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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 0-29739
Register.com, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 11-3239091
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
575 Eighth Avenue, 11th Floor, New York, New York 10018
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(Address of principal executive offices) (Zip Code)
(212) 798-9100
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
As of November 11, 2000, there were 36,772,772 shares of the
registrant's common stock outstanding.
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Register.com, Inc.
FORM 10-Q
INDEX
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PART I. CONSOLIDATED FINANCIAL INFORMATION........................................................................2
Item 1. Consolidated Financial Statements...................................................................2
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...............8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................................40
PART II. OTHER INFORMATION.......................................................................................40
Item 1. Changes in Securities and Use of Proceeds..........................................................40
Item 2. Exhibits and Report on Form 8-K....................................................................40
Item 3. Signatures.........................................................................................42
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PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Register.com, Inc.
Consolidated Balance Sheet
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December 31, September 30,
1999 2000
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(Unaudited)
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Assets
Current assets
Cash and cash equivalents................................................ $ 40,944,122 $ 85,572,375
Short-term investments................................................... 4,723,050 54,267,946
Accounts receivable, less allowance of $314,516
and $1,211,787 (unaudited), respectively.............................. 2,516,186 6,475,987
Prepaid domain name registry fees........................................ 4,954,730 16,135,085
Deferred tax asset....................................................... 8,578,045 22,307,550
Prepaid income taxes..................................................... - 6,343,486
Deferred offering costs.................................................. 390,000 -
Other current assets..................................................... 195,196 2,024,739
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Total current assets..................................................... 62,301,329 193,127,168
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Fixed assets, net........................................................ 2,458,386 8,773,936
Prepaid domain name registry fees, net of current portion................ 3,576,331 5,027,704
Other Investments........................................................ - 3,000,000
Available-for-sale securities............................................ - 25,025,840
Goodwill and other intangibles, net...................................... - 57,298,676
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Total assets............................................................. $ 68,336,046 $ 292,253,324
============= =============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses.................................... $ 8,513,079 $ 12,523,979
Income taxes payable..................................................... 5,608,198 -
Deferred revenue, net.................................................... 18,193,871 70,242,373
Capital lease obligations, current portion............................... 5,967 -
Other current liabilities................................................ 166,857 1,912,478
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Total current liabilities................................................ 32,487,972 84,678,830
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Deferred revenue, net of current portion................................. 13,907,361 22,123,009
Capital lease obligations, net of current portion........................ 27,858 -
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Total liabilities........................................................ $ 46,423,191 $ 106,801,839
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Commitments and contingencies
Stockholders' equity
Preferred stock -- $.0001 par value, 5,000,000 shares authorized; Series
A convertible preferred; 4,694,333 issued and outstanding at December 31,
1999 and none issued and outstanding at September 30, 2000
(liquidation preference of $16,094,844)............................... 469 -
Common stock -- $.0001 par value, 200,000,000 shares authorized;
21,065,047 shares issued and outstanding at December 31, 1999, and
36,731,708 issued and outstanding at September 30, 2000............... 2,106 3,673
Additional paid-in capital............................................... 36,709,821 204,908,931
Unearned compensation.................................................... (2,647,770) (5,181,728)
Accumulated deficit...................................................... (12,151,771) (14,279,391)
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Total stockholders' equity............................................... 21,912,855 185,451,485
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Total liabilities and stockholders' equity............................... $ 68,336,046 $ 292,253,324
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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Register.com, Inc.
Consolidated Statement of Operations
(Unaudited)
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Three months ended Nine months ended
September 30, September 30,
1999 2000 1999 2000
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Net revenues......................... $ 2,186,342 $24,572,134 $ 4,455,404 $ 57,239,890
Cost of revenue...................... 1,096,779 6,546,454 1,421,562 15,934,154
----------- ----------- ----------- ------------
Gross Profit......................... 1,089,563 18,025,680 3,033,842 41,305,736
----------- ----------- ----------- ------------
Operating costs and expenses
Sales and marketing.................. 2,897,858 14,309,163 4,615,621 36,462,550
Research and development............. 470,120 1,353,845 1,093,672 3,307,942
General and administrative (exclusive
of non-cash compensation)......... 552,097 3,618,042 954,422 6,960,121
Non-cash compensation................ 41,442 445,495 4,572,257 1,735,588
Amortization of goodwill and other
intangibles....................... - 1,389,737 - 1,688,192
----------- ----------- ----------- ------------
Total operating costs and expenses... 3,961,517 21,116,282 11,235,972 50,154,393
----------- ----------- ----------- ------------
Loss from operations................. (2,871,954) (3,090,602) (8,202,130) (8,848,657)
Other income......................... 335,893 2,946,006 419,066 6,721,037
----------- ----------- ----------- -----------
Net loss............................. $(2,536,061) $ (144,596) $(7,783,064) $(2,127,620)
=========== ========== =========== ===========
Basic and diluted earnings (net
loss) per share................... $(0.15) $(0.00) $(0.42) $(0.07)
=========== ========== =========== ===========
Weighted average shares used in
basic and diluted net loss per
share............................. 17,295,882 32,810,931 18,368,102 29,550,167
=========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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Register.com, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
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Nine months ended September 30,
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1999 2000
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Cash flows from operating activities
Net loss........................................................................ $(7,783,064) $(2,127,620)
Adjustments to reconcile net loss to net cash provided by operating activities
Deferred revenues............................................................ 12,805,937 60,264,150
Depreciation and amortization................................................ 276,406 2,738,164
Compensatory stock options and warrants expense.............................. 4,572,257 1,735,588
Deferred income taxes........................................................ (2,190,765) (13,729,505)
Changes in assets and liabilities affecting operating cash flows
Accounts receivable.......................................................... (1,186,886) (3,959,801)
Prepaid domain name registry fees............................................ (3,456,786) (12,631,728)
Prepaid income taxes......................................................... - (6,343,486)
Other current assets......................................................... (145,540) (1,829,543)
Other assets................................................................. 30,643 -
Accounts payable and accrued expenses........................................ 4,792,523 4,010,900
Income taxes payable......................................................... 2,190,765 (5,608,198)
Other current liabilities.................................................... 132,595 1,745,621
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Net cash provided by operating activities.................................. 10,038,085 24,264,542
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Cash flows from investing activities
Purchases of fixed assets.................................................... (2,021,792) (7,365,522)
Deferred offering costs...................................................... - 390,000
Purchases of investments..................................................... (551,050) (77,570,736)
Acquisitions, net............................................................ - (11,021,202)
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Net cash used in investing activities...................................... (2,572,842) (95,567,460)
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Cash flows from financing activities
Repayment of notes payable................................................... (52,040) -
Net proceeds from issuance of common stock and warrants...................... 6,693,498 115,964,996
Net proceeds from issuance of preferred stock and warrants................... 18,130,796 -
Principal payments on capital lease obligations.............................. (7,618) (33,825)
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Net cash provided by financing activities.................................... 24,764,636 115,931,171
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Net increase in cash and cash equivalents....................................... 32,229,879 44,628,253
Cash and cash equivalents at beginning of period................................ 1,284,648 40,944,122
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Cash and cash equivalents at end of period...................................... $33,514,527 $85,572,375
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Supplemental disclosure of cash flow information
Cash paid for interest....................................................... 4,451 15,493
Cash paid for income taxes................................................... - 25,197,509
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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Register.com, Inc.
Notes to Unaudited Consolidated 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 also markets software for
creation of Internet websites and, through its subsidiary Afternic.com, Inc.,
provides a secondary market for the purchase and sale of domain names as well as
appraisal and escrow services.
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.
Principals of Consolidation
The financial statements of the Company include the accounts of the
Company and its wholly-owned subsidiaries. All significant inter-company
transactions have been eliminated in consolidation.
Organization
The Company originally operated as Forman Interactive Corp. ("Forman"),
a New York Corporation that was formed in November 1994. Pursuant to a Merger
Agreement dated June 23, 1999 by and among Register.com, a Delaware Corporation
formed in May 1999 specifically for the purpose of this merger, and Forman, the
stockholders of Forman exchanged their shares for an equivalent number of shares
of Register.com. References herein to the operations and historical financial
information of the "Company" prior to the date of the merger refer to the
operations and historical financial information of Forman.
Stock Split
In January 2000, the Company effected a 3.5 to 1 stock split. All
common and preferred shares, options, warrants and related per-share data
reflected in the accompanying financial statements and notes thereto have been
adjusted to give retroactive effect to the stock split.
2. Summary of Significant Accounting Policies
Interim Financial Statements
The interim unaudited consolidated financial statements have been
prepared by Register.com without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). In the opinion of management,
financial statements included in this report reflect all normal recurring
adjustments which Register.com considers necessary for fair presentation of the
results of operations for the interim periods covered and of the financial
position of Register.com at the date of the interim balance sheet. Certain
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information and footnote disclosures normally included in the annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. However,
Register.com believes that the disclosures are adequate for understanding the
information presented. The operating results for interim periods are not
necessarily indicative of the operating results for the entire year. These
interim financial statements should be read in conjunction with Register.com's
December 31, 1999 audited financial statements and notes thereto included in
Register.com's final prospectus filed with the SEC on March 2, 2000 in
connection with its initial public offering of common stock.
Revenue Recognition
The Company's revenues are primarily derived from domain name
registration fees, advertising and online products and services.
Domain name registration fees
Registration fees charged to end-users for registration services are
recognized on a straight-line basis over the life of the registration term.
Substantially all end-user subscribers pay for services with major credit cards
for which the Company receives daily remittances from the credit card
processors. A provision for chargebacks from the credit card processors 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 some of our private label and co-brand partners
are deducted from gross registration fees in determining net revenues.
Online products and services
Revenue from online products and services is recognized over the period
in which services are provided, generally monthly. Payments received in advance
of services being provided are included in deferred revenue.
Advertising
Advertising revenues are derived principally from short-term
advertising contracts in which the Company typically guarantees a minimum number
of impressions or pages to be delivered to users over a specified period of time
for a fixed fee. Advertising revenues are recognized ratably in the period in
which the advertisement is displayed, provided that no significant obligations
remain, at the lesser of the ratio of impressions delivered over total
guaranteed impressions or the straight line basis over the term of the contract.
To the extent that minimum guaranteed impressions are not met, the Company
defers recognition of the corresponding revenues until the guaranteed
impressions are achieved.
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3. Initial Public Offering
In March 2000, Register.com sold 5,222,279 shares of common stock
through its initial public offering including 222,279 shares through an
over-allotment option granted to the underwriters. Net proceeds from the
offering and over-allotment were approximately $115.3 million, after deducting
the discount granted to the underwriters and other offering expenses. At the
time of the initial public offering, all of Register.com's preferred stock
automatically converted into 4,694,333 shares of common stock.
4. Investment
In February 2000, the Company purchased 476,784 shares of Series A
Convertible Preferred Stock and warrants to acquire an additional 95,357 shares
of Series A Convertible Preferred Stock of Great Domains.com, Inc. ("Great
Domains"), representing approximately 10% of the outstanding voting stock of
Great Domains, for $2,500,000.
5. Acquisitions
In June 2000, the Company, through a newly formed wholly-owned
subsidiary, acquired all of the outstanding capital stock of Inabox, Inc. for
$1.0 million cash and 280,019 shares of the Company's common stock. The total
value of the transaction at the time of the acquisition was approximately $11.7
million. The acquisition has been accounted for using the purchase method of
accounting, and accordingly the purchase price has been allocated to assets
acquired and liabilities assumed based on their respective fair values.
Intangible assets, representing the unallocated excess of purchase price, plus
transaction expenses, over the net assets acquired and liabilities assumed based
on their respective fair values. Intangible assets, representing the unallocated
excess of purchase price, plus transaction expenses, over the net assets
acquired, or approximately $11.6 million has been allocated to goodwill and
other intangibles and is being amortized on a straight-line basis over a period
of 39 months.
In September 2000, the Company, through a newly formed wholly-owned
subsidiary, acquired Afternic.com, Inc. for $10.0 million cash and the issuance
of 4,378,289 shares of our common stock to the stockholders of Afternic.com, a
portion of which cash and stock was used to satisfy existing obligations of
Afternic.com. The total value of the transaction at the time of the acquisition
was approximately $47.3 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
$47.3 million has been preliminarily allocated to goodwill and other intangibles
and is being amortized on a straight-line basis over a period of 48 months.
6. Subsequent Events
In October 2000, Great Domains was purchased by VeriSign, Inc. and the
Company received $2,887,407 and 44,294 restricted shares of VeriSign common
stock in consideration for the equity security of Great Domains that it held.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
This report contains forward-looking statements relating to future
events and our future performance within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, including, without limitation, statements regarding our
expectations, beliefs, intentions or future strategies that are signified by the
words "expects", "anticipates", "intends", "believes" or similar language.
Actual results could differ materially from those anticipated in such
forward-looking statements. All forward-looking statements included in this
document are based on information available to us on the date hereof, and we
assume no obligation to update any forward-looking statements. We caution
investors that our business and financial performance are subject to substantial
risks and uncertainties. In evaluating our business, prospective investors
should carefully consider the information set forth below under the caption
"Risk Factors" in addition to the other information set forth herein and
elsewhere in our other public filings with the Securities and Exchange
Commission.
Overview
We are a provider of Internet domain name registration services
worldwide for individuals and businesses that wish to have a unique address and
branded identity on the Internet. Domain names serve as part of the
infrastructure for Internet communications, including websites, email, audio,
video and telephony.
As the first registrar to compete in the domain registration market
after the U.S. government deregulated the industry, we have processed over three
million domain registrations since June 1999. Currently, we directly register
domain names in the .com, .net and .org top level domains and we also register
over 230 country code domains, such as .co.uk for the United Kingdom, .de for
Germany and .jp for Japan.
We believe that we offer a quick and user-friendly registration process
as well as 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:
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<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 to 400 search
FirstStepSite engines
o domain name re-sale services, such as auctions, o trademark monitoring under the name Trademark
appraisals and escrow services, offered through our Guardian
subsidiary Afternic.com
</TABLE>
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Our goal is to become a one-stop resource through which our customers
will establish, maintain and enhance their presence on the Internet.
Through our network of indirect channel participants, we also provide
telecommunications companies, ISPs and other online businesses and community
websites with the ability to offer, brand and manage their own unique version of
our domain registration and website creation services.
We provide offerings for all segments of the domain name registration
market. In addition to the register.com-branded products, we offer discounted
and free domain name registration with limited functionality and limited
customer service registered through NameBargain.com and NameDemo.com.
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. 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.
In September 2000, the Company, through a newly formed wholly-owned
subsidiary, acquired Afternic.com, Inc. for $10.0 million cash and the issuance
of 4,378,289 shares of our common stock to the stockholders of Afternic.com, a
portion of which cash and stock was used to satisfy existing obligations of
Afternic.com. This transaction was accounted for using the purchase method of
accounting. As a result, Afternic.com's financial results are consolidated with
our financial results from the date of acquisition, but did not have a material
impact on the period ended September 30, 2000.
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. Beginning January 15, 2000, we supplemented our registration period
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offerings to include one-, five- and ten-year registration periods for both
initial and renewal domain name registrations in the .com, .net and .org
domains. Renewal and extension registration periods can be from one to ten
years. For our .com, .net and .org domain names, we currently charge $35 per
year and offer registration terms of one, two, five and ten years. For our
country code domains, we currently charge, on our website, approximately $40 to
$299 for one- or two-year registrations. From time to time we run promotional
campaigns to acquire additional registrations and customers, including
significant free promotions which we ran during the third quarter of 2000. We
charge the same rates for renewals as we do for corresponding initial
registration periods. Because we only began operating as a registrar in April
1999, we have processed a limited amount of registration renewals. We anticipate
that registration renewals will contribute to our net revenues as our customers'
initial registrations reach the end of their terms.
In addition to our standard registration fees, we have a number of
different fee structures for our domain registration services. Our Corporate
Services department delivers a diversified range of higher-priced services for
our corporate customers. We pay referral commissions based on a percentage of
the net registration revenues derived from registrations processed through the
participants in our network of co-brand websites and those we process though our
www.register.com website referred to us by participants in our affiliate
network. Participants in our network of private label websites pay us a fee per
registration, discounted off of our standard registration fee. In August 2000,
we added product and service offerings to expand into different segments of the
domain name registration market which we did not previously serve. These include
registrations targeted for bulk customers and registered through NameBargain.com
at a substantial discount to our standard registration fees and the use of
domain names for consumers at no charge registered through NameDemo.com limiting
the customer to one name per user as identified by a unique email address and
are offered for a duration of one year. Each of these new offerings includes a
reduced level of customer service and limited value-added products or services.
As a result of expanding into these new segments, we anticipate that in the
short-term our overall gross margin will be negatively impacted, but will
improve over the long-term if 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
and for some participants in our network of private label websites, 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, site submission to search engines 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
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material and we do not expect these revenues to be material for the foreseeable
future. We offer web-hosting through our own servers and through web-hosting
services provided by third parties. In 1999, we shifted our business model, and
have chosen to direct our resources toward our domain name registration business
and not toward our own web-hosting business. As such, while we continue to offer
our own web-hosting services, we do not actively promote this service and,
therefore, do not anticipate significant revenue growth from our own web-hosting
service in future periods. We intend, however, to continue actively promoting
web-hosting services provided by third parties.
Advertising revenues are derived from the sale of sponsorships and
banner advertisements under short-term contracts that range from one month to
one year in duration. We recognize these revenues ratably over the period in
which the advertisements are displayed provided that no significant company
obligation remains and collection of the resulting receivable is probable.
Cost of Revenues
Our cost of revenues consists of the costs associated with providing
domain name registrations and online products and services. Cost of revenues for
domain name registrations primarily consists of registry fees, depreciation on
the equipment used to process the domain name registrations, the fees paid to
the co-location facilities maintaining our equipment and fees paid to the
financial institutions to process credit card payments on our behalf. Through
January 14, 2000, we paid a $9 per year registry fee for each .com, .net and
.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 $250
for, direct, one- or two-year country code domain name registrations. The
largest component of our cost of revenues is the registry fees which, while paid
in full at the time that the domain name is registered, are recorded as a
prepaid expense and recognized ratably over the term of the registration.
Cost of revenues for our online products and services consists of fees
paid to third-party service providers, depreciation on the equipment used to
deliver the services, fees paid to the co-location facilities maintaining our
equipment and fees paid to the financial institutions to process credit card
payments on our behalf.
There are no material costs associated with our software revenues.
While we have no direct cost of revenues associated with our
advertising revenue, we do incur operational costs including salaries and
commissions, which are classified as operating expenses. We have no incremental
cost of revenues associated with advertising since we use the same equipment to
deliver the advertisements as we use for our domain name registration services.
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Operating Expenses
Our operating expenses consist of sales and marketing, research and
development, general and administrative, non-cash compensation expenses, and
amortization of goodwill and other intangible assets. Our sales and marketing
expenses consist primarily of employee salaries, marketing programs such as
advertising, registry fees associated with the domain names registered through
NameDemo.com or as part of our promotional campaigns offering free registrations
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
$1.7 million for the nine months ended September 30, 2000, and will record
approximately $4.8 million in additional non-cash compensation charges through
2004 as follows: $448,000 for the remainder of 2000, $1.8 million in each of
2001 and 2002, $714,000 in 2003 and $59,000 in 2004. These charges primarily
relate to the issuance through September 2000 of employee stock options having
exercise prices below fair market value on the date of grant. The amortization
of goodwill and other intangible assets is associated with our acquisition of
Inabox, Inc. in June 2000 and our acquisition of Afternic.com, Inc. in September
2000. The Inabox transaction was valued at approximately $11.7 million of which
approximately $11.6 million has been allocated to goodwill and other intangible
items. This amount is being amortized on a straight-line basis over 39 months.
The Afternic.com transaction was valued at approximately $47.3 million which has
been preliminarily allocated in its entirety to goodwill and other intangible
items. This amount is being amortized on a straight-line basis over 48 months.
Net Losses
We have incurred annual and quarterly losses from our operations since
our inception. We incurred net losses of $145,000 and $2.1 million for the three
and nine months ended September 30, 2000, respectively, $8.8 million for the
year ended December 31, 1999, $2.5 million and $7.8 million for the three and
nine months ended September 30, 1999, respectively, and $1.2 million for the
year ended December 31, 1998. Although we expect to become profitable beginning
in the fourth quarter of 2000 and to continue to be so in the future, 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.
Results of Operations
Because we only began operating as a domain name registrar in the
second quarter of 1999 and generated only limited revenues from domain name
registration services prior to this time, we believe that third quarter and nine
month comparisons of 1999 against 2000 are not meaningful and you should not
rely upon them as indications of our future performance. 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 prior operating results will not be
meaningful and should not be relied upon as an indication of future performance.
Due to the nascent state of the domain name registration market, anticipated
events in the market such as the introduction of multilingual domain names and
new generic top level domains and other factors, many of which are outside our
control, may cause our quarterly operating results to fluctuate significantly in
the future.
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We anticipate that in future periods net revenues from domain name
registrations will continue to be the largest component of our net revenues and
cost of domain name registrations will continue to be the largest component of
our cost of revenues.
The following table presents selected statement of operations data for
the periods indicated as a percentage of net revenues. The operating results in
any quarter are not necessarily indicative of the results to be expected for any
future period.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------- ----------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues.......................... 100% 100% 100% 100%
Cost of revenues...................... 50 27 32 28
----- ---- ----- ----
Gross Profit.......................... 50 73 68 72
----- ---- ----- ----
Operating expenses
Sales and marketing................... 133 58 104 64
Research and development.............. 21 6 25 6
General and administrative............ 25 15 21 12
Non-cash compensation................. 2 2 103 3
Amortization of Goodwill and other
intangibles........................ - 5 - 3
----- ---- ----- ----
Total operating expenses.............. 181 86 253 88
----- ---- ----- ----
Loss from operations.................. (131) (13) (185) (16)
Other income (expenses), net.......... 15 12 9 12
----- ---- ----- ----
Net income (loss)..................... (116)% (1)% (176)% (4)%
===== ==== ===== ====
</TABLE>
Nine months ended September 30, 1999 and 2000
Net Revenues
Total net revenues increased from $4.5 million for the nine months
ended September 30, 1999 to $57.2 million for the nine months ended September
30, 2000.
Domain Name Registrations. Revenues from domain name registrations
increased from $1.5 million for the nine months ended September 30, 1999 to
$46.2 million for the nine months ended September 30, 2000. This increase was
due to the shift in our business from serving as a distributor of domain names
to serving as a registrar for generic top level domain names in June 1999.
Additionally, we had $12.9 million of deferred revenue, net from domain name
registrations at September 30, 1999, while deferred revenue, net from domain
name registrations was $90.5 million at September 30, 2000. We anticipate that
revenues from domain name registrations will increase in absolute dollars in
future periods as a result of recognition of deferred revenues, growth in the
market for domain name registrations, renewals and transfers and the
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implementation of our business strategy. In addition, we anticipate that the
expansion of our services to include multilingual domain names in the .com, .net
and .org domains and the introduction of new generic top level domains will
further increase revenues generated by domain name registrations. In the three
months ended December 31, 1999, we registered 330,000 domain names in the .com,
.net, .org and country code domains, in the three months ended March 31, 2000,
we registered 923,000 domain names in these domains, in the three months ended
June 30, 2000, we registered 710,000 domain names in these domains, and in the
three months ended September 30, 2000 we registered 842,000 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. We also believe that events in the marketplace such
as the introduction of multilingual domain names and new generic top level
domains will be key factors to future growth.
Online Products and Services. Revenues from online products and
services increased 71.4% from $1.4 million for the nine months ended September
30, 1999 to $2.4 million for the nine months ended September 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, but that these revenues will increase over the long term as we
expand our online product and service offerings.
Advertising. Revenues from advertising increased from $1.6 million for
the nine months ended September 30, 1999 to $8.7 million for the nine months
ended September 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 and because of the availability of additional advertising space
on our Afternic.com, NameBargain.com and NameDemo.com websites.
Cost of Revenues
Total cost of revenues increased from $1.4 million for the nine months
ended September 30, 1999 to $15.9 million for the nine months ended September
30, 2000.
Cost of Domain Name Registrations. Cost of domain name registrations
increased from $1.0 million for the nine months ended September 30, 1999 to
$15.7 million for the nine months ended September 30, 2000. The increase was
primarily due to the shift in our business from serving as a distributor of
domain names to serving as a registrar for generic top level domain names 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.
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<PAGE>
Cost of Online Products and Services. Cost of online products and
services decreased from $379,000 for the nine months ended September 30, 1999 to
$212,000 for the nine months ended September 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 nine months
ended September 30, 1999 as compared to the nine months ended September 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 $11.2 million for the nine
months ended September 30, 1999 to $50.2 million for the nine months ended
September 30, 2000.
Sales and Marketing. Sales and marketing expenses increased from $4.6
million for the nine months ended September 30, 1999 to $36.5 million for the
nine months ended September 30, 2000. The increase was primarily due to 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
(i) the increase in salaries associated with newly hired sales, marketing and
customer service professionals and (ii) the registry fees associated with (a)
registrations effected through NameDemo.com (which was launched in August 2000)
and (b) free registrations offered through promotional campaigns run principally
in September 2000. We anticipate that sales and marketing expenses will increase
in absolute dollars as we expand our domestic and international marketing
programs and as the number of registrations through our NameDemo.com offering
increases. 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 $1.1 million for the nine months ended September 30, 1999 to $3.3 million
for the nine months ended September 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 $954,000 for the nine months ended September 30, 1999 to $7.0
million for the nine months ended September 30, 2000. The increase was primarily
due to 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.
15
<PAGE>
Non-cash Compensation. Non-cash compensation expenses decreased from
$4.6 million for the nine months ended September 30, 1999 to $1.7 million for
the nine months ended September 30, 2000. For the nine months ended September
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 nine months ended
September 30, 2000, non-cash compensation expense 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 intangibles was $1.7 million for the nine months ended
September 30, 2000 and related to the goodwill and intangibles associated with
our acquisitions of Inabox and Afternic.com. We had no amortization of goodwill
and other intangibles for the nine months ended September 30, 1999.
Other Income, Net
Other income, net consists primarily of interest income net of interest
expense. Other income, net increased from $419,000 for the nine months ended
September 30, 1999 to $6.7 million for the nine months ended September 30, 2000.
The increase was primarily due to 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 $5.7 million to $2.1 million in the nine months
ended September 30, 2000 from $7.8 million in the nine months ended September
30, 1999.
Three months ended September 30, 1999 and 2000
Net Revenues
Total revenues increased from $2.2 million for the three months ended
September 30, 1999 to $24.6 million for the three months ended September 30,
2000.
Domain Name Registrations. Revenues from domain name registrations
increased from $1.2 million for the three months ended September 30, 1999 to
$20.8 million for the three months ended September 30, 2000. The three months
ended September 30, 1999 was the first complete quarter that we served as a
registrar for generic top level domain names. The increase in revenues from that
quarter to the three months ended September 30, 2000 is attributable primarily
to the increase in volume of domain name registrations, as well as the
recognition of our deferred revenue associated with previously registered top
level domains. Our deferred revenue, net from domain name registrations at
September 30, 1999, was $12.9 million, while deferred revenue, net from domain
name registrations from domain name registrations was $90.5 million at September
30, 2000. We anticipate that revenues from domain name registrations will
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<PAGE>
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. 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. We also
believe that events in the market place such as the introduction of multilingual
domain names and new generic top level domains will be key factors to future
growth.
Online Products and Services. Revenues from online products and
services increased from $302,000 for the three months ended September 30, 1999
to $876,000 for the three months ended September 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, but that these revenues will increase over the long term as we expand
our online product and service offerings.
Advertising. Revenues from advertising increased from $674,000 for the
three months ended September 30, 1999 to $2.9 million for the three months ended
September 30, 2000 primarily due to the increased number of page views and the
volume of advertising and sponsorships sold on our www.register.com, FirstStep
and FutureSite websites. We anticipate that revenues from advertising in future
periods will increase in absolute dollars primarily for the same reasons and
because of the availability of additional advertising inventory on our
Afternic.com, NameBargain.com and NameDemo.com websites.
Cost of Revenues
Total cost of revenues increased from $1.1 million for the three months
ended September 30, 1999 to $6.5 million for the three months ended September
30, 2000.
Cost of Domain Name Registrations. Cost of domain name registrations
increased from $973,000 for the three months ended September 30, 1999 to $6.4
million for the three months ended September 30, 2000. The three months ended
September 30, 1999 was the first complete quarter that we served as a registrar
for generic top level domain names. The increase in cost from that quarter to
the three months ended September 30, 2000 is attributable primarily to the
increase in the volume of domain name registrations. 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 $124,000 for the three months ended September 30, 1999
to $107,000 for the three months ended September 30, 2000. The decrease was
primarily due to renegotiations with vendors which resulted in lower costs of
sales. 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 $4.0 million for the three
months ended September 30, 1999 to $21.1 million for the three months ended
September 30, 2000.
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<PAGE>
Sales and Marketing. Sales and marketing expenses increased from $2.9
million for the three months ended September 30, 1999 to $14.3 million for the
three months ended September 30, 2000. The increase was primarily due to the
costs associated with our television advertising campaign. The television
campaign was launched in May 2000. The increase is also attributable to (i) our
expansion of domestic and international marketing programs, (ii) the increase in
salaries associated with newly hired sales, marketing and customer service
professionals and (iii) the registry fees associated with (a) registrations
effected through NameDemo.com (which was launched in August 2000) and (b) free
registrations offered through promotional campaigns run principally in September
2000. We anticipate that sales and marketing expenses will increase
substantially in absolute dollars as we continue to expand our domestic and
international marketing programs and as the number of registrations through our
NameDemo.com offering increases. 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 $470,000 for the three months ended September 30, 1999 to $1.4 million for
the three months ended September 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 $553,000 for the three months ended September 30, 1999 to $3.6
million for the three months ended September 30, 2000. The increase was
primarily due to 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.
Non-cash Compensation. Non-cash compensation expenses increased from
$41,000 for the three months ended September 30, 1999 to $445,000 for the three
months ended September 30, 2000. For the three months ended September 30, 1999
and 2000, non-cash compensation expenses 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 intangibles was $1.4 million for the three months ended
September 30, 2000 and related to the goodwill and intangible items associated
with our acquisition of Inabox and Afternic.com. We had no amortization of
goodwill and other intangibles for the three months ended September 30, 1999.
Other Income, Net
Other income, net consists primarily of interest income net of interest
expense. Other income, net increased from $336,000 for the three months ended
September 30, 1999 to $2.9 million for the three months ended September 30,
2000. The increase was primarily due to interest earned on our cash balance as a
result of our equity financings, including our initial public offering and cash
provided by operations.
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Net Loss
Net loss decreased $2.4 million to $145,000 in the three months ended
September 30, 2000 from $2.5 million in the three months ended September 30,
1999.
Liquidity and Capital Resources
Historically, we funded our operations and met our capital expenditure
requirements primarily through private sales of equity securities, cash
generated from operations, and borrowings. We issued 5,222,279 shares of our
common stock to the public on March 3, 2000, which generated approximately
$115.3 million after deducting the underwriting discount and other offering
expenses.
Our business generated $10.0 million and $24.3 million of cash from
operations during the nine months ended September 1999 and 2000, respectively.
The increase in cash generated from operations was primarily due to increased
domain name registrations.
Net cash used for investing activities was $2.6 million and $95.6
million for the nine months ended September 30, 1999 and 2000, respectively. For
the nine months ended September 30, 1999, cash used for investing activities
related primarily to the purchase of property and equipment and investment in
our systems infrastructure. For the nine months ended September 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 acquisitions of Inabox and Afternic.com, and our
investment in short-term investments.
We generated $24.8 million and $115.9 million in cash from financing
activities for the nine months ending September 30, 1999 and 2000, respectively.
For the nine months ended September 30, 1999, substantially all of the financing
activities were private sales of equity securities. For the nine months ended
September 30, 2000, substantially all of these financing activities were
attributable to our initial public offering.
Although we have no material commitments for capital expenditures or
other long-term obligations, we anticipate that we will substantially increase
our capital expenditures and lease commitments consistent with our anticipated
growth in operations, infrastructure and personnel, including the addition of
new products and services, implementation of additional co-location facilities
and various capital expenditures associated with expanding our facilities. We
currently anticipate that we will continue to experience significant growth in
our operating expenses for the foreseeable future and that our operating
expenses will be a material use of our cash resources. We may have additional
opportunities to expand our business by providing registry services for new
generic top level domains. In the event that we are afforded these opportunities
and pursue them, we expect our capital expenditures to further increase. 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.
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RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should consider carefully the risks described below, together with the other
information contained in this report. If any of the following events actually
occurs, our business, financial condition and results of operations may suffer
materially. As a result, the market price of our common stock could decline, and
you could lose all or part of your investment in our common stock.
Risks Related to Our Industry and Our Business
We have a limited operating history as a domain name registrar and expect to
encounter difficulties faced by early-stage companies.
We only recently entered the domain name registration industry. In
February 1998, we began providing a consumer interface for registering domain
names in the .com, .net, .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 although we expect to be profitable in the
quarter ended December 31, 2000, we cannot assure you that we will achieve or
sustain profitability.
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 $2.1 million for the nine months ended September
30, 2000. As of September 30, 2000, our accumulated losses totaled $14.3
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 nine months ended September 30, 2000 and expect to be
profitable for the three months ending December 31, 2000, 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 be reduced in future periods 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 nine months ended September 30, 2000, we recorded a $1.7
million non-cash compensation charge. Based principally on grants of common
stock, stock options and warrants made to date, we will record approximately
$4.8 million of additional non-cash compensation through 2004 as follows:
$448,000 for the remainder of 2000, $1.8 million in each of 2001 and 2002,
$714,000 in 2003 and $59,000 in 2004. These charges will reduce our earnings in
future periods.
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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 introduction of competition into the domain name
registration industry in 1999, 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.
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 strengthened 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. Based on
VeriSign's press release dated October 25, 2000, Network Solutions registered
approximately 2.2 million net new registrations in the .com, .net and .org
domains and renewed and extended over 620,000 names for the three months ended
September 30, 2000. Network Solutions' net new registrations represent
approximately 43% of all new registrations in these domains for the period.
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Network Solutions' exclusive control over the registry for the .com, .net and
.org domains has given it an advantage over all competitive registrars.
The Internet domain name registration system is composed of two
principal functions: registry and registrar. Registries maintain the database
that contain names registered within the top level domains and their
corresponding Internet protocol addresses. Registrars act as intermediaries
between the registry and individuals and businesses, referred to as registrants,
seeking to register domain names. The agreements among Network Solutions, ICANN
and the U.S. Department of Commerce have given Network Solutions the exclusive
right to operate and maintain the registry for the .com, .net and .org domains
at least until November 30, 2003. Registrars other than Network Solutions are
known in the industry as "competitive registrars." As the exclusive registry for
these domains, Network Solutions receives from us, and every other competitive
registrar, $6 per domain name per year. Although registry fees may not be used
directly to fund Network Solutions' registrar business, the substantial net
revenues from these fees, and the certainty of receiving them, provide Network
Solutions significant advantages over any competitive registrar.
If Verisign sells its registry business 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. If Verisign
sells its registrar business, its registry business may begin to compete with
registrars in providing registrants with value-added products and services.
The agreements among Network Solutions, ICANN and the U.S. Department
of Commerce provide for Network Solutions to act as the registry for the .com,
.net and .org domains until November 30, 2003. If Network Solutions separates
its registry and registrar operations by May 9, 2001, the term of the registry
exclusivity extends for an additional four years to November 30, 2007. If
Verisign sells its registrar business, its registry business may begin to
compete with registrars in providing registrants with value-added products and
services. If Verisign sells its registry business, it 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 Verisign's registrar business or the entry of the
registry into the market for value-added products and services could have a
material adverse effect on our business, financial condition and results of
operations.
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.
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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 November 10, 2000, ICANN had accredited 145
competitive registrars, including us, to register domain names in the .com, .net
and .org domains. As of November 10, 2000, Network Solutions and 66 other
registrars, not including us, were registering domain names in these domains. An
additional 77 registrars have been accredited to register but are not yet
registering domain names, and 7 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 have made it difficult for us to maintain our
current market share and contributed to a sequential quarterly decline in the
number of paid registrations we performed since the first quarter of 2000. If we
continue to lose market share and experience a decline in paid registrations,
our business, financial condition and results of operations would be materially
adversely affected. 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.
Increasing competition in the domain name registration industry, could force us
to reduce our prices for our core products and services, which would negatively
impact our results of operations.
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In response to increasing competition in the domain name registration
industry, we may be required, by market factors or otherwise, to reduce, perhaps
significantly, the prices we charge for our core domain name registration and
related products and services. Some of our competitors offer domain name
registration services at a wholesale price level minimally above the $6 registry
fee. Other competitors, including Network Solutions, have reduced their pricing
for domain name registrations during the past six months both for short-term
promotions and on a permanent basis. Further, some of our competitors are
offering domain name registrations for free and derive their revenues from other
sources. In response to competitive challenges, we continue to experiment with
different promotions and price points for our core products and services. In
August 2000, we added our NameBargain.com and NameDemo.com product and service
offerings to expand into different segments of the domain name registration
market we did not previously serve. Through NameBargain.com we offer
registrations at a substantial discount to our standard registration fees
targeted for bulk customers and through NameDemo.com we offer customers the
right to use a domain name for free, limited to one name per customer as
identified by a unique email address. Each of these new offerings also includes
a reduced level of value-added services. Reducing the prices we charge for
domain name registration services through our core register.com branded
offerings in order to remain competitive would materially adversely affect our
results of operations.
If our new services and promotions do not result in additional future revenues,
our business, financial condition and results of operation could be materially
adversely affected.
During the three months ended September 30, 2000, in addition to
running significant discount and free promotional campaigns to acquire
additional registrations and customers, we launched NameBargain.com through
which we offer reduced price one-year subscriptions for domain names and
NameDemo.com through which we offer customers the one-year right to use a domain
name for free. NameBargain.com targets bulk customers to whom we expect to
market Afternic.com's re-sale services as an upsell opportunity. NameDemo.com
targets individuals who are interested in a domain name for personal use but are
not certain what to do with it. We cannot assure you that we will cover a
significant portion of our costs for NameDemo.com through advertising revenue or
that it will prove to be an effective customer acquisition tool over time. We
cannot assure you that the business strategies underlying NameBargain.com,
NameDemo.com and the various promotions we ran in the three months ended
September 30, 2000 will be successful. If these subscribers do not renew their
subscriptions with us or do not convert to our higher margin products and
services, our business, financial condition and results of operation could be
materially adversely affected.
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 in paid registrations may decline as they have for the three months
ended September 30, 2000 and June 30, 2000. Such a continuing decline could
materially adversely affect our business, results of operations and financial
condition.
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.
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The growth of our business depends in part on our customers' renewal of
their domain name registrations through us. Having only become an accredited
registrar in 1999, we have 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 those customers who will renew their registrations will do so through
us. If our customers decide, for any reason, not to renew their registrations
through us, our revenues from domain name registrations will decrease and our
business, financial condition and results of operations could be materially
adversely affected.
If we are restricted from offering 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 and recent
ICANN announcements, we expect that ICANN will approve the introduction of new
generic top level domains, such as .web, .firm or .store for introduction in the
first or second quarter of 2001. We cannot assure you that any additional names
will be approved in our expected time frame, or at all, or if they are, that we
will be permitted to offer registrations in these domains. Furthermore, we
cannot assure you that we will successfully market our capabilities in these
areas or that customers will rely on us to provide registration services within
these domains. Our business, financial condition and results of operations could
be materially adversely affected if we are restricted from registering names in
the new top level domains or if substantial numbers of our customers turn to
other registrars for these registration needs.
If the registry bids we have submitted to ICANN are not selected, we will not
benefit from the additional revenues generated from the registry fees associated
with registrations of new generic top level domains.
In September 2000, Afilias, LLC, a consortium of nineteen
ICANN-accredited registrars including us, submitted a bid to ICANN to operate an
unrestricted generic top level domain name registry for the .info, .site and
.web domain names. In October 2000, RegistryPro, a joint venture between Virtual
Internet, a European provider of Internet hosting, naming and online brand
management services, and us, submitted a bid to ICANN to form a new registry for
the top level domain .pro which will be exclusively for accredited
professionals. As a registry, Afilias or RegistryPro would earn revenue from
registry fees paid by registrars to register names in these top level domains.
If either of these ventures is not selected as a registry for the new generic
top level domains that are introduced, we will not be able to participate in
these particular business opportunities.
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If Afilias' or RegistryPro's bids are selected by ICANN and we choose to pursue
either or both ventures, we cannot assure you that they will be successful. In
addition, we may incur significant capital expenditures to establish and develop
their products and services. Such expenditures would reduce the financial
resources we could use for our primary business.
In their early stages, these ventures would require additional
infusions of capital as they establish themselves as registries of new top level
domains. In addition, we may spend a significant amount of capital to build
systems to support each of Afilias and RegistryPro and to market their services.
We cannot accurately predict whether there will be a demand for the domain names
for which these ventures would serve as the registry, when or the extent to
which we will be able to generate revenues from Afilias and RegistryPro, or if
either of these ventures will be profitable. If there is no demand, or demand
that is lower than anticipated, for these new generic top level domains, or if
the returns on our capital expenditures are lower than expected or take longer
to materialize, our primary business, financial conditions and results of
operation would be materially adversely affected.
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 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, including our recent acquisitions of Inabox and
Afternic.com, 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 possible changes to our business model in ways that might impact upon
our accreditation status with ICANN.
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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 and we may not achieve the benefits we expect from our
acquisitions. 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.
Our acquisition of Afternic.com could adversely affect our financial results.
If the benefits of our acquisition of Afternic.com do not exceed the
costs associated with this acquisition, including any dilution to our
stockholders resulting from the issuance of shares in connection with the
acquisition, our financial results, including earnings per share, could be
adversely affected. We expect to incur an on-going quarterly non-cash
amortization of approximately $985,000 for 48 months.
If our customers do not find our expanded product and service offerings
appealing, among other things, we may remain dependent on domain name
registrations as a primary source of revenue and our net revenues may fall below
anticipated levels.
Part of our long-term strategy includes diversifying our revenue base
by offering value-added products and services, including website applications
that enable electronic commerce and other business services, to our customers.
We expect to incur significant costs in acquiring, developing and marketing
these new products and services. Domain name registration services generated
approximately 81% of our net revenues during the nine months ended September 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. Although our decision
to acquire Afternic.com was based on our belief that its products and services
would complement our own, we cannot assure you that we will succeed in
developing and integrating these new products and services or that they will
generate significant revenues.
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 10% of our domain name
registrations will be purchased 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.
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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 nine months ended September 30, 2000, our number of
full-time employees grew from approximately 122 to approximately 229. 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.
If we are unable to attract and retain highly qualified management and technical
personnel, our business may be harmed.
Our success depends in large part on the contributions of our senior
management team and technology personnel and in particular Richard D. Forman,
our President and Chief Executive Officer. We face intense competition in hiring
and retaining personnel from a number of sectors, including technology and
Internet companies. Many of these companies have greater financial resources
than we do to attract and retain qualified personnel. In addition, although we
maintain employment agreements with Mr. Forman and Jack S. Levy, our General
Counsel, we have not in the past executed, and do not have any current plans to
execute, employment agreements with our other employees. As a result, we may be
unable to retain our employees or attract, integrate, train and retain other
highly qualified employees in the future. During the third quarter of 2000, our
Vice President of Finance and Accounting, Alan G. Breitman, and our Senior Vice
President of Sales and Marketing, Sascha Mornell, resigned from our Company. Our
Chief Financial Officer, Cindy E. Horowitz also resigned from our Company in
November 2000. The loss of services of these or any other executive officers or
the loss of the services of other key employees could harm our business. In
addition, if we fail to attract new personnel, particularly in finance, or
retain and motivate our current personnel, our business, financial condition and
results of operations could be materially adversely affected.
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We have entered the secondary market for domain names.
We cannot assure you that we will be able to generate revenues or profits from
operations in this market or that ICANN will not impose restrictions on the
ability of accredited registrars to conduct business in this sector.
The secondary market for domain names is still in its nascent stages of
development. In September 2000, we acquired Afternic.com, Inc. a business which
has only been in operation since September 1999. Through Afternic.com we provide
a secondary market for companies and individuals to buy and sell domain names,
as well as appraisal and escrow services for these names. Because the industry
is so new, we cannot accurately predict whether the secondary market will
continue to grow, when or the extent to which we will be able to generate
revenues from this sector, or if we will be profitable in this sector.
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
pronouncements by ICANN we are uncertain as to what restrictions if any ICANN
may impose on us in terms of integrating Afternic.com's secondary market
operations with our current operations. In July 2000, 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. If we cannot fully integrate
Afternic.com's operations with our own, we may not be able to achieve the
anticipated benefits of the merger and our business, financial condition and
results of operations may be materially adversely affected.
Our business will suffer if we fail to build awareness of our brand name.
Building recognition of our brand is critical to attracting additional
traffic and customers to our website, new business alliances, acquisition
candidates, advertisers and employees. Accordingly, in addition to segment
directed marketing, 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
continue to make significant expenditures 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 registrations. As of November 10, 2000, Network
Solutions and 66 other registrars, not including us, were registering domain
names through the Shared Registration System. The 77 other accredited registrars
and the 7 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.
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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 or if the country code registries fail to process our customers'
registrations in a timely and accurate fashion, our business, financial
condition and results of operations would be materially adversely affected.
We cannot assure you that our standard agreements will be enforceable.
We rely on several agreements that govern the terms of the services we
provide to our users, including domain name registration and secondary market
services. These agreements contain a number of provisions intended to limit our
potential liability arising from our providing services for our customers
including liability resulting from our failure to register or maintain domain
names. As most of our customers use our services online, execution of our
agreements by customers occurs electronically or, in the case of our terms of
use, is deemed to occur because of a user's continued use of the website
following notice of those terms. We believe that our reliance on these
agreements is consistent with the practices in our industry but if a court were
to find that either one of these methods of execution is invalid or that key
provisions of our services agreements are unenforceable, we could be subject to
liability that would have a materially adverse effect on our business, financial
condition or results of operations.
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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. 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, the
adoption of new laws or regulations regarding the use of personal information
that require us to change the way we conduct our business or an investigation of
our privacy practices could make it cost-prohibitive to operate our business and
prevent us from pursuing our business strategies.
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.
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We rely upon copyright, trade secret and trademark law, invention
assignment agreements and confidentiality agreements to protect our proprietary
technology, including software and applications and trademarks, and other
intellectual property to the extent that protection is sought or secured at all.
We do not currently have patents on any of our technologies or processes. While
we typically enter into confidentiality agreements with our employees,
consultants and strategic partners, and generally control access to and
distribution of our proprietary information, we cannot ensure that our efforts
to protect our proprietary information will be adequate to protect against
infringement and misappropriation of our intellectual property by third parties,
particularly in foreign countries where laws or law enforcement practices may
not protect our proprietary rights as fully as in the United States.
Furthermore, because the validity, enforceability and scope of
protection of proprietary rights in Internet-related industries is uncertain and
still evolving, we cannot assure you that we will be able to defend our
proprietary rights. In addition to being difficult to police, once any
infringement is detected, disputes concerning the ownership or rights to use
intellectual property could be costly and time-consuming to litigate, may
distract management from operating the business and may result in our losing
significant rights and our ability to operate our business.
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.
The nature of our services may subject us to alleged infringement and other
claims relating specifically to domain names.
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As a registrar of domain names, a provider of web-hosting services, and
a participant in the secondary market for domain names, we may be subject to
various claims, including claims from third parties asserting 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.
The Anticybersquatting Consumer Protection Act, enacted in November
1999 to curtail a practice commonly known in the industry as "cybersquatting," a
problem that could be exacerbated with any additional top level domain names
that may be established by ICANN. A cybersquatter is generally defined in this
Act as one who registers a domain name that is identical or similar to another
party's trademark or the name of a living person, in each case with the bad
faith intent to profit from use of the domain name. Although the Act states that
registrars may not be held liable for registering or maintaining a domain name
for another person absent a showing of the registrar's bad faith intent to
profit from the use of the domain name, registrars may be held liable if they
fail to comply promptly with procedural provisions. If we are held liable under
this law, any liability could have a material adverse effect on our business,
financial condition and results of operations.
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, the application of these laws and
precedent to the secondary market is still undeveloped. Therefore, we cannot
predict what our potential liabilities may be with respect to allegations that
our participation in the secondary market facilitates cybersquatting. Any
determination that our secondary market activities facilitate cybersquatting
could have a material adverse effect on our business, financial condition and
results of operations.
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.
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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 websites. 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 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.
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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
o to respond to technological advances and emerging industry standards
and practices on a cost-effective and timely basis.
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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 widespread use of the Internet as an advertising and marketing medium fails
to develop our future business could be materially adversely affected.
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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 15% of our net revenues for the nine months ended September 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.
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.
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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.
The introduction of tax laws targeting companies engaged in electronic commerce
could materially adversely affect our business, financial condition and results
of operations.
We file tax returns in such states as required by law based on
principles applicable to traditional businesses. However, one or more states
could seek to impose additional income tax obligations or sales tax collection
obligations on out-of-state companies, such as ours, which engage in or
facilitate electronic commerce. A number of proposals have been made at state
and local levels that could impose such taxes on the sale of products and
services through the Internet or the income derived from such sales. Such
proposals, if adopted, could substantially impair the growth of electronic
commerce and materially adversely affect our business, financial condition and
results of operations.
Legislation limiting the ability of the states to impose taxes on
Internet-based transactions has been enacted by the United States Congress.
However, this legislation, known as the Internet Tax Freedom Act, imposes only a
three-year moratorium, which commenced October 1, 1998 and ends on October 21,
2001, on state and local taxes on electronic commerce. It is possible that the
tax moratorium could fail to be renewed prior to October 21, 2001. Failure to
renew this legislation would allow various states to impose taxes on
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.
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The stock market has experienced extreme price and volume fluctuations
that have particularly affected the market prices of the securities of
Internet-related companies. These fluctuations may adversely affect the market
price of our common stock.
Our directors, executive officers and principal stockholders own a significant
percentage of our shares, which will limit your ability to influence corporate
matters.
As of September 30, 2000, our directors, executive officers and
principal stockholders beneficially owned approximately 33.8% of our common
stock. Accordingly, these stockholders could have significant influence over the
outcome of any corporate transaction or other matter submitted to our
stockholders for approval, including mergers, consolidations and the sale of all
or substantially all of our assets, and also could prevent or cause a change in
control. The interests of these stockholders may differ from the interests of
our other stockholders. In addition, third parties may be discouraged from
making a tender offer or bid to acquire us because of this concentration of
ownership.
Shares eligible for public sale could adversely affect our stock price.
After March 3, 2001, 2,312,325 shares will become available for sale in
the public markets upon the expiration of a lock-up agreement with us. In
addition, 221,682 shares of common stock held by the former stockholders of
Inabox are subject to lock-up agreements with us pursuant to which 11,667 shares
will be released from the lock-up on a monthly basis until the expiration of the
lock-up agreement on June 4, 2002. In addition, 4,378,289 shares of common stock
held by the former stockholders of Afternic.com are also subject to lock-up
agreements with us pursuant to which 32,392 shares will be released on a monthly
basis beginning April 15, 2001 until the expiration of the lock-up agreement on
March 15, 2004 and 3,017,831 shares will be released on March 15, 2001.
As of November 2, 2000 existing stockholders owning an aggregate of
21,418,181 shares of common stock and common stock issuable upon the exercise of
warrants had the right to require us to register their shares under the
Securities Act. If we register these shares, they can be sold in the public
market. The market price of our common stock could decline as a result of sales
by these existing stockholders of their shares of common stock in the market or
the perception that these sales could occur. These sales also might make it
difficult for us to sell equity securities in the future at a time and price
that we deem appropriate.
Our charter documents and Delaware law may inhibit a takeover that stockholders
may consider favorable.
Provisions in our amended and restated certificate of incorporation,
our amended and restated bylaws and Delaware law could delay or prevent a change
of control or change in management that would provide stockholders with a
premium to the market price of their common stock. The authorization of
undesignated preferred stock, for example, gives our board the ability to issue
preferred stock with voting or other rights or preferences that could impede the
success of any attempt to change control of the company. If a change of control
or change in management is delayed or prevented, this premium may not be
realized or the market price of our common stock could decline.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our exposure to market risk is limited to interest income sensitivity,
which is affected by changes in the general level of U.S. interest rates. We
believe that we are not subject to any material interest rate risk because a
majority of our investments are in fixed-rate, short-term securities. The fair
value of our investment portfolio or related income would not be significantly
impacted by either a 100 basis point increase or decrease in interest rates due
mainly to the fixed-rate, short-term nature of the substantial majority of our
investment portfolio. We did not have any foreign currency hedging or derivative
instruments as of September 30, 2000.
We do not enter into financial instruments for trading or speculative
purposes and do not currently utilize derivative financial instruments. We have
no long-term debt.
PART II. OTHER INFORMATION
Item 1. Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities
In September 2000, the Company, through a newly formed wholly-owned
subsidiary, acquired Afternic.com, Inc. for $10.0 million cash and the issuance
of 4,378,289 shares of our common stock to the stockholders of Afternic.com, a
portion of which cash and stock was used to satisfy existing obligations of
Afternic.com. The total value of the transaction was approximately $47.3
million.
These issuances were made in reliance upon exemptions from registration
pursuant to Section 506 of Regulation D of the Securities Act of 1933, as
amended. No underwriters were involved with this transaction.
(d) Use of Proceeds
Through September 30, 2000, Register.com has used $82.4 million of the
net proceeds from the initial public offering for general working capital
(including the payment of taxes), $10.0 million as payment in the Afternic.com
transaction and $6.8 million for capital expenditures. Register.com has invested
the remainder of the net proceeds in short-term, interest bearing, investment
grade obligations pending their use for other purposes.
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Item 2. Exhibits and Report on Form 8-K
(a) Exhibits
Number Description
------ -----------
27.1 Financial Data Schedule.
(b) The following report on Form 8-K was filed during the quarter ended
June 30, 2000:
On September 29, 2000, we filed a report on Form 8-K, pursuant to Item
2 of such form, to report that on September 15, 2000, we acquired all of the
outstanding capital stock of Afternic.com, Inc., a company that provides a
secondary market for companies and individuals to buy and sell domain names, as
well as appraisal and escrow services for these names.
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Item 3. Signatures
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGISTER.COM, INC.
Date: November 14, 2000 By: /s/ Glenn Story
----------------
Name: (Principal Financial and Accounting Officer)
Title: Corporate Controller
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