fix the number of
shares underlying the warrants at 2,450,001 and to increase the exercise price
to $0.97 per share. These warrants were issued on a pro rata basis to the
stockholders immediately prior to the Internet Web Builders investment as
follows:
<TABLE>
<CAPTION>
Value of
Underlying Shares
Common Stock Net of Exercise Price
Name of Investor Underlying Warrants at $30.75 per share
------------------------------ --------------------- ----------------------
<S> <C> <C>
Richard D. Forman ............ 699,717 $20,837,572
Peter A. Forman .............. 548,247 16,326,796
Dan B. Levine ................ 283,798 8,451,504
Capital Express, LLC ......... 918,239 27,345,157
</TABLE>
The aggregate value of the shares underlying these warrants, net of the
exercise price, based on an assumed public offering price of $30.75 per share,
would be $72,961,030.
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<PAGE>
As payment of a finder's fee in connection with the Internet Web Builders
investment, we issued to each of Zachary Prensky, our then director, and Niles
Cohen, our current director, warrants to purchase 350,000 shares of our common
stock, at exercise prices of $0.36 for 50% of the shares and $0.86 for the
remaining shares. The aggregate value of the shares underlying these warrants,
net of the exercise price, based on an assumed public offering price of $30.75
per share, would be $21,098,000. At the time of the transactions, Zachary
Prensky was both one of our directors and the managing member of Internet Web
Builders. In addition, Niles Cohen is, and at the time of the transactions was,
the managing member of Capital Express, LLC.
In May 1998, we sold 3,640,000 shares of our common stock at a purchase
price of $0.36 per share. The aggregate value of these shares based on an
assumed public offering price of $30.75 per share would be $111,930,000. Of
these, our directors, executive officers, stockholders beneficially owning 5%
or more in the aggregate of our common stock and Melvin Forman, an immediate
family member of two of our directors, purchased shares as follows:
Value of Shares
Name of Investor Common Stock at $30.75 per share
------------------------------- -------------- --------------------
Richard D. Forman ............. 308,000 $ 9,471,000
Peter A. Forman ............... 308,000 9,471,000
Capital Express, LLC .......... 140,000 4,305,000
Internet Web Builders ......... 1,764,000 54,243,000
Melvin Forman ................. 280,000 8,610,000
Concurrently with the closing of this transaction, as payment of a
finder's fee, we issued to each of Zachary Prensky and Niles Cohen warrants to
purchase 221,669 shares of our common stock, at exercise prices of $0.36 for
50% of the shares and $0.86 for the remaining shares. The aggregate value of
the shares underlying these warrants, net of the exercise price, based on an
assumed public offering price of $30.75 per share, would be $13,362,207.
In March 1999, we issued 1,499,999 shares of our Exchangeable Preferred
Stock to Palisade Private Partnership, L.P. at a purchase price of $2.00 per
share. These shares were automatically converted to common stock on August 15,
1999, in accordance with their terms. The value of these shares based on an
assumed public offering price of $30.75 per share would be $46,124,969. In
addition, we entered into a service agreement with Palisade Private
Partnership, LP, whereby Palisade agreed to provide us six months of financial
and strategic advisory services in exchange for a warrant to purchase 420,000
shares of our common stock at a price of $2.14 per share. The aggregate value
of the shares underlying these warrants, net of the exercise price, based on an
assumed public offering price of $30.75 per share, would be $12,016,200. Mr.
Hoffman, one of our current directors, is a member of Palisade Private
Holdings, LLC, the General Partner of Palisade Private Partnership L.P.
In May 1999, we sold 2,041,666 shares of our common stock to Staples, Inc.
at a price of $3.43 per share. The value of these shares based on an assumed
public offering price of $30.75 per share would be $62,781,230. In connection
with the transaction, we issued to Staples warrants to purchase up to 700,000
shares of our common stock at an exercise price of $0.0029. The aggregate value
of the shares underlying these warrants, net of the exercise price, based on an
assumed public offering price of $30.75 per share, would be $21,522,970.
From June 1999 through July 1999, we sold 4,694,333 shares of our Series A
Convertible Preferred Stock at a purchase price of $3.43 per share. The value
of these shares based on an assumed public offering price of $30.75 per share
would be $144,350,740. In connection with these transaction, we issued warrants
to purchase 938,888 shares of our common stock, each at an exercise price of
$3.43 per share. The aggregate value of the shares underlying these warrants,
net of the exercise price, based on an assumed public offering price of $30.75
per share, would be $25,650,420. Of these, our directors, officers and
stockholders beneficially owning 5% or more in the aggregate of our common
stock purchased shares and were issued warrants as follows:
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<TABLE>
<CAPTION>
Aggregate Value
of Securities
Series A Convertible Common Stock Net of Exercise Price
Name of Investor Preferred Stock Underlying Warrants at $30.75 per share
----------------------------------------- ---------------------- --------------------- ----------------------
<S> <C> <C> <C>
Richard D. Forman ....................... 1,460 291 $ 52,845
Peter A. Forman ......................... 4,893 980 177,234
Dan B. Levine ........................... 459 95 16,709
Alan G. Breitman ........................ 15,585 2,919 558,986
Concentric Network Corporation .......... 1,458,335 291,669 52,812,198
Internet Web Builders, LLC .............. 6,934 1,386 251,087
Sandler Capital IV FTE Partners L.P. 381,500 76,300 13,815,641
Sandler Capital Management .............. 145,835 29,169 5,281,323
Sandler Capital IV Partners L.P. ........ 931,000 186,200 33,715,234
Staples, Inc. ........................... 120,659 24,136 4,369,660
</TABLE>
Samantha McCuen, one of our current directors, is a Managing Director of
Sandler Capital Management and a principal of Sandler Internet Partners L.P. At
the time of the Series A Convertible Preferred Stock financing, Zachary Prensky
was one of our directors and a managing member of Internet Web Builders, LLC.
Related Party Transactions
Legg Mason Wood Walker, Incorporated earned an advisory fee in connection
with the sale of our Exchangeable Preferred Stock, our common stock to Staples
and our Series A Convertible Preferred Stock, consisting of $1.1 million in
cash and warrants to purchase 494,449 shares of our common stock at an exercise
price of $4.08 per share. The aggregate value of the shares underlying these
warrants, net of the exercise price, based on an assumed public offering price
of $30.75 per share, would be $13,186,955. In addition, we granted Legg Mason
piggyback registration rights with respect to the common stock issuable upon
exercise of their warrants. We also agreed that Legg Mason could be included as
a managing underwriter in connection with our initial public offering.
In May 1999, we entered into a cooperative marketing agreement with
Staples. The agreement gives us the exclusive right to market our domain name
registration services on all of Staples' branded properties, including
Staples.com's website and the Staples retail stores. Further, the agreement
gives Staples the exclusive right to market its office supplies on our website.
In addition, the agreement restricts us from entering into similar marketing
agreements with entities that derive more than 20% of their revenue from the
sale of office supplies. The initial term of the agreement ends on May 31,
2002, but automatically renews for consecutive one-year terms unless terminated
by either party upon 60 days' written notice. No cash payments are required to
be paid by either Staples or us under this cooperative marketing agreement.
In June 1999, we entered into a marketing and distribution agreement with
Concentric Network Corporation, which was amended in June 30, 2000. The
agreement makes us the exclusive provider of domain name registration services
in generic top level domains for Concentric's branded web-hosting and
electronic services. The agreement provides that through December 2000
Concentric will be one of up to three web-hosting or electronic commerce
service providers on our website and from January 2001 through December 2001,
it will be one of up to four web-hosting or electronic commerce providers.
Concentric has agreed to purchase advertising space on our website through
December 2000, at a rate of $100,000 per month, and for the seven months
commencing March 2000 at a rate of $100,000 per month, plus an additional
$800,000 for the period from September to December 2000. In addition,
Concentric has agreed to pay us a $75 commission for each of our customers who
use Concentric's services. We pay Concentric $41,666.67 per month under the
agreement for co-branded marketing programs. We also pay Concentric a
commission not to exceed 20% of the net revenue generated by new registrations
originating from Concentric based upon the volume of these new registrations.
The term of our agreement with Concentric expires on December 31, 2001.
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In addition, Concentric has agreed to purchase advertising space on our
website through December 2001 at a rate of $350,000 per month for the three
months ended March 2001, $400,000 for the three months ended June 2001,
$450,000 per month for the three months ended September 2001, and $500,000 per
month for the three months ended December 2001.
Registration Rights Agreement
In connection with the sale of our Series A Convertible Preferred Stock,
we entered into a Registration Rights Agreement with Dan B. Levine, Peter A.
Forman, Richard D. Forman, Capital Express, L.L.C., Internet Web Builders,
L.L.C., Palisade Private Partnership, L.P., Staples, Inc. and the purchasers of
our Series A Preferred Stock. This Registration Rights Agreement amends and
restates the registration rights agreement that we entered into in connection
with the sale of our Exchangeable Preferred Stock and our sale of common stock
to Staples. For a description of the Registration Rights Agreement, please see
"Description of Capital Stock--
Registration Rights Agreement."
Stockholders Agreement
Also in connection with the sale of our Series A Convertible Preferred
Stock, we entered into a Stockholders Agreement with the parties to the
Registration Rights Agreement described above. This Stockholders Agreement
terminated upon the consummation of our initial public offering in March 2000.
The Agreement amended and restated the stockholders agreement that we entered
into in connection with the sale of our Exchangeable Preferred Stock and our
sale of common stock to Staples. Under this Stockholders Agreement, the parties
agreed to restrictions on the transferability of their shares in number of
specified circumstances, including rights of first refusal, tag along rights
and drag along rights. In addition, the Stockholders Agreement, which has since
terminated required that we obtain Staples' written consent prior to entering
into a merger, consolidation or sale of all or substantially all of our assets
unless the merger consideration equaled at least $3.43 per share of common
stock, with adjustments for stock splits, dividends and similar events.
The Stockholders Agreement also required the stockholders to vote all of
their voting stock, subject among other things to minimum stock holding
requirements, in favor of
o three directors designated by Richard D. Forman, Peter A. Forman and Dan
B. Levine;
o one director designated by Capital Express, LLC;
o one director designated by Internet Web Builders, LLC;
o one director designated by Palisade Private Partnership, L.P; and
o one director designated by the holders of at least 50% of the outstanding
Series A Preferred Stock.
In February 2000, Internet Web Builders, LLC agreed to forfeit its right
to designate a board member. We granted Kenneth Greif, the managing member of
Internet Web Builders, LLC, the non-transferable right to attend meetings of
the board of directors as a non-voting observer, except in limited contexts.
Mr. Greif terminated his observer rights voluntarily on April 6, 2000.
In December 1997, we borrowed an aggregate of $80,000 at an annual rate of
10% from Kenneth Greif. In connection with this transaction, we issued 11,200
shares of our common stock to Mr. Greif for no additional consideration. We
repaid this loan in January 1998.
Transactions Between Principal Stockholders
On March 6, 2000, Capital Express, LLC sold warrants to purchase 918,239
shares of our common stock with an exercise price of $0.97 per share to
Staples, Inc. The purchase price
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<PAGE>
per warrant was $23.03. The aggregate value of the shares underlying these
warrants, based on public offering price of $30.75 per share, was
$27,345,157. The warrants were sold at a price less than the deemed fair
value of the warrants, as calculated using the Black-Scholes model. As a
result, we recorded approximately $400,000 of expense related to this
transaction in the first quarter of 2000.
On March 28, 2000 Staples purchased 75,000 shares of our common stock at a
purchase price per share equal to $24.00 per share from Richard D. Forman, our
President, Chief Executive Officer and the chairman of our board of directors.
The aggregate value of these shares, based on an initial public offering price
of $24.00 per share, would be $1,800,000. As part of the same agreement,
Staples purchased an additional 75,000 shares of our common stock at a purchase
price of $24.00 per share from Palisade Private Partnership, L.P. Mark S.
Hoffman, one of our current directors, is a member of Palisade Private
Holdings, LLC, the General Partner of Palisade Private Partnership L.P. The
aggregate value of these shares based on an initial public offering price of
$24.00, would be $1,800,000.
Staples, Inc. has entered into two lock-up and voting agreements with us,
which generally require Staples not to transfer or otherwise dispose of any of
our securities for a period of one year from March 2, 2000, or if the transfer
is to an affiliate of Staples. As a condition of any transfer, the transferee
must agree to receive and hold the securities subject to the lock-up and voting
agreement. In addition, the agreements provide that, for as long as Staples
beneficially owns more than 5% of our outstanding voting securities, Staples
must not vote against any matter put before our stockholders if the holders of
at least a majority of our voting securities, excluding Staples, have voted in
favor of the matter, with limited exceptions.
No monetary exchanges between Staples and us are required under these
agreements. Each of Messrs. Cohen, Forman and Hoffman may be considered
underwriters in connection with these sales of securities to Staples.
Other Transactions
From inception until May 1998, we utilized office space and received
administrative services from Ben Forman & Sons, Inc. for which we paid $18,682
in 1997 and $577 in 1998. Melvin Forman, an executive officer of Ben Forman &
Sons, is the father of Richard D. Forman and Peter A. Forman. During 1998,
Peter A. Forman served as an executive officer of Ben Forman & Sons.
We pay $500 per month to one of Lease On Line, Inc.'s employees for
facilities management services provided to us. We have also issued options to
purchase 5,000 shares of our common stock to this employee. In addition, we
provide Lease On Line the use of approximately 200 square feet of our office
space and various office services without charge. Richard D. Forman is the
President and principal owner of Lease On Line.
We have entered into employment agreements with Richard D. Forman and Jack
S. Levy, and a severance agreement with Alan G. Breitman. We also have a letter
agreement with Cindy E. Horowitz confirming the terms of her employment. For a
detailed description of these agreements, please see "Management--Employment
Agreements."
In addition, in consideration for consulting services that Mr. Van Lee
will provide to us, we have issued him options to purchase an additional 9,450
shares of our common stock, with an exercise price equal to $24.00 per share
and a vesting schedule identical to the vesting schedule for his other options.
We believe that all of the transactions set forth in this section were
made on terms no less favorable to us than could have been obtained from
unaffiliated third parties. We intend that all future transactions between us
and any of our officers, directors, principal stockholders and their affiliates
will be approved by a majority of the independent and disinterested directors
on our board of directors and will be on terms no less favorable to us than
could be obtained from unaffiliated third parties.
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<PAGE>
Board of Advisors
We have established a Board of Advisors to assist with the planning of our
strategic growth and development. The Board of Advisors currently consists of
Robert H. Lessin, Co-Chief Executive Officer of Wit Capital Corporation, Stuart
D. Levi, a partner in the firm of Skadden, Arps, Slate, Meagher & Flom LLP,
Peter J. Varvara, the President and Chief Executive Officer of Customer
Strategies Worldwide, and Steve W. Klebe, Vice President of Payment Alliances
Cybersource. Members of the Board of Advisors do not receive a stated salary
for their services as members. From time to time, the Board of Directors has
granted warrants to purchase common stock as compensation to the members of the
Board of Advisors. As of June 30, 2000, we have granted warrants to purchase an
aggregate of 31,500 shares to the members of the Board of Advisors, at exercise
prices ranging from $0.43 to $2.86 per share.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of July 15, 2000, and as adjusted to reflect
the sale of the shares of common stock offered hereby, by each person or group
of affiliated persons whom we know to beneficially own 5% or more of our common
stock, each director, each named executive officer, all of our directors and
executive officers as a group and each selling stockholder. Unless otherwise
indicated, the address of each officer, director and principal stockholder
listed below is c/o Register.com, Inc., 575 Eighth Avenue, 11th Floor, New
York, New York 10018.
As of July 15, 2000, we had 31,990,420 shares of common stock outstanding.
The following table gives effect to the shares of common stock issuable within
60 days of July 15, 2000 upon the exercise of all options and other rights
beneficially owned by the indicated stockholders on that date. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and includes voting or investment power with respect to
securities. To our knowledge, except as set forth in the footnotes to the
following table, each stockholder identified in the table possesses sole voting
and investment power with respect to all shares of common stock shown as being
beneficially owned by the stockholder.
<TABLE>
<CAPTION>
Shares Beneficially
Owned Shares Beneficially
Before the Offering Owned After the Offering
----------------------- Shares To ------------------------
Number Percent Be Sold Number Percent
------------ --------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Executive Officers and Directors
Richard D. Forman (1) ..................... 5,651,421 16.4% 842,087 4,809,334 14.1%
Peter A. Forman (2) ....................... 3,774,149 11.6 566,122 3,208,027 9.9
Mark S. Hoffman (3) ....................... 1,748,999 5.4 262,350 1,486,649 4.6
Niles H. Cohen (4) ........................ 899,108 2.8 133,210 765,898 2.4
Samantha McCuen (5) ....................... 1,575,000 4.9 236,250 1,338,750 4.1
Reginald Van Lee .......................... -- -- -- -- --
Cindy E. Horowitz ......................... -- -- -- -- --
Alan G. Breitman (6) ...................... 101,593 * 13,937 87,656 *
Sascha A. Mornell (7) ..................... 162,787 * 23,535 139,252 *
Robert D. Gardos (8) ...................... 132,000 * -- 132,000 *
Jack S. Levy (9) .......................... 39,703 * 3,966 35,737 *
Lauren M. Gaviser (10) .................... 35,600 * -- 35,600 *
All directors and executive officers as
a group (12 persons) ..................... 14,120,360 42.5 2,081,457 12,038,903 36.3
Principal Stockholders
Kenneth Greif (11) ........................ 3,876,707 11.9 574,364 3,302,343 10.1
Staples, Inc. (12) ........................ 3,954,700 11.8 -- 3,954,700 11.6
Palisade Private Partnership
LP (13) .................................. 1,748,999 5.4 262,350 1,486,649 4.6
Concentric Network
Corporation (14) ......................... 1,662,053 5.1 -- 1,662,053 5.1
Sandler Capital Entities (15) ............. 1,575,000 4.9 236,250 1,338,750 4.1
Other Selling Stockholders
Andrew and Helen Ackerman ................. 140,000 * 20,742 119,258 *
Patricia Forman ........................... 280,000 * 41,484 238,516 *
Stephane Fourdrinier (16) ................. 11,097 * 1,485 9,612 *
Lawrence Horn (17) ........................ 918,333 2.9 136,058 782,275 2.4
Alan Locker (18) .......................... 280,000 * 41,484 238,516 *
RHL Ventures LLC (19) ..................... 751,916 2.4 111,402 640,514 2.0
Ted Struhl (20) ........................... 1,313,401 4.1 194,590 1,118,811 3.4
Warren Struhl (21) ........................ 1,313,400 4.1 194,590 1,118,810 3.4
Hikari Tsushin, Inc. (22) ................. 665,004 2.1 99,751 565,253 1.7
Rong Zheng (23) ........................... 26,250 * 2,593 23,657 *
</TABLE>
-------------
* Represents less than 1%.
(1) Includes 3,076,113 shares of common stock held by RDF Ventures LLC, 37,800
shares of common stock held by the RDF 1999 Family Trust, warrants to
purchase 699,717 shares of common stock at an exercise price of $0.97 per
share, warrants to purchase 291 shares of common stock at an exercise
price of $3.43 per share and currently exercisable options to purchase
1,837,500 shares of common stock at a weighted average price of $12.30 per
share.
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<PAGE>
(2) Includes 350,000 shares of common stock held by Forman Capital Partners I,
LP, warrants to purchase 548,247 shares of common stock at an exercise
price of $0.97 per share and warrants to purchase 980 shares of common
stock at an exercise price of $3.43 per share.
(3) Includes 1,328,999 shares of common stock owned by Palisade Private
Partnership LP and a warrant to purchase 420,000 shares of common stock at
an exercise price of $2.14 per share. Mr. Hoffman is a member of Palisade
Private Holdings, LLC, the General Partner of Palisade Private Partnership
LP. Mr. Hoffman shares voting and investment power with respect to all
shares beneficially owned by Palisade Private Partnership LP.
(4) Includes warrants to purchase 110,834 shares of common stock at an
exercise price of $0.36 per share and warrants to purchase 110,835 shares
of common stock at an exercise price of $0.86 per share. Mr. Cohen's
address is 8 Flaming Road North, East Hills, New York 11576.
(5) Includes 931,000 shares of common stock and warrants to purchase 186,200
shares of common stock at an exercise price of $3.43 per share owned by
Sandler Capital IV Partners, LP; and 381,500 shares of common stock and
warrants to purchase 76,300 shares of common stock at an exercise price of
$3.43 per share owned by Sandler Capital IV FTE Partners, LP. Ms. McCuen
is a Managing Director of Sandler Capital Management and may be deemed to
share voting and investment power with respect to all shares beneficially
owned by the Sandler Capital Entities. Ms. McCuen disclaims beneficial
ownership of such shares except to the extent of her pecuniary interest in
these entities.
(6) Includes 500 shares of common stock held by Mr. Breitman's spouse in a
Uniform Gift to Minors Act account for their children, warrants to
purchase 2,919 shares of common stock at an exercise price of $3.43 per
share, and currently exercisable options to purchase 84,089 shares of
common stock at a weighted average price of $9.80.
(7) Includes currently exercisable options to purchase 102,687 shares of
common stock at a weighted average price of $7.80.
(8) Includes currently exercisable options to purchase 132,000 shares of
common stock at a weighted average price of $6.00.
(9) Includes currently exercisable options to purchase 39,603 shares of common
stock at a weighted average price of $7.38.
(10) Includes currently exercisable options to purchase 35,500 shares of common
stock at a weighted average price of $1.75.
(11) Includes 1,570,401 shares of common stock held by the Greif I Trust,
warrants to purchase 277,085 shares of common stock at an exercise price
of $0.36 per share, 249,085 shares of common stock at an exercise price of
$0.86 per share, 153,696 shares of common stock at an exercise price of
$0.97 per share and warrants to purchase 1,386 shares of common stock at
an exercise price of $3.43 per share. Mr. Greif disclaims beneficial
ownership of an aggregate of 218,750 shares of common stock underlying
these warrants, which he has informed us he holds on behalf of a group of
business associates and family members. Mr. Greif's address is c/o
Internet Web Builders, LLC, 1270 Avenue of the Americas, Suite 1905, New
York, New York 10019.
(12) Includes warrants to purchase 918,239 shares of common stock at an
exercise price of $0.97 per share, 700,000 shares of common stock at an
exercise price of $.0029 per share and 24,136 shares of common stock at an
exercise price of $3.43 per share. The address of Staples, Inc. is 500
Staples Drive, Framingham, Massachusetts 01702.
(13) Includes warrants to purchase 420,000 shares of common stock at an
exercise price of $2.14 per share. The address of Palisade Private
Partnership LP is One Bridge Plaza, Fort Lee, New Jersey 07024.
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(14) Includes warrants to purchase 291,669 shares of common stock at an
exercise price of $3.43 per share. The address of Concentric Network
Corporation is 1400 Parkmoor Avenue, San Jose, California 95126.
(15) Includes 931,000 shares of common stock and warrants to purchase 186,200
shares of common stock at an exercise price of $3.43 per share owned by
Sandler Capital IV Partners, LP; and 381,500 shares of common stock and
warrants to purchase 76,300 shares of common stock at an exercise price of
$3.43 per share owned by Sandler Capital IV FTE Partners, LP. The address
of the Sandler Capital Entities is 767 Fifth Avenue, 45th Floor, New York,
New York 10153.
(16) Includes currently exercisable options to purchase 11,097 shares of common
stock at a weighted average price of $3.24. Mr Fourdrinier is currently
employed as a network engineer at Register.com.
(17) Includes 213,969 shares of common stock held by the Horn I Trust.
(18) Includes 13,650 shares of common stock equally divided among three trusts,
one for the benefit of Katherine R. Locker, a second for the benefit of
Sarah H. Locker and the third for the benefit of Jonathan C. Locker.
(19) Includes warrants to purchase 5,250 shares of common stock at an exercise
price of $1.57 per share. Robert Lessin is a current member of our Board
of Advisors. Mr. Lessin is the sole member of RHL Ventures, LLC.
(20) Includes 262,680 shares of common stock held by the Ted Struhl Family
Partnership. Mr. T. Struhl is a former director of Register.com.
(21) Includes 656,700 shares of common stock held by the Warren Struhl Family
Partnership. Mr. W. Struhl is a former director of Register.com.
(22) Includes warrants to purchase 116,669 shares of common stock at an
exercise price of $3.43 per share.
(23) Includes currently exercisable options to purchase 2,918 shares of common
stock at a price of $0.43. Mr. Zheng is currently employed as a program
developer at Register.com.
DESCRIPTION OF CAPITAL STOCK
General
The following description of our common stock and preferred stock and the
relevant provisions of our amended and restated certificate of incorporation
and amended and restated bylaws are summaries and are qualified by reference to
these documents. Forms have been filed with the Securities and Exchange
Commission as exhibits to our registration statement, of which this prospectus
forms a part.
Our authorized capital stock consists of 200,000,000 shares of common
stock, par value $0.0001 per share, and 5,000,000 shares of preferred stock,
par value $0.0001 per share.
Common Stock
As of June 30, 2000, there were 31,990,420 shares of common stock
outstanding held of record by stockholders. Holders of common stock are
entitled to one vote for each share held on all matters submitted to a vote of
stockholders and do not have cumulative voting rights. Accordingly, holders of
a majority of the shares of common stock entitled to vote in any election of
directors may elect all of the directors standing for election. Holders of
common stock are entitled to receive ratably those dividends, if any, as the
board of directors may declare out of funds legally available for the payment
of dividends, subject to any preferential dividend rights of any outstanding
preferred stock. If we liquidate, dissolve or wind up the
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company, the holders of our common stock will be entitled to receive ratably
our net assets available after the payment of all debts and liabilities and
after the prior rights of any outstanding preferred stock have been satisfied.
Holders of the common stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of common stock are, and the shares
that we are offering will be, when issued, after payment of consideration,
fully paid and nonassessable. The rights, preferences and privileges of holders
of common stock are subject to, and may be adversely affected by, the rights of
the holders of preferred stock that we may designate and issue in the future.
Preferred Stock
Currently, no shares of preferred stock are outstanding. The board of
directors is authorized, without further stockholder approval, to issue from
time to time up to an aggregate of 5,000,000 shares of preferred stock in one
or more series and to fix or alter the designations, preferences, rights and
any qualifications, limitations or restrictions of the shares of each series of
preferred stock, including the dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, including sinking fund provisions,
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designation of series. We have no present plans to
issue any shares of preferred stock.
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Warrants
As of June 30, 2000, there were warrants outstanding to purchase a total
of 5,894,067 shares of common stock, including:
Shares Issuable Exercise Price
Upon Exercise Per Share Expiration Date
----------------- --------------- ----------------
350,000 $ 0.36 January 2003
350,000 0.86 January 2003
2,319,898 0.97 June 2005
214,419 0.36 May 2003
219,919 0.86 May 2003
3,500 0.43 September 2008
29,999 0.57 February 2009
5,250 0.57 March 2009
420,000 2.14 February 2004
185,490 4.08 March 2004
700,000 0.0029 May 2002
5,250 1.43 May 2009
308,959 4.08 May 2004
5,250 1.57 June 2009
763,883 3.43 June 2004
12,250 2.86 November 2009
The warrants are subject to customary adjustments for stock splits,
mergers, reclassification and similar transactions.
Options
Options to purchase a total of 7,350,000 shares of common stock may be
granted under our stock option plans. This share reserve will automatically be
increased on the first trading day of January of each calendar year, beginning
in January 2001, by a number of shares equal to 2% of the total number of
shares of common stock outstanding on the last trading day of the prior
calendar year, but no such annual increase will exceed 1,750,000 shares. As of
June 30, 2000, there were outstanding options to purchase a total of 5,866,027
shares of common stock. We filed a registration statement on Form S-8 on April
11, 2000. Shares issued upon exercise of these options will be immediately
available for sale in the public market, subject to the terms of lock-up
agreements entered into with the underwriters in connection with our initial
public offering and this offering, and subject to compliance with Rule 144 in
the case of our affiliates.
Registration Rights
Under the terms of our registration rights agreement, dated as of June 30,
1999, and other existing registration rights after the consummation of this
offering, the holders of 15,162,833 shares of common stock and shares of common
stock issuable upon the exercise of warrants will be entitled to have us
register their shares under the Securities Act. These holders will be entitled
to exercise a total of up to six demands for the registration of their shares
and securities under the Securities Act, subject to certain limitations. This
registration rights agreement also entitles these holders to piggyback
registration rights with respect to the registration of their shares under the
Securities Act, subject to various limitations. In addition, pursuant to a
Registration Rights Agreement dated June 4, 2000, the holders of 280,019
shares of common stock are entitled to piggyback registration rights with
respect to the registration of their shares under the Securities Act, subject
to various limitations.
The registration rights are subject to specified conditions and
limitations, among them the right of the underwriters of an offering to limit
the number of shares of common stock held by security holders with registration
rights to be included in a registration. In addition, we
78
<PAGE>
have a right, exercisable only once in any 12-month period, to defer or delay
the registration process for a period of up to 90 days if our board of
directors determines that registration would not be in our best interests at
that time. We also have the right not to effect a demand registration within
180 days after the effective date of any prior underwritten registration of our
common stock.
In connection with our acquisition of Inabox Inc., we entered into a
Registration Rights Agreement dated June 4, 2000 with the former stockholders
of Inabox who currently hold 280,019 shares of our common stock and shares of
common stock issuable upon the exercise of outstanding options and warrants.
The Registration Rights Agreement entitles these holders to piggyback
registration rights with respect to the registration of their shares under the
Securities Act until June 2005. The registration rights are subject to
specified conditions and limitations, among them the right of the underwriters
of an offering to limit the number of shares of common stock held by the
security holders with registration rights to be included in a registration.
Pursuant to this agreement, we also have the right to defer or delay the
registration.
We are generally required to bear all of the expenses of registrations
effected under either of these agreements, except underwriting discounts and
selling commissions. If we register any of these shares, these shares would
become freely tradable without restriction under the Securities Act immediately
upon effectiveness of the registration.
Anti-Takeover Effects of Provisions of Delaware Law and Our Amended and
Restated Certificate of Incorporation and Amended and Restated Bylaws
Delaware Law. We are subject to the provisions of Section 203 of the
Delaware General Corporation Law. Subject to some exceptions, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained that status with the
approval of the board of directors or unless the business combination is
approved in a prescribed manner. Generally, "business combinations" mean
mergers, asset sales and other transactions resulting in a financial benefit to
the interested stockholder. Subject to various exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of the corporation's voting stock. This
statute could prohibit or delay mergers or other attempts to effect a change in
control and, accordingly, may discourage attempts to acquire us.
Amended and Restated Certificate of Incorporation and Amended and Restated
Bylaws. Various provisions of our amended and restated certificate of
incorporation and our amended and restated bylaws, are summarized in the
following paragraphs. These provisions may be deemed to have an anti-takeover
effect and may delay, defer or prevent a tender offer or takeover attempt that
a stockholder might consider in its best interest, including those attempts
that might result in a premium over the market price for the shares held by
stockholders.
Board Vacancies and Removals. Our amended and restated certificate of
incorporation authorizes the board of directors to fill vacant directorships or
increase the size of the board of directors, which may delay a stockholder from
removing incumbent directors and simultaneously gaining control of the board of
directors by filling the vacancies created by the removal with its own
nominees. The amended and restated certificate of incorporation also provides
that directors may be removed by stockholders only for cause and only by the
affirmative vote of holders of two-thirds of the outstanding shares of voting
stock.
Stockholder Action; Special Meeting of Stockholders. Our amended and
restated bylaws provide that stockholders may not act by written consent. The
amended and restated bylaws
further provide that special meetings of our stockholders may be called only by
a majority of the board of directors, the Chairman or the President.
79
<PAGE>
Advance Notice Requirements for Stockholder Proposals and Director
Nominations.
Our amended and restated bylaws provide that stockholders seeking to bring
business before an annual meeting of stockholders, or to nominate candidates
for election as directors at an annual meeting of stockholders, must provide
timely notice to us in writing. To be timely, a stockholder's notice must be
received at our principal executive offices not less than 90 days nor more than
120 days prior to the anniversary date of the immediately preceding annual
meeting of stockholders. In the event that the annual meeting is called for a
date that is not within 30 days before or 70 days after the anniversary date,
in order to be timely, notice from the stockholder must be received:
o not earlier than 120 days prior to the annual meeting of stockholders;
and
o not later than 90 days prior to the annual meeting of stockholders or the
tenth day following the date on which notice of the annual meeting was
made public.
In the case of a special meeting of stockholders called for the purpose of
electing directors, notice by the stockholder, in order to be timely, must be
received:
o not earlier than 120 days prior to the special meeting; and
o not later than 90 days prior to the special meeting or the close of
business on the tenth day following the day on which public disclosure of
the date of the special meeting was made.
Our amended and restated bylaws also specify requirements as to the form
and content of a stockholder's notice. These provisions may preclude
stockholders from bringing matters before an annual or special meeting of
stockholders or from making nominations for directors at an annual or special
meeting of stockholders.
Authorized But Unissued Shares. The authorized but unissued shares of
common stock and preferred stock are available for future issuance without
stockholder approval, subject to various limitations imposed by The Nasdaq
National Market. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions, as part of a poison pill defense and employee
benefit plans. The existence of authorized but unissued shares of common stock
and preferred stock could make more difficult or discourage an attempt to
obtain control over us by means of a proxy contest, tender offer, merger or
otherwise.
Supermajority Vote to Amend Our Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws. The Delaware General Corporation
Law provides generally that the affirmative vote of a majority of the shares
entitled to vote on any matter is required to amend a corporation's certificate
of incorporation or bylaws, unless a corporation's certificate of incorporation
or bylaws, as the case may be, requires a greater percentage. Our amended and
restated certificate of incorporation imposes a two-thirds supermajority vote
requirement in connection with various corporate governance actions and the
amendment of various provisions of our amended and restated certificate of
incorporation, including those provisions relating to special meetings of
stockholders. In addition, a two-thirds supermajority vote of stockholders will
be required to amend our amended and restated bylaws.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock
Transfer and Trust Company.
Listing
Our common stock is listed on The Nasdaq National Market under the trading
symbol "RCOM."
80
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market
could adversely affect prevailing market prices of our common stock. Upon the
consummation of this offering, we will have outstanding an aggregate of
32,490,420 shares of our common stock, based on the number of shares
outstanding at June 30, 2000 and assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options and warrants. Of
these shares, all shares sold in this offering will be freely tradeable without
restriction or further registration under the Securities Act unless these
shares are purchased by "affiliates" as that term is defined in Rule 144 under
the Securities Act. As of the date of this prospectus, an aggregate of
15,338,593 shares of common stock will be covered by lock-up agreements with
the underwriters of this offering. Of these shares:
o 3,825,426 shares will be released 60 days after the date of this
prospectus;
o 2,332,145 shares will be released 90 days after the date of this
prospectus; and
o 2,295,255 shares will be released every 30 days thereafter through the
date 210 days after the date of this prospectus.
Upon release from the lock-up, these shares will be eligible for resale
under Rule 144 (subject in some cases to volume restrictions), Rule 144(k) and
Rule 701. In addition, the 280,019 shares of common stock issued in the Inabox
acquisition are subject to lock-up agreements with us and are "restricted
securities" as defined in Rule 144. Please see "Lock-up Agreements" below
for a description of the terms of these agreements. Additional shares are
eligible for sale in the public market as follows:
<TABLE>
<CAPTION>
Number of
Shares Date
------------------ --------------------------------------------------------------
<S> <C>
9,750,000 After the date of this prospectus, including freely
tradeable shares sold in this offering.
496,360 After the date of this prospectus, shares eligible for resale
under Rule 144 (subject in some cases to volume
restrictions) and Rule 144(k).
10,215,300 After August 29, 2000 under Rule 144 (subject in some
cases to volume restrictions) and Rule 144(k).
2,312,325 After March 2, 2001, shares which are held by Staples,
under Rule 144 (subject to volume restrictions).
</TABLE>
Any remaining shares of common stock held by existing stockholders are
"restricted securities" as defined in Rule 144. Restricted securities may be
sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144 or 701 under the Securities Act,
which rules are summarized below.
Lock-up Agreements
We and the selling stockholders other than Mr. Breitman have signed
lock-up agreements with the underwriters, which generally require them not to
transfer or otherwise dispose of, directly or indirectly, any shares of our
common stock or any securities convertible into or exercisable or exchangeable
for shares of our common stock for specified periods of time, except under
limited circumstances. We and the employee selling stockholders subject to
these lock-up agreements, other than Richard D. Forman, have agreed to a 90-day
lock-up period. The shares held by the other selling stockholders covered by
lock-up agreements will be released in stages: 25% of these shares will be
released 60 days after the date of this prospectus and 15% of these shares will
be released every 30 days thereafter, through the date 210 days after the date
of this prospectus. Deutsche Bank Securities may waive, in its sole discretion,
these lock-up restrictions. See "Underwriting--Lock-up." In addition, Staples,
Inc. has executed a lock-up with us, which generally requires it not to
transfer or otherwise
81
<PAGE>
dispose of any of our securities until March 2, 2001, unless the transfer is to
an affiliate of Staples. The 280,019 shares of common stock held by the former
stockholders of Inabox are subject to lock-up agreements with us pursuant to
which 1/24th of the shares are released from the lock-up on a monthly basis
following June 4, 2000.
Rule 144
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of 1% of the number of shares of common stock then
outstanding, which will equal approximately 324,904 shares immediately after
the offering, or the average weekly trading volume of the common stock on the
Nasdaq National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale. Sales under Rule 144 are also
subject to manner-of-sale provisions, notice requirements and the availability
of current public information about us.
Rule 144(k)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the 90 days preceding a sale and who has beneficially owned the shares
proposed to be sold for at least two years, including the holding period of any
prior owner other than an affiliate, is entitled to sell shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144. Therefore, unless otherwise restricted, "144(k)
shares" be sold immediately.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect,
each of our employees, consultants or advisors who purchases shares from us in
connection with a compensatory stock plan or other written agreement is
eligible to resell such shares in reliance on Rule 144, but without compliance
with certain restrictions, including the holding period, contained in Rule 144.
Registration Rights
After this offering, the holders of 15,442,852 shares of common stock and
shares of common stock issuable upon the exercise of warrants will be entitled
to rights with respect to the registration of those shares under the Securities
Act. See "Description of Capital Stock--
Registration Rights." After registration and resale under a registration
statement, these shares of our common stock become freely tradeable without
restriction under the Securities Act. These sales could have a material adverse
effect on the trading price of our common stock.
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<PAGE>
UNDERWRITING
We and the selling stockholders intend to offer our common stock through a
number of underwriters. Deutsche Bank Securities Inc., Thomas Weisel Partners
LLC, Banc of America Securities LLC and Legg Mason Wood Walker, Incorporated
are acting as representatives of each of the underwriters named below. Subject
to the terms and conditions set forth in an underwriting agreement among us,
the selling stockholders and the underwriters, we and the selling stockholders
have agreed to sell to the underwriters, and each of the underwriters severally
and not jointly has agreed to purchase from us and the selling stockholders,
the number of shares of common stock set forth opposite its name below.
Number of
Underwriter Shares
-------------------------------------------------- ----------
Deutsche Bank Securities Inc .................
Thomas Weisel Partners LLC ...................
Banc of America Securities LLC ...............
Legg Mason Wood Walker, Incorporated .........
---------
Total ......................................
==========
In the underwriting agreement, the several underwriters have agreed,
subject to the terms and conditions set forth in the underwriting agreement, to
purchase all of the shares of common stock being sold under the terms of the
underwriting agreement if any of the shares of common stock being sold under
the terms of the underwriting agreement are purchased. In the event of a
default by an underwriter, the underwriting agreement provides that the
underwriting commitments of the nondefaulting underwriters may be increased or
the underwriting agreement may be terminated depending upon the amount of
shares of common stock that the defaulting underwriter was to have purchased.
We have agreed to indemnify the underwriters against liabilities,
including liabilities under the Securities Act, liabilities arising from
breaches of representations and warranties contained in the underwriting
agreement, or to contribute to payments the underwriters may be required to
make in respect of those liabilities.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to:
o the representations and warranties made by us and the selling
stockholders to the underwriters being true;
o there being no change in the financial markets; and
o our delivering customary closing documents to the underwriters, including
opinions of counsel.
The underwriters reserve the right to withdraw, cancel or modify such
offer and to reject orders in whole or in part.
Thomas Weisel Partners LLC, one of the representatives of the
underwriters, was organized and registered as a broker-dealer in December 1998.
Since December 1998, Thomas Weisel Partners LLC has been named as a lead or
co-manager on 172 filed public offerings of equity securities, of which 130
have been completed, and has acted as a syndicate member in an additional 100
public offerings of equity securities. Thomas Weisel Partners LLC does not have
any material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with
us under the underwriting agreement entered into in connection with this
offering.
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<PAGE>
Legg Mason Wood Walker, Incorporated acted as our financial advisor in
connection with the private placement of our Exchangeable Preferred Stock that
occurred in March 1999, our common stock that occurred in May 1999, and our
Series A Convertible Preferred Stock that occurred in June and July of 1999,
for which we received aggregate net proceeds of $25.7 million. We paid an
advisory fee to Legg Mason Wood Walker, Incorporated for its services,
consisting of $1.1 million in cash and warrants to purchase 494,449 shares of
our common stock at a price of $4.08 per share and gave them piggyback
registration rights with respect to the common stock issuable upon exercise of
their warrants. At present, none of these warrants have been exercised. We also
agreed that Legg Mason could be included as a managing underwriter in
connection with our initial public offering.
Commissions and Discounts
The representatives have advised us that the underwriters propose
initially to offer the shares of common stock to the public at the public
offering price set forth on the cover page of this prospectus, and to certain
dealers at such price less a concession not in excess of $____ per share of
common stock. The underwriting discount is equal to the public offering price
per share less the amount paid to us per share and is intended to be _% of the
public offering price. The underwriters may allow, and such dealers may
reallow, a discount not in excess of $____ per share of common stock on sales
to other dealers.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us and the selling stockholders. Other than the per share
information, this information is presented assuming either no exercise or full
exercise by the underwriters of the over-allotment option.
<TABLE>
<CAPTION>
Per Share Without Option With Option
----------- ---------------- ------------
<S> <C> <C> <C>
Public offering price ..................... $ $ $
Underwriting discount ..................... $ $ $
Proceeds, before expenses,
to Register.com, Inc. ................... $ $ $
Proceeds to selling stockholders .......... $ $ $
</TABLE>
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $450,000 and are payable by us.
Over-allotment Option
We have granted an option to the underwriters, exercisable for 30 days
after the date of this prospectus, to purchase up to an aggregate of 600,000
additional shares of our common stock at the public offering price set forth on
the cover page of this prospectus, less the underwriting discount. The
underwriters may exercise this option solely to cover over-allotments, if any,
made on the sale of our common stock offered hereby. To the extent that the
underwriters exercise this option, each underwriter will be obligated, subject
to the conditions stated above, to purchase a number of additional shares of
our common stock proportionate to such underwriter's initial amount reflected
in the first paragraph of this section.
Lock-up
The Company and the selling stockholders other than Mr. Breitman have
agreed that subject to limited exceptions, without the prior written consent of
Deutsche Bank Securities Inc. for specified periods of time, they will not
directly or indirectly:
84
<PAGE>
o offer, sell or otherwise dispose of or transfer any shares of our common
stock or securities convertible into or exchangeable or exercisable for
our common stock, or file a registration statement under the Securities
Act with respect to any shares of our common stock; or
o enter into any swap or other agreement that transfers the economic
benefit of ownership of our common stock.
We and the employee selling stockholders subject to these lock-up
agreements, other than Richard D. Forman, have agreed to a 90-day lock-up
period. The shares held by the other selling stockholders covered by lock-up
agreements will be released in stages: 25% of these shares will be released 60
days after the date of this prospectus and 15% of these shares will be released
every 30 days thereafter, through the date 210 days after the date of this
prospectus. Deutsche Bank Securities Inc. may waive, in its sole discretion,
these lock-up restrictions.
Nasdaq National Market Quotation
Our common stock is listed on The Nasdaq National Market under the symbol
"RCOM."
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of our common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters to
bid for and purchase our common stock. As an exception to these rules, the
representatives are permitted to engage in transactions that stabilize the
price of our common stock. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of our common stock.
If the underwriters create a short position in our common stock in
connection with the offering, that is, if they sell more shares of our common
stock than are set forth on the cover page of this prospectus, the
representatives may reduce that short position by purchasing our common stock
in the open market. The representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described
above.
The representatives may also impose a penalty bid on underwriters. This
means that if the representatives purchase shares of our common stock in the
open market to reduce the underwriters' short position or to stabilize the
price of our common stock, they may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
shares.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of our common stock to the extent that
it discourages resales of our common stock.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
we nor any of the underwriters makes any representation that the
representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
85
<PAGE>
LEGAL MATTERS
The validity of the common stock that we are offering will be passed upon
for us by Brobeck, Phleger & Harrison LLP, New York, New York. Certain legal
matters in connection with the offering will be passed upon for the
underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York.
Skadden, Arps, Slate, Meagher & Flom LLP has from time to time represented, and
may continue to represent, us in connection with certain legal matters. Stuart
D. Levi, a partner in the firm of Skadden, Arps, Slate, Meagher & Flom LLP,
serves as a member of our Board of Advisors and as of June 30, 2000 held
warrants to purchase 5,250 shares of common stock.
EXPERTS
The financial statements as of December 31, 1998 and 1999, and for each of
the three years in the period ended December 31, 1999, included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits, schedules and amendments filed with
the registration statement, under the Securities Act with respect to the common
stock to be sold in this offering. This prospectus does not contain all of the
information set forth in this registration statement. For further information
about us and the shares of common stock to be sold in the offering, please
refer to the registration statement. For additional information, please refer
to the exhibits that have been filed with our registration statement on Form
S-1.
You may read and copy all or any portion of the registration statement or
any other information that we file at the Securities and Exchange Commission's
public reference room at 450 Fifth Street, N.W., Washington, D.C., 20549. You
can request copies of these documents upon payment of a duplicating fee, by
writing to the Securities and Exchange Commission. Please call the Securities
and Exchange Commission at 1-800-SEC-0330 for further information about the
public reference rooms. Our Securities and Exchange Commission filings,
including the registration statement, are also available on the Securities and
Exchange Commission's website (http://www.sec.gov).
We are subject to the information and reporting requirements of the
Securities Exchange Act of 1934, as amended, and, in accordance with these
requirements, we file periodic reports, proxy statements and other information
with the Securities and Exchange Commission.
We provide our stockholders annual reports containing financial statements
audited by our independent auditors and to make available quarterly reports
containing unaudited financial data for the first three quarters of each fiscal
year.
86
<PAGE>
Register.com, Inc.
Index to Financial Statements
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Accountants ....................................................... F-2
Financial Statements
Balance Sheets at December 31, 1998 and 1999, and June 30, 2000 (unaudited) ........... F-3
Statements of Operations for the years ended December 31, 1997, 1998 and 1999,
and the six months ended June 30, 1999 and 2000 (unaudited) .......................... F-4
Statements of Stockholders' (Deficit) Equity for the years ended December 31, 1997,
1998 and 1999, and the six months ended June 30, 2000 (unaudited) .................... F-5
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999,
and the six months ended June 30, 1999 and 2000 (unaudited) .......................... F-6
Notes to Financial Statements ......................................................... F-7
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Stockholders of Register.com, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' (deficit) equity and cash flows present fairly, in
all material respects, the financial position of Register.com, Inc. at December
31, 1998 and 1999, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
January 31, 2000
F-2
<PAGE>
Register.com, Inc.
Balance Sheet
<TABLE>
<CAPTION>
December 31, June 30,
--------------------------------- ---------------
1998 1999 2000
-------------- ---------------- ---------------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents ......................................... $ 1,284,648 $ 40,944,122 $ 148,332,164
Short-term investments ............................................ -- 4,723,050 26,912,789
Accounts receivable, less allowance of $65,947, $314,516 and
$804,576 (unaudited), respectively .............................. 67,509 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 .............................................. 3,925 195,196 1,667,597
------------ ------------- -------------
Total current assets ........................................... 1,356,082 62,301,329 221,083,956
Fixed assets, net .................................................. 224,300 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 ....................................................... 30,643 -- --
------------ ------------- -------------
Total assets ................................................... $ 1,611,025 $ 68,336,046 $ 247,698,038
============ ============= =============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses ............................. $ 610,474 $ 8,513,079 $ 11,777,790
Income taxes payable .............................................. -- 5,608,198 --
Deferred revenue, net ............................................. 113,527 18,193,871 63,509,292
Capital lease obligations, current portion ........................ 10,425 5,967 --
Notes payable ..................................................... 52,040 -- --
Other current liabilities ......................................... -- 166,857 927,430
------------ ------------- -------------
Total current liabilities ...................................... 786,466 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 .................. 1,779 27,858 --
------------ ------------- -------------
Total liabilities .............................................. 788,245 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; none issued and outstanding at
December 31, 1997 and 1998, 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; 17,295,882, and 21,065,047 shares issued and
outstanding at December 31, 1998 and 1999, respectively,
31,990,420 issued and outstanding at June 30, 2000 .............. 1,729 2,106 3,199
Additional paid-in capital ........................................ 4,301,871 36,709,821 167,212,811
Unearned compensation ............................................. (105,967) (2,647,770) (5,627,223)
Accumulated deficit ............................................... (3,374,853) (12,151,771) (14,134,795)
------------ ------------- -------------
Total stockholders' equity ..................................... 822,780 21,912,855 147,453,992
------------ ------------- -------------
Total liabilities and stockholders' equity ..................... $ 1,611,025 $ 68,336,046 $ 247,698,038
============ ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
Register.com, Inc.
Statement of Operations
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30
-------------------------------------------------- ----------------------------------
1997 1998 1999 1999 2000
-------------- --------------- --------------- --------------- ----------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues .................. $ 713,263 $ 1,319,359 $ 9,644,552 $ 2,269,062 $ 32,667,756
Cost of revenues .............. 191,539 461,152 3,082,499 324,783 9,387,700
---------- ------------ ------------ ------------ ------------
Gross profit ............... 521,724 858,207 6,562,053 1,944,279 23,280,056
---------- ------------ ------------ ------------ ------------
Operating costs and expenses
Sales and marketing .......... 366,975 863,720 7,149,693 1,717,763 22,153,387
Research and development ..... 71,471 276,687 1,767,158 623,552 1,954,097
General and administrative
(exclusive of non-cash
compensation) .............. 263,017 795,425 2,380,190 402,325 3,342,079
Non-cash compensation ........ -- 149,682 4,929,200 4,530,815 1,290,093
Amortization of goodwill
and other intangibles ...... -- -- -- -- 298,455
---------- ------------ ------------ ------------ ------------
Total operating cost and
expenses .................. 701,463 2,085,514 16,226,241 7,274,455 29,038,111
---------- ------------ ------------ ------------ ------------
Loss from operations .......... (179,739) (1,227,307) (9,664,188) (5,330,176) (5,758,055)
Other income (expenses), net (25,787) 66,559 887,270 83,173 3,775,031
---------- ------------ ------------ ------------ ------------
Net loss ................... $ (205,526) $ (1,160,748) $ (8,776,918) $ (5,247,003) $ (1,983,024)
========== ============ ============ ============ ============
Basic and diluted net loss
per share ................. $ (.02) $ (.07) $ (.46) $ (.30) $ (.07)
========== ============ ============ ============ ============
Weighted average
common shares used in
basic and diluted net
loss per share ............ 8,884,709 15,697,013 19,117,027 17,747,079 27,901,444
========== ============ ============ ============ ============
Pro forma basic and diluted
net loss per share
(unaudited) .................. $ (.40) $ (.07)
============ ============
Weighted average common
shares used in pro forma
basic and diluted net loss
per share (unaudited) ........ 22,112,252 29,526,406
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
Register.com, Inc.
Statement of Stockholders' (Deficit) Equity
<TABLE>
<CAPTION>
Exchangeable Series A Convertible
Preferred Stock Preferred Stock Common Stock
-------------------------- -------------------------- ----------------------
Shares Amount Shares Amount Shares Amount
--------------- --------- --------------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 ................. -- $ -- -- $ -- 8,884,218 $ 888
Issuance of common stock in
connection with notes payable ............ -- -- -- -- 11,200 1
Net loss .................................. -- -- -- -- -- --
-- ------- -- ------- --------- ------
Balance at December 31, 1997 ............... -- -- -- -- 8,895,418 889
Issuance of common stock in exchange
for accrued compensation ................. -- -- -- -- 945,000 95
Exercise of warrants issued in
connection with stockholder loans ........ -- -- -- -- 411,766 41
Conversion of stockholder note payable -- -- -- -- 123,529 12
Sale of common stock ...................... -- -- -- -- 6,906,666 691
Issuance of common stock in exchange
for services ............................. -- -- -- -- 13,503 1
Issuance of common stock warrants for
services ................................. -- -- -- -- -- --
Issuance of compensatory stock options -- -- -- -- -- --
Amortization of unearned
compensation ............................. -- -- -- -- -- --
Net loss .................................. -- -- -- -- -- --
-- ------- -- ------- --------- ------
Balance at December 31, 1998 ............... -- -- -- -- 17,295,882 1,729
Sale of exchangeable preferred stock ...... 1,499,999 150 -- -- -- --
Sale and issuance of common stock and
warrants ................................. -- -- -- -- 2,041,666 204
Sale and issuance of series A
convertible preferred stock and
warrants ................................. -- -- 4,694,333 469 -- --
Conversion of exchangeable preferred
stock to common stock .................... (1,499,999) (150) -- -- 1,499,999 150
Issuance of common stock warrants for
services ................................. -- -- -- -- -- --
Issuance of compensatory stock options -- -- -- -- -- --
Amortization of unearned
compensation ............................. -- -- -- -- -- --
Modification of common stock warrants -- -- -- -- -- --
Exercise of employee stock options ........ -- -- -- -- 175,000 18
Exercise of warrants ...................... -- -- -- -- 52,500 5
Net loss .................................. -- -- -- -- -- --
---------- ------- --------- ------- ---------- ------
Balance at December 31, 1999 ............... -- -- 4,694,333 469 21,065,047 2,106
Sale and issuance of common stock ......... -- -- -- -- 5,222,279 522
Conversion of exchangeable preferred
stock to common stock .................... -- -- (4,694,333) (469) 4,694,333 469
Issuance of common stock in
connection with acquisition .............. -- -- -- -- 280,019 28
Issuance of compensatory stock options -- -- -- -- -- --
Amortization of unearned
compensation ............................. -- -- -- -- -- --
Exercise of employee stock options ........ -- -- -- -- 87,191 9
Exercise of warrants ...................... -- -- -- -- 641,551 65
Net loss .................................. -- -- -- -- -- --
---------- ------- ---------- ------- ---------- ------
Balance at June 30, 2000 (unaudited) ....... -- $ -- -- $ -- 31,990,420 $3,199
========== ======= ========== ======= ========== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Additional
Paid-in Unearned Accumulated
Capital Compensation Deficit Total
-------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 ................. $ 1,146,546 $ -- $ (2,008,579) $ (861,145)
Issuance of common stock in
connection with notes payable ............ 3,999 -- -- 4,000
Net loss .................................. -- -- (205,526) (205,526)
------------ ------------ ------------- ------------
Balance at December 31, 1997 ............... 1,150,545 -- (2,214,105) (1,062,671)
Issuance of common stock in exchange
for accrued compensation ................. 261,571 -- -- 261,666
Exercise of warrants issued in
connection with stockholder loans ........ 99,959 -- -- 100,000
Conversion of stockholder note payable 44,107 -- -- 44,119
Sale of common stock ...................... 2,490,041 -- -- 2,490,732
Issuance of common stock in exchange
for services ............................. 5,786 -- -- 5,787
Issuance of common stock warrants for
services ................................. 28,887 -- -- 28,887
Issuance of compensatory stock options 220,975 (123,475) -- 97,500
Amortization of unearned
compensation ............................. -- 17,508 -- 17,508
Net loss .................................. -- -- (1,160,748) (1,160,748)
------------ ------------ ------------- ------------
Balance at December 31, 1998 ............... 4,301,871 (105,967) (3,374,853) 822,780
Sale of exchangeable preferred stock ...... 2,840,625 -- -- 2,840,775
Sale and issuance of common stock and
warrants ................................. 6,693,293 -- -- 6,693,497
Sale and issuance of series A
convertible preferred stock and
warrants ................................. 15,289,552 -- -- 15,290,021
Conversion of exchangeable preferred
stock to common stock .................... -- -- -- --
Issuance of common stock warrants for
services ................................. 721,858 -- -- 721,858
Issuance of compensatory stock options 2,871,145 (2,871,145) -- --
Amortization of unearned
compensation ............................. -- 329,342 -- 329,342
Modification of common stock warrants 3,878,000 -- -- 3,878,000
Exercise of employee stock options ........ 62,482 -- -- 62,500
Exercise of warrants ...................... 50,995 -- -- 51,000
Net loss .................................. -- -- (8,776,918) (8,776,918)
------------ ------------ ------------- ------------
Balance at December 31, 1999 ............... 36,709,821 (2,647,770) (12,151,771) 21,912,855
Sale and issuance of common stock ......... 115,292,625 -- -- 115,293,147
Conversion of exchangeable preferred
stock to common stock .................... -- -- -- --
Issuance of common stock in
connection with acquisition .............. 10,548,646 -- -- 10,548,674
Issuance of compensatory stock options 3,894,547 (3,894,547) -- --
Amortization of unearned
compensation ............................. 374,999 915,094 -- 1,290,093
Exercise of employee stock options ........ 69,819 -- -- 69,828
Exercise of warrants ...................... 322,354 -- -- 322,419
Net loss .................................. -- -- (1,983,024) (1,983,024)
------------ ------------ ------------- ------------
Balance at June 30, 2000 (unaudited) ....... $167,212,811 $ (5,627,223) $ (14,134,795) $147,453,992
============ ============ ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
Register.com, Inc.
Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1997 1998 1999
--------------- ----------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss .............................. $ (205,526) $ (1,160,748) $ (8,776,918)
Adjustments to reconcile net loss
to net cash provided by (used
in) operating activities
Deferred revenues .................. (20,568) 81,489 31,987,705
Depreciation and
amortization ..................... 41,182 121,474 347,860
Compensatory stock options
and warrants expense ............. 4,000 163,797 4,929,200
Deferred income taxes .............. -- -- (8,578,045)
Changes in assets and liabilities
affecting operating cash flows
Accounts receivable ................. (5,348) (54,605) (2,448,677)
Prepaid domain name registry
fees ............................... -- -- (8,531,061)
Prepaid income taxes ................ -- -- --
Other current assets ................ (17,239) 22,404 (191,271)
Other assets ........................ -- (28,375) 30,643
Accounts payable and accrued
expenses ........................... 80,711 161,747 2,764,386
Accrued registry fees ............... -- -- 3,175,982
Accrued advertising ................. -- -- 1,962,235
Income taxes payable ................ -- -- 5,608,198
Other current liabilities ........... -- -- 166,857
----------- ------------- ------------
Net cash provided by (used
in) operating activities ......... (122,788) (692,817) 22,447,094
----------- ------------- ------------
Cash flows from investing activities
Purchases of fixed assets ............. (15,578) (267,330) (2,543,715)
Deferred offering costs ............... -- -- (390,000)
Purchases of investments .............. -- -- (4,723,050)
Acquisition of Inabox, net ............ -- -- --
----------- ------------- ------------
Net cash used in investing
activities ....................... (15,578) (267,330) (7,656,765)
----------- ------------- ------------
Cash flows from financing activities
Proceeds from notes payable ........... 358,040 -- --
Repayment of notes payable ............ (162,000) (286,000) (52,040)
Net proceeds from issuance of
common stock and warrants ........... -- 2,490,732 6,806,999
Net proceeds from issuance of
preferred stock and warrants ........ -- -- 18,130,796
Principal payments on capital
lease obligations ................... (17,903) (20,782) (16,610)
----------- ------------- ------------
Net cash provided by
financing activities ............. 178,137 2,183,950 24,869,145
----------- ------------- ------------
Net increase in cash and cash
equivalents ........................... 39,771 1,223,803 39,659,474
Cash and cash equivalents at
beginning of period ................... 21,074 60,845 1,284,648
----------- ------------- ------------
Cash and cash equivalents at end of
period ................................ $ 60,845 $ 1,284,648 $ 40,944,122
=========== ============= ============
Supplemental disclosure of cash
flow information
Cash paid for interest ................ $ 21,912 $ 14,510 $ 6,008
Cash paid for income taxes ............ $ -- $ -- $ 2,969,847
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------
1999 2000
---------------- ----------------
(unaudited)
<S> <C> <C>
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
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
Register.com, Inc.
Notes to 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.
In December 1999, the Company's Board of Directors authorized management
to file a registration statement with the Securities and Exchange Commission to
permit the Company to sell shares of its common stock to the public.
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
Cash equivalents
The Company considers all highly liquid investments purchased with an
initial maturity of 90 days or less to be cash equivalents. The Company
maintains its cash balances in highly rated financial institutions. At times,
such cash balances may exceed the Federal Deposit Insurance Corporation limit.
The Company has pledged approximately $6,700,000 of its cash equivalents and
short-term investments as collateral against outstanding letters of credit.
Short-term investments
Short-term investments are classified as held-to-maturity and consist of
certificates of deposit with highly rated financial institutions with maturity
dates of less than one year, and are carried at cost.
Fixed assets
Depreciation of equipment and furniture and fixtures is provided for by
the straight-line method over their estimated useful lives of three to five
years. Amortization of leasehold
F-7
<PAGE>
Register.com, Inc.
Notes to Financial Statements -- (Continued)
improvements is provided for by the straight-line method over the shorter of
their estimated useful life or the lease term. The costs of additions and
betterments are capitalized, and repairs and maintenance costs are charged to
operations in the periods incurred.
Long-lived assets
The Company reviews for the impairment of long-lived assets whenever
events or circumstances indicate that the carrying amount of an asset may not
be recoverable. An impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of the asset and
its eventual disposition is less than its carrying amount. If such assets are
considered impaired, the amount of the impairment loss recognized is measured
as the amount by which the carrying value of the asset exceeds the fair value
of the asset, fair value being determined based upon discounted cash flows or
appraised values, depending on the nature of the asset. No such impairment
losses have been identified by the Company.
Unaudited interim financial information
The accompanying unaudited financial statements as of June 30, 2000 and
for the six months ended June 30, 1999 and 2000 has been prepared by management
and includes all adjustments, consisting of normal recurring adjustments,
necessary to present fairly its financial position, results of operations and
cash flows. The results of operations for the six months ended June 30, 2000
are not necessarily indicative of the operating results to be expected for the
entire year ending December 31, 2000.
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, two
years for initial registrations and one year for the registration renewals.
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
F-8
<PAGE>
Register.com, Inc.
Notes to Financial Statements -- (Continued)
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.
Deferred revenue
Deferred revenue primarily relates to the unearned portion of revenue
related to the unexpired term of registration fees, net of an estimate for
credit card chargebacks, deferred advertising revenue and online products and
services revenue.
Prepaid domain name registry fees
Prepaid domain name registry fees represent amounts paid to the registry
for .com, .net and .org domains for updating and maintaining the registry.
Domain name registry fees are recognized on a straight-line basis over the life
of the registration term, two years for initial registrations and one year for
the registration renewals.
Deferred offering costs
In connection with the Company's initial public offering ("IPO"), the
Company has incurred certain costs which have been deferred. In the event the
IPO is not consummated, the deferred offering costs will be expensed.
Research and development and software development costs
Research and development costs, other than certain software development
costs, are charged to expense as incurred. Software development costs incurred
subsequent to the establishment of technological feasibility and prior to the
general release of the product or service to the public, are capitalized and
amortized to cost of revenues over the estimated useful life of the related
product or service. Software development costs eligible for capitalization have
not been significant to date.
Advertising costs
The Company expenses the costs of advertising in the period in which the
costs are incurred. Advertising expenses were approximately $49,500, $228,000,
and $4,089,000 for the years ended December 31, 1997, 1998, and 1999,
respectively.
Income taxes
The Company recognizes deferred taxes by the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized for differences between the financial statement and
tax bases of assets and liabilities at enacted statutory tax rates in effect
for the years in which the differences are expected to reverse. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. In addition, valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
Fair value of financial instruments
All current assets and liabilities are carried at cost, which approximates
fair value because of the short-term maturity of those instruments.
F-9
<PAGE>
Register.com, Inc.
Notes to Financial Statements -- (Continued)
Concentration of credit risk
Concentration of credit risks associated with registration receivables is
limited due to the wide variety and number of customers, as well as their
dispersion across geographic areas. Additionally, the majority of the Company's
receivables at December 31, 1999 are comprised of amounts due from credit card
carriers. The Company has no derivative financial instruments. At December 31,
1998 one customer aggregated 15% of the total net accounts receivable balance.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the management of the Company to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Stock based compensation
The Company accounts for employee stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations ("APB No. 25"). The Company applies
the disclosure requirements of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123") (Note 9).
Loss per share
Basic earnings per share ("Basic EPS") is computed by dividing net loss
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share ("Diluted
EPS") gives effect to all dilutive potential common shares outstanding during a
period. In computing Diluted EPS, the treasury stock method is used in
determining the number of shares assumed to be purchased from the conversion of
common stock equivalents.
Diluted net loss per share for the year ended December 31, 1999 does not
include the effect of 4,694,333 shares of Series A Convertible Preferred Stock
outstanding because its effect is anti-dilutive. Diluted net loss per share for
the years ended December 31, 1997, 1998 and 1999 does not include 35,000,
2,530,850 and 3,277,435, respectively, of stock options outstanding with
exercise prices ranging from $.17 to $1.71 per share because their effects are
anti-dilutive. Additionally, diluted net loss per share for the years ended
December 31, 1997, 1998 and 1999 excludes 1,480,295, 3,596,839, and 6,155,675,
respectively, of common shares issuable upon the exercise of outstanding
warrants, with exercise prices ranging from $.01 to $4.08 per share because
their effects are anti-dilutive.
Pro forma information (unaudited)
The pro forma basic and diluted net loss per share assumes the conversion
of the Exchangeable Preferred Stock and Series A Convertible Preferred Stock at
the date of original issuance.
F-10
<PAGE>
Register.com, Inc.
Notes to Financial Statements -- (Continued)
Comprehensive income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). This statement requires companies to classify items
of their comprehensive income by their nature in the financial statements and
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS No. 130 is effective for financial
statements issued for fiscal years beginning after December 15, 1997. The
Company adopted SFAS No. 130 in fiscal year 1998. There was no difference
between net income and comprehensive income for the years ended December 31,
1997, 1998 or 1999.
Segment reporting
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"), which established
standards for reporting information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
was adopted by the Company at December 31, 1998. Adoption of SFAS No. 131 had
no impact on the Company's results of operations, financial position or cash
flows as it operates in one segment.
Recent accounting pronouncements
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities" ("SOP 98-5"). SOP 98-5, which is effective for fiscal
years beginning after December 15, 1998, provides guidance on the financial
reporting of start-up costs and organization costs. It requires costs of
start-up activities and organization costs to be expensed as incurred. As the
Company has expensed these costs historically, the adoption of this standard
did not have a significant impact on the Company's results of operations or
financial position.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives
and Hedging Activities" ("SFAS 133"), which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The Company does
not expect the adoption of this statement to have a significant impact on the
Company's results of operations or financial position.
In December 1999, the Staff of the Securities and Exchange Commission
released Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition".
SAB 101 provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. The additional guidance provided by SAB 101
had no effect on the Company's financial statements.
F-11
<PAGE>
Register.com, Inc.
Notes to Financial Statements -- (Continued)
3. Fixed Assets
Fixed assets consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1999
------------- -------------
<S> <C> <C>
Computer equipment ...................................... $ 307,052 $2,060,848
Furniture and fixtures .................................. 46,341 93,865
Office equipment ........................................ 59,404 148,287
Leasehold improvements .................................. -- 691,743
---------- ----------
412,797 2,994,743
Less: accumulated depreciation and amortization ......... (188,497) (536,357)
---------- ----------
Total fixed assets ................................. $ 224,300 $2,458,386
========== ==========
</TABLE>
Included in office equipment is $97,675 of assets under capital lease at
December 31, 1999. Accumulated amortization of such assets amounted to $63,454
at December 31, 1999.
4. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
December 31,
---------------------------
1998 1999
----------- -------------
Trade accounts payable ............ $334,023 $ 458,226
Accrued payroll ................... 32,361 664,377
Accrued registry fees ............. -- 3,175,982
Provision for chargebacks ......... -- 894,095
Accrued advertising ............... -- 1,962,235
Accrued professional fees ......... -- 990,500
Other ............................. 244,090 367,664
-------- ----------
$610,474 $8,513,079
======== ==========
5. Notes Payable
In December 1997, the Company issued an $80,000 note payable. The note
bore interest at 10% per annum and was due on the earlier of an equity
financing or December 31, 1999. In connection with the issuance of the note,
the Company issued 11,200 shares of common stock to the noteholder. The Company
has recorded the fair value of the shares, in the amount of $4,000, as interest
expense. The Company repaid the note upon the closing of the January 1998
private placement.
At December 31, 1998, the Company was indebted to a bank on notes
aggregating $52,040. The notes were payable upon demand and guaranteed by the
stockholders. The notes bore interest at the bank's prime rate +1%. The notes
were also secured by an interest in all personal property and fixtures of the
Company, but were subordinate to the capitalized lease equipment obligations.
These amounts were repaid in 1999.
6. Notes Payable -- Related Parties
In August 1996, the Company issued an aggregate of $100,000 in notes to
certain stockholders and executive officers. The notes were payable upon demand
and bore interest at 8% per annum. In addition, the Company issued warrants to
acquire an aggregate of 411,766 shares of common stock at $.24 per share. The
warrants expire on the earlier of
F-12
<PAGE>
Register.com, Inc.
Notes to Financial Statements -- (Continued)
August 2006 or repayment of the notes. The Company has recorded the estimated
fair value of the warrants, as determined using the Black-Scholes model, of
$69,412 as additional interest expense. In January 1998, the noteholders
elected to exercise the warrants in exchange for repayment of the notes.
In August 1996, the Company was advanced $30,000 under an informal note
agreement with a principal stockholder of the Company. The note bore interest
at 8% per annum and was payable upon demand. In January 1998, the Company and
the noteholder agreed to convert the principal and unpaid interest on the note
into 123,529 shares of common stock. The Company has recorded the difference
between the conversion price and the fair value of the common stock issued, in
the amount of $14,118 as additional interest expense.
Interest expense to related parties amounted to approximately $10,400,
$14,100 and $0 for the years ended December 31, 1997, 1998, and 1999,
respectively.
7. Stockholders' Equity
Authorized Capital
In June 1999, the Company amended its certificate of incorporation to
increase the authorized shares of Common Stock to 25,000,000 and Preferred
Stock to 5,000,000 shares.
Common Stock
In January and May 1998, the Company completed private placements of an
aggregate of 6,440,000 shares of common stock at $.36 per share, providing
proceeds, net of offering expenses, of $2,290,732. In connection with these
placements, the Company issued warrants to acquire an aggregate of 1,143,338
shares of its common stock as a finders fee to two individuals who were members
of two different entities that are principal stockholders of the Company (Note
8). Additionally, the Company issued warrants to acquire up to 2,450,001 shares
of common stock to all stockholders of record prior to the January 1998 private
placement, on a pro rata basis to their stock holdings (Note 8).
In June 1998, the Company completed a private placement of 466,666 shares
of common stock at $.43 per share, providing proceeds of $200,000.
In May 1999, the Company completed a private placement of 2,041,666 shares
of its common stock and a warrant to acquire 700,000 shares of its common stock
at an exercise price of $.01 per share (Note 8), providing gross proceeds of
$7,000,000 and proceeds, net of offering expenses, of $6,693,497. Until such
time as the Company consummates its initial public offering, the Company must
obtain the written consent of the investor prior to entering into a merger,
consolidation or sale of substantially all of its assets at a price of less
than $3.43 per share. In addition, the Company and the investor entered into a
two-year marketing agreement that allows for cross-marketing among each of the
parties websites. In addition, the Company issued the placement agent in the
offering warrants to acquire 308,959 shares of common stock at an exercise
price of $4.08 per share (Note 8).
Each share of common stock entitles the holder to one vote on all matters
submitted to a vote of the Company's stockholders. Common stockholders are
entitled to receive dividends, if any, as may be declared by the Board of
Directors, subject to any preferential dividend rights of the preferred
stockholders. The Company has reserved a total of 16,485,308 shares for
issuance under the Company's stock option plans, exercise of warrants and
non-plan options, and conversion of the Series A Convertible Preferred Stock.
F-13
<PAGE>
Register.com, Inc.
Notes to Financial Statements -- (Continued)
Exchangeable Preferred Stock
In March 1999, the Company completed a private placement of 1,499,999
shares of exchangeable preferred stock at a price of $2.00 per share, providing
proceeds, net of expenses, of $2,840,775. The Company also issued the investor
warrants to acquire 420,000 shares of common stock at an exercise price of
$2.14 per share in exchange for financial consulting services (Note 8). In
addition, the Company issued the placement agent in the offering warrants to
acquire 185,490 shares of common stock at an exercise price of $4.08 per share
(Note 8). On August 15, 1999, the Exchangeable Preferred Stock automatically
converted into 1,499,999 shares of common stock.
Series A Convertible Preferred Stock
In June and July 1999, the Company completed a private placement of
4,694,333 shares of its Series A Convertible Preferred Stock (the "Series A
Stock") at $3.43 per share, providing proceeds, net of offering expenses, of
$15,290,021. In addition, the Company also issued the investors warrants to
acquire an aggregate of 938,888 shares of common stock at an exercise price of
$3.43 per share (Note 8). Additionally, the Company entered into a marketing
and distribution agreement with one investor who purchased 1,405,835 shares of
the Company's Series A Convertible Preferred Stock (Note 10).
Voting
Each share of Series A Stock is entitled to the number of votes equal to
the number of shares of common stock into which the Series A Stock are then
convertible. Series A stockholders vote together with common stockholders as
one class. The holders of the Series A Stock, voting as a single class, have
the right to elect 1 member of the Board of Directors.
Conversion
Each share of Series A Stock is currently convertible, at the option of
the holder, into one share of common stock, subject to certain antidilutive
adjustments. Each share of Series A Stock will automatically convert into
common stock upon the completion of an initial public offering of the Company's
common stock at a price of at least $5.14 per share (subject to adjustment for
stock splits, stock dividends or recapitalizations) and with gross proceeds of
at least $20,000,000.
Dividends and liquidation preference
The holders of the Series A Stock are entitled to receive dividends prior
and in preference to dividends on common stock. Dividends, if any, are
noncumulative and are payable when declared by the Board of Directors. In the
event of liquidation of the Company, the holders of the Series A Stock are
entitled to receive, prior and in preference to any distribution to the holders
of the common stock, an amount equal to $3.43 per share, plus any declared but
unpaid dividends.
8. Warrants
In September 1996, the Company issued warrants to acquire an aggregate of
945,000 shares of common stock at $.17 per share to two officers and directors
of the Company in exchange for their personal guarantees on a $162,000 demand
note payable to a bank. The fair value of the warrants at the time of issuance
of $85,320 was recorded as interest expense.
F-14
<PAGE>
Register.com, Inc.
Notes to Financial Statements -- (Continued)
In January 1998, the warrant holders exercised the warrants by forgiving
approximately $260,000 in accrued compensation. The difference between the
accrued compensation forgiven and the exercise price of the warrants was
recorded as a contribution of capital.
In January and April 1998, and in connection with a private placement of
common stock, the Company issued warrants to acquire 571,669 shares of common
stock at an exercise price of $.36 per share and warrants to acquire 571,669
shares of common stock at an exercise price of $.86 per share as a finders fee.
The warrants were immediately exercisable and expire at various dates through
May 2003.
In January 1998, and in connection with the January 1998 private placement
of common stock, the Company issued warrants to acquire up to, in the
aggregate, 2,450,001 shares of its common stock at $.36 per share to all the
stockholders of record prior to the private placement. The warrants were issued
to stockholders on a pro rata basis to their stock holdings prior to the
private placement. Under the initial terms of the agreement, the vesting of
these warrants was contingent upon the Company reaching certain revenue targets
for the quarter ended June 30, 2000. In June 1999, the Company and the warrant
holders modified the terms of the warrant to (i) remove the revenue targets,
(ii) fix the aggregate number of shares at 2,450,001, and (iii) increase the
exercise price to $.97 per share. The Company has recorded compensation expense
in the amount of $3,878,000 based upon the difference between the fair value of
the Common Stock and the exercise price of the warrants at the time of
modification. In December 1999, warrants to acquire 52,500 shares of common
stock were exercised, providing gross proceeds of $51,000.
In September 1998, the Company issued warrants to acquire an aggregate of
3,500 shares of common stock to consultants at an exercise price of $.43 per
share. The Company has recorded the estimated fair value of the warrants, in
the amount of $2,587, at the time of grant as consulting expense. The warrants
are exercisable through September 2008.
In March 1999, in connection with a private placement of Exchangeable
Preferred Stock, the Company entered into a six-month financial advisory
services agreement with the acquirer of the Exchangeable Preferred Stock. Under
the terms of the agreement, the Company issued the investor warrants to acquire
420,000 shares of common stock at an exercise price of $2.14 per share. The
warrants expire in February 2004. The Company has recorded the estimated fair
value of the warrants, in the amount of $493,320, as consulting expense.
In May 1999, in connection with a private placement of the Company's
common stock (see Note 7), the Company issued the purchaser warrants to acquire
700,000 shares of common stock at an exercise price of $.01 per share. The
warrants are exercisable through May 2002.
In February, March, May and June 1999, the Company issued warrants to
acquire an aggregate of 45,749 shares of common stock to consultants at
exercise prices ranging from $.57 to $1.57 per share. The Company has recorded
the estimated fair value of the warrants, in the amount of $75,890, at the time
of grant as consulting expense. The warrants are exercisable through May 2009.
In March and May 1999, the Company issued warrants to acquire an aggregate
of 494,449 shares of common stock at an exercise price of $4.08 per share as a
fee for the March 1999 sale of Exchangeable Preferred Stock and the May 1999
sale of common stock. The warrants expire in March and May 2004.
In June 1999, and in connection with a private placement of Series A
Convertible Preferred Stock, the Company issued the investors warrants to
acquire an aggregate of 938,888 shares of common stock at an exercise price of
$3.43 per share. The warrants are exercisable through June 2004.
F-15
<PAGE>
Register.com, Inc.
Notes to Financial Statements -- (Continued)
In November 1999, the Company issued warrants to acquire 12,250 shares of
common stock to a consultant at an exercise price of $2.86 per share. The
Company has recorded the estimated fair value of the warrants, in the amount of
$151,928, at the time of grant as consulting expense. The warrants are
exercisable through November 2009.
The following table is a summary of the common shares issuable upon
exercise of warrants outstanding at December 31, 1999:
Shares Issuable Exercise Price
Issuance Date Expiration Date Upon Exercise Per Share
---------------- ----------------- ----------------- ---------------
January 1998 January 2003 350,000 $ .36
January 1998 January 2003 350,000 $ .86
January 1998 June 2005 2,397,501 $ .97
April 1998 May 2003 221,669 $ .36
April 1998 May 2003 221,669 $ .86
September 1998 September 2008 3,500 $ .43
February 1999 February 2009 29,999 $ .57
March 1999 March 2009 5,250 $ .57
March 1999 February 2004 420,000 $ 2.14
March 1999 March 2004 185,490 $ 4.08
May 1999 May 2002 700,000 $ .01
May 1999 May 2009 5,250 $ 1.43
May 1999 May 2004 308,959 $ 4.08
June 1999 June 2009 5,250 $ 1.57
June 1999 June 2004 938,888 $ 3.43
November 1999 November 2009 12,250 $ 2.86
--------- ------
Total shares and average exercise 6,155,675 $ 1.50
========= ======
price
9. Stock Option Plans
1997 Stock Option Plan
The Company's 1997 Stock Option Plan (the "1997 Plan") permits the grant
of both "incentive stock options" designed to qualify under the Internal
Revenue Code Section 422 and non-qualified stock options. Options under the
plan may only be granted to employees of the Company. A total of 1,750,000
shares of common stock have been reserved for issuance under the 1997 Plan.
Each option, once vested, allows the optionee the right to purchase one share
of the Company's common stock. The Board of Directors determines the exercise
price of the options. Options granted to date generally vest over 36 to 45
months and expire ten years from the date of grant.
1999 Stock Option Plan
The Company's 1999 Stock Option Plan (the "1999 Plan") permits the grant
of both incentive stock options and non-qualified stock options. Incentive
stock options may only be granted to employees of the Company whereas
non-qualified stock options may be granted to non-employees, directors and
consultants. A total of 2,275,000 shares have been reserved for issuance under
the 1999 Plan. The Compensation Committee of the Board of Directors determines
the exercise price of the options.
F-16
<PAGE>
Register.com, Inc.
Notes to Financial Statements -- (Continued)
Stock option activity under the 1997 and 1999 Plans can be summarized as
follows:
Weighted-
Average
Number Exercise
of Shares Price
------------- ----------
Outstanding at December 31, 1996 ........... -- $ --
Granted .................................. 35,000 .17
Exercised ................................ -- --
Forfeited ................................ -- --
------ -----
Outstanding at December 31, 1997 ........... 35,000 .17
Granted .................................. 745,850 .42
Exercised ................................ -- --
Forfeited ................................ (35,000) .17
------- -----
Outstanding at December 31, 1998 ........... 745,850 .42
Granted .................................. 1,063,510 1.28
Exercised ................................ (175,000) .36
Forfeited ................................ (141,925) 1.12
--------- -----
Outstanding at December 31, 1999 ........... 1,492,435 $ 1.01
========= ======
Options available for future grant ......... 2,357,565
=========
The following table summarizes information about options outstanding under
the 1997 and 1999 Plans at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ----------------------------
Weighted-
Number Average Weighted- Number Weighted
Outstanding at Remaining Average Exercisable at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Price 1999 Life (Years) Price 1999 Price
-------------- ---------------- -------------- ----------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
$ .17-$.43 428,750 8.4 $ .35 218,750 $ .35
$ .50-$.86 339,850 9.0 $ .71 112,613 $ .75
$1.00-$1.43 723,835 9.6 $ 1.41 117,843 $ 1.40
------- --- ------ ------- ------
1,492,435 9.1 $ 1.01 449,206 $ .72
========= === ====== ======= ======
</TABLE>
In January 1998, the Company granted an aggregate of 1,750,000 non-plan
options to an officer and principal stockholder of the Company. 525,000 of such
options have an exercise price of $.17 per share and vested immediately. The
remaining 1,225,000 of such options vest over a period of 24 months and have
the following exercise prices: 350,000 are exercisable at $.46 per share,
350,000 are exercisable at $.86 per share and the remaining 525,000 are
exercisable at $1.71 per share. The Company has recorded compensation expense
of $97,500 based upon the difference between the exercise price and estimated
fair value of the common stock on the date of grant.
F-17
<PAGE>
Register.com, Inc.
Notes to Financial Statements -- (Continued)
As permitted by SFAS No. 123. "Accounting for Stock-Based Compensation",
the Company accounts for its stock-based compensation arrangements pursuant to
APB Opinion No.25, "Accounting for Stock Issued to Employees". In accordance
with the provisions of SFAS No. 123, the Company discloses the pro forma
effects of accounting for these arrangements using the minimum value method to
determine fair value. Based on the fair value of the stock options at the grant
date the Company's net loss would have been adjusted to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1997 1998 1999
-------------- ---------------- ----------------
<S> <C> <C> <C>
Net loss
As reported ........................... $ (205,526) $ (1,160,748) $ (8,776,918)
Pro forma ............................. $ (205,526) $ (1,164,635) $ (8,828,475)
Net loss per share
As reported-basic and diluted ......... $ (0.08) $ (0.26) $ (0.46)
Pro forma basic and diluted ........... $ (0.08) $ (0.26) $ (0.46)
</TABLE>
The fair value of each option grant to employees is estimated using the
minimum value method of the Black-Scholes option-pricing model, which assumes
no volatility. The values were obtained using assumptions which were arrived
using information provided by management of the Company. Changes in the
information would affect the assumptions and the option prices derived from the
assumptions. The weighted average assumptions used for grants made in 1997,
1998 and 1999 were as follows:
1997 1998 1999
--------- --------- ---------
Risk free interest rate .......... 6.3% 6.1% 5.5%
Expected lives (years) ........... 5.0 5.0 5.0
Expected dividends ............... 0.0% 0.0% 0.0%
In October 1998, the Company granted non-plan options to acquire 35,000
shares of the Company's common stock at exercise prices ranging from $.17 to
$.36 per share to a consultant for services rendered. The Company has recorded
the estimated fair value of the options on the date of grant, as determined
using the Black-Scholes option pricing model, of $26,300 as consulting expense.
The fair value of options and warrants (Note 8) granted to non-employees
is estimated using the Black-Scholes option-pricing model. The values were
obtained using assumptions, which were arrived using information provided by
management of the Company. Changes in the information would affect the
assumptions and the option prices derived from the assumptions. The weighted
average assumptions used for grants to non-employees made in 1998 and 1999 were
as follows: risk free interest rate of 6.1% and 5.5%, respectively; expected
lives of 5 to 10 years based upon the term of the option or warrant; expected
dividends of 0% for each year; and a volatility of 100% for each year.
F-18
<PAGE>
Register.com, Inc.
Notes to Financial Statements -- (Continued)
The following table is a summary of the weighted average exercise price
and grant date fair values of options and warrants granted to employees and
consultants during the years ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
---------------------- ----------------------- -----------------------
Exercise Fair Exercise Fair Exercise Fair
Price Value Price Value Price Value
---------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Options granted to employees
and consultants:
Exercise price less than fair
value of stock on date of
grant ............................. $-- $-- $ 0.27 $ 0.29 $ 1.28 $ 3.10
Exercise price equal to fair value
of stock on date of grant ......... 0.17 0.09 0.40 0.01 -- --
Exercise price greater than fair
value of stock on date of
grant ............................. -- -- 1.11 -- -- --
Warrant grants to employees and
consultants for services:
Exercise price less than fair
value of stock on date of
grant ............................. $-- $-- $ 0.43 $ 0.74 $ 1.22 $ 3.93
Exercise price equal to fair value
of stock on date of grant ......... -- -- 0.35 0.16 -- --
Exercise price greater than fair
value of stock on date of
grant ............................. -- -- -- -- 2.14 1.17
</TABLE>
10. Related Party Transactions
General and administrative
During 1997 and 1998, the Company leased office space and received
administrative and support services from an entity in which a principal
stockholder of the Company is an executive officer. These expenses aggregated
approximately $18,682 and $577 in 1997 and 1998, respectively. Included in
accounts payable are approximately $4,890 due to the aforementioned related
party at December 31, 1998.
Concentric Network Corporation
In June 1999, the Company entered into a one-year marketing and
distribution agreement with Concentric Network Corporation ("Concentric").
Under the terms of the agreement, the Company is required to fund $41,667 per
month to a cooperative marketing program from which the parties will jointly
promote their services. In addition, Concentric has agreed to purchase a
minimum of $100,000 per month of advertising from the Company. In June 1999,
Concentric also purchased 1,405,835 shares of the Company's Series A
Convertible Preferred Stock (Note 7). In December 1999, Concentric agreed to
purchase additional advertising on our website for seven months commencing in
March 2000 at a value of $100,000 per month.
F-19
<PAGE>
Register.com, Inc.
Notes to Financial Statements -- (Continued)
11. Income Taxes
Net operating loss carryforwards and temporary differences between the
carrying amounts of assets and liabilities for financial reporting and income
tax purposes result in a net deferred tax asset of $702,243, $1,206,744 and
$11,921,024 at December 31, 1997, 1998 and 1999, respectively. The Company's
operating plans anticipate taxable income in future periods; however, such
plans make significant assumptions which cannot be reasonably assured.
Therefore, in consideration of the Company's accumulated losses and the
uncertainty of its ability to utilize the deferred tax asset in the future, the
Company has recorded a valuation allowance in the amount of $702,243,
$1,206,744 and $3,342,979 at December 31, 1997, 1998, and 1999, respectively,
to offset the deferred tax benefit amount.
The provision for income taxes for the years ended December 31, 1997,
1998, and 1999 consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1998 1999
------ ------ ---------------
<S> <C> <C> <C>
Current:
Federal ................................ $-- $-- $5,210,244
State .................................. -- -- 3,367,801
--- --- ----------
Total current .......................... -- -- 8,578,045
--- --- ----------
Deferred:
Federal ................................ -- -- (5,210,244)
State .................................. -- -- (3,367,801)
--- --- ----------
Total deferred ......................... -- -- (8,578,045)
--- --- ----------
Total provision for income taxes ......... $-- $-- $ --
=== === ==========
</TABLE>
The components of the net deferred tax asset as of December 31, 1997,
1998, and 1999 consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1997 1998 1999
------------- --------------- ---------------
<S> <C> <C> <C>
Deferred tax assets:
Operating loss carryforward ............... $ 538,957 $ 982,066 $ --
Allowance for doubtful accounts ........... 24,703 29,620 144,070
Accrued expenses .......................... 124,139 121,137 472,264
Stock compensation ........................ -- -- 547,551
Deferred revenue .......................... 14,444 50,990 14,704,541
---------- ------------ ------------
Total deferred tax assets .............. 702,243 1,183,813 15,868,426
Deferred tax liabilities:
Prepaid domain name registry fees ......... -- -- 3,907,804
Depreciation and amortization ............. -- (22,931) 39,598
---------- ------------ ------------
Total deferred tax liabilities ......... -- (22,931) 3,947,402
Net deferred tax asset ...................... 702,243 1,206,744 11,921,024
Less: valuation allowance ................... (702,243) (1,206,744) (3,342,979)
---------- ------------ ------------
Deferred tax asset .......................... $ -- $ -- $ 8,578,045
========== ============ ============
</TABLE>
F-20
<PAGE>
Register.com, Inc.
Notes to Financial Statements -- (Continued)
The financial statement income tax provision differs from income taxes
determined by applying the statutory Federal income tax rate to the financial
statement net loss for the years ended December 31, 1997, 1998, and 1999 as a
result of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Tax benefit at Federal statutory rate ....................... (34.0)% (34.0)% (35.0)%
State income tax benefit, net of Federal tax charge ......... ( 7.1) ( 8.0) (11.8)
Non-deductible compensation expenses ........................ -- .1 15.5
Valuation allowance ......................................... 41.1 41.9 31.3
----- ----- -----
--% --% --%
====== ====== ======
</TABLE>
12. Commitments
Operating and Capital leases
The Company leases office facilities and equipment under operating leases
expiring through 2009. The Company also leases telephone and other office
equipment under capital leases expiring through 2004. Future minimum lease
payments due under noncancellable operating leases and capital leases were as
follows:
<TABLE>
<CAPTION>
Operating Capital
------------- ------------
<S> <C> <C>
Year ending December 31,
2000 .................................................... $ 269,076 $ 10,704
2001 .................................................... 332,072 10,704
2002 .................................................... 342,084 10,704
2003 .................................................... 352,295 10,704
2004 .................................................... 367,864 3,568
Thereafter .............................................. 1,977,959 --
---------- ---------
Total minimum lease payments ......................... $3,641,350 46,384
==========
Less: amount representing interest ........................ (12,559)
---------
Present value of future minimum lease payments ............ 33,825
Less: current portion ..................................... (5,967)
---------
Capital lease obligations, net of current portion ......... $ 27,858
=========
</TABLE>
Rent expense for the years ended December 31, 1997, 1998, and 1999 was
approximately $14,000, $43,000 and $220,000, respectively.
Employment agreements
In the normal course of business, the Company has entered into two
employment agreements with its employees.
Marketing and distribution/strategic partnership agreements
In the normal course of business, the Company enters into marketing and
distribution/strategic partnership agreements with various entities. These
agreements generally have a term of 12 to 24 months, and a number require the
Company to purchase a minimum amount of advertising or pay other fees over the
term of the contract. Future minimum
F-21
<PAGE>
Register.com, Inc.
Notes to Financial Statements -- (Continued)
payments required under the marketing and distribution/strategic partnership
agreements for the years ended December 31, 2000 and 2001 are approximately
$1,800,000 (including $250,000 to Concentric -- Note 10) and $750,000,
respectively.
13. Contingencies
Litigation
There are various claims, lawsuits and pending actions against the Company
incidental to the operations of its business. It is the opinion of management,
after consultation with counsel, that the ultimate resolution of such claims,
lawsuits and pending actions will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
14. Subsequent Events
In January 2000, the Company's stockholders approved the 2000 Stock
Incentive Plan (the "2000 Plan"). The 2000 Plan will serve as the successor to
the 1997 and the 1999 Plans. All outstanding options under the 1997 and 1999
Plans will be incorporated into the 2000 Plan, and no further option grants
would be made under the predecessor plan. The maximum aggregate number of
shares reserved for issuance under the 2000 Plan is 7,350,000. All non-employee
board members who first join the board on or after January 26, 2000 will
automatically be granted an option to acquire 35,000 shares of common stock,
which will vest over two years. In addition, each non-employee board member
will receive an annual option grant to purchase 5,250 shares of common stock,
which will vest over one year, after the initial grant of 35,000 is fully
vested.
In January 2000, the Company's stockholders approved the Employee Stock
Purchase Plan (the "ESPP"). The ESPP is intended to qualify under Section 423
of the Code in order to provide employees of the Company with an opportunity to
purchase Common Stock through payroll deductions. An aggregate of 350,000
shares have been reserved for issuance under the ESPP, plus an annual increase
on the first trading day of each calendar year, beginning in 2001, equal to the
lessor of (i) .25% of the outstanding shares on such date or (ii) 140,000
shares.
In January 2000, the Company filed an amendment to its certificate of
incorporation to increase the authorized shares of Common Stock to 60,000,000.
In January 2000, the Company granted options to acquire an aggregate of
1,075,851 shares of common stock to employees at $12.86 per share. During the
first quarter of 2000, the Company will record approximately $3,400,000 of
unearned compensation based upon the difference between the fair value of the
common stock on the date of grant and the exercise price of the options. The
unearned compensation will be amortized over the 42 month vesting period of the
options.
In January 2000, Concentric agreed to purchase an additional $800,000 of
advertising space on our website for the period from September to December
2000.
Unaudited
In February 2000, the Company entered into an employment agreement with
its chief executive officer ("CEO") for a period of 42 months. Under the terms
of the agreement, the CEO is to receive minimum annual compensation of $200,000
per year and options to purchase 525,000 shares of common stock. 175,000 of
such options will be exercisable at
F-22
<PAGE>
Register.com, Inc.
Notes to Financial Statements -- (Continued)
110% of the IPO price, an additional 175,000 of such options will be
exercisable at 140% of the IPO price and the remaining 175,000 options will be
exercisable at 160% of the IPO price. The options will vest in equal
installments over 42 months.
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.
In February 2000, the Company granted options to acquire 594,396 shares of
common stock to employees at the IPO price per share.
In February 2000, a principal stockholder of the Company entered into an
agreement to sell warrants to acquire an aggregate of 918,239 shares of the
Company's common stock to a second principal stockholder. The sale price of the
warrants will be at a price less than the deemed fair value of the warrants as
calculated using the Black-Scholes Model. As a result the Company recorded
$374,999 of expense related to this transaction in the first quarter of 2000.
In March 2000, Register.com sold 5,222,279 shares of common stock through
its initial public offering including 222,279 shares as a result of the
underwriters' exercise of their over allotment option. 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.
In March 2000, the Company amended its Certificate of Incorporation to
increase the authorized shares of common stock to 200,000,000.
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, of 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.
In June 2000, Concentric agreed to purchase an additional $5,100,000 of
advertising from the company for the period from January to December 31, 2001.
F-23
<PAGE>
[Inside Back Cover]
The words "Register..." "...your family" "...your business" "...your brand"
appearing from top to bottom on the page.
Next to "your family" is a picture of a young boy holding a drawing with the tag
line "I registered my imagination" and www.emmettsworld.com underneath.
Next to "your business" is a picture of a man holding a diamond necklace with
two security guards behind him with the tag line "I registered my rocks" and
www.auctionjeweler.com underneath.
Next to "your business" is a picture of a man sitting on cardboard boxes with
the tag line "I registered my brand" and www.staples.com underneath.
"The above are reproductions of advertisements for our domain name registration
services." appears at the bottom of the page.
<PAGE>
You may rely only on the information contained in this prospectus. We have not
authorized anyone to provide information different from that contained in this
prospectus. Neither the delivery of this prospectus nor the sale of common
stock means that information contained in this prospectus is correct after the
date of this prospectus. This prospectus is not an offer to sell or
solicitation of an offer to buy these shares in any circumstances under which
the offer or solicitation is unlawful.
TABLE OF CONTENTS
Page
---------
Prospectus Summary .......................... 3
Risk Factors ................................ 8
Special Note Regarding Forward-Looking
Statements ............................... 24
Use of Proceeds ............................. 25
Price Range of Common Stock ................. 25
Dividend Policy ............................. 25
Capitalization .............................. 26
Dilution .................................... 27
Selected Financial Data ..................... 28
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................... 29
Business .................................... 39
Management .................................. 54
Certain Relationships and Related
Transactions ............................. 68
Principal and Selling Stockholders .......... 74
Description of Capital Stock ................ 76
Shares Eligible for Future Sale ............. 81
Underwriting ................................ 83
Legal Matters ............................... 86
Experts ..................................... 86
Where You Can Find Additional
Information .............................. 86
Index to Financial Statements ............... F-1
<PAGE>
--------------------------------------------------------------------------------
[GRAPHIC OMITTED]
4,000,000 Shares
Common Stock
Deutsche Banc Alex. Brown
Thomas Weisel Partners LLC
Banc of America Securities LLC
Legg Mason Wood Walker
Incorporated
Prospectus
, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth an estimate of the costs and expenses,
other than the underwriting discounts and commissions, payable by the
Registrant in connection with the issuance and distribution of the common stock
being registered.
SEC registration fee ................. $ 38,937
NASD fee ............................. 15,249
NASDAQ listing fee ................... 11,000
Legal fees and expenses .............. 175,000
Accounting fees and expenses ......... 100,000
Printing expenses .................... 100,000
Blue sky fees and expenses ........... 5,000
Miscellaneous ........................ 4,814
--------
Total ............................ $450,000
========
Item 14. Indemnification of Directors and Officers
The registrant's certificate of incorporation (the "Certificate") provides
that, except to the extent prohibited by the Delaware General Corporation Law,
as amended (the "DGCL"), the registrant's directors shall not be personally
liable to the registrant or its stockholders for monetary damages for any
breach of fiduciary duty as directors of the registrant. Under the DGCL, the
directors have a fiduciary duty to the registrant which is not eliminated by
this provision of the Certificate and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available. In addition, each director will continue to be subject to liability
under the DGCL for breach of the director's duty of loyalty to the registrant,
for acts or omissions which are found by a court of competent jurisdiction to
be not in good faith or involving intentional misconduct, for knowing
violations of law, for actions leading to improper personal benefit to the
director, and for payment of dividends or approval of stock repurchases or
redemptions that are prohibited by DGCL. This provision does not limit the
directors' responsibilities under any other laws, including the federal
securities laws or state or federal environmental laws. The registrant
maintains liability insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this
provision shall not eliminate or limit the liability of a director: (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) arising under
Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit. The DGCL provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, a vote of stockholders or otherwise. The
Certificate eliminates the personal liability of directors to the fullest
extent permitted by Section 102(b)(7) of the DGCL and provides that the
registrant shall fully indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (whether civil, criminal, administrative or investigative)
by reason of the fact that such person is or was a director or officer of the
registrant, or is or was serving at the request of the registrant as a director
or officer of another corporation, partnership, joint venture,
II-1
<PAGE>
trust, employee benefit plan or other enterprise, against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Certificate. The registrant is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
Item 15. Recent Sales of Unregistered Securities
Within the last three years, the Registrant has sold and issued the
following securities:
(1) In December 1997, the Registrant issued 11,200 shares of common stock
to Kenneth Greif, the managing member of Internet Web Builders LLC, one
of its stockholders.
(2) From January 1997 through December 1997, the Registrant granted
employees options to purchase 35,000 shares of common stock at a
weighted average exercise price of $0.17.
(3) In January and May 1998, the Registrant issued an aggregate of
6,440,000 shares of common stock to Internet Web Builders LLC, Capital
Express LLC, Richard D. Forman and Peter A Forman, at a purchase price
of $0.36 per share, with proceeds, net of offering expenses, of
$2,290,732. In connection with these transactions, the Registrant
issued to Niles H. Cohen and Zachary Prenskey warrants to acquire an
aggregate of 571,669 shares of common stock at an exercise price of
$0.36 per share and 571,669 shares of common stock at an exercise price
of $0.86 per share. The Registrant also issued to Richard D. Forman,
Peter A. Forman, Dan B. Levine and Capital Express LLC, stockholders of
record prior to the private placement, warrants to purchase 2,450,001
shares of its common stock at an exercise price of $0.36 per share.
These warrants were modified in June 1999 to increase the exercise
price to $0.97 per share.
(4) In June 1998, the Registrant issued 446,666 shares of common stock to
a RHL Investors LLC at a purchase price of $0.43 per share, with
proceeds, net of expenses, of $200,000.
(5) In August 1998, the Registrant issued 13,503 shares of common stock to
James Krantz, a consultant, in consideration for services.
(6) In September 1998, the Registrant issued to Steve Klebe, a consultant,
warrants to purchase an aggregate of 3,500 shares of common stock at an
exercise price of $0.43 per share.
(7) From January 1998 through December 1998, the Registrant granted
employees options to purchase 745,850 shares of common stock at a
weighted average exercise price of $0.41.
(8) In March 1999, the Registrant issued 1,499,999 shares of exchangeable
preferred stock to Palisade Private Partnership, LP at a price of $2.00
per share, with proceeds, net of expenses, of $2,840,775. The
Registrant also issued warrants to purchase 420,000 shares of common
stock at an exercise price of $2.14 per share to Palisade Private
Partnership, LP for financial advisory services.
(9) In May 1999, the Registrant issued 2,041,666 shares of its common
stock to Staples, Inc. at a purchase price of $3.43 per share for an
aggregate purchase price of $6,999,996. In connection with the
transaction, the Registrant also issued warrants to purchase 700,000
shares of common stock at an exercise price of $.0029 per share.
II-2
<PAGE>
(10) In June and July 1999, the Registrant issued 4,694,333 shares of its
Series A Convertible Preferred Stock to Bayview Investors Ltd.,
Bessemer Venture Partners IV L.P., Bessec Ventures IV L.P., Staples,
Inc., Concentric Network Corporation, Sandler Capital Partners IV
L.P., Sandler Capital IV FTE Partners, L.P., Sandler Capital
Management, Hikari Tsushin Inc., Irwin Leiber, Barry Rubenstein,
Richard A. Forman, Alan G. Breitman, Brian L. Greenspun Separate
Property Trust, Internet Web Builders LLC, Peter D. Forman, and Dan B.
Levine, at a price of $3.43 per share, with proceeds, net of offering
expenses, of $15,290,021. In connection with the transaction, the
Registrant also issued warrants to acquire an aggregate of 938,888
shares of common stock at an exercise price of $3.43 per share.
(11) In February 1999, the Registrant issued to Terrence Kaliner, a
consultant, a warrant to purchase 29,999 shares of common stock at an
exercise price of $0.57 per share. In March 1999, the Registrant
issued to Robert Lessin, a consultant, a warrant to purchase 5,250
shares of common stock at $0.57 per share. In May 1999, the Registrant
issued to Peter Varava, a consultant, a warrant to purchase 5,250
shares at an exercise price of $1.43 per share. In June 1999, the
Registrant issued to Stuart Levi, a consultant, a warrant to purchase
5,250 shares of common stock at an exercise price of $1.57 per share.
In November 1999, the Registrant issued to Peter Varvara, a
consultant, a warrant to purchase 12,250 shares of common stock at an
exercise price of $2.86 per share.
(12) From January 1999 through December 1999, the Registrant granted
employees options to purchase 1,063,510 shares of common stock at a
weighted average exercise price of $1.28.
(13) In January 2000, the Registrant granted options to acquire an
aggregate of 1,075,851 shares of common stock to employees at $12.86
per share.
(14) In February 2000, the Registrant entered into an employment agreement
with Richard D. Forman, its chief executive officer, pursuant to which
Mr. Forman was granted options to purchase 175,000 shares of common
stock, exercisable at 110% of the initial public offering price;
options to purchase 175,000 shares of common stock, exercisable at
140% of the initial public offering price; options to purchase 175,000
shares of common stock, exercisable at 160% of the initial public
offering price;
(15) In February 2000, the Registrant granted options to acquire 594,396
shares of common stock to employees at a price per share equal to the
initial public offering price.
(16) In June 2000, in connection with the acquisition of Inabox, Inc., and
as consideration for the transaction, the Registrant issued 280,019
shares of common stock to the stockholders of Inabox, Inc.
Legg Mason Wood Walker, Incorporated was the placement agent for the
equity sales in March, May, June and July 1999. In connection with its
services, it was issued warrants to purchase 494,449 shares of common stock at
an exercise price of $4.08 per share.
The issuances of the above securities were issued in transactions exempt
from registration under the Securities Act in reliance upon Section 4(2)
thereof as transactions by an issuer not involving any public offering. In
addition, the issuances of employee options described above were issued in
transactions exempt from registration under the Securities Act in reliance upon
Rule 701 and/or Rule 4(2) promulgated under the Securities Act. The issuances
in Items 8, 9 and 10 and the issuance to Internet Web Builders, LLC in Item 3
were issued in transactions exempt from registration under the Securities Act
in reliance upon Section 506 of
Regulation D.
All share numbers in this registration statement have been adjusted to
reflect a 3.5-for-one stock split of our common stock that was effected in
January 2000 in the form of a stock dividend.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------------ --------------------------------------------------------------------------------------
<S> <C>
1.1 Form of underwriting agreement.
3.1 + Amended and restated certificate of incorporation.
3.2 Certificate of Correction of Amended and Restated Certificate of Incorporation
3.3 + Amended and restated bylaws
4.1 + Specimen common stock certificate.
4.2 + See Exhibits 3.1, 3.2, and 3.3 for provisions of the certificate of incorporation and
bylaws defining the rights of holders of Common Stock.
4.3.1 # Registration Rights Agreement dated June 30, 1999.
4.3.2 Registration Rights Agreement dated June 4, 2000.
4.4 + Amended and Restated Stockholders Agreement.
4.5 + Certificate of designations, preferences and relative, participating, optional and
other special rights of preferred stock and qualifications, limitations and
restrictions of Series A Convertible Preferred Stock.
4.6.1 + Form of warrant to purchase common stock issued to Series A Convertible
Preferred Stockholders.
4.6.2 + Warrant to purchase common stock issued to Staples, Inc.
4.6.3 + Warrant to purchase common stock issued to Palisade Private Partnership, LP.
4.6.4 + Form of warrant to purchase common stock issued to Niles H. Cohen and
Zachary Prensky.
4.6.5 + Form of Amended and Restated Common Stock Purchase Warrant -- Series A
issued to Richard D. Forman, Peter A. Forman, Dan Levine and Capital Express
LLC.
4.6.6 + Warrants to purchase common stock issued to Legg Mason Wood Walker,
Incorporated.
4.6.7 + Form of warrant to purchase common stock issued to consultants.
4.6.8 + Warrant to purchase common stock issued to Terrence Kaliner.
4.7.1 + Employee Stock Option Certificate issued to Richard D. Forman.
4.7.2 + Stock Option Certificate issued to Pondfield Associates, Inc.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
10.1 + 1997 Stock Option Plan.
10.2 + 1999 Stock Option Plan.
10.3 + Registrar Accreditation Agreement, dated [November 30, 1999], by and between
ICANN and Register.com, Inc.
10.4 + Registrar License and Agreement, dated December 13, 1999, by and between
Network Solutions, Inc. and Register.com, Inc.
10.5 + Lease between Pennbus Realties, Inc. and Forman Interactive Corp.
10.6 + 2000 Stock Incentive Plan.
10.7 + Employee Stock Purchase Plan.
10.8 + Employment Agreement, dated November 15, 1995, with Richard D. Forman.
10.8.2 + Employment Agreement, dated February 27, 2000, with Richard D. Forman.
10.9 + Employment Agreement with Jack S. Levy.
10.10+ Marketing Agreement, dated as of May 21, 1999, with Staples, Inc.
10.11.1 ## Joint Marketing and Distribution Agreement, dated as of June 25, 1999, with
Concentric Network Corporation.
10.11.2 Amendment No. 1, dated as of June 30, 2000, with Concentric Network
Corporation.
10.12.1 + Lock Up and Voting Agreement, dated February 2, 2000, by and between
Register.com, Inc. and Staples, Inc.
10.12.2 + Lock Up and Voting Agreement, dated February 28, 2000, by and between
Register.com, Inc. and Staples, Inc.
10.13+ Letter Agreement, dated January 31, 2000, with Internet Web Builders LLC and
Kenneth R. Greif.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.14 Severance Agreement, dated July 9, 2000, with Alan G. Breitman.
10.15 Form of Offer Letter, dated July 7, 2000, with Cindy E. Horowitz.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
24.1 Powers of attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
-------------
+ Incorporated by reference to the identically numbered exhibit of
Registration Statement No. 333-93533
# Incorporated by reference to Exhibit 4.3 of Registration Statement No.
333-93533
## Incorporated by reference to Exhibit 10.11 of Registration Statement No.
333-93533
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Page Number Description
<S> <C>
S-1 Report of Independent Accountants on Financial Statement Schedule
S-2 Schedule II -- Valuation and Qualifying Accounts
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or the notes thereto.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424 (b) (1)
or (4) or 497 (h) under the Securities Act of 1933 shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on this 27th day of July, 2000.
REGISTER.COM, INC.
By: /s/ Richard D. Forman
--------------------------------
Richard D. Forman
President and Chief Executive
Officer
POWER OF ATTORNEY
We, the undersigned directors and/or officers of Register.com, Inc. (the
"Company"), hereby severally constitute and appoint Richard D. Forman,
President and Chief Executive Officer, and Alan G. Breitman, Vice President of
Finance and Accounting, and each of them individually, with full powers of
substitution and resubstitution, our true and lawful attorneys, with full
powers to them and each of them to sign for us, in our names and in the
capacities indicated below, the registration statement on Form S-1 filed with
the Securities and Exchange Commission, and any and all amendments to said
registration statement filed (including post-effective amendments), and any
registration statement filed pursuant to Rule 462(b) under the Securities Act
of 1933, as amended, in connection with the registration under the Securities
Act of 1933, as amended, of equity securities of the Company, and to file or
cause to be filed the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as each of them
might or could do in person, and hereby ratifying and confirming all that said
attorney, and each of them, or their substitute or substitutes, shall do or
cause to be done by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on July 27, 2000.
<TABLE>
<CAPTION>
Signature Title(s)
-------------------------------------------------------------- ---------------------------------------------
<S> <C>
/s/ Richard D. Forman President, Chief Executive Officer and
------------------------------------- Director (Principal Executive Officer)
Richard D. Forman
/s/ Alan G. Breitman Vice President of Finance and Accounting
------------------------------------- (Principal Accounting and Financial Officer)
Alan G. Breitman
/s/ Peter A. Forman Director
-------------------------------------
Peter A. Forman
/s/ Niles H. Cohen Director
-------------------------------------
Niles H. Cohen
/s/ Samantha McCuen Director
-------------------------------------
Samantha McCuen
/s/ Mark S. Hoffman Director
-------------------------------------
Mark S. Hoffman
/s/ Reginald Van Lee Director
-------------------------------------
Reginald Van Lee
</TABLE>
II-6
<PAGE>
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors
of Register.com, Inc.
Our audits of the financial statements referred to in our report dated January
31, 2000 appearing in the prospectus constituting part of this Registration
Statement on Form S-1 of Register.com, Inc. also included an audit of the
financial statement schedule listed in Part II herein. In our opinion, this
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
financial statements.
PricewaterhouseCoopers LLP
New York, New York
January 31, 2000
S-1
<PAGE>
Schedule II -- Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and Ending
of Period Expenses Deductions of Period
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
For the year ended December 31, 1997:
Provision for doubtful accounts ......... $ -- $ 75,764 $ 55,000 $ 20,764
======= ======== ======== ========
For the year ended December 31, 1998:
Provision for doubtful accounts ......... $20,764 $ 72,232 $ 27,049 $ 65,947
======= ======== ======== ========
For the year ended December 31, 1999:
Provision for doubtful accounts ......... $65,947 $536,585 $288,016 $314,516
======= ======== ======== ========
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------------ --------------------------------------------------------------------------------------
<S> <C>
1.1 Form of underwriting agreement.
3.1+ Amended and restated certificate of incorporation.
3.2 Certificate of Correction of Amended and Restated Certificate of Incorporation
3.3+ Amended and restated bylaws
4.1+ Specimen common stock certificate.
4.2+ See Exhibits 3.1, 3.2, and 3.3 for provisions of the certificate of incorporation and
bylaws defining the rights of holders of Common Stock.
4.3.1# Registration Rights Agreement dated June 30, 1999.
4.3.2 Registration Rights Agreement dated June 4, 2000.
4.4+ Amended and Restated Stockholders Agreement.
4.5+ Certificate of designations, preferences and relative, participating, optional and
other special rights of preferred stock and qualifications, limitations and
restrictions of Series A Convertible Preferred Stock.
4.6.1+ Form of warrant to purchase common stock issued to Series A Convertible
Preferred Stockholders.
4.6.2+ Warrant to purchase common stock issued to Staples, Inc.
4.6.3+ Warrant to purchase common stock issued to Palisade Private Partnership, LP.
4.6.4+ Form of warrant to purchase common stock issued to Niles H. Cohen and
Zachary Prensky.
4.6.5+ Form of Amended and Restated Common Stock Purchase Warrant -- Series A
issued to Richard D. Forman, Peter A. Forman, Dan Levine and Capital Express
LLC.
4.6.6+ Warrants to purchase common stock issued to Legg Mason Wood Walker,
Incorporated.
4.6.7+ Form of warrant to purchase common stock issued to consultants.
4.6.8+ Warrant to purchase common stock issued to Terrence Kaliner.
4.7.1+ Employee Stock Option Certificate issued to Richard D. Forman.
4.7.2+ Stock Option Certificate issued to Pondfield Associates, Inc.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
10.1+ 1997 Stock Option Plan.
10.2+ 1999 Stock Option Plan.
10.3+ Registrar Accreditation Agreement, dated [November 30, 1999], by and between
ICANN and Register.com, Inc.
10.4+ Registrar License and Agreement, dated December 13, 1999, by and between
Network Solutions, Inc. and Register.com, Inc.
10.5+ Lease between Pennbus Realties, Inc. and Forman Interactive Corp.
10.6+ 2000 Stock Incentive Plan.
10.7+ Employee Stock Purchase Plan.
10.8+ Employment Agreement, dated November 15, 1995, with Richard D. Forman.
10.8.2+ Employment Agreement, dated February 27, 2000, with Richard D. Forman.
10.9+ Employment Agreement with Jack S. Levy.
10.10+ Marketing Agreement, dated as of May 21, 1999, with Staples, Inc.
10.11.1 ## Joint Marketing and Distribution Agreement, dated as of June 25, 1999, with
Concentric Network Corporation.
10.11.2 Amendment No. 1, dated as of June 30, 2000, with Concentric Network
Corporation.
10.12.1 + Lock Up and Voting Agreement, dated February 2, 2000, by and between
Register.com, Inc. and Staples, Inc.
10.12.2 + Lock Up and Voting Agreement, dated February 28, 2000, by and between
Register.com, Inc. and Staples, Inc.
10.13+ Letter Agreement, dated January 31, 2000, with Internet Web Builders LLC and
Kenneth R. Greif.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.14 Severance Agreement, dated June 9, 2000, with Alan G. Breitman.
10.15 Form of Offer Letter, dated July 7, 2000, with Cindy E. Horowitz.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
24.1 Powers of attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
------------
+ Incorporated by reference to the identically numbered exhibit of
Registration Statement No. 333-93533
# Incorporated by reference to Exhibit 4.3 of Registration Statement No.
333-93533
## Incorporated by reference to Exhibit 10.11 of Registration Statement No.
333-93533
