REGISTER COM INC

 

 

 

Filing Type:

S-1/A

Description:

Registration Statement

Filing Date:

Mar 2, 2000

Period End:

N/A

 

 

Primary Exchange:

NASDAQ - National Market System

Ticker:

RCOM

 

 

 


Table of Contents

 

 

 

 

To jump to a section, double-click on the section name.

 

S-1/A

 

.............................. 2

............................ 2

.......................... 8

.......................... 9

....................... 27

....................... 28

....................... 28

....................... 30

....................... 30

....................... 33

....................... 37

.................... 38

.................... 55

.................... 63

.................... 63

.................... 64

.................... 70

.................... 71

.................... 72

.................... 76

.................... 76

.................... 80

.................... 83

.................... 87

... 91

...................................... 92

.................... 92

.................... 93

...................................... 94

................. 101

................. 101

................. 105

................. 106

................. 107

................. 108

................. 108

................. 108

................. 110

................. 110

................. 111

................ 115

................... 115

................. 115

................... 116

................... 118

................. 118

................... 120

................. 122

 

EX-5.1

 

.................... 124

 

EX-10.13

 

.............. 125


 

 

     

 

     

  

 

    As filed with the Securities and Exchange Commission on March 2, 2000.

                                                     Registration No. 333-93533

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

   

                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549

                                ---------------

                                   Amendment

  

                                    No. 5 to

   

                                   FORM S-1

                            REGISTRATION STATEMENT

                                     UNDER

                          THE SECURITIES ACT OF 1933

                                ---------------

                              Register.com, Inc.

            (Exact name of registrant as specified in its charter)

      

        

 

             Delaware                         7379                        11-3239091

                                                                                    

(State or other jurisdiction of   (Primary standard industrial         (I.R.S. employer

incorporation or organization)     classification code number)       identification  number)

       

 

                               ---------------

                         575 Eighth Avenue, 11th Floor

                              New York, NY 10018

                           Telephone: (212) 798-9100

(Address, including zip code, and telephone number, including area code, of

                   registrant's principal executive offices)

                                ---------------

                               Richard D. Forman

                     President and Chief Executive Officer

                              Register.com, Inc.

                         575 Eighth Avenue, 11th Floor

                              New York, NY 10018

                           Telephone: (212) 798-9100

(Name, address, including zip code, and telephone number, including area code

                             of agent for service)

                                ---------------

                                  Copies to:

 

    Alexander D. Lynch, Esq.                   Stacy J. Kanter, Esq.

     Scott L. Kaufman, Esq.         Skadden, Arps, Slate, Meagher & Flom LLP

Brobeck, Phleger & Harrison LLP                 Four Times Square

  1633 Broadway, 47th Floor                    New York, NY 10036

    New York, NY 10019                           (212) 735-3000

      (212) 581-1600

                                ---------------

     Approximate date of commencement of proposed sale to the public: As soon

as practicable after the effective date of this Registration Statement.

 

     If any of the securities being registered on this Form are to be offered

on a delayed or continuous basis pursuant to Rule 415 under the Securities Act

of 1933, check the following box. / /

     If this Form is filed to register additional securities for an offering

pursuant to Rule 462(b) under the Securities Act, check the following box and

list the Securities Act registration statement number of the earlier effective

registration statement for the same offering. / / ________

     If this Form is a post-effective amendment filed pursuant to Rule 462(c)

under the Securities Act, check the following box and list the Securities Act

registration statement number of the earlier effective registration statement

for the same offering. / / ________

     If this Form is a post-effective amendment filed pursuant to Rule 462(d)

under the Securities Act, check the following box and list the Securities Act

registration statement number of the earlier effective registration statement

for the same offering. / / ________

 

     If delivery of the prospectus is expected to be made pursuant to Rule 434,

check the following box. / /

 

     

 

                                ---------------

                        CALCULATION OF REGISTRATION FEE

 

      

        

===============================================================================================================

                                                     Proposed Maximum      Proposed Maximum

     Title of Each Class of        Amount to be          Offering              Aggregate           Amount of

  Securities to be Registered     Registered(1)    Price Per Share (2)    Offering Price (2)    Registration Fee

----------------------------------------------------------------------------------------------------------------

                                                                                                 

Common stock, par value $0.0001

 per share ....................    5,750,000      $ 21.00                    $120,750,000         $  31,878(3)

===============================================================================================================

       

 

-----------

(1) Includes 750,000 shares of common stock to cover the over-allotment option

    granted to the underwriters.

(2) Estimated solely for purposes of calculating the registration fee in

    accordance with Rule 457(a).

  

(3) Previously paid.

   

                               ---------------

     The Registrant hereby amends this registration statement on such date or

dates as may be necessary to delay its effective date until the Registrant

shall file a further amendment which specifically states that this registration

statement shall thereafter become effective in accordance with Section 8(a) of

the Securities Act of 1933 or until the registration statement shall become

effective on such date as the Securities and Exchange Commission, acting

pursuant to said Section 8(a), may determine.

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

     

 

 

The information in this preliminary prospectus is not complete and may be

changed. We may not sell these securities until the registration statement

filed with the Securities and Exchange Commission is effective. This

preliminary prospectus is not an offer to sell and is not soliciting an offer

to buy these securities in any jurisdiction where the offer or sale is not

permitted.

 

  

Subject to Completion, Dated March 2, 2000

   

 

 

[GRAPHIC OMITTED]

 

--------------------------------------------------------------------------------

 Register.com, Inc.

 5,000,000 Shares

 Common Stock

--------------------------------------------------------------------------------

 This is an initial public offering of common stock of Register.com, Inc. We

 anticipate that the initial public

 offering price will be between $19.00 and $21.00 per share.

 

 

 We have applied to have our common stock approved for quotation on The Nasdaq

 National Market under the symbol "RCOM."

 

 

 Investing in our common stock involves risks. See "Risk Factors" beginning on

 page 8.

 

 

 NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES

 COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED OR

 PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO

 THE CONTRARY IS A CRIMINAL OFFENSE.

 

 

 

 

 

 

 

 

                                                Per Share     Total

                                                -----------   --------

 Public offering price                             $          $

 Underwriting discounts and commissions            $          $

 Proceeds, before expenses, to Register.com        $          $

 Proceeds, before expenses, to selling

 stockholders                                      $          $

 

 The underwriters have the right to purchase up to an additional 750,000 shares

 from us and the selling stockholders at the public offering price within 30

 days from the date of this prospectus to cover over-allotments. We will not

 receive any of the proceeds from the sale of shares by the selling

 stockholders.

 

 

 

 

 

  Deutsche Banc Alex. Brown                         Thomas Weisel Partners LLC

 

 

 

                 Legg Mason Wood Walker

                       Incorporated

 

 

 

                                                             Wit SoundView

 

 

     The date of this prospectus is     , 2000.

     

 

 

[Inside Front Cover]

 

Internet screen shot of Register.com home page.

 

"Value-Added Products and Services" above six button links for online products

and services featured on the Register.com website.

 

"Co-Branded Websites" above the register.com and Net Objects logo taken from a

co-branded website.

 

 

 

     

 

                              PROSPECTUS SUMMARY

 

 

     You should read the following summary together with the more detailed

information regarding our company and the common stock we are selling in this

offering, including the risk factors and our financial statements and related

notes, included elsewhere in this prospectus.

 

 

 

                              Register.com, Inc.

 

 

Our Business

 

 

     We are a provider of Internet domain name registration services worldwide.

Domain names, such as mybrand.com, are the equivalent of addresses on the

Internet and are registered through companies known as registrars. Domain names

serve as part of the infrastructure for Internet communications and registering

a domain name is one of the first steps for individuals and businesses seeking

to establish an online identity. We believe that we offer a quick and

user-friendly registration process and responsive and reliable customer

support. We also offer a suite of value-added products and services targeted to

assist our customers in developing and maintaining their online identities,

including:

 

 

 

      

        

         Products and Services                     Products and Services

             Provided by Us                         Provided by Others

                                            

 

  

  o domain name forwarding, which            o email

    allows customers to link their new

    domain names to their existing

    websites

   

                                        

  o real-time domain name management,        o maintaining, storing and connecting

    which allows customers to view             websites to the Internet, also      

    online and change, on an                   known as web hosting                

    instantaneous basis, domain name                                              

    information                              o website-creation tools            

                                           

       

 

Our goal is to become a one-stop resource through which our customers will

establish, maintain and enhance their presence on the Internet.

 

 

     In June 1999, we became the first registrar other than Network Solutions,

Inc. to register domain names in the .com, .net and .org domains directly on

behalf of customers. For the three months ended December 31, 1999, we

registered approximately 308,000 domain names in these domains, representing an

increase of 94% over the approximately 159,000 domain names we registered in

these domains for the three months ended September 30, 1999.

 

 

     We face a number of risks that you should consider before you decide to

buy our common stock. These risks include, among other things, that we have

never been profitable and anticipate incurring additional losses in the

foreseeable future, that our accumulated losses totaled $12.2 million as of

December 31, 1999 and that, following the consummation of the offering, our

existing stockholders will hold approximately 84% of our outstanding common

stock and will be able to control the election of directors and all other

matters requiring stockholder approval. In addition, we face substantial

competition from Network Solutions in particular and in the industry in

general. Based on its press release dated February 10, 2000,

 

 

                                       3

     

 

Network Solutions registered 1.6 million net new registrations in the .com,

.net and .org domains for the three months ended December 31, 1999,

representing approximately 71% of new registrations in these domains for the

period. As of February 26, 2000, Network Solutions and 27 other registrars, not

including us, were registering domain names in these domains. An additional 62

registrars have been accredited to register but are not yet registering domain

names, and 18 registrars have qualified to register domain names but have not

yet signed the agreements required for registering domain names, in the .com,

.net and .org domains.

 

     We derive our revenues from domain name registration fees, online products

and services and advertising. Our net revenues increased 137% from $2.2 million

for the three months ended September 30, 1999 to $5.2 million for the three

months ended December 31, 1999. Our cost of revenues increased 51% from $1.1

million for the three months ended September 30, 1999 to $1.7 million for the

three months ended December 31, 1999. Our net loss decreased 61% from $2.5

million for the three months ended September 30, 1999 to $1.0 million for the

three months ended December 31, 1999.

 

Market Opportunity

 

     As a result of the growth of the Internet and the introduction of

competition into the domain name registration industry, we believe there is

great potential for growth in the market for domain name registrations. We also

believe that this growth will be driven by individuals' and businesses' desire

for an online identity and brand, as well as the need to promote products,

services and events. We estimate that growth in global domain name

registrations will accelerate over the next few years from approximately 11

million domain names registered through September 30, 1999 to approximately 140

million domain names by the end of 2003, based on our internal calculations.

 

Our Solution

 

     Registration Services. Our core expertise is providing domain name

registration services. Domain names are generally classified according to

industry custom either as "generic" for the .com, .net, .org, .gov, .edu and

.mil domains or as "country code" if they are associated with a particular

country. In addition, the domain name system is organized according to industry

custom by levels so that, for example, in the domain name mybrand.com, .com is

the top level domain and mybrand is the second level domain. We register domain

names in the .com, .net and .org generic domains and are able to register

domain names in over 140 country code domains, of which 26 may currently be

registered directly through our www.register.com website.

 

     In addition, through a dedicated team of account managers, our Corporate

Services department which targets the needs of corporate customers provides

domain name registration and other services, such as multiple domain name

registrations and international brand protection.

 

     Online Products and Services. We have assembled a suite of targeted

products and services to assist our customers with their online identities,

including email, web hosting and real-time domain management.

 

     Customer Service. Our customer support group seeks to provide dependable

and timely resolution of customer inquiries, 24 hours per day, seven days per

week. We manage and respond to customer inquiries through our internally

developed Internet-based customer care tracking system. We have teams of

customer service representatives who specialize in key aspects of our business,

and who are informed about our products, services and technology through our

ongoing training.

 

     Distribution. We believe that our direct and indirect distribution

channels enable us to reach a broad range of potential customers with products

and services targeted to their needs and to increase our exposure across the

market. We provide our products and services

 

 

                                       4

     

 

directly to our customers through our www.register.com website as well as

through our Corporate Services department. We also offer domain name

registration services indirectly through our network of co-brand and private

label websites, which include Internet service providers, also known as ISPs,

web-hosting companies and other companies whose websites may appeal to our

target customers. A co-brand network participant offers our domain name

registration services through a website similar in appearance to our

www.register.com website, but branded with the participant's and our logos. A

customer typically accesses a co-brand website through the participant's home

page. A co-brand website also typically provides links back to the

participant's website to facilitate the sale of products and services by the

participant. A private label network participant offers our domain name

registration and other services through a website of its own design but the

actual domain name registrations are processed through our systems. Private

label websites may also include the language "powered by register.com."

 

 

Our Strategy

 

     Our objectives are to continue to increase our share of domain name

registrations, to differentiate our products and services and to develop

long-term relationships with our customers by helping them to establish,

maintain and enhance their online presence. Our key strategies for achieving

these objectives include:

  

     o introducing new products and services, including the following that we

       anticipate introducing this year:

 

            o billing consolidation for registrants with multiple domain names

 

            o account masking, to allow the domain name registrant to remain

              anonymous

 

            o a service designed to monitor usage of our customer's trademarks

              on the Internet

   

     o enhancing awareness of our brand;

 

     o extending our distribution channels;

 

     o expanding our Corporate Services department;

 

     o pursuing strategic acquisitions;

 

     o offering names in additional domains; and

 

     o expanding internationally.

 

 

Our History

 

     We were founded by Richard D. Forman, Peter A. Forman and Dan B. Levine as

Forman Interactive Corp., a New York corporation, on November 23, 1994. Forman

Interactive merged with and into Register.com, Inc., a Delaware corporation, on

June 23, 1999. Our principal executive offices are located at 575 Eighth

Avenue, 11th Floor, New York, New York 10018. Our telephone number at that

location is (212) 798-9100. References in this prospectus to "Register.com,"

"we," "our" and "us" refer to Register.com, Inc. and Forman Interactive.

 

                             --------------------

     We maintain a corporate website at www.register.com. The contents of our

website are not part of this prospectus.

 

 

                                       5

     

 

                                 The Offering

 

 

      

  

                                                               

Common stock offered by Register.com ......................  5,000,000 shares

Common stock to be outstanding after the offering .........  30,759,380 shares

Use of proceeds ...........................................  We plan to use the proceeds from

                                                             this offering for marketing, capital

                                                             expenditures, working capital,

                                                             acquisitions, investments and general

                                                             corporate purposes. Please see "Use

                                                             of Proceeds."

Proposed Nasdaq National Market symbol ....................  RCOM

        

   

 

     The foregoing information is based on the shares outstanding as of

December 31, 1999. The total number of shares of common stock that we assume

will be outstanding after the offering excludes:

 

   o 1,750 shares of common stock issued upon the exercise of stock options

      between January 1, 2000 and February 28, 2000.

 

   o 4,353,286 shares of common stock issuable upon the exercise of stock

     options outstanding as of February 28, 2000, with a weighted average

     exercise price of $7.50 per share;

 

   o 594,396 shares of common stock issuable upon exercise of stock options

     outstanding as of February 28, 2000, with an exercise price equal to the

     initial public offering price of our common stock;

 

   o 4,185,568 shares of common stock available for issuance under our stock

     option plans for options not yet granted;

 

   o 350,000 shares reserved for issuance under our employee stock purchase

     plan; and

 

   o 6,155,675 shares of common stock issuable upon exercise of outstanding

      warrants with a weighted average exercise price of $1.50 per share.

 

     Unless otherwise noted, the information in this prospectus assumes:

 

   o the conversion of each outstanding share of our preferred stock into one

     share of our common stock upon the consummation of this offering; and

 

   o no exercise of the underwriters' over-allotment option.

 

     All share numbers in this prospectus have been adjusted to reflect

3.5-for-1 stock splits of our common stock and preferred stock effected in

January 2000 as stock dividends.

 

 

                                       6

     

 

                          Our Summary Financial Data

 

     The following table summarizes financial data for our business. You should

read the summary financial data in conjunction with "Management's Discussion

and Analysis of Financial Condition and Results of Operations" and our

financial statements and the notes to those financial statements included

elsewhere in this prospectus. The pro forma basic and diluted net loss per

share data give effect to the conversion of our Exchangeable Preferred Stock

and Series A Convertible Preferred Stock at the date of original issuance.

 

 

 

 

      

         

                                                                      Year Ended December 31,

                                      ----------------------------------------------------------------------------------------

                                           1995              1996              1997              1998               1999

                                      --------------   ----------------   --------------   ----------------   ----------------

                                                                                                                

Statement of Operations Data:

 Net revenues .....................     $   87,696       $    868,018       $  713,263       $  1,319,359       $  9,644,552

 Gross profit .....................         75,297            525,878          521,724            858,207          6,562,053

 Operating expenses:

   Sales and marketing ............        166,330            935,495          366,975            863,720          7,149,693

   Research and development .......        102,901            390,814           71,471            276,687          1,767,158

   General and administrative

    (exclusive of non-cash

    compensation ) ................         94,704            743,609          263,017            795,425          2,380,190

   Non-cash compensation ..........             --                 --               --            149,682          4,929,200

                                        ----------       ------------       ----------       ------------       ------------

    Total operating expenses ......        363,935          2,069,918          701,463          2,085,514         16,226,241

 

 Net loss .........................     $ (288,638)      $ (1,714,076)      $ (205,526)      $ (1,160,748)      $ (8,776,918)

                                        ==========       ============       ==========       ============       ============

 Basic and diluted net loss per

   share ..........................     $    (0.07)      $      (0.26)      $    (0.02)      $      (0.07)      $      (0.46)

                                        ==========       ============       ==========       ============       ============

 Weighted average common

   shares used in basic and

   diluted net loss per share .....      4,429,859          6,633,905        8,884,709         15,697,013         19,117,027

                                        ==========       ============       ==========       ============       ============

 Pro forma basic and diluted net

   loss per share .................                                                                             $      (0.40)

                                                                                                                ============

 Weighted average shares used

   in pro forma basic and

   diluted net loss per share .....                                                                               22,112,252

                                                                                                                ============

 

 

       

 

     The following table is a summary of our balance sheet at December 31,

1999. The pro forma data give effect to the conversion of each outstanding

share of preferred stock into one share of common stock and the pro forma as

adjusted data reflect the sale of 5,000,000 shares of common stock offered

hereby at an assumed initial public offering price of $20.00 per share, after

deducting underwriting discounts and commissions and estimated offering

expenses payable by us.

 

 

 

 

      

        

                                                     December 31, 1999

                                      -----------------------------------------------

                                                                         Pro Forma

                                          Actual         Pro Forma      As Adjusted

                                      --------------  --------------  ---------------

                                                                        

Balance Sheet Data:

 Cash and cash equivalents .........   $40,944,122     $40,944,122     $132,744,122

 Working capital ...................    29,813,357      29,813,357      121,613,357

 Total assets ......................    68,336,046      68,336,046      159,746,046

 Total deferred revenue ............    32,101,232      32,101,232       32,101,232

 Total liabilities .................    46,423,191      46,423,191       46,033,191

 Stockholders' equity ..............    21,912,855      21,912,855      113,712,855

 

 

       

 

                                       7

     

 

                                 RISK FACTORS

 

 

     Any investment in our common stock involves a high degree of risk. You

should consider carefully the risks described below, together with the other

information contained in this prospectus, before you decide to buy our common

stock. If any of the following events actually occurs, our business, financial

condition and results of operations may suffer materially. As a result, the

market price of our common stock could decline, and you could lose all or part

of your investment in our common stock.

 

 

                Risks Related to Our Industry and Our Business

 

 

We have a limited operating history as a domain name registrar and expect to

encounter difficulties faced by early-stage companies.

 

 

     We only recently entered the domain name registration industry. In

February 1998, we began providing a consumer interface for registering domain

names in the .com, .net and .org domains and in country code domains by

forwarding the information we gathered from the consumer to Network Solutions

or the applicable country code registrars or registries. In June 1999, we began

to compete directly with Network Solutions for registrations in the .com, .net

and .org domains. Accordingly, we have only a limited operating history as a

domain name registrar upon which our current business and prospects can be

evaluated, and our operating results, since June 1999, are not comparable to

our results for prior periods. As a company operating in a newly competitive

and rapidly evolving industry, we face risks and uncertainties relating to our

ability to implement our business plan successfully. We cannot assure you that

we will adequately address these risks and uncertainties or that our business

plan will be successful.

 

 

We have a history of losses and expect losses to continue for the foreseeable

future.

 

 

     We have never been profitable. We incurred net losses of approximately

$1.2 million for the year ended December 31, 1998 and $8.8 million for the year

ended December 31, 1999. As of December 31, 1999, our accumulated losses

totaled $12.2 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 1999, we expect to incur additional

losses for the foreseeable future, primarily due to an increase in our

marketing expenses to build our brand, which we expect to exceed $25.0 million

in 2000, and our capital expenditures, which we expect to exceed $10.0 million

in 2000. These losses are expected to increase significantly from current

levels, which in turn will increase our accumulated losses. We cannot assure

you that we will become profitable or, if we become profitable, that we will be

able to sustain or increase our profitability in the future.

 

 

Our earnings will decrease because of stock-based compensation that we have

incurred.

 

 

     Non-cash compensation expenses are related to grants of common stock,

stock options and warrants made to employees, directors, consultants and

vendors. In 1999, we recorded a $4.9 million non-cash compensation charge.

Based principally on grants of common stock, stock options and warrants made to

date, we will record approximately $6.4 million of non-cash compensation

through 2003 as follows: $2.2 million in 2000, $1.8 million in each of 2001 and

2002 and $639,000 in 2003. These charges will reduce our earnings in future

periods.

 

 

                                       8

     

 

We cannot predict with any certainty the effect that new governmental and

regulatory policies, or industry reactions to those policies, will have on our

business.

 

 

     Before April 1999, the domain name registration system for the .com, .net

and .org domains was managed by Network Solutions pursuant to a cooperative

agreement with the U.S. government. In November 1998, the Department of

Commerce recognized the Internet Corporation for Assigned Names and Numbers,

commonly known as ICANN, to oversee key aspects of the Internet domain name

registration system. We cannot assure you that any future measures adopted by

the Department of Commerce or ICANN will benefit us or that they will not

materially harm our business, financial condition and results of operations. In

addition, we continue to face the risks that:

 

 

   o the U.S. government may, for any reason, reassess its decision to

     introduce competition into, or ICANN's role in overseeing, the domain name

     registration market;

 

 

   o the Internet community may become dissatisfied with ICANN and refuse to

     recognize its authority or support its policies, which could create

     instability in the domain name registration system; and

 

 

   o ICANN may attempt to impose additional fees on registrars if it fails to

     obtain funding sufficient to run its operations.

 

 

We may not be able to maintain or improve our competitive position because of

strong competition from Network Solutions.

 

 

     Network Solutions' authorization by the U.S. government to act as the sole

domain name registrar prior to April 1999 in the .com, .net and .org domains

gives it a significant competitive advantage in the domain name registration

industry.

 

 

     Before the recent introduction of competition into the domain name

registration industry, Network Solutions was the sole entity authorized by the

U.S. government to serve as the registrar for domain names in the .com, .net

and .org domains. This position allowed Network Solutions to develop a

substantial customer base, which gives it advantages in securing customer

renewals and in developing and marketing ancillary products and services.  We

face significant competition from Network Solutions as we seek to increase our

overall share of the market for domain name registration services, and we

cannot assure you that we will be able to maintain or improve our competitive

position. Based on its press release dated February 10, 2000, Network Solutions

registered 1.6 million net new registrations in the .com, .net and .org domains

for the three months ended December 31, 1999, representing approximately 71% of

all new registrations for the period. For a more detailed discussion of the

introduction of competition into the domain name registration services

industry, see "Business--

Administration of the Internet; Government Regulation and Legal Uncertainties."

 

 

     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

 

 

                                       9

     

 

may not be used directly to fund Network Solutions' registrar business, the

substantial net revenues from these fees, and the certainty of receiving them,

provide Network Solutions significant advantages over any competitive

registrar.

 

     If Network Solutions sells the registry for the .com, .net and .org

domains and uses the proceeds to fund its registrar business or related product

and service offerings, it will have a substantial competitive advantage over

all competitive registrars.

 

 

     The agreements among Network Solutions, ICANN and the U.S. Department of

Commerce provide that if Network Solutions separates its registry and registrar

operations by May 9, 2001 and sells the registry assets to a third party, the

term of exclusivity for the third party extends for an additional four years to

November 30, 2007. If a sale of the registry occurs, Network Solutions could

use the proceeds of the sale, which we believe would be substantial, to fund

its registration operations and related product and service offerings. We

believe that the use of these proceeds to finance Network Solutions' registrar

business could have a material adverse effect on our business, financial

condition and results of operations.

 

 

We also face competition from other competitive registrars and others in the

domain name registration industry and expect this competition to intensify.

 

 

     Competition in the domain name registration services industry will

intensify as the number of entrants into the market increases.

 

     When we began providing online domain name registrations in the .com, .net

and .org domains in June 1999, we were one of only five testbed competitive

registrars accredited by ICANN to interface with the Shared Registration

System. The Shared Registration System was designed to allow registrars to

interface directly with Network Solutions' registry for domain names. The

testbed period ended on November 30, 1999. As of February 26, 2000, ICANN had

accredited 91 competitive registrars, including us, to register domain names in

the .com, .net and .org domains. As of February 26, 2000, 27 of these

competitive registrars were registering domain names, and the other 62, while

accredited, had not begun registering domain names, in the .com, .net and .org

domains. An additional 18 companies have qualified for accreditation but have

yet to sign the agreements required by ICANN and Network Solutions. We face

substantial competition from competitive registrars and others in that:

 

 

   o many accredited registrars that are not currently registering domain

     names may begin to do so in the near future;

 

 

   o companies that are not accredited registrars may offer domain name

     registrations through a competing accredited registrar's system; and

 

 

   o ICANN may accredit new registrars to register domain names in the .com,

     .net and .org domains.

 

 

     We face competition from other competitive registrars and others in the

domain name registration industry who may have longer operating histories,

greater name recognition or greater resources.

 

 

     Our competitors in the domain name registration industry include companies

with strong brand recognition and Internet industry experience, such as major

telecommunications firms, cable companies, ISPs, web-hosting providers,

Internet portals, systems integrators, consulting firms and other registrars.

Many of these companies also possess core capabilities to deliver ancillary

services, such as customer service, billing services and network management.

Our market position could be harmed by any of these existing or future

competitors, some of which may have longer operating histories, greater name

recognition and greater financial, technical, marketing, distribution and other

resources than we do. Also, as a result of increased competition, our

period-over-period growth rates may decline.

 

 

                                       10

     

 

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 February 26, 2000, there

were 29 registrars, including us and Network Solutions, registering domain

names through the Shared Registration System. The 62 other accredited

registrars and the 18 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.

 

 

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.

   

 

 

Competition in the domain name registration industry could force us to reduce

our prices for our products and services and would negatively impact our

results of operations.

 

     Since competition in the domain name registration industry is in its early

stages, we cannot assure you that we will not be required, by market factors or

otherwise, to reduce, perhaps significantly, the prices we charge for our

domain name registration and related products and services. Further, some of

our competitors are offering domain name registrations for free and derive

their revenues from other sources. Reducing the prices we charge for domain

name registration services in order to remain competitive could materially

adversely affect our results of operations.

 

 

If our customers do not renew their domain name registrations through us, and

we fail to replace their business or develop alternative sources of revenue,

our business, financial condition and results of operations would be materially

adversely affected.

 

     The growth of our business depends in part on our customers' renewal of

their domain name registrations through us. Having only recently become an

accredited registrar, we do not have any actual experience with registration

renewals. If our customers decide, for any reason, not to renew their

registrations through us, our business, financial condition and results of

operations would be materially adversely affected.

 

 

If we fail to become accredited to offer domain names in additional generic top

level domains that may be introduced, or our customers turn to other registrars

for these registration needs, our business, financial condition and results of

operations would be materially adversely affected.

 

     ICANN or another approving entity may introduce new generic top level

domains, such as .web, .firm and .store. We cannot assure you that, if

introduced, we will be accredited to offer

 

 

                                       11

     

 

registrations in these domains or that customers will rely on us to provide

registration services within any new generic top level domains. Our business,

financial condition and results of operations would be materially adversely

affected if substantial numbers of our customers turn to other registrars for

these registration needs.

 

 

Our ability to register domain names in the .com, .net and .org domains depends

upon our continued accreditation by ICANN.

 

 

     We need to be an ICANN-accredited registrar in order to register domain

names in the .com, .net and .org domains. Our current ICANN accreditation

agreement expires on April 26, 2000. While we anticipate that ICANN will renew

this agreement, we cannot assure you that it will do so. If ICANN does not

renew our accreditation, our business, financial condition and results of

operations would be materially adversely affected.

 

 

If 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 46% of our net revenues during the year ended December 31, 1999

and we expect it to account for an increasing percentage of our revenues in

future periods. If we fail to offer products and services that meet our

customers' needs, or our customers elect not to purchase our products and

services, our anticipated net revenues may fall below expectations, we may not

generate sufficient revenue to offset these related costs and we will remain

dependent on domain name registrations as a primary source of revenue.

 

 

Our failure to establish and maintain online business relationships that

generate a significant amount of traffic could limit the growth of our

business.

 

 

     We expect that in the future approximately 15% of our customers will

purchase their domain name registrations through our network of co-brand and

private label websites comprising our indirect distribution channel. We

currently have contractual agreements with participants in this network, and if

these third parties do not attract a significant number of visitors to their

websites, we may not receive a significant number of customers from these

network relationships and our net revenues may decrease or not grow. In

addition, we plan to expand our network of co-brand and private label websites.

Our net revenues may suffer if we fail to expand or maintain our network or if

our network does not result in a number of new customers sufficient to justify

the cost.

 

 

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. In 1999, our number of full-time employees grew from

approximately 33 to approximately 122. 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

 

 

                                       12

     

 

controls, billing systems, reporting systems and procedures, and we will also

need to continue to expand, train and manage our workforce. If we fail to

manage our growth effectively, our business, financial condition and results of

operation could be materially adversely affected.

 

     In addition, as we offer new products and services, we will need to

increase the size and expand the training of our customer service staff to

ensure that they can adequately respond to customer inquiries. If we fail to

provide our customer service staff training and staffing sufficient to support

new products and services, we may lose customers who feel that their inquiries

have not adequately been addressed.

 

 

If we are unable to attract and retain highly qualified management and

technical personnel, our business may be harmed.

 

     Our success depends in large part on the contributions of our senior

management team and technology personnel and in particular Richard D. Forman,

our President and Chief Executive Officer. We face intense competition in

hiring and retaining personnel from a number of sectors, including technology

and Internet companies. Many of these companies have greater financial

resources than we do to attract and retain qualified personnel. In addition,

although we maintain employment agreements with Mr. Forman and Jack S. Levy,

our General Counsel, we have not in the past executed, and do not have any

current plans to execute, employment agreements with our other employees. As a

result, we may be unable to retain our employees or attract, integrate, train

and retain other highly qualified employees in the future. If we fail to

attract new personnel or retain and motivate our current personnel, our

business, financial condition and results of operations could be materially

adversely affected.

 

 

Our business will suffer if we fail to build awareness of our brand name.

 

     Building recognition of our brand is critical to attracting additional

traffic and customers to our website, new business alliances, acquisition

candidates, advertisers and employees. Accordingly, we intend to continue

pursuing an aggressive brand-enhancement strategy, which includes mass market

and multimedia advertising, promotional programs and public relations

activities. We intend to make significant expenditures, over $25 million in

2000, on advertising and promotional programs and activities. These

expenditures may not result in an increase in net revenues sufficient to cover

our advertising and promotional expenses. We cannot assure you that promoting

our brand name will increase our net revenues. Accordingly, if we incur

expenses in promoting our brand without a corresponding increase in our net

revenues, our business, financial condition and results of operations would be

materially adversely affected.

 

 

Our failure to respond to the rapid technological changes in our industry may

harm our business.

 

     If we are unable, for technological, legal, financial or other reasons, to

adapt in a timely manner to changing market conditions or customer

requirements, we could lose customers, strategic alliances and market share.

The 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:

 

 

                                       13

     

 

   o to enhance our existing products and services;

 

   o to develop and license new products, services and technologies that

     address the increasingly sophisticated and varied needs of our current and

     prospective customers; and

 

   o to respond to technological advances and emerging industry standards and

     practices on a cost-effective and timely basis.

 

     The development of additional products and services and other proprietary

technology involves significant technological and business risks and requires

substantial expenditures and lead time. We may be unable to use new

technologies effectively or adapt our websites, internally developed technology

and transaction-processing systems to customer requirements or emerging

industry standards. Updating our technology internally and licensing new

technology from third parties may require us to incur significant additional

capital expenditures.

 

 

  

If we are unable to make suitable acquisitions and investments, our long-term

growth strategy could be impeded.

 

     Our long-term growth strategy includes identifying and, from time to time,

acquiring or investing in suitable candidates on acceptable terms. In

particular, we intend to acquire or make investments in providers of product

offerings that complement our business and other companies in the domain name

registration industry. In pursuing acquisition and investment opportunities, we

may be in competition with other companies having similar growth and investment

strategies. Competition for these acquisitions or investment targets could also

result in increased acquisition or investment prices and a diminished pool of

businesses, technologies, services or products available for acquisition or

investment. Our long-term growth strategy could be impeded if we fail to

identify and acquire or invest in promising candidates on terms acceptable to

us.

   

 

Our acquisition strategy could subject us to significant risks, any of which

could harm our business.

 

     Acquisitions involve a number of risks and present financial, managerial

and operational challenges, including:

 

   o diversion of management attention from running our existing business;

 

   o increased expenses, including compensation expenses resulting from newly

     hired employees;

 

   o adverse effects on our reported operating results due to possible

     amortization of goodwill associated with acquisitions; and

 

   o potential disputes with the sellers of acquired businesses, technologies,

     services or products.

 

  

In addition, we may not be successful in integrating the business, technology,

operations and personnel of any acquired company. Performance problems with an

acquired business, technology, service or product could also have a material

adverse impact on our reputation as a whole. In addition, any acquired

business, technology, service or product could significantly underperform

relative to our expectations. For all these reasons, our pursuit of an overall

acquisition and investment strategy or any individual acquisition or investment

could have a material adverse effect on our business, financial condition and

results of operations.

   

 

 

If 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

 

 

                                       14

     

 

the regulations imposed by country code registries, these registries will

likely prohibit us from registering or continuing to register names in their

country codes. Further, in most cases, our rights to provide country code

domain name registration services are not governed by written contract. In the

case of our written contracts, there is uncertainty as to what law may govern.

As a result, we cannot be certain that we will continue to be able to register

domain names in the country code domains we currently offer. Any restrictions

on our ability to offer domain name registrations in a significant number of

country codes could materially adversely affect our business, financial

condition and results of operations.

 

 

If country code registries cease operations or otherwise fail to process

registrations or related information accurately, we would be unable to honor

our subscriptions relating to those country codes.

 

 

     Country code registries may be administered by the host country,

entrepreneurs or other third parties. If these registry businesses cease

operations or otherwise fail to process domain name registrations or the

related information in country code domains, we would be unable to honor the

subscriptions of registrants who have registered, or are in the process of

registering, domain names in the applicable country code domain. If we are

unable to honor a substantial number of subscriptions for our customers for any

reason, our business, financial condition and results of operations would be

materially adversely affected.

 

 

We are restricted from entering into agreements with web-hosting service

providers as a result of an agreement we have with Concentric Network

Corporation.

 

 

     As part of our marketing and distribution agreement with Concentric

Network Corporation, we have agreed that no more than three service providers,

one of which must be Concentric, may market, advertise or otherwise promote

their web-hosting services on our website. This agreement expires on December

31, 2000 and may be renewed by the parties for an additional year. Accordingly,

we are severely restricted in our ability to enter agreements with other

providers of these services.

 

 

We cannot assure you that our standard registration agreement will be

enforceable.

 

 

     All of our customers must execute our standard registration agreement as

part of the process of registering a domain name. This agreement contains a

number of provisions intended to limit our potential liability arising from our

registration of domain names for our customers including liability resulting

from our failure to register or maintain domain names. As most of our customers

register their domain names online, execution of the registration agreement by

these customers occurs electronically. If a court were to find that our

registration agreement is unenforceable, we could be subject to liability that

could have a materially adverse effect on our business, financial condition or

results of operations.

 

 

  

Our failure to register or maintain the domain names that we process on behalf

of our customers may subject us to negative publicity, which could have a

material adverse effect on our business.

 

 

     Clerical errors or systems failures, including failures of the Shared

Registration System, have resulted in our failure to properly register or to

maintain the registration of domain names that we processed on behalf of our

customers. Our failure to properly register or to maintain the registration of

our customers' domain names may subject us to negative publicity, which could

have a material adverse effect on our business.

   

 

     We may not be able to protect and enforce our intellectual property rights

or protect ourselves from the intellectual property claims of third parties.

 

 

     We may be unable to protect and enforce our intellectual property rights

from infringement.

 

 

                                       15

     

 

     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 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.

 

     As a registrar of domain names and a provider of web-hosting services, we

may be subject to various claims, including claims from third parties asserting

that their rights have been infringed by domain names registered or websites

hosted on behalf of other parties.

 

     We may be subject to various claims, including trademark infringement,

unfair competition and violations of publicity and privacy rights, to the

extent that such parties consider their rights to be violated by the

registration of particular domain names by other parties or our hosting of

third-party websites. If these claims against us are successful, our business,

financial condition and results of operations could be materially adversely

affected.

 

 

                                       16

     

 

We may be held liable if third parties misappropriate our users' personal

information.

 

     A fundamental requirement for online communications is the secure

transmission of confidential information over public networks. If third parties

succeed in penetrating our network security or otherwise misappropriate our

customers' personal or credit card information, we could be subject to

liability. Our liability could include claims for unauthorized purchases with

credit card information, impersonation or other similar fraud claims as well as

for other misuses of personal information, including for unauthorized marketing

purposes. These claims could result in litigation and adverse publicity which

could have a material adverse effect on our business, financial condition and

results of operations, as well as our reputation.

 

     In addition, the Federal Trade Commission and state agencies have been

investigating various Internet companies regarding their use of personal

information. We could have additional expenses if new regulations regarding the

use of personal information are introduced or if our privacy practices are

investigated.

 

 

We may incur significant expenses related to the security of personal

information online.

 

     The need to securely transmit confidential information online has been a

significant barrier to electronic commerce and online communications. Any

well-publicized compromise of security could deter people from using online

services such as the ones we offer, or from using them to conduct transactions

that involve transmitting confidential information. Because our success depends

on the acceptance of online services and electronic commerce, we may incur

significant costs to protect against the threat of security breaches or to

alleviate problems caused by these breaches.

 

 

We may be held liable for Year 2000 problems relating to one of our former

product offerings.

 

 

     From July 1995 until October 1998, we sold Internet Creator, a website

creation and management software program. We later offered this product to our

web-hosting customers at no cost. Although we have conducted usability tests to

confirm to our satisfaction that Internet Creator is Year 2000 compliant, we

cannot be certain that users of the product will not experience systems

failures, delays or miscalculations affecting their websites that result from

Year 2000 problems. If users of the product experience Year 2000 problems and

successfully assert actions against us, our business, financial condition and

results of operations could be materially adversely affected.

 

 

               Risks Related to Our Technology and the Internet

 

 

Systems disruptions and failures could cause our customers and advertisers to

become dissatisfied with us and may impair our business.

 

     Our customers, advertisers and business alliances may become dissatisfied

with our products and services due to interruptions in access to our website.

 

     Our ability to maintain our computer and telecommunications equipment in

working order and to reasonably protect them from interruption is critical to

our success. Our website must accommodate a high volume of traffic and deliver

frequently updated information. Our website has in the past experienced slower

response times as a result of increased traffic. We have conducted planned site

outages and experienced unplanned site outages with minimal impact on our

business. Currently, our systems operate, on average, at approximately 50%

capacity. If we were to experience a substantial increase in traffic and fail

to increase our

 

 

                                       17

     

 

capacity, our customers would experience slower response times or disruptions

in service. Our customers, advertisers and business alliances may become

dissatisfied by any systems failure that interrupts our ability to provide our

products and services to them. Substantial or repeated system failures would

significantly reduce the attractiveness of our website and could cause our

customers, advertisers and business alliances to switch to another domain name

registration service provider.

 

     Our customers, advertisers and business alliances may become dissatisfied

with our products and services due to interruptions in our access to the Shared

Registration System or country code registries.

 

     We depend on the Shared Registration System and country code registries to

register domain names on behalf of our customers. We have in the past

experienced problems with the Shared Registration System, including outages,

particularly during its implementation phase. Any significant outages in the

Shared Registration System or country code registries would prevent us from

delivering or delay our delivery of our services to our customers. Prolonged or

repeated interruptions in our access to the Shared Registration System or

country code registries could cause our customers, advertisers and business

alliances to switch to another domain name registration service provider.

 

     Delays or systems failures unrelated to our systems could harm our

business.

 

     Our customers depend on ISPs, online service providers and others to

access our website. Many of these parties have experienced outages and could in

the future experience outages, delays and other difficulties due to systems

failures unrelated to our systems. Although we carry general liability

insurance, our insurance may not cover any claims by dissatisfied customers,

advertisers or strategic alliances, or may be inadequate to indemnify us for

any liability that may be imposed in the event that a claim were brought

against us. Our business could be materially harmed by any system failure,

security breach or other damage that interrupts or delays our operations.

 

     Our business would be materially harmed if our computer systems become

damaged.

 

     Our network and communications systems are located at Exodus

Communications' hosting facility in Jersey City, New Jersey and Globix

Corporation's hosting facility in New York, New York. We are currently adding

network capacity to our systems located at Globix Corporation's New York, New

York hosting facility to make our systems geographically redundant. Although we

plan to complete this project by the end of the second quarter of 2000, we

cannot assure you that our systems will be geographically redundant by this

time. Fires, floods, earthquakes, power losses, telecommunications failures,

break-ins and similar events could damage these systems. Computer viruses,

electronic break-ins, human error or other similar disruptive problems could

also adversely affect our systems. We do not carry business interruption

insurance. Accordingly, any significant damage to our systems would have a

material adverse effect on our business, financial condition and results of

operations.

 

 

Our ability to deliver our products and services and our financial condition

depend on our ability to license third-party software, systems and related

services on reasonable terms from reliable parties.

 

     We depend upon various third parties for software, systems and related

services, including access to the Shared Registration System provided by

Network Solutions. Some of these parties have a limited operating history or

may depend on reliable delivery of services from others. If these parties fail

to provide reliable software, systems and related services on agreeable license

terms, we may be unable to deliver our products and services.

 

 

Failure by our third-party provider of credit card processing services to

process payments in a timely fashion will have a negative effect on our

business.

 

     Under the terms of our accreditation agreement with ICANN, we are required

to obtain a reasonable assurance of payment of registration fees prior to

registering or renewing domain

 

 

                                       18

     

 

names. To satisfy this requirement, we have engaged Cybersource to process

credit card payments for our individual customers. Therefore, if Cybersource or

its system fails for any reason to process credit card payments in a timely

fashion, we may not be in compliance with ICANN's requirement and as a result

may not be allowed to process domain name registrations. In addition, the

domain name reservation process will be delayed and customers may be unable to

obtain their desired domain name.

 

 

If Internet usage does not grow, or if the Internet does not continue to expand

as a medium for commerce, our business may suffer.

 

     Our success depends upon the continued development and acceptance of the

Internet as a widely used medium for commerce and communication. Rapid growth

in the uses of and interest in the Internet is a relatively recent phenomenon

and we cannot assure you that use of the Internet will continue to grow at its

current pace. A number of factors could prevent continued growth, development

and acceptance, including:

 

   o the unwillingness of companies and consumers to shift their purchasing

     from traditional vendors to online vendors;

 

   o the Internet infrastructure may not be able to support the demands placed

     on it, and its performance and reliability may decline as usage grows;

 

   o security and authentication issues may create concerns with respect to

     the transmission over the Internet of confidential information, such as

     credit card numbers, and attempts by unauthorized computer users,

     so-called hackers, to penetrate online security systems; and

 

   o privacy concerns, including those related to the ability of websites to

     gather user information without the user's knowledge or consent, may

     impact consumers' willingness to interact online.

 

Any of these issues could slow the growth of the Internet, which could have a

material adverse effect on our business, financial condition and results of

operations.

 

 

If the use of the Internet as an advertising and marketing medium fails to

develop or develops more slowly than we expect, our future business could be

materially adversely affected.

 

     Our future success depends in part on a significant increase in the use of

the Internet as an advertising and marketing medium. Advertising revenues

constituted 32% of our net revenues for the year ended December 31, 1999. 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

 

 

                                       19

     

 

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 pricing controls;

 

     o characteristics and quality of products and services;

 

     o consumer protection;

 

     o cross-border commerce;

 

     o libel and defamation;

 

     o copyright, trademark and patent infringement;

 

     o pornography; and

 

     o other claims based on the nature and content of Internet materials.

 

 

     The adoption of any new laws or regulations or the new application or

interpretation of existing laws or regulations to the Internet could hinder the

growth in use of the Internet and other online services generally and decrease

the acceptance of the Internet and other online services as media of

communications, commerce and advertising. Our business may be harmed if any

slowing of the growth of the Internet reduces the demand for our services. In

addition, new legislation could increase our costs of doing business and

prevent us from delivering our products and services over the Internet, thereby

harming our business, financial condition and results of operations.

 

     For example, in November 1999, the Anticybersquatting Consumer Protection

Act was enacted to curtail a practice commonly known in the industry as

"cybersquatting." A cybersquatter is generally defined in this Act as one who

registers a domain name that is identical or similar to another party's

trademark or the name of a living person, in each case with the bad faith

intent to profit from use of the domain name. Although the Act states that

registrars may not be held liable for registering or maintaining a domain name

for another person absent a showing of the registrar's bad faith intent to

profit from the use of the domain name, registrars may be held liable if they

fail to comply promptly with procedural provisions. If we are held liable under

this law, any liability could have a material adverse effect on our business,

financial condition and results of operations.

 

     We file tax returns in such states as required by law based on principles

applicable to traditional businesses. However, one or more states could seek to

impose additional income tax obligations or sales tax collection obligations on

out-of-state companies, such as ours, which engage in or facilitate electronic

commerce. A number of proposals have been made at state and local levels that

could impose such taxes on the sale of products and services

 

 

                                       20

     

 

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.

 

 

                        Risks Related to This Offering

 

 

There has been no prior market for our common stock and our stock may

experience extreme price and volume fluctuations.

 

     The stock market has experienced extreme price and volume fluctuations

that have particularly affected the market prices of the securities of

Internet-related companies. Prior to this offering, there has been no public

market for our common stock. We cannot predict the extent to which investor

interest in our stock will lead to the development of an active trading market

or how liquid that market might become. The initial public offering price for

the shares will be determined by negotiations between us and the

representatives of the underwriters and may not be indicative of prices that

will prevail in the trading market. The market price of our common stock may

decline below the initial public offering price. In the past, companies that

have experienced volatility in the market price of their stock have been the

objects of securities class action litigation. If we were the object of

securities class action litigation, it could result in substantial costs and a

diversion of our management's attention and resources.

 

 

Our management has broad discretion over how to use the proceeds of this

offering and may not use the proceeds in ways that help our business succeed.

 

     We estimate that our net proceeds from this offering will be $91.8

million, assuming an initial public offering price of $20.00 per share after

deducting underwriting discounts and estimated offering expenses. Other than

our 2000 marketing and capital expenditure plans, we have no specific plans for

the net proceeds of this offering other than to fund general corporate

purposes, including working capital, and acquisitions and strategic

investments. Accordingly, our management will have broad discretion as to how

to apply the net proceeds of this offering. If we fail to use the proceeds

effectively, our business may not grow and our net revenues and net income may

decline.

 

 

Our directors, executive officers and principal stockholders own enough of our

shares to control Register.com, which will limit your ability to influence

corporate matters.

 

     Our directors, executive officers and principal stockholders currently

beneficially own approximately 88.5% of our common stock and, after the

offering, will beneficially own approximately 78.2% of our common stock.

Accordingly, these stockholders could control the outcome of any corporate

transaction or other matter submitted to our stockholders for approval,

including mergers, consolidations and the sale of all or substantially all of

our assets, and also could prevent or cause a change in control. The interests

of these stockholders may differ from the interests of our other stockholders.

In addition, third parties may be discouraged from making a tender offer or bid

to acquire us because of this concentration of ownership.

 

 

                                       21

     

 

Shares eligible for public sale after this offering could adversely affect our

stock price.

 

     Based on shares outstanding on January 31, 2000, from time to time after

this offering, a total of 26,880 and 23,245,177 shares of common stock may be

sold in the public market by existing stockholders 90 days and 180 days,

respectively, after the date of this prospectus, subject to applicable volume

and other limitations imposed under federal securities laws. The 180-day

restriction on resales is the result of lock-up agreements with our

underwriters for this offering. Deutsche Bank Securities may release, in its

sole discretion, all or any portion of the securities subject to the 180-day

lock-up agreements prior to the expiration of their term. Deutsche Bank

Securities may waive these restrictions at our request or upon the request of a

stockholder. In evaluating whether to grant such a request, Deutsche Bank

Securities may consider a number of factors with a view toward maintaining an

orderly market for, and minimizing volatility in the market price of, our

common stock. These factors include, among others, the number of shares

involved, recent trading volume and prices of the stock, the length of time

before the lock-up expires and the reasons for, and the timing of, the request.

 

 

     In addition, existing stockholders owning an aggregate of 29,894,846

shares of common stock and common stock issuable upon the exercise of

outstanding options and warrants have the right to require us to register their

shares under the Securities Act. If we register these shares, they can be sold

in the public market. The market price of our common stock could decline as a

result of sales by these existing stockholders of their shares of common stock

in the market after this offering, or the perception that these sales could

occur. These sales also might make it difficult for us to sell equity

securities in the future at a time and price that we deem appropriate.

 

 

Our charter documents and Delaware law may inhibit a takeover that stockholders

may consider favorable.

 

     Provisions in our amended and restated certificate of incorporation, our

amended and restated bylaws and Delaware law could delay or prevent a change of

control or change in management that would provide stockholders with a premium

to the market price of their common stock. The authorization of undesignated

preferred stock, for example, gives our board the ability to issue preferred

stock with voting or other rights or preferences that could impede the success

of any attempt to change control of the company. If a change of control or

change in management is delayed or prevented, this premium may not be realized

or the market price of our common stock could decline.

 

 

You will incur immediate and substantial dilution.

 

     The initial public offering price per share will significantly exceed the

net tangible book value per share. Accordingly, investors purchasing shares in

this offering will suffer immediate dilution of their investment equal to

$16.58 per share, based on an assumed initial offering price of $20.00. If we

issue additional shares of common stock in the future, investors purchasing

shares in this offering may experience further dilution. Any further dilution

could adversely affect the trading price of our stock.

 

 

                                       22

     

 

                                USE OF PROCEEDS

 

     We estimate that we will receive net proceeds from the sale of the shares

of common stock in this offering of approximately $91.8 million, assuming an

initial public offering price of $20.00 per share and after deducting

underwriting discounts and commissions and estimated offering expenses. If the

underwriters exercise their over-allotment option in full, we estimate that our

net proceeds will be approximately $95.9 million.

 

  

     We plan to use the proceeds from this offering for marketing, capital

expenditures, working capital, development of new products and services,

acquisitions of and investments (where we acquire less than a controlling

interest) in companies whose businesses, products or services complement our

own and general corporate purposes. We intend to spend over $25.0 million in

2000 on advertising and promotional programs and activities and over $10.0

million in 2000 for capital expenditures, including expenditures for servers,

co-location equipment and other hardware and software necessary to support our

registration systems. As of the date of this prospectus, we have not made any

other specific expenditure plans with respect to the proceeds of this offering.

Therefore, we cannot specify with certainty the particular uses for the

remaining net proceeds to be received upon completion of this offering.

Accordingly, our management will have significant flexibility in applying the

net proceeds of this offering. Pending any use, we intend to invest the net

proceeds of this offering in short-term, investment-grade, interest-bearing

securities.

 

     The principal purposes of this offering are to increase our working

capital, to create a public market for our common stock, to facilitate future

access to the public capital markets and to increase our visibility in the

marketplace. Although we engage in discussions with potential acquisition, and

strategic investment, candidates from time to time, we have no present

commitments with respect to any acquisition or investment.

   

 

                                DIVIDEND POLICY

 

     We have never declared or paid any cash dividends on our common stock. We

currently anticipate retaining any future earnings for the development and

operation of our business. Accordingly, we do not anticipate declaring or

paying any cash dividends in the foreseeable future.

 

 

                                       23

     

 

                                CAPITALIZATION

 

     The following table shows our capitalization as of December 31, 1999 on an

actual basis, a pro forma basis and a pro forma as adjusted basis. The pro

forma column reflects the conversion of each outstanding share of preferred

stock into one share of common stock, which will occur upon the closing of this

offering. The pro forma as adjusted column further reflects our sale of shares

of common stock in this offering at an assumed initial public offering price of

$20.00 per share, after deducting underwriting discounts and commissions and

estimated offering expenses payable by us.

 

     You should read the following table in conjunction with our financial

statements and the notes to those financial statements included elsewhere in

this prospectus.

 

 

 

      

        

                                                                    December 31, 1999

                                                   ----------------------------------------------------

                                                                                           Pro Forma

                                                        Actual          Pro Forma         As Adjusted

                                                   ---------------   ---------------   ----------------

                                                                                         

Capital lease obligations ......................   $    33,825       $    33,825       $     33,825

                                                   -----------       -----------       ------------

Stockholders' equity:

  Preferred Stock, $.0001 par value; 5,000,000

   shares authorized:

   Series A Convertible Preferred Stock;

     5,000,000 shares authorized; 4,694,333

     shares issued and outstanding (actual);

     no shares issued or outstanding (pro

     forma and pro forma as adjusted) ..........           469                --                 --

  Common Stock, $.0001 par value;

   60,000,000 shares authorized; 21,065,047

   shares issued and outstanding (actual);

   25,759,380 shares issued and outstanding

   (pro forma); 30,759,380 shares issued and

   outstanding (pro forma as adjusted) .........         2,106             2,575              3,075

  Additional paid-in capital ...................    36,709,821        36,709,821        128,509,321

  Unearned compensation ........................    (2,647,770)       (2,647,770)        (2,647,770)

  Accumulated deficit ..........................   (12,151,771)      (12,151,771)       (12,151,771)

                                                   -----------       -----------       ------------

   Total stockholders' equity ..................    21,912,855        21,912,855        113,712,855

                                                   -----------       -----------       ------------

     Total capitalization ......................   $21,946,680       $21,946,680       $113,746,680

                                                   ===========       ===========       ============

 

 

       

 

     The number of shares of common stock to be outstanding after this offering

is based on the number of shares outstanding as of December 31, 1999. It does

not include:

 

   o 1,750 shares of common stock issued upon the exercise of stock options

     between January 1, 2000 and February 28, 2000;

 

   o 4,353,286 shares of common stock issuable upon the exercise of stock

     options outstanding as of February 28, 2000, with a weighted average

     exercise price of $7.50 per share;

 

   o 594,396 shares of common stock issuable upon the exercise of stock

     options outstanding as of February 28, 2000, with an exercise price equal

     to the initial offering price of our common stock;

 

   o 4,185,568 shares of common stock available for issuance under our stock

     option plans for options not yet granted;

 

     o 350,000 shares reserved for issuance under our employee stock purchase

     plan; and

 

   o 6,155,675 shares of common stock issuable upon exercise of outstanding

     warrants with a weighted average exercise price of $1.50 per share.

 

 

                                       24

     

 

                                   DILUTION

 

     If you invest in our common stock, your interest will be diluted to the

extent of the difference between the public offering price per share of our

common stock and the pro forma net tangible book value per share of our common

stock after this offering. We calculate pro forma net tangible book value per

share by dividing the net tangible book value (total tangible assets less total

liabilities) by the pro forma number of outstanding shares of common stock.

     Our pro forma net tangible book value at December 31, 1999 was $12.9

million or $0.50 per share, based on 25,759,380 shares of our common stock

outstanding after giving effect to the conversion of all outstanding shares of

our preferred stock into common stock upon the closing of this offering.

     After giving effect to the issuance and sale of the shares of common stock

that we are offering (less the underwriting discounts and estimated offering

expenses payable by us), our pro forma net tangible book value at December 31,

1999 would be $105.1 million or $3.42 per share or if the underwriters exercise

their over-allotment option in full, $109.3 million or $3.53 per share. This

represents an immediate increase in pro forma net tangible book value of $2.92

per share to existing stockholders or $3.03 per share if the underwriters

exercise their over-allotment option in full, and an immediate dilution of

$16.58 per share or, if the underwriters exercise their over-allotment option

in full, $16.47 per share to investors purchasing shares in the offering. If

the initial public offering price is higher or lower, the dilution to new

investors will be greater or less, respectively.  The following table

illustrates this per share dilution:

 

      

                                                                                             

Assumed initial public offering price per share ...........................                $ 20.00

Pro forma net tangible book value per share at December 31, 1999 ..........   $ 0.50

Increase in pro forma net tangible book value per share attributable to

  this offering ...........................................................    2.92

                                                                              ------

Pro forma net tangible book value per share after this offering ...........                  3.42

                                                                                           -------

Dilution per share to new investors .......................................                $ 16.58

                                                                                           =======

 

       

 

     The following table shows on a pro forma basis at December 31, 1999, after

giving effect to the conversion of all outstanding shares of our preferred

stock into an aggregate of 4,694,333 shares of common stock upon the closing of

this offering, the number of shares of common stock purchased from us, the

total consideration paid to us and the average price per paid share by existing

stockholders and by new investors purchasing common stock in this offering:

 

      

        

                                          Shares Purchased           Total Consideration        Average Price

                                        Number      Percentage       Amount       Percentage      Per Share

                                     ------------  ------------  --------------  ------------  --------------

                                                                                                  

Existing stockholders (1) .........  25,759,380     83.7%        $ 28,809,799     22.3%        $ 1.12

New investors .....................   5,000,000     16.3          100,000,000     77.7         20.00

                                     ----------    -----         ------------    -----

  Total (1) .......................  30,759,380    100.0%        $128,809,799    100.0%

                                     ==========    =====         ============    =====

 

 

       

 

     If the underwriters exercise their over-allotment option in full, the

number of shares of common stock held by existing stockholders will be reduced

to 25,231,659 or 81.4% of the total number of shares of common stock to be

outstanding after this offering. The average price per share for existing

stockholders would increase to $1.14. In addition, the number of shares of

common stock held by new investors will be increased to 5,750,000, or 18.6% of

the total number of shares of common stock to be outstanding after this

offering.

-------------

(1) The above information is based on shares outstanding as of December 31,

    1999. It excludes:

 

   o 1,750 shares of common stock issued upon the exercise of stock options

     between January 1, 2000 and February 28, 2000;

 

   o 4,353,286 shares of common stock issuable upon the exercise of stock

     options outstanding as of February 28, 2000, with a weighted average

     exercise price of $7.50 per share;

 

 

                                       25

     

 

   o 594,396 shares of common stock issuable upon the exercise of stock

     options outstanding as of February 28, 2000, with an exercise price equal

     to the initial offering price of our common stock.

 

   o 4,185,568 shares of common stock available for issuance under our stock

     option plans for options not yet granted;

 

   o 350,000 shares reserved for issuance under our employee stock purchase

     plan; and

 

   o 6,155,675 shares of common stock issuable upon exercise of outstanding

     warrants with a weighted average exercise price of $1.50 per share.

 

     To the extent that any of these stock options or warrants are exercised,

new investors will experience further dilution.

 

 

                                       26

     

 

                            SELECTED FINANCIAL DATA

 

     The selected financial data below as of December 31, 1998 and 1999 and for

the years ended December 31, 1997, 1998 and 1999 have been derived from our

financial statements included in this prospectus, which have been audited by

PricewaterhouseCoopers LLP, independent accountants. The selected financial

data as of December 31, 1997 have been derived from our audited financial

statements not included in this prospectus. The selected financial data below

as of and for the years ended December 31, 1995 and 1996 have been derived from

our unaudited financial statements. These unaudited financial statements have

been prepared on the same basis as our audited financial statements and, in our

opinion, include all adjustments, consisting of normal recurring adjustments,

necessary for the fair presentation of our financial position and results of

operations. Historical results are not necessarily indicative of results to be

expected for any future period. You should read the data below together with

"Management's Discussion and Analysis of Financial Condition and Results of

Operations" and the financial statements and the notes to those statements

included in this prospectus. The pro forma basic and diluted net loss per share

data give effect to the conversion of our Exchangeable Preferred Stock and the

Series A Convertible Preferred Stock at the date of original issuance.

 

 

      

        

                                                                        Year Ended December 31,

                                          -----------------------------------------------------------------------------------

                                               1995             1996             1997             1998              1999

                                          -------------   ---------------   -------------   ---------------   ---------------

                                                                                                                 

Statement of Operations Data:

 Net revenues .........................    $   87,696      $    868,018      $  713,263      $  1,319,359      $  9,644,552

 Cost of revenues .....................        12,399           342,140         191,539           461,152         3,082,499

                                           ----------      ------------      ----------      ------------      ------------

 Gross profit .........................        75,297           525,878         521,724           858,207         6,562,053

 

 Operating expenses:

   Sales and marketing ................       166,330           935,495         366,975           863,720         7,149,693

   Research and development ...........       102,901           390,814          71,471           276,687         1,767,158

   General and administrative

    (exclusive of non-cash

    compensation) .....................        94,704           743,609         263,017           795,425         2,380,190

   Non-cash compensation ..............            --                --              --           149,682         4,929,200

                                           ----------      ------------      ----------      ------------      ------------

   Total operating expenses ...........       363,935         2,069,918         701,463         2,085,514        16,226,241

                                           ----------      ------------      ----------      ------------      ------------

 

 Loss from operations .................      (288,638)       (1,544,040)       (179,739)       (1,227,307)       (9,664,188)

 Other income (expenses), net .........            --          (170,036)        (25,787)           66,559           887,270

                                           ----------      ------------      ----------      ------------      ------------

 

 Net loss .............................    $ (288,638)     $ (1,714,076)     $ (205,526)     $ (1,160,748)     $ (8,776,918)

                                           ==========      ============      ==========      ============      ============

 Basic and diluted net loss per

   share ..............................    $    (0.07)     $      (0.26)     $    (0.02)     $      (0.07)     $      (0.46)

                                           ==========      ============      ==========      ============      ============

 Weighted average shares used

   in basic and diluted net loss

   per share ..........................     4,429,859         6,633,905       8,884,709        15,697,013        19,117,027

                                           ==========      ============      ==========      ============      ============

 Pro forma basic and diluted net

   loss per share .....................                                                                        $      (0.40)

                                                                                                               ============

 Weighted average shares used

   in pro forma basic and

   diluted net loss per share .........                                                                          22,112,252

                                                                                                               ============

 

       

 

 

      

        

                                                                             December 31,

                                            ------------------------------------------------------------------------------

                                                1995           1996             1997             1998            1999

                                            -----------   -------------   ---------------   -------------   --------------

Balance Sheet Data:

                                                                                                               

 Cash and cash equivalents ..............    $226,995      $   21,074      $     60,845      $1,284,684      $40,944,122

 Working capital (deficiency) ...........     179,345        (949,383)       (1,131,173)        569,616       29,813,357

 Total assets ...........................     260,002         141,774           180,786       1,611,025       68,336,046

 Total deferred revenues ................          --              --            32,038         113,527       32,101,232

 Total liabilities ......................     147,451       1,002,920         1,243,457         788,245       46,423,191

 Stockholders' equity (deficit) .........     112,551        (861,146)       (1,062,671)        822,780       21,912,855

 

 

        

 

     

 

                                       27

     

 

        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

                             RESULTS OF OPERATIONS

 

     You should read the following discussion of our financial condition and

results of operations together with "Selected Financial Data," our financial

statements, the notes to those statements and the other information appearing

elsewhere in this prospectus.

 

Overview

 

     We are a provider of Internet domain name registration services worldwide.

Domain names serve as part of the infrastructure for Internet communications

and registering a domain name is one of the first steps for individuals and

businesses seeking to establish an online identity. We believe that we offer a

quick and user-friendly registration process and responsive and reliable

customer support. We also offer a suite of value-added products and services

targeted to assist our customers in developing and maintaining their online

identities, including:

 

 

 

         Products and Services              Products and Services

             Provided by Us                   Provided by Others

 

  o domain name forwarding                o email

                                          o web hosting

  o real-time domain name management,     o website-creation tools

 

 

Our goal is to become a one-stop resource through which our customers will

establish, maintain and enhance their presence on the Internet.

 

     We are the successor by merger to Forman Interactive Corp. Forman

Interactive commenced operations in 1994 as a developer of electronic commerce

software, and began offering web-hosting and related products and services in

1997. In February 1998, we began to distribute domain names either for free or,

to a lesser extent, were paid commissions for the domain names we distributed

for international registrars and registries. In April 1999, we commenced

offering registration services for country code domains and in June 1999, we

began offering registrations in the .com, .net and .org domains.

 

Net Revenues

 

     We derive our net revenues from domain name registrations, online products

and services and advertising. Net revenues from domain name registrations

consist of fees paid by registrants over the course of the registration period

reduced by referral commissions and a provision for credit card chargebacks. We

currently earn registration fees in connection with new registrations and

transferred registrations. We pay referral commissions on domain name

registrations processed through the participants in our network of co-brand and

private label websites and those we process through our www.register.com

website that are referred to us by participants in our affiliate network. From

June 1999 until January 14, 2000, we offered two-year registration periods for

the initial domain name registration in the .com, .net and .org domains with

annual renewals and either one- or two-year registration periods for domain

names in the country code domains. As of January 15, 2000, we have supplemented

our registration period offerings to include one-, five- and ten-year

registration periods for both initial and renewal domain name registrations in

the .com, .net, and .org domains. For our .com, .net and .org domain names, we

currently charge $35 for a one-year registration, $70 for a two-year

registration, $159 for a five-year registration and $299 for a ten-year

registration. For our country code domains, we currently charge approximately

$40 to $299 for one- or two-year registrations. We intend to charge the same

rates for renewals as we do for corresponding initial registration periods.

Because we only began operating as a registrar in April 1999, we have not

processed any registration renewals. We anticipate that registration renewals

will contribute to our net revenues once our customers' initial registrations

reach the end of their terms.

 

 

                                       28

     

 

     Domain name registration revenues are deferred at the time of the

registration and are recognized ratably over the term of the registration

period. Under this subscription-based model, we recognize revenue when we

provide the registration services, including customer service and maintenance

of the individual domain name records. ICANN requires us to have reasonable

assurance of payment in order to register a domain name. Therefore, we require

prepayment via credit card for all online domain name registration sales, which

provides us with the full cash fee at the beginning of the registration period

while recognizing the revenues over the registration period. For some of our

customers who register domain names through our Corporate Services department,

we establish lines of credit based on credit worthiness, thereby reasonably

assuring payment.

 

     Online products and services, which consist of email, domain name

forwarding and web hosting, are sold either as annual or monthly subscriptions,

depending on the product or service offering. These revenues are recognized

ratably over the period in which we provide our services. We offer web hosting

through our own servers and through web-hosting services provided by third

parties. We have 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 has been reduced to $6 per year

commencing on January 15, 2000. We currently pay registry fees of approximately

$5 to $150 for one- or two-year country code domain name registrations. The

largest component of our cost of revenues is the registry fees which, while

paid in full at the time that the domain name is registered, are recorded as a

prepaid expense and recognized ratably over the term of the registration.

 

     Cost of revenues for our online products and services consists of fees

paid to third party service providers, depreciation on the equipment used to

deliver the services, fees paid to the co-location facilities maintaining our

equipment and fees paid to the financial institutions to process credit card

payments on our behalf.

 

     While we have no direct cost of revenues associated with our advertising

revenue we do incur operational costs including salaries and commissions which

are classified as operating expenses. We have no incremental cost of revenues

associated with advertising since we use the same equipment to deliver the

advertisements as we use for our domain name registration services.

 

 

Operating Expenses

 

     Our operating expenses consist of sales and marketing, research and

development, general and administrative and non-cash compensation expenses. Our

sales and marketing expenses consist primarily of employee salaries, marketing

programs such as advertising and,

 

 

                                       29

     

 

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 will be recording $2.2 million in non-cash

compensation charges in 2000, $1.8 million in each of 2001 and 2002, and

$639,000 in 2003. These charges primarily relate to the issuance through

February 2000 of employee stock options having exercise prices below fair

market value on the date of grant.

 

 

Net Losses

 

     We have incurred annual and quarterly losses from our operations since our

inception, and we expect to incur operating losses on both an annual and

quarterly basis for the foreseeable future. We have incurred significant net

losses in the past and expect these losses to continue to increase from current

levels as we grow our business by hiring additional employees, increasing our

marketing expenses to build our brand and increasing our capital expenditures.

We incurred net losses of $8.8 million in 1999, $1.2 million in 1998 and

$206,000 in 1997. We intend to spend over $25 million in 2000 on advertising

and promotional programs and approximately $10 million in capital expenditures.

Furthermore, given the rapidly evolving nature of our business and our limited

operating history as a competitive registrar, our operating results are

difficult to forecast, and period-to-period comparisons of our operating

results will not be meaningful and should not be relied upon as an indication

of future performance. Due to these and other factors, many of which are

outside our control, quarterly operating results may fluctuate significantly in

the future.

 

 

Results of Operations

 

     Because we began operating as a domain name registrar only in the second

quarter of 1999 and generated only limited revenues from domain name

registration services prior to this time, we believe that year-to-year

comparisons of 1997 against 1998 and 1998 against 1999 are not meaningful and

you should not rely upon them as indications of our future performance.

 

     We anticipate that in future periods net revenues from domain name

registrations will be the largest component of our net revenues and cost of

domain name registrations will be the largest component of our cost of

revenues. The following table presents selected statement of operations data

for the periods indicated as a percentage of net revenues.

 

 

 

      

        

                                                 Year Ended December 31,

                                           -----------------------------------

                                              1997         1998         1999

                                           ----------   ----------   ---------

                                                                       

Net revenues ...........................      100%          100%        100%

Cost of revenues .......................       27            35          32

                                              ---           ---         ---

Gross profit ...........................       73            65          68

                                              ---           ---         ---

Operating expenses

   Sales and marketing .................       51            66          74

   Research and development ............       10            21          18

   General and administrative (exclusive

     of non-cash compensation) .........       37            60          25

   Non-cash compensation ...............       --            11          51

                                              ---           ---         ---

Total operating expenses ...............       98           158         168

                                              ---           ---         ---

Loss from operations ...................      (25)          (93)       (100)

Other income (expenses), net ...........         (4)          5           9

                                              ------        ---        ----

Net loss ...............................      (29)%         (88)%       (91)%

                                              =====         ===        ====

 

       

 

                                       30

 

     

 

Years Ended December 31, 1998 and 1999

 

Net Revenues

 

     Total net revenues increased from $1.3 million for 1998 to $9.6 million

for 1999.

 

     Domain Name Registrations. Revenues from domain name registrations

increased from $37,000 for 1998 to $4.5 million for 1999. Domain name

registrations represented 3% of 1998 net revenues and 46% of 1999 net revenues.

This increase was primarily from the shift in our business from serving as a

distributor of domain names to serving as a generic top level domain name

registrar in June 1999. Additionally, we had no deferred revenue from domain

name registrations in 1998 while deferred revenue was $32.1 million in 1999. We

anticipate that revenues from domain name registrations will increase in

absolute dollars and as a percentage of our net revenues in future periods as a

result of growth in the market for domain name registrations, renewals and

transfers and the implementation of our business strategy.

 

     Online Products and Services. Revenues from online products and services

increased 91% from $1.1 million in 1998 to $2.1 million for 1999 primarily from

increased sales of web hosting provided through our servers. Online products

and services represented 87% of 1998 net revenues and 22% of 1999 net revenues.

We anticipate that revenues from online products and services will remain flat

in the near term as we begin to introduce new online products and services and

no longer actively promote our own web-hosting services. We anticipate that

these revenues will increase over the longer term as we expand our online

product and service offerings.

 

     Advertising. Revenues from advertising increased from $133,000 for 1998 to

$3.1 million for 1999 primarily from the increased number of page views and the

volume of advertising and sponsorships sold on our www.register.com and

FutureSite websites. Advertising represented 10% of 1998 net revenues and 32%

of 1999 net revenues. We anticipate that revenues from advertising will

increase in absolute dollars but decrease as a percentage of total net

revenues.

 

 

Cost of Revenues

 

     Total cost of revenues increased from $461,000 for 1998 to $3.1 million

for 1999.

 

     Cost of Domain Name Registrations. Cost of domain name registrations

increased from $19,000 for 1998 to $2.5 million for 1999. The increase was

primarily from the shift in our business from serving as a distributor of

domain names to serving as a generic top level domain name registrar in June

1999. As a distributor, we generally passed through registry costs to the

applicable registry or registrar. We anticipate that cost of revenues for

domain name registrations will increase in absolute dollars primarily as a

result of growth in our domain name registrations and renewals.

 

     Cost of Online Products and Services. Cost of online products and services

increased 24% from $442,000 for 1998 to $548,000 for 1999. The increase was

primarily from the additional depreciation expense associated with the

equipment dedicated to our operations to support our growing online product and

service offerings. We anticipate these costs will increase in absolute dollars

as we expand our online product and service offerings.

 

 

Operating Expenses

 

     Total operating expenses increased from $2.1 million for 1998 to $16.2

million for 1999.

 

     Sales and Marketing. Sales and marketing expenses increased from $864,000

for 1998 to $7.1 million for 1999. The increase was primarily from the costs

associated with the launch of our radio and print media advertising campaign in

September 1999 and from salaries

 

 

                                       31

     

 

associated with newly hired sales, marketing and customer service

professionals. We anticipate that sales and marketing expenses will increase

substantially in absolute dollars as we further our marketing programs and

international expansion. Additionally, we anticipate increasing our customer

service staff and domain name registration sales force to support both the

demands of our customers as well as to further our direct and indirect sales

strategy for domain name registrations.

 

     Research and Development. Research and development expenses increased from

$277,000 for 1998 to $1.8 million for 1999. The increase resulted primarily

from salaries associated with newly hired technology personnel to support our

growth. We anticipate that research and development expenses will continue to

increase in absolute dollars as we continue to invest in developing and

modifying our systems to grow our business.

 

     General and Administrative. General and administrative expenses increased

from $795,000 for 1998 to $2.4 million for 1999. The increase was primarily

from salaries associated with newly hired personnel and related costs required

to manage our growth and facilities expansion. We expect that our general and

administrative expenses will increase in absolute dollars to support our

overall growth including increased expenses relating to our new

responsibilities as a public company.

 

     Non-cash Compensation. Non-cash compensation expenses increased from

$150,000 for 1998 to $4.9 million for 1999. The increase in non-cash

compensation was primarily associated with the modification of warrants

previously granted to some of our stockholders and the issuance of warrants in

connection with a financial consulting agreement. Non-cash compensation expense

included $18,000 in 1998 and $329,000 in 1999 of amortization of deferred

compensation related to employee stock options. Amortization of deferred

compensation primarily related to employee stock options issued through

February 2000 will be $2.2 million in 2000, $1.8 million in each of 2001 and

2002, and $639,000 in 2003.

 

Other Income (Expenses), Net.

 

     Other income (expenses), net consists primarily of interest income net of

interest expense. Other income (expenses), net increased from $67,000 for 1998

to $887,000 for 1999. The increase was primarily from interest earned on our

cash balance as a result of our equity financings and cash provided by

operations.

 

Net Loss

 

     Net loss increased $7.6 million to $8.8 million in 1999 from $1.2 million

in 1998.

 

Years Ended December 31, 1997 and 1998

 

Net Revenues

 

     Total net revenues increased 85% from $713,000 for 1997 to $1.3 million

for 1998.

 

     Domain Name Registrations. We had no revenues from domain name

registrations for 1997 as we did not distribute domain names until February

1998. Revenues from commissions earned from distributing domain name

registrations was $37,000 in 1998 and represented 3% of 1998 net revenues.

 

     Online Products and Services. Revenues from online products and services

increased 54% from $713,000 for 1997 to $1.1 million for 1998. Online products

and services represented 100% of 1997 net revenues and 87% of 1998 net

revenues. The increase in net revenues from 1997 to 1998 was attributable to

the growth of our web-hosting service.

 

     Advertising. We had no revenues from advertising for 1997. Revenues from

advertising were $133,000 for 1998 and represented 10% of 1998 net revenues.

The increase in net revenues from 1997 to 1998 was attributable to the launch

of our www.register.com website and our initial advertising sales efforts.

 

Cost of Revenues

 

     Total cost of revenues increased 141% from $192,000 for 1997 to $461,000

for 1998.

 

                                       32

     

 

     Cost of Domain Name Registrations. We incurred no cost of domain name

registrations for 1997 because we did not begin to distribute domain names

until February 1998. As a distributor of domain names, we simply forwarded a

registration request to the appropriate registrar without paying any registry

fees. Cost of domain name registrations was $19,000 for 1998.

 

     Cost of Online Products and Services. Cost of online products and services

increased 131% from $192,000 for 1997 to $442,000 for 1998. The increase

resulted primarily from the depreciation expense associated with the equipment

dedicated to our operations to support our web-hosting business.

 

 

Operating Expenses

 

     Total operating expenses increased 197% from $701,000 for 1997 to $2.1

million for 1998.

 

     Sales and Marketing. Sales and marketing expenses increased 135% from

$367,000 for 1997 to $864,000 for 1998. The increase was primarily attributable

to costs associated with additional customer service personnel, marketing

personnel and telemarketers for our web-hosting business as well as limited

advertising campaigns.

 

     Research and Development. Research and development expenses increased 287%

from $71,000 for 1997 to $277,000 for 1998. The increase was primarily

attributable to the salaries associated with newly hired technology personnel.

 

     General and Administrative. General and administrative expenses increased

202% from $263,000 for 1997 to $795,000 for 1998. The increase was primarily

due to salaries of newly hired executive and financial personnel to help manage

our growth.

 

     Non-cash Compensation. We had no non-cash compensation expenses for 1997.

Non-cash compensation expenses were $150,000 for 1998, which was primarily from

our issuance of non-plan options at exercise prices below fair market value.

 

 

Other Income (Expenses), Net.

 

     Other income (expenses), net increased from ($26,000) for 1997 to $67,000

for 1998, which was primarily from interest earned on our cash balance as a

result of our equity financings.

 

 

Net Loss

 

     Net loss increased $1.0 million to $1.2 million in 1998 from $200,000 in

1997.

 

 

Quarterly Results of Operations

 

     The following tables set forth selected unaudited quarterly statement of

operations data, in dollar amounts and as a percentage of net revenue, for each

of the four quarters ended December 31, 1999. In our opinion this information

has been prepared substantially on the same basis as the audited financial

statements appearing elsewhere in this prospectus, and all necessary

adjustments, consisting only of normal recurring adjustments, have been

included in the amounts stated below to present fairly the unaudited quarterly

results of operations data. The quarterly data should be read with our

financial statements and the notes to those statements appearing elsewhere in

this prospectus. The operating results for any quarter are not necessarily

indicative of results for any future period.

 

 

                                       33

     

 

 

      

        

                                                                Three Months Ended

                                             ---------------------------------------------------------

                                              March 31,     June 30,     September 30,    December 31,

                                                 1999         1999            1999            1999

                                             -----------  ------------  ---------------  -------------

                                                                  (in thousands)

                                                                                           

Net revenues ..............................   $    747      $  1,521       $  2,187        $  5,189

Cost of revenues ..........................         92           233          1,097           1,661

                                              --------      --------       --------        --------

Gross profit ..............................        655         1,288          1,090           3,528

                                              --------      --------       --------        --------

Operating expenses

   Sales and marketing ....................        720           998          2,898           2,534

   Research and development ...............        267           357            470             673

   General and administrative (exclusive of

     non-cash compensation) ...............        202           199            553           1,426

   Non-cash compensation ..................        586         3,945             41             357

                                              --------      --------       --------        --------

Total operating expenses ..................      1,775         5,499          3,962           4,990

                                              --------      --------       --------        --------

Loss from operations ......................     (1,120)       (4,211)        (2,872)         (1,462)

Other income (expenses), net ..............         13            71            336             468

                                              --------      --------       --------        --------

Net loss ..................................   $ (1,107)     $ (4,140)      $ (2,536)       $   (994)

                                              ========      ========       ========        ========

 

       

 

 

      

        

                                                               Three Months Ended

                                             -------------------------------------------------------

                                              March 31,    June 30,    September 30,    December 31,

                                                 1999        1999           1999            1999

                                             -----------  ----------  ---------------  -------------

                                                                                         

Net revenues ..............................       100%        100%           100%           100%

Cost of revenues ..........................        12          15             50             32

                                                  ---         ---            ---            ---

Gross profit ..............................        88          85             50             68

                                                  ---         ---            ---            ---

Operating expenses

   Sales and marketing ....................        96          66            133             49

   Research and development ...............        36          24             21             13

   General and administrative (exclusive of

     non-cash compensation) ...............        27          13             25             27

   Non-cash compensation ..................        79         259              2              7

                                                  ---         ---            ---            ---

Total operating expenses ..................       238         362            181             96

                                                  ---         ---            ---            ---

Loss from operations ......................      (150)       (277)          (131)           (28)

Other income (expenses), net ..............         2           5             15              9

                                                 ----        ----           ----            ---

Net loss ..................................      (148)%      (272)%         (116)%          (19)%

                                                 ====        ====           ====            ===

 

       

 

     Our net revenues have increased significantly in absolute dollars over the

past four quarters as a result of repositioning our focus on the domain name

registration services business. We expect that net revenues will continue to

increase in the future as we continue to expand our business and the market for

domain name registrations grows.

 

     Our operating expenses have increased significantly in absolute dollars

over the past four quarters as a result of our repositioning our focus on the

domain name registration service business. We expect operating expenses will

continue to increase in the future as we continue to expand our business.

 

 

Liquidity and Capital Resources

 

 

     Since 1997, we have funded our operations and met our capital expenditure

requirements primarily through private sales of equity securities, cash

generated from operations, and borrowings. Since inception, proceeds from the

sale of our common and preferred stock through 1999 totaled approximately $28.8

million. At December 31, 1999, we had $40.9 million of cash.

 

 

     Our business generated $22.4 million of cash from operations during 1999.

This cash generated from operations was primarily due to increased domain name

registrations. Net cash

 

 

                                       34

     

 

used in operating activities was $693,000 and $123,000 for 1998 and 1997,

respectively. The principal use of cash for these periods was to fund our

losses from operations.

     Net cash used for investing activities was $7.7 million, $267,000 and

$16,000 for 1999, 1998 and 1997, respectively. In each period, cash used for

investing activities related primarily to the purchase of property and

equipment and investments in our systems infrastructure.

 

     We generated $24.9 million, $2.2 million and $178,000 in cash from

financing activities for 1999, 1998 and 1997, respectively. For 1999,

substantially all of these financing activities were private sales of equity

securities. For 1998, the $2.2 million represents the issuance of equity

securities offset by the repayment of indebtedness. For 1997, cash from

financing activities represents borrowed indebtedness.

 

  

     Although we have no material commitments for capital expenditures or other

long-term obligations, we anticipate that we will substantially increase our

capital expenditures and lease commitments consistent with our anticipated

growth in operations, infrastructure and personnel, including the addition of

new products and services, implementation of additional co-location facilities

and various capital expenditures associated with expanding our facilities. We

currently anticipate that we will continue to experience significant growth in

our operating expenses for the foreseeable future and that our operating

expenses will be a material use of our cash resources. We intend to spend over

$25.0 million in 2000 on advertising and promotional programs and over $10.0

million on capital expenditures in 2000, and we believe that the net proceeds

from this offering, together with 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. We currently have no

plans to conduct an additional equity offering following our initial public

offering in 2000. However, we may be required to raise additional funds in 2000

if our business plans change. In addition, after 2000, to the extent we require

additional funds to support our operations, addition of new products and

services acquisitions or investments or the expansion of our business, we may

need to sell additional equity, issue debt or convertible securities, obtain

credit facilities or obtain other sources of funding. Additional financing may

not be available when needed or, if available financing may not be on terms

favorable to us. If additional funds are raised through the issuance of equity

securities, our existing stockholders may experience significant dilution.

   

 

     Additionally, if we are unsuccessful in completing our offering, we

believe that by reducing the anticipated marketing expenses, capital

expenditures and headcount, we will have sufficient cash to fund operations for

the next 12 months. By reducing these planned areas of spending, however, we

will significantly limit our ability to grow.

 

Recent Accounting Pronouncements

 

     In April 1998, the American Institute of Certified Public Accountants

issued Statement of Position 98-5, "Reporting on the Costs of Start-up

Activities" ("SOP 98-5"). SOP 98-5, which is effective for fiscal years

beginning after December 15, 1998, provides guidance on the financial reporting

of start-up costs and organization costs. It requires costs of start up

activities and organization costs to be expensed as incurred. As we have

expensed these costs historically, the adoption of this standard did not have a

significant impact on our results of operations or financial position.

 

     In June 1998, the Financial Accounting Standards Board issued Statement of

Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging

Activities" ("SFAS 133"), which establishes accounting and reporting standards

for derivative instruments, including certain derivative instruments embedded

in other contracts, (collectively referred to as derivatives) and for hedging

activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years

beginning after June 15, 1999. We do not expect the adoption of this statement

to have a significant impact on our results of operations or financial

position.

 

     In December 1999, the staff of the Securities and Exchange Commission

released Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition."

SAB 101 provides guidance on the recognition, presentation and disclosure of

revenue in financial statements. The additional guidance provided by SAB 101

had no effect on our financial statements.

 

 

                                       35

     

 

                                   BUSINESS

 

Overview

 

     We are a provider of Internet domain name registration services worldwide.

Domain names serve as part of the infrastructure for Internet communications

and registering a domain name is one of the first steps for individuals and

businesses seeking to establish an online identity. We believe that we offer a

quick and user-friendly registration process and responsive and reliable

customer support. We also offer a suite of value-added products and services

targeted to assist our customers in developing and maintaining their online

identities, including:

 

 

 

         Products and Services              Products and Services

             Provided by Us                   Provided by Others

 

  o domain name forwarding                o email

  o real-time domain name management,     o web hosting

                                          o website-creation tools

 

 

Our goal is to become a one-stop resource through which our customers

establish, maintain and enhance their presence on the Internet.

 

     We offer our products and services directly through our www.register.com

website and through our Corporate Services department, and indirectly through

our network of co-brand and private label websites, which include ISPs,

web-hosting companies and other companies whose websites may appeal to our

target customers. These distribution channels enable us to reach a broad range

of potential customers with products and services targeted to their needs and

to increase our exposure across the market. We seek to enter into business

alliances, which are important sources for new customer opportunities, brand

building, revenue growth and increased product and service offerings. We derive

our revenues from domain name registration fees, online products and services

and advertising. Our net revenues for the three months ended December 31, 1999,

were approximately $5.2 million, representing a 137% increase over the three

months ended September 30, 1999.

 

     We have been an active participant in the domain name registration

industry since February 1998. In June 1999, we became the first competitive

registrar to register domain names in the .com, .net and .org domains directly

on behalf of customers. For the three months ended December 31, 1999, we

registered approximately 308,000 new domain names in the .com, .net and .org

domains, representing an increase of 94% from the approximately, 159,000 domain

names we registered in the same domains for the three months ended September

30, 1999. During December 1999, we registered approximately 144,000 domain

names in the .com, .net and .org domains, representing a 252% increase over the

approximately 41,000 domain names we registered during July 1999, our first

full calendar month of operating as a registrar for these domains. We estimate,

based on our internal calculations, that growth in global domain name

registrations in all top level domains will accelerate over the next few years

from approximately 11 million domain names registered through September 30,

1999, to approximately 140 million domain names registered through the end of

2003.

 

 

Industry Background and Market Opportunity

 

     The Internet and Electronic Commerce

 

     The Internet has emerged as a significant global communications medium,

enabling businesses and individuals to conduct business and communicate

electronically. According to International Data Corporation, a technology and

Internet research consulting company commonly known as IDC, the number of

Internet users worldwide will grow from an

 

 

                                       36

     

 

estimated 142.2 million in 1998 to approximately 502.4 million by the end of

2003. IDC also expects the number of web pages to grow from 0.9 billion in 1998

to 13.1 billion by 2003. We believe that any growth in the number of Internet

users and web pages will result in a corresponding growth in the demand for

domain name registration services. In addition, IDC estimates that worldwide

electronic commerce will grow from $50.0 billion in 1998 to $1.3 trillion in

2003. We believe that this rapid growth of electronic commerce will contribute

to the growth in demand for domain name registration services as businesses

around the world establish an Internet presence in order to remain competitive.

 

 

     There is also a growing demand for products and services that enable

individuals and companies to establish and maintain their Internet presence.

IDC forecasts that the market for Internet and electronic commerce services

worldwide will grow from $7.4 billion in 1998 to $43.7 billion in 2002.

Businesses and individuals in the early stages of establishing their Internet

identities are seeking products and services such as website creation and

development tools, interactive capabilities, electronic commerce capabilities,

web hosting, website content and infrastructure. We believe that many of the

businesses and individuals registering domain names would appreciate the

convenience of being able to purchase these products and services through a

single source.

 

     The Internet is evolving into an important medium for advertisers due to

its interactive nature, global reach, rapidly growing audience and the

significant increase in electronic commerce. IDC estimates that spending on

Internet advertising will grow from $3.4 billion in 1999 to approximately $10.8

billion in 2003.

 

     Domain Name Registration System

 

     The domain name system is organized according to industry custom by

levels, so that, for example, in the domain name mybrand.com, .com is the top

level domain and mybrand is the second level domain. Top level domains are

classified as either generic or country code. The most common generic top level

domains are .com, .net and .org.

 

     There are over 250 different country code top level domains, such as

.co.uk and org.uk for the United Kingdom and .md for Moldova representing over

190 countries. Each registry for country code domain names is responsible for

maintaining and operating its own database of registered domain names. Some

country code domains are unrestricted and allow anyone, from anywhere, to

register their domain names on a first-come, first-served basis. Currently, 75

countries follow this unrestricted practice. Others require that prospective

registrants have a local presence in the country to be able to register for

domain names in that country. While there have been movements directed at

creating uniform domain name registration rules and registrar administration

guidelines, to date there is no international uniformity.

 

     From January 1993 until April 1999, Network Solutions was the sole entity

authorized by the U.S. government to act as registrar and registry for domain

names in the .com, .net and .org top level domains. Network Solutions continues

to act as sole registry, maintaining the files in the Shared Registration

System for the .com, .net and .org domains and the directory databases listing

these domain names and their numerical addresses.

 

     In October 1998, the Department of Commerce called for the formation of a

non-profit corporation to oversee the management of the .com, .net and .org

domains and in November 1998, ICANN was recognized as this non-profit

corporation. In April 1999, as a preliminary step to introducing competition

into the domain name registration system for .com, .net and .org domains, ICANN

selected five registrars to participate in a testbed to evaluate whether the

Shared Registration System could accommodate multiple registrars. On June 2,

1999, we were the first of these five competitive registrars to launch our

registration services. On November 30, 1999, the testbed was completed, and all

registrars meeting ICANN's standards for accreditation were permitted to

register domain names in the .com, .net and .org domains. As of February 24,

2000, there were 91 ICANN-accredited registrars, including Network Solutions.

 

 

                                       37

     

 

Of these, only 27 are connected to the Shared Registration System, and the

remaining accredited registrars are still in the development phase with respect

to offering registration services. An additional 18 companies have qualified

for accreditation but have yet to sign the agreements required by ICANN and

Network Solutions.

 

     For a detailed discussion of the regulatory background of the domain name

registration system, see "Administration of the Internet; Government Regulation

and Legal Uncertainties."

 

     Domain Name Registration Market

 

     As a result of the growth of the Internet and the introduction of

competition in the domain name registration industry, we believe there is great

potential for growth in the market for domain name registrations. We estimate,

based on our internal calculations, that growth in global domain name

registrations in all top level domains will accelerate over the next few years

from approximately 11 million domain names registered through September 30,

1999 to approximately 140 million domain names through the end of 2003.

 

  

     Although there has been a market for domain name registrations for over

six years, a substantial percentage of the growth in domain name registrations

has occurred more recently. The following industry statistics related to domain

name registrations are based on information contained in press releases issued

by Network Solutions. Approximately 90% of all domain names in the generic top

level domains were registered in the 18 months ended December 31, 1999 and over

80% were registered in the 12 months ended December 31, 1999. During the 12

months ended December 31, 1999, a total of approximately 7.4 million new domain

names in the .com, .net and .org domains were registered, an increase of 290%

over approximately 1.9 million new domain names registered in all of 1998. We

believe that the market for domain name registrations will continue to grow and

that this growth will be driven primarily by:

   

 

     Individuals. As more people begin to use the Internet and as online

activities become a greater part of family communications and identities, they

will want to establish their own unique presence on the Internet.

 

     Corporations. As a result of the significant growth in electronic

commerce, as well as the increasing focus on the global promotion and

protection of their corporate identities, corporations will continue to be

significant users of domain name registration services.

 

     Small offices and home offices. As small offices and home offices

increasingly move their businesses online, demand for domain name registration

and related online products and services will increase.

 

     Further, we believe that businesses will use domain names for a number of

distinct purposes, including:

 

     Products and services. Registering products and services as domain names

and establishing web identities related to particular products and services,

which are key components of a global promotional, marketing and brand

protection strategy.

 

     One-time events. One-time events, such as sporting events and elections,

which represent additional domain name registration opportunities as sponsors

increasingly turn to the Internet to differentiate and promote their events.

 

 

The Register.com Solution

 

     We offer products and services that assist individuals and businesses in

establishing, maintaining and enhancing their Internet presence. We believe

that our industry experience and our emphasis on, and ability to respond to,

the needs of our customers have positioned us to capitalize on the growing

market for domain name registration and related products and services. Our

competitive advantages include:

 

 

                                       38

     

 

     Substantial Industry Experience. We have been active in the domain name

registration industry since February 1998, when we began offering domain names

to customers throughout the world. We were one of five registrars selected by

ICANN to participate in the testbed process and, in June 1999, were the first

of these registrars to register domain names in the .com, .net and .org domains

directly on behalf of customers. Our experience in providing a consumer

interface for registrations prior to June 1999, our participation in the

testbed and our involvement with the development of ICANN's policies contribute

to our substantial operational experience in, and knowledge of, the domain name

registration industry.

 

 

     Customer Service Focus. Our customer support group seeks to provide

dependable and timely resolution of customer inquiries, 24 hours per day, seven

days per week. We manage and respond to customer inquiries through our

internally developed Internet-based customer care tracking system. We have

teams of customer service representatives who specialize in key aspects of our

business, and who are informed about our products, services and technology

through our ongoing training.

 

 

     Value-Added Products and Services. We have assembled a suite of targeted

products and services to assist our customers with their online identities. In

addition to our quick and easy-to-use domain name registration services, we

offer a range of value-added products and services that we provide or that are

provided by third parties, including advertisers. These products and services

include real-time domain management, web hosting, comprehensive email services,

domain name forwarding, trademark protection services, multi-year registration

and one-step registration for current users. We also offer services to

participants in our network of co-brand and private label websites to enable

them to manage their customers' domain names.

 

 

     Broad and Efficient Distribution Channels. We believe that our direct and

indirect distribution channels enable us to reach a broad range of potential

customers with products and services targeted to their needs and to increase

our exposure across the market. We sell our services directly through our www.

register.com website and dedicated Corporate Services account managers. We also

offer domain name registration services indirectly through our network of

co-brand and private label websites. This network currently consists of over

290 participants. We serve as the exclusive registrar for a substantial

majority of these participants.

 

 

     Scalable, Reliable and Secure Technological Platform. We designed and

developed our technological infrastructure with a view toward ensuring the

scalability, reliability and security essential to support the growth expected

in the domain name registration industry. Our selection by ICANN as a testbed

registrar was based in part on our technological plans.

 

 

The Register.com Strategy

 

 

     Our objectives are to continue to increase our share of domain name

registrations, to differentiate our service and to develop a long-term

relationship with our customers by helping them to establish, maintain and

enhance their online presence. Our key strategies for achieving these

objectives include:

 

 

  

     Introducing New Products and Services. We will continue to introduce new

products and services in order to empower our customers as they develop their

online presence. We anticipate that we will introduce the following new

products and services this year:

 

     o a billing consolidation for registrants with multiple domain names

 

     o account masking, to allow the domain name registrant to remain anonymous

 

     o a service designed to monitor usage of our customer's trademarks on the

       Internet

   

 

                                       39

     

 

  

As part of this strategy, we will continue to enter into new business

alliances, develop new applications and website features and invest in our

technologies. We believe that these enhancements will increase traffic to our

website and strengthen customer loyalty, as well as position us as a preferred

registrar for ISPs, web-hosting companies and other companies whose websites

may appeal to our target customers.

 

 

     Enhancing Brand Awareness. We will continue to build our brand awareness

and reputation in order to drive additional traffic to our website and attract

new strategic alliances, acquisition candidates, advertisers and talented

employees. We are promoting our brand through a marketing campaign, including

print and radio advertisements, increasing our distribution channels and adding

and improving our products and services. We also promote our brand through

speaking engagements, interviews and industry conferences.

   

 

     Extending Distribution Channels. We will continue to extend our

distribution channels in order to further broaden our potential customer base.

We are focusing on expanding the participants in our co-brand and private label

network and, in particular, to include companies that have significant

subscriber or user bases.

 

 

     Expanding Corporate Services Department. We will expand our Corporate

Services department by offering new products and services and by increasing our

targeted marketing to our potential customers. Our dedicated Corporate Services

account managers focus on servicing large corporate customers with offerings

such as multiple domain name registrations, multiple registration and registrar

transfers and international brand protection. We expect to expand our current

products and services to offer international trademark infringement

notification and account consolidation and billing.

 

  

     Pursuing Acquisitions and Investments. We intend to selectively pursue

acquisitions of, and investments in, companies, including other domain name

registrars and developers of web-based applications and services. We will

target companies that offer complementary products, services and technologies

that can expand our business. For example, we recently made an investment for

approximately 10% of the equity of GreatDomains.com, Inc. GreatDomains provides

a secondary market for companies and individuals to buy and sell domain names,

as well as brokerage and escrow services for these names.

   

 

     Offering Names in Additional Top Level Domains. We intend to continue to

offer our customers the ability to register domains in additional country codes

to meet their global needs. We also intend to register names in new generic top

level domains, such as .web, .firm and .store, if and when such domains become

available and we are authorized to do so by ICANN.

 

     Expanding Internationally. We are expanding our relationships with foreign

ISPs and other foreign companies in order to offer our products and services to

the growing international Internet market. We also intend to pursue alliances

to create local language websites to provide domain name registration and

value-added products and services to non-English speaking people.

 

Products and Services

 

 

     Registration Services. Our core expertise is providing domain name

registration services. We register domain names in the .com, .net and .org

domains and are able to register domain names in over 140 country code domains,

of which 26 may currently be registered through our www.register.com website.

As of January 15, 2000 we have supplemented our registration period offerings

to include one-, five- and ten-year registration periods for both the initial

and renewal domain name registration in the .com, .net and .org domains. For

our .com, .net and .org domain names, we currently charge $35 for a one-year

registration, $70 for

 

 

                                       40

     

 

a two-year registration, $159 for a five-year registration and $299 for a

ten-year registration. For our country code domain names, we currently charge

approximately $40 to $299 for one- or two-year registrations. We intend to

charge the same rates for renewals as we do for corresponding initial

registration periods. We provide the following basic products and services, for

no additional fee, together with our registration services:

 

   o FirstStepSite. Since February 9, 2000, we have provided new and existing

     customers who have registered domain names through us the ability to

     create a three-page website and post it on the Internet. Customers can

     select from a multitude of layouts, themes and colors and also upload

     images to customize their FirstStepSites.

 

   o FutureSite. For customers who do not take advantage of FirstStepSite, we

     provide a presence on the Internet immediately following registration

     until they launch their own website. Entering a customer's new domain name

     will bring up a webpage stating: "Coming Soon! We recently registered our

     domain name at register.com."

 

   o Domain Manager. This quick and easy-to-use service enables our customers

     to view and modify important domain name information online, on a

     real-time basis, including

     their email address, the location of the server that hosts their website

     and all billing information.

 

   o One-Step Registration. We provide our existing users the ability to

     register additional domain names through a one-step registration process

     using Domain Manager.

 

 

     Corporate Services. Through our Corporate Services department, we offer:

 

   o Multiple Domain Registrations. We register large numbers of domain names,

     typically greater than 30 per customer.

 

   o International Brand Protection. We are able to register domain names in

     over 140 country code domains, thereby assisting customers in protecting

     their brands.

 

   o Multiple Registration and Registrar Transfers. We facilitate the

     processing of domain name transfers between registrants. If we were not

     originally the registrar for a customer's domain names, we will facilitate

     our designation as the registrar for those domain names.

 

     Online Products and Services. We offer value-added products and services,

some of which we provide and some of which are provided by third parties

including advertisers. These products and services include:

 

   o Email. We resell comprehensive email services to our customers. These

     email services enable our customers to use their unique domain names to

     create branded email addresses, such as myname@mybrand.com.

 

   o SiteLink URL Forwarding. We have developed a domain name forwarding

     system that allows customers to forward traffic from their domain names to

     other web addresses.

 

   o Web Hosting. We offer web hosting to our customers primarily through

     Concentric Network Corporation and advertisers.

 

In addition, we pursue advertisers for our website to offer additional products

and services that are complementary to our own offerings and appeal to our

customers. These include:

 

     o trademark services;

 

     o incorporation services;

 

     o web hosting;

 

     o online marketing;

 

     o computer hardware and equipment; and

 

     o virtual intranet applications for the small office and home office

       market.

 

                                       41

     

 

Customer Service

 

 

     We believe that our ability to establish and maintain long-term

relationships with our customers depends, in part, on the strength of our

customer support operations and staff. Furthermore, we value frequent

communication with and feedback from our customers in order to continually

improve the quality of care provided by our customer service representatives.

Our customer service representatives handle general inquiries, investigate the

status of orders and payments and answer technical questions about the Internet

and domain name management.

 

 

     Our technology team developed our Internet-based customer service inquiry

tracking system, which we use to respond to substantially all customer service

inquiries. This system enables our customer service representatives to access

customer account information efficiently, including all past requests and our

responses. Additionally, based on information provided by our customers at the

time of their inquiry, our system automatically routes the inquiry to the

appropriate team of customer service representatives. This system also allows

our management to monitor the efficiency and effectiveness of our

representatives. We solicit feedback from our customers by emailing

quality-of-service surveys to them after we have resolved their inquiries. We

analyze the survey results on a quantitative and qualitative basis. These

responses provide us with real-time feedback on the quality of our customer

service.

 

 

Distribution

 

 

     We believe that our direct and indirect distribution channels enable us to

reach a broad range of potential customers with products and services targeted

to their needs and to increase our exposure across the market. We believe that

we provide our customers quick, easy-to-use, value-added and flexible solutions

across both of our distribution channels. In 1999, our direct distribution

channels accounted for approximately 90% of our revenue and our indirect

distribution channels accounted for approximately 10% of our revenue.

 

 

     Direct. We provide our products and services directly to our customers

through our www.register.com website. We also offer services to corporate

customers through our Corporate Services department.

 

 

   o Website. Through our www.register.com website, customers may register a

     domain name in six quick, easy-to-follow steps and access the value-added

     products and services we offer to establish, maintain and enhance their

     Internet presence. Through our affiliate program, we pay a commission for

     customer referrals that result in domain name registrations to encourage

     others to provide links to our website.

 

 

   o Corporate Services. We launched this service to meet the needs of our

     corporate customers. Many companies currently rely on internal brand

     managers and attorneys to register domain names related to their

     trademarks and brand names. We believe that we can provide these services

     more efficiently through our dedicated team of account managers.

 

 

     Indirect. We offer our products and services indirectly through our

network of co-brand and private label websites, which include ISPs, web-hosting

companies and other companies whose websites may appeal to our target

customers. In addition, we provide ISP Manager, a real-time domain management

tool that allows these companies to control aspects of the domain name for

their customers directly and to monitor their customers' domain name

registration activity. We currently have over 290 participants in our network

of co-brand and private label websites of which approximately 11 are private

label and the remaining are co-brand participants. Because our first private

label websites went live only recently, through December 31, 1999, over 95% of

our revenues derived from our indirect network have come from co-brand

participants.

 

 

                                       42

     

 

   o Co-brand. We provide our network participants with the opportunity to

     earn incremental revenue with minimal cost or effort on their part by

     providing them a co-branded website through which they can offer our

     services. In less than one day, we can construct and deliver a customized,

     co-branded website that offers the same quick, easy-to-use, six-step

     registration process available on our website. Typically, a co-branded

     website is accessed through the participant's home page and provides one

     or more links back to its website to facilitate the sale of additional

     products and services. Our "register.com" logo usually appears side by

     side with our co-brand participant's logo, providing us with additional

     brand visibility. We also typically manage all of the domain name support

     services, including notification, billing, collections and customer

     service. Co-brand participants typically enter into one-to-three year

     contracts with renewal options and receive commissions depending upon the

     volume of registrations and the nature of the relationship. A substantial

     majority of these contracts provide for us to act as exclusive domain name

     registrar for the co-brand participant.

 

   o Private Label. We offer companies that we expect will provide a large

     volume of registrations the opportunity to interface directly with our

     domain name registration system through which they can offer our services.

     This distribution channel allows an end-user to register a domain name and

     purchase other products and services on a webpage that maintains the look

     and feel of the website of our private label participant. Private label

     websites may also include the language "powered by register.com." We also

     offer our private label participants a range of billing, notification and

     customer support options.

 

     International. Our direct and indirect distribution channels are

accessible through Internet access worldwide. We currently offer our customers

the ability to register domain names in over 140 country code domains and have

over ten co-brand network participants with principal places of business

outside the United States.

 

 

Marketing

 

 

     Our marketing efforts focus on attracting customers by emphasizing our

simplified registration process and customer service. We use a combination of

Internet, print and radio advertisements. We believe this combination of online

and offline advertising is particularly effective in targeting individuals and

small- to medium-sized businesses.

 

     From September through December 1999, we sponsored two telephone surveys

of males aged 25-49 to measure brand awareness in the domain name registration

services industry. The surveys were conducted by Data Development Corporation,

a marketing research firm specializing in customized research. The results of

the surveys indicated that, while there is no dominant brand in the domain

registration industry, through aided and unaided prompting approximately 20% of

people surveyed recognized our brand prior to our launching any significant

advertising campaign.

 

 

Business Alliances

 

 

     We seek to enter into business alliances to expand our business. These

alliances are important sources for new customer opportunities, brand building,

revenue growth and increasing our product and service offerings.

 

 

Advertising Sales

 

 

     We believe that our growing user base provides advertisers and merchants

with an attractive platform from which to reach their target audience. During

the three-month period ended December 31, 1999, our advertising revenues

increased by 131% over the prior

 

 

                                       43

     

 

three-month period ended September 30, 1999. Because we attract visitors to our

website with the products and services we offer, as compared to other sites

that attract visitors with their content, we believe these visitors are more

likely to purchase goods or services through our website. In addition, we sell

advertising space on FutureSite pages.

 

 

Technology

 

     Our technology infrastructure is built and maintained for reliability,

scalability, flexibility and security and is administered by our skilled

technical staff.

 

     Facilities. Our online systems are located at Exodus Communications'

hosting facility in Jersey City, New Jersey and Globix Corporation's hosting

facility in New York, New York. We are currently adding network capacity to our

systems located at the Globix facility to make our systems geographically

redundant. We believe each facility has ample power redundancy, fire

suppression, peering to other ISPs, bandwidth and backbone redundancy to

support the current and anticipated growth of our business.

 

     Reliability. Our technology platform uses technologies to maximize

reliability. All hardware components are redundant through highly available

systems. We provide software and data reliability through a variety of

processes and quality-assurance procedures. Our standard procedures include

daily database backups, offsite storage of critical information and incremental

backups of ongoing database modifications. Additional reliability is provided

by our fault-tolerant and redundant platform architecture, which utilizes

clustering technology that is designed to ensure uninterrupted service.

 

     Scalability and Flexibility. We designed our systems to handle a large

volume of domain name registrations, general website traffic and domain name

server queries in an efficient, scalable and fault-tolerant manner. Our

application servers are clustered and use a shared file system which allows us

to add additional capacity. Our system is designed to scale easily and to

support rapid growth without the need to redesign the network.

 

     Security. Our technology incorporates a variety of security techniques to

protect domain name registration data, including limiting access to users that

are authenticated through a Virtual Private Network (VPN) and encrypting user

passwords at the time of account creation. We have initiated processes to

maintain internal server passwords as well as to ensure limited accessibility

to critical components on the network. Our network is protected by a suite of

industry-leading hardware/software security solutions.

 

     Ongoing Improvements. We are in the process of implementing new load

balancing and security protocols to help protect our network and further

improve scalability. We expect to add network operation centers in other

locations, which will help add redundancy and intelligent load balancing to our

systems. We believe that introducing geographic redundancy will enable us to

maintain systems that are less susceptible to regional Internet outages.

 

     Technology Staff. Our technology team is skilled in developing scalable,

reliable and critical applications and solutions. Many of our technologies,

including our web-based customer care tracking system, were developed in-house.

Our team of engineers monitors our systems 24 hours per day, seven days per

week.

 

     In 1997, 1998 and 1999, we spent $71,000, $277,000 and $1.8 million,

respectively, on our research and development activities.

 

 

Historical Operations

 

     We are the successor by merger to Forman Interactive Corp. Forman

Interactive commenced operations in 1994 as a developer of electronic commerce

software and began offering web hosting and related products and services in

1997. Forman Interactive's principal software product was Internet Creator, a

website management software program. We have not

 

 

                                       44

     

 

sold Internet Creator since October 1998 and ceased distributing it to our

web-hosting customers at no cost in spring 1999. We continue to operate our

web-hosting service. However, since its development is not part of our business

strategy, we are not actively promoting this service. In February 1998, we

began to distribute domain names, in most cases without charge and in a few

cases on commission basis when we distributed domain names for international

registrars and registries. In April 1999, we commenced offering registration

services for country code domains and in June 1999, we began offering

registrations in the .com, .net and .org domains.

 

 

Administration of the Internet; Government Regulation and Legal Uncertainties

 

 

     The Internet domain name registration system is composed of two principal

functions: registry and registrar. The registry maintains the database that

contains the domain names registered in the top level domains and their

corresponding Internet protocol addresses. The registrar acts as an

intermediary between the registry and individuals and businesses, referred to

as registrants, seeking to register domain names.

 

 

     Under a 1993 cooperative agreement with the U.S. Department of Commerce,

Network Solutions was authorized to act as the sole registry and sole registrar

for domain names in the .com, .net and .org, top level domains. On July 1,

1997, President Clinton approved and released a report entitled A Framework for

Global Electronic Commerce, in which he authorized the creation of an

inter-agency working group under the leadership of the Department of Commerce

to study domain name system registration and administration issues,

specifically the issue of privatizing the management of the domain name system.

In October 1998, in response to this report, the Department of Commerce amended

the Network Solutions cooperative agreement to call for the formation of a

not-for-profit corporation to oversee the management of, and create policies

regarding, domain names in the .com, .net and .org top level domains. The

Department of Commerce also proposed that additional registrars be authorized

to register domain names in these domains based upon the idea that competitive

registrars would benefit consumers and businesses. ICANN was recognized as this

not-for-profit corporation by the Department of Commerce in November 1998.

 

 

     ICANN's authority is based upon voluntary compliance with its consensus

policies. While these policies do not constitute law in the United States or

elsewhere, they are expected to have a significant influence on the future of

the domain name registration system.

 

 

     In April 1999, ICANN selected five testbed companies to act as registrars

to register domain names in the .com, .net and .org domains and compete with

Network Solutions. These five entities were Register.com, America Online, Inc.,

France Telecom, Melbourne IT and CORE, which is a worldwide consortium of

registrars. Each registrar was required to execute a one-year accreditation

agreement with ICANN. Register.com was the first of the testbed companies to

begin directly registering domain names. The testbed registrars were the first

registrars provided with access to the Shared Registration System, which

allowed them to interface directly with Network Solutions' registry. The

testbed period ended on November 30, 1999. As of February 26, 2000, 91

companies were accredited by ICANN to act as registrars.

 

 

     On November 10, 1999, ICANN, Network Solutions and the Department of

Commerce executed a set of agreements that were intended to amend the 1993

cooperative agreement and make Network Solutions an ICANN-accredited registrar.

These agreements also provided for Network Solutions to act as the registry

until November 30, 2003. If Network Solutions separates its registry and

registrar operations by May 9, 2001 and sells the registry assets to a third

party, the term of the agreement for the purchaser of the registry operations

will be extended for an additional four years until November 30, 2007. These

agreements provide that:

 

 

                                       45

     

 

   o Network Solutions is prohibited until approximately October 2000 from

     entering into exclusive agreements with any third-party partners,

     including web-hosting companies and ISPs. This provision is intended to

     provide us and other competitive registrars with the ability to enter into

     agreements with these third parties;

 

   o the annual fee that a registrar must pay to the registry for each domain

     name registered in a generic top level domain is $6 per year during the

     term of the agreement;

 

   o the registry for the .com, .net and .org domain names will no longer

     limit registrations to an initial period of two years. Since January 15,

     2000, the registry has accepted domain name registrations in the .com,

     .net and .org domains for periods from one to ten years; and

 

   o the InterNIC website www.internic.net, formerly controlled by Network

     Solutions, will be turned over to ICANN on May 31, 2000. This website

     links to a directory of domain names in the Network Solutions registry,

     and now contains information regarding the introduction of competitive

     registrars and includes the names of the operational, ICANN-accredited

     registrars.

 

     On December 1, 1999, ICANN's first substantive policy, the Uniform Dispute

Resolution Policy, became effective. This dispute resolution policy was created

to address the problem of cybersquatting, or registering the trademark of

another as a domain name with the intent to wrongfully profit from the goodwill

in that name created by the trademark holder. ICANN intends to create

additional policies governing the domain name registration system, and we will

be affected by any of these policies. We played a leading role in the drafting

and implementation of the Uniform Dispute Resolution Policy, and we intend to

continue to play an active role in the development of ICANN policies.

 

     We anticipate that new top level domains, such as .firm, .web and .store,

will eventually be authorized by ICANN for introduction into the domain name

registration system. The timing of the introduction of these new top level

domains depends on a number of factors, including reaching a consensus among

the international Internet community on what the domains will be, and what type

of registry will be established to serve as the repository for such domains. If

and when these domains become available, we intend to petition ICANN for

authorization to act as a registrar for these domains.

 

     There have been ongoing legislative developments and judicial decisions

with respect to trademark infringement claims, unfair competition claims, and

dispute resolution policies relating to the registration of domain names. To

help protect ourselves from liability in the face of these ongoing legal

developments, we have taken the following precautions:

 

   o in our standard registration agreement, we require that each registrant

     indemnify, defend and hold us harmless for any dispute arising from the

     registration or use of a domain name registered in that person's name; and

     

 

   o on December 1, 1999, we implemented the Uniform Domain Name Dispute

     Resolution Policy as approved by ICANN.

 

Despite these precautions, we cannot assure you that our indemnity and dispute

resolution policies will be sufficient to protect us against claims asserted by

various third parties, including claims of trademark infringement and unfair

competition.

 

     New laws or regulations regarding domain names and domain name registrars

may be adopted at any time. Our responses to uncertainty in the industry or new

regulations could increase our costs or prevent us from delivering our services

over the Internet, which could delay growth in demand for our services and

limit the growth of our revenues. New and existing laws may cover issues such

as:

 

     o pricing controls;

 

                                       46

     

 

   o the creation of additional generic top level domains and country code

     domains;

 

 

     o consumer protection;

 

 

     o cross-border domain name registration;

 

 

     o trademark, copyright and patent infringement;

 

 

     o domain name dispute resolution; and

 

 

     o other claims based on the nature of content of domain names and domain

       name registration.

 

 

     In November 1999, the Anticybersquatting Consumer Protection Act was

enacted by the United States government. This law seeks to curtail a practice

commonly known in the domain name registration industry as "cybersquatting." A

cybersquatter is generally defined in the Act as one who registers a domain

name that is identical or similar to another party's trademark, or the name of

another living person, in each case with the bad faith intent to profit from

use of the domain name. The law states that registrars may not be held liable

for registration or maintenance of a domain name for another person absent a

showing of the registrar's bad faith intent to profit from the use of the

domain name. Registrars may be held liable, however, if they do not comply

promptly with procedural provisions of the law. For example, if there is a

litigation involving a domain name, the registrar is required to deposit a

certificate representing the domain name registration with the court. To date,

there is no precedent to specify under what circumstances we may suffer

liability under this law. If we are held liable under this law, any liability

could have a material adverse effect on our business financial condition and

results of operations.

 

 

Competition

 

 

     We believe that our industry experience, product and service offerings,

customer service focus, quick and easy to use registration process and broad

and efficient distribution policies enable us to compete favorably in providing

domain name registration services and ancillary products and services and in

attracting advertisers. However, our competitors may have greater name

recognition, longer operational histories and greater financial, technical and

managerial resources and may undertake extensive marketing campaigns for their

brands and services, adopt aggressive pricing policies and make more attractive

offers to potential distribution partners, advertisers and customers.

 

 

     Competition in the Domain Name Registration Industry. As of February 26,

2000, Network Solutions and 27 other registrars, not including us, were

registering domain names in the .com, .net and .org domains. An additional 62

registrars have been accredited by ICANN but are not yet registering domain

names, and 18 registrars have qualified to register domain names in these

domains but have not yet signed the agreements required for registering domain

names in these domains. Our principal competitor in the market for domain name

registration services is Network Solutions. The barriers for other competitors

seeking to enter the market as domain name registrars include developing the

requisite technological infrastructure and meeting ICANN's accreditation

requirements. In addition to other registrars, we face competition from

companies who align themselves with accredited registrars to offer domain name

registration services, including ISPs, web-hosting companies,

telecommunications firms and Internet professional service firms.

 

 

     Competition with respect to our online products and services. A key

component of our business strategy is to offer value-added products and

services that encourage customers to use our website for the development and

maintenance of their online presence. The markets for our products and services

are highly competitive. Other registrars may develop or enter into strategic

relationships to offer products and services similar to those that we now

provide,

 

 

                                       47

     

 

including our email, domain-forwarding and website-hosting features. In

addition to competing with other registrars, we also compete with many other

providers of these products and services, including application service

providers and Internet professional services firms.

 

     Competition for Advertisers. We compete for Internet advertising and

sponsorship revenues with other domain name registrars, content-based websites,

ISPs, Internet content providers, large web-based publishers, Internet search

engines and portal companies and various other companies that facilitate

Internet advertising. We also compete with traditional offline media for a

share of advertisers' total advertising budgets.

 

 

Intellectual Property and Proprietary Rights

 

     We believe that we are well positioned in the domain name registration and

shared Internet web-hosting markets in part due to our highly recognized brand,

register.com. We regard our trademarks, copyrights, trade secrets and other

intellectual property as critical to our success. We rely on trademark and

copyright law, trade secret protection and confidentiality and/or license

agreements with our employees, customers, partners and others to protect our

intellectual property rights. Despite our precautions, third parties could

obtain and use our intellectual property without authorization. Furthermore,

the validity, enforceability and scope of protection of intellectual property

in Internet-related industries is uncertain and still evolving. The laws of

some foreign countries do not protect intellectual property to the same extent

as do the laws of the United States. Our trademark registration applications

are pending for "The First Step on the Web" and "SiteAmerica." All other

trademarks and service marks used in this prospectus are the property of their

respective owners.

 

     We have received initial rejections from the U.S. Patent and Trademark

Office on our trademark applications for "register" and "register.com" based on

descriptiveness. In due course we will be preparing a response arguing that

these brands have become widely known through extensive use in commerce and are

valid trademarks. While we will be taking all reasonable measures to secure

trademark registrations for the "register" and "register.com" marks, we cannot

assure you that we will be able to obtain these registrations.

 

     Effective trademark, service mark, copyright and trade secret protection

may not be available in every country in which our services are or will be made

available. We also expect to license proprietary rights such as trademarks or

copyrighted material to strategic partners in the course of planned national

and international expansion. While we will attempt to ensure in our agreements

that licensees will maintain the quality of our service, we cannot assure you

that they will not take actions that might diminish the value of our

proprietary rights or reputation and that could thereby materially harm our

business.

 

     We also rely on certain technologies that we license from other parties.

For instance, Network Solutions has licensed us the right to use key software

products and database technology. We cannot assure you that these third-party

technology licenses will not infringe on the proprietary rights of others or

will continue to be available to us on commercially reasonable terms, if at

all. The loss of such technology could require us to obtain substitute

technology of lower quality or performance standards or at greater cost, which

could materially harm our business.

 

     To date, we have not been notified that our technologies infringe the

proprietary rights of any third parties. There can be no assurance that others

will not claim that we have infringed their proprietary rights with respect to

past, current or future technologies. We expect that the number of infringement

claims in our market will increase as the number of services and competitors in

our industry grows. Any of those claims, whether meritorious or not, could be

time consuming, result in costly litigation, or require us to enter into

royalty or licensing agreements. Royalty or licensing agreements might not be

available on terms we find acceptable or at all. As a result, any such claim

could materially harm our business.

 

 

                                       48

     

 

Employees

 

     As of February 28, 2000, we had approximately 150 full-time employees.

None of our employees are represented by a labor union or are subject to

collective-bargaining agreements. We believe that we maintain good

relationships with our employees.

 

 

Facilities

 

     We currently lease approximately 20,000 square feet of space in one

location in New York, New York under a ten-year contract that expires in 2009.

We also sublease 2,700 square feet in our current location on a month-to-month

basis. We believe that our current space will meet our needs for approximately

one year.

 

 

Legal Proceedings

 

     We are not party to any material legal proceedings and are not aware of

any pending or threatened litigation that would materially and adversely affect

our business.

 

 

                                       49

     

 

                                  MANAGEMENT

 

 

Our executive officers and directors

 

     The following table sets forth our executive officers and directors, their

ages and the positions they hold:

 

 

 

      

        

Name                                Age                   Position

---------------------------------  -----  ---------------------------------------

                                            

Richard D. Forman (1) ...........   35    President, Chief Executive Officer

                                          and Chairman of the Board of Directors

Alan G. Breitman ................   30    Vice President of Finance and

                                          Accounting; Treasurer

Robert D. Gardos ................   27    Vice President of Technology

Sascha A. Mornell ...............   31    Vice President of Marketing

Jack S. Levy ....................   30    General Counsel and Secretary

Lauren M. Gaviser ...............   29    Director of Strategic Initiatives

Gerhard Karba ...................   43    Director of Development

Niles H. Cohen (1)(2) ...........   39    Director

Peter A. Forman .................   38    Director

Mark S. Hoffman (1)(2) ..........   38    Director

Samantha McCuen (2) .............   31    Director

Reginald Van Lee ................   41    Director

 

       

 

-------------

(1) Member of compensation committee.

(2) Member of audit committee.

 

 

     Richard D. Forman has been our Chief Executive Officer since March 1996

and our President since March 1998. He has served as one of our Directors since

our inception and as Chairman of the Board since May 1999. Since 1994, Mr.

Forman has also been the President of Lease On Line, Inc., a real estate

brokerage and management firm. In addition, Mr. Forman has managed real estate

in the New York City area since August 1992. Mr. Forman was formerly a

consultant with Booz Allen & Hamilton, Inc. in its New York City and Sydney,

Australia offices. Mr. Forman is the brother of Peter A. Forman, one of our

directors and co-founders. In 1987, Mr. Forman graduated from the University of

Pennsylvania's Management and Technology Program, and received his B.S. in

Economics from the Wharton School of Business and B.S. in Electrical

Engineering from the Moore School of Electrical Engineering. In 1992, Mr.

Forman received his M.S. in Real Estate from New York University.

 

 

     Alan G. Breitman has served as our Vice President of Finance and

Accounting since November 1998 and was appointed our Treasurer in December

1998. From December 1998 until October 1999, Mr. Breitman served as our

Secretary. From September 1998 through October 1998, Mr. Breitman served as the

Chief Financial Officer of Metro Lights Advertising, a domestic outdoor

advertising company. From August 1997 through August 1998, Mr. Breitman was the

Manager of Financial Planning and Analysis at Allaire Corporation, a developer

of Internet development tools. From May 1997 to July 1997, Mr. Breitman was the

Manager of Financial Planning and Analysis for Datamedic, a developer of

integrated point of care computerized patient record and practice management

solutions. From May 1996 to May 1997, Mr. Breitman worked as both the

accounting manager and financial analyst for Visibility, Inc., a developer of

manufacturing accounting systems. From 1995 to 1996, Mr. Breitman was the

Manager of Internal Financial Reporting for Xtra Corp. From 1992 to 1995, Mr.

Breitman was an auditor at Coopers & Lybrand, where he worked primarily with

high technology and financial services companies. Mr. Breitman received his

B.S. in Business from Skidmore College in 1992.

 

 

     Robert D. Gardos has served as our Vice President of Technology since June

1999. From June 1998 until June 1999, Mr. Gardos served as our Director of

Information Systems.

 

 

                                       50

     

 

From May 1997 to May 1998, Mr. Gardos was the Chief Financial Officer for

Touchlink, a privately held company that he co-founded to provide public

Internet kiosks. From December 1994 to April 1997, Mr. Gardos was a Senior

Consultant for Ernst & Young where he managed system selection and

implementation projects. From January 1994 to December 1994, Mr. Gardos was an

analyst for UMS Management group, a firm specializing in utility consulting.

Mr. Gardos received his B.S. in Economics from the Wharton School of Business,

with a concentration in Finance in 1993.

 

     Sascha A. Mornell has served as our Vice President of Marketing since June

1999. From May 1998 until June 1999, Mr. Mornell served as our Director of

Online Products and Marketing. From August 1997 to March 1998, Mr. Mornell was

Manager of International Business Development and Marketing at the National

Basketball Association in New York. From August 1992 to December 1995, Mr.

Mornell was the New Product Development Manager for Dreyer's Brand Ice Cream in

Tokyo, Japan. Mr. Mornell received his B.A. in History from the University of

California at Berkeley in 1990 and received his M.B.A. from Harvard Business

School in 1997.

 

     Jack S. Levy has served as our General Counsel and Secretary since October

1999. From September 1996 until October 1999, Mr. Levy was an associate in the

corporate department of Willkie Farr & Gallagher. Mr. Levy received his B.A. in

Government from Harvard College in 1992 and his J.D. from Columbia Law School

in 1996.

 

     Lauren M. Gaviser has served as our Director of Strategic Initiatives

since April 1999. From August 1996 until April 1999, Ms. Gaviser was a senior

associate at Booz Allen & Hamilton, Inc., in its Communications, Media and

Technology Practice in New York and from December 1992 until May 1994 was in

the Sales and Marketing division of Alcatel Bell Telephone in Antwerp, Belgium.

Ms. Gaviser received her B.A. in Spanish and Comparative Area Studies from Duke

University in 1992 and received her M.B.A. from Columbia University in 1996.

 

     Gerhard Karba has served as our Director of Development since October

1999. From November 1998 until September 1999, Mr. Karba was Executive Vice

President of Mik & Associates Inc., a custom software and systems integration

company. From December 1997 until October 1998, Mr. Karba was President of

Ambras Technologies, Inc., a software company that was acquired by Mik &

Associates. From 1993 to November 1997, Mr. Karba served as the President of

Paradigm Software Technologies, an enterprise software company specializing in

high-end project tracking and billing systems. Mr. Karba received his Executive

M.B.A. degree from Pace University in 1992, and his B.B.A. from Pace University

in 1986.

 

     Niles H. Cohen has served as one of our Directors since November 1995.

Since 1994, Mr. Cohen has been the Managing Member of Capital Express, LLC, a

New Jersey-based venture capital firm that he founded. Mr. Cohen is a member of

the boards of directors of several privately held companies, including

Awards.com, Inc., 1-800 BIRTHDAY.com, Inc. and MoneyHunt Properties, Inc. Since

December 1988, Mr. Cohen has been the President of Nihco Equities, Inc., an

investment and consulting firm that he founded. Mr. Cohen received his B.S. in

Economics from the Wharton School of Business in 1982.

 

     Peter A. Forman, our co-founder, has served as one of our Directors since

our inception in 1994. Mr. Forman served as our President from our inception in

1994 until March 1998 and as Chairman of the Board from our inception in 1994

until May 1999. Since January 1998, Mr. Forman has been a Managing Member of

Forman Capital Management, which specializes in early stage internet and

technology companies. Since February, 1999, Mr. Forman has served as President

of WellSet, a consumer and commercial products manufacturing, marketing, and

distribution company. From August 1983 until February 1999, Mr. Forman served

as the Chief Executive Officer of Ben Forman & Sons, Inc., a wholesale consumer

products manufacturer. Mr. Forman is the brother of the Company's President and

Chief Executive Officer, Richard D. Forman. Mr. Forman received his B.S. in

Economics from the Wharton School of Business in 1983.

 

 

                                       51

     

 

     Mark S. Hoffman has served as one of our Directors since March 1999. Since

October 1994, he has been a Member of Palisade Capital Management, LLC, the

investment manager of Palisade Private Partnership, L.P. Mr. Hoffman is a

director of several privately held companies, including C3i, Inc., Show

Digital, Inc., Berdy Medical Systems, Inc. and comstar.net, inc. Mr. Hoffman

received his B.S. in Economics from the Wharton School of Business in 1983.

 

     Samantha McCuen has served as one of our Directors since June 1999. She is

a Vice President of Sandler Capital Management. Ms. McCuen joined Sandler in

January 1996 and is currently responsible for analyzing, structuring and

managing Sandler's investments in Internet and technology companies in the

public and private sectors. She has been a principal of Sandler Internet

Partners, L.P. since October 1999. From 1990 to 1996, Ms. McCuen held both

equity research and investment banking positions at Morgan Stanley Dean Witter

where she specialized in Internet and PC software companies. Ms. McCuen

received her B.A. in Economics from Lehigh University in 1990.

 

     Reginald Van Lee has served as one of our Directors since January 2000.

Mr. Van Lee joined Booz Allen & Hamilton, Inc. in 1984 and has been a Partner

there since 1993. Mr. Van Lee, who specializes in international business

strategy and management of technology-driven companies in the global

communications, media and technology industries, is currently the Managing

Partner of Booz Allen & Hamilton's New York City office. Mr. Van Lee received

his B.S. in Civil Engineering in 1979 and his M.S. in Civil Engineering in 1980

from the Massachusetts Institute of Technology. In 1984, Mr. Van Lee received

his M.B.A. from Harvard Business School.

 

     Each of our directors was nominated and elected in accordance with our

Stockholders Agreement, as amended, and will hold office until the next annual

meeting of our stockholders. The Stockholders Agreement will terminate upon the

consummation of this offering in accordance with its terms.

 

     The Stockholders Agreement provides that we maintain a seven-member board

of directors and that each of the parties to the agreement vote all voting

stock in favor of the following:

 

   o Three director nominees designated by Richard D. Forman, Peter A. Forman

     and Dan B. Levine, subject to their collectively owning a specified

     minimum percentage of our shares and rights to acquire our shares. Richard

     D. Forman, Peter A. Forman and Reggie Van Lee serve as the directors

     designated by this group.

 

   o One director nominee designated by Capital Express, LLC, subject to its

     owning a specified minimum percentage of our shares and rights to acquire

     our shares. Niles H. Cohen currently serves as the director designated by

     Capital Express, LLC.

 

   o One director nominee designated by Internet Web Builders, LLC, subject to

     its owning a specified minimum percentage of our shares and rights to

     acquire our shares. Zachary Prensky initially served as the director

     designated by Internet Web Builders, LLC. Internet Web Builders, LLC does

     not have a designee currently serving on the board.

 

   o One director nominee designated by Palisade Private Partnership, LP,

     subject to its owning a specified minimum percentage of our shares and

     rights to acquire our shares. Mark Hoffman currently serves as the

     director designated by Palisade Private Partnership, LP. Palisade Private

     Partnership, LP may also designate a representative to attend board of

     directors' meetings in a non-voting observer capacity.

 

   o One director nominee designated by the holders of at least 50% of the

     outstanding Series A Preferred Stock, for as long as the Series A

     Preferred Stock represents at least 6% of our outstanding common stock and

     rights to acquire our common stock. Samantha McCuen currently serves as

     the director designated by the Series A Preferred Stock.

 

 

                                       52

     

 

     In January 2000, Internet Web Builders, LLC forfeited its right under the

Stockholders Agreement to designate a board member. The board position is

currently vacant and consistent with the Stockholders Agreement, is expected to

be filled by the remaining directors in office following the consummation of

our initial public offering.

 

 

Executive Officers

 

 

     Our executive officers are elected by our board of directors on an annual

basis and serve until the next annual meeting of the board or until their

successors have been duly elected and qualified.

 

 

Board Observers

 

 

     In connection with Internet Web Builder, LLC's forfeiture of its right to

designate a board member, we granted Kenneth Greif, the managing member of

Internet Web Builders, LLC, the non-transferrable right to attend meetings of

the board of directors as a non-voting observer, except in limited contexts.

Mr. Greif's observer rights will terminate on the earliest of:

 

   o 18 months after the consummation of our initial public offering;

 

 

   o the closing of a merger or acquisition in which we do not survive the

     transaction or our stockholders immediately prior to the transaction own

     less than 50% of the surviving company's voting securities;

 

 

   o the date upon which Mr. Greif no longer beneficially owns at least 5% of

     our outstanding securities; or

 

 

   o the date upon which Mr. Greif sends us a certified letter indicating his

     intention to terminate his observer rights.

 

 

     In December 1997, we borrowed an aggregate of $80,000 at an annual rate of

10% from Kenneth Greif. In connection with this transaction, we issued 11,200

shares of our common stock to Mr. Greif for no additional consideration. We

repaid this loan in January 1998.

 

 

Board Committees

 

 

     Audit Committee.  The audit committee reports to the board of directors

regarding the appointment of our independent public accountants, the scope and

results of our annual audits, compliance with our accounting and financial

policies and management's procedures and policies relative to the adequacy of

our internal accounting controls. The current members of the audit committee

are Mark S. Hoffman, Niles H. Cohen and Samantha McCuen.

 

 

     Compensation Committee. The compensation committee of the board of

directors reviews and makes recommendations to the board regarding our

compensation policies and all forms of compensation to be provided to our

executive officers and directors. In addition, the compensation committee

reviews bonus and stock compensation arrangements for all of our other

employees. The current members of the compensation committee are Richard D.

Forman, Mark S. Hoffman and Niles H. Cohen. Prior to the consummation of this

offering, Mr. Forman will step down from the compensation committee and will be

replaced by Reginald Van Lee.

 

 

Director Compensation

 

 

     We will pay directors who are not affiliated with any stockholder who

purchased shares from us prior to this offering, who we refer to as

unaffiliated directors, an annual fee of $4,000. Our other directors do not

receive compensation for their services as members of our

 

 

                                       53

     

 

board of directors. We reimburse our directors for expenses incurred in

connection with their attendance at board and committee meetings. We currently

do not provide additional compensation for committee participation or special

assignments of the board of directors.

 

     Reginald Van Lee, who is an unaffiliated director, is entitled to receive

options to purchase 35,000 shares of our common stock with an exercise price

equal to the initial public offering price of our common stock upon his joining

our board. Subject to his continuing service as a director, 50% of these

options will vest on the first anniversary of his becoming a director and the

remaining 50% will vest on the second anniversary. In addition, in

consideration for consulting services that Mr. Van Lee will provide to us, we

have granted to him options to purchase an additional 9,450 shares of our

common stock, with an exercise price equal to the initial public offering price

and a vesting schedule identical to the vesting schedule for his other options.

 

 

     Each future unaffiliated director, upon becoming a director, will receive

a grant of options to purchase 35,000 shares of our common stock with an

exercise price equal to the fair market value of our common stock on the close

of business on the date of grant. Subject to the option holder's continuing

service as a director, 50% of these options will vest upon the first

anniversary of the individual's becoming a director and 50% will vest upon the

second anniversary.

 

     No interlocking relationships currently exist between our board of

directors or compensation committee and the board of directors or compensation

committee of any other company, nor has any interlocking relationship existed

in the past.

 

 

Limitation on Directors' Liability and Indemnification

 

     Our amended and restated certificate of incorporation limits the liability

of directors to the maximum extent permitted by Delaware law. Delaware law

provides that directors of a corporation will not be personally liable for

monetary damages for breach of their fiduciary duties as directors, except

liability for:

 

     o any breach of their duty of loyalty to the corporation or its

       stockholders;

 

     o acts or omissions not in good faith or which involve intentional

       misconduct or a knowing violation of law;

 

     o unlawful payments of dividends or unlawful stock repurchases or

       redemptions; or

 

     o any transaction from which the director derived an improper personal

       benefit.

 

In accordance with applicable law, this limitation of liability does not apply

to liabilities arising under the federal securities laws and does not affect

the availability of equitable remedies such as injunctive relief or rescission.

 

 

     Our amended and restated certificate of incorporation and our amended and

restated bylaws provide that we will indemnify our directors and officers and

may indemnify our employees and other agents to the fullest extent permitted by

law. We believe that indemnification under our amended and restated bylaws

covers at least negligence and gross negligence on the part of indemnified

parties. Our amended and restated bylaws also permit us to secure insurance on

behalf of any officer, director, employee or other agent for any liability

arising out of his or her actions in his or her capacity as an officer,

director, employee or other agent, regardless of whether the amended and

restated bylaws would permit indemnification.

 

     The limited liability and indemnification provisions in our amended and

restated certificate of incorporation and amended and restated bylaws may

discourage stockholders from bringing a lawsuit against our directors for

breach of their fiduciary duty and may reduce the likelihood of derivative

litigation against our directors and officers, even though a derivative action,

if successful, might otherwise benefit us and our stockholders. A stockholder's

investment in us may be adversely affected to the extent we pay the costs of

settlement or damage awards against our directors and officers under these

indemnification provisions.

 

 

                                       54

     

 

     At present, there is no pending litigation or proceeding involving any of

our directors, officers or employees in which indemnification is sought, nor

are we aware of any threatened litigation that may result in claims for

indemnification.

 

 

Employment Agreements

 

     We have entered into employment agreements with each of Richard D. Forman,

our President and Chief Executive Officer and Jack S. Levy, our General

Counsel.

 

 

     Richard D. Forman.

 

 

     Mr. Forman's employment agreement with us became effective as of February

27, 2000 and has an initial term of 42 months, with automatic renewal for

successive one-year terms unless we or Mr. Forman give notice of cancellation

at least 90 days prior to the expiration of the agreement. The agreement

entitles Mr. Forman to receive a base salary of $200,000 per year,

discretionary annual bonuses and fringe benefits such as medical and dental

coverage, short and long term disability and life insurance.

 

 

     In addition, we granted Mr. Forman stock options under our 2000 Stock

Incentive Plan to purchase up to 525,000 shares of common stock, of which:

 

 

   o options to purchase 175,000 shares will have an exercise price equal to

     110% of the initial public offering price;

 

 

   o options to purchase 175,000 shares will have an exercise price equal to

     140% of the initial public offering price; and

 

 

   o options to purchase 175,000 shares will have an exercise price equal to

     160% of the initial public offering price.

 

 

     These stock options are to vest in equal monthly amounts over a 42-month

period, as long as Mr. Forman is employed by us. The options with an exercise

price equal to 110% of the initial public offering price will vest first, over

a 14-month period beginning on the date of the grant; the options with an

exercise price equal to 140% of the initial public offering price will vest

over the following 14 months; and the option with an exercise price equal to

160% of the initial public offering price will vest over the remaining 14

months of the 42-month period.

 

  

     The vesting of Mr. Forman's stock option will accelerate in full upon the

termination of Mr. Forman's employ by us without cause or by him for good

reason. In addition, if his employment is terminated without cause or for good

reason, Mr. Forman will be entitled to a lump-sum severance payment in an

amount equal to one month's base salary multiplied by the number of months

remaining in the contract term or 12 months, whichever number is greater. He

would also be entitled to medical and dental benefits for himself and his

eligible dependents under COBRA for a period of 18 months following the date of

termination. Mr. Forman is also entitled to an additional payment in order to

compensate him for any "golden parachute" excise tax that he incurs as a result

of receiving the severance payments and benefits provided for in the employment

agreement.

   

 

     In addition, if Mr. Forman's employment is terminated without cause or for

good reason, or due to his death or disability, he will be entitled to any

earned but unpaid salary, as well as accrued but unused vacation, any unpaid

bonus accrued prior to the date of termination, a pro rata bonus for the year

in which the termination occurs, reimbursement for business expenses and any

payments or benefits due under our policies or benefit plans. Mr. Forman may

terminate his employment upon one month's written notice to us.

 

 

     Mr. Forman is prohibited under his employment agreement from using or

disclosing any of our confidential information at any time in the future and

has assigned to us all rights to any inventions he develops during his

employment that pertain to our business or that are

 

 

                                       55

     

 

developed during work time or using our material or facilities. Mr. Forman is

also prohibited from competing with us or soliciting any of our customers or

employees during his employment and for a period of one year thereafter.

 

 

     In connection with Mr. Forman's prior employment agreement with us, he

received options to purchase up to 1,750,000 shares of common stock, of which:

 

 

     o options to purchase 525,000 shares have an exercise price of $0.17 per

       share;

 

     o options to purchase 350,000 shares have an exercise price of $0.46 per

       share;

 

     o options to purchase 350,000 shares have an exercise price of $0.86 per

       share; and

 

     o options to purchase 525,000 shares have an exercise price of $1.71 per

       share.

 

     All of Mr. Forman's options under his prior employment agreement are fully

vested and are exercisable at any time prior to January 4, 2003.

 

     Jack S. Levy.

 

     Mr. Levy's employment agreement with us became effective as of October 11,

1999. The agreement provides for a one-year term, at which time the term will

be extended for consecutive 45-day periods, unless terminated by either party.

Mr. Levy is entitled to an annual salary of at least $116,327 and received a

signing bonus of $25,000. Mr. Levy is also entitled to receive a $50,000 cash

bonus within 15 days of the closing of either our initial public offering or

our change in control, plus a $25,000 cash bonus at the one-year anniversary of

our initial public offering or the six-month anniversary of our change in

control. We have also granted Mr. Levy options to purchase up to 122,500 shares

of our common stock at an exercise price of $1.43 per share. These options vest

beginning on January 11, 2000 in 41 monthly installments of 2,916 shares and a

final monthly installment of 2,944 shares.

 

 

     We also granted Mr. Levy options to purchase 52,500 shares of our common

stock. The exercise price per share for these options will equal the initial

public offering price. These options vest on a monthly basis for a period of 42

months beginning on the closing of an initial public offering. The vesting of

Mr. Levy's options will accelerate upon the earlier of:

 

 

   o our change in control, in which case vesting will accelerate to the

     six-month anniversary of the closing of the transaction; or

 

 

   o the termination of Mr. Levy's employ by us without cause or by him for

     good reason following our change in control, in which case vesting will

     accelerate to the date of his termination.

 

 

     If Mr. Levy's employment is terminated by us without cause or by him for

good reason following our change in control, the vesting of any options that

would have vested through the expiration of the employment term had the

termination not occurred will be accelerated to the date of the termination.

This provision will apply to Mr. Levy's options to purchase 52,500 shares of

common stock only if an initial public offering or change in control has

occurred prior to the effective date of his termination. In addition, we would

be required to pay Mr. Levy the bonuses applicable to these transactions, as

well as pay his salary until the scheduled expiration of the employment

agreement. If Mr. Levy's employment is terminated due to death or for good

cause, or a voluntary resignation, he will not be entitled to any compensation

from us in addition to the payment of any accrued base salary, bonuses and

benefits.

 

 

                                       56

     

 

Executive Compensation

 

     The following table sets forth the total compensation paid or accrued for

the years ended December 31, 1999 and 1998 to our Chief Executive Officer and

to each of our most highly compensated executive officers other than our Chief

Executive Officer whose salary and bonus for 1999 exceeded $100,000. We refer

to the Chief Executive Officer and these other officers as named executive

officers.

 

 

                          Summary Compensation Table

 

 

 

      

        

                                                                                        Long-Term

                                                                                       Compensation

                                                             Annual Compensation          Awards

                                                           ------------------------   -------------

                                                                                        Securities

                                                                                        Underlying

Name and Principal Position                        Year     Salary($)     Bonus($)     Options (#)

-----------------------------------------------   ------   -----------   ----------   -------------

                                                                                        

Richard D. Forman .............................   1999     $162,737       $30,000              --

Chief Executive Officer and President .........   1998      114,462        20,000       1,750,000

Alan G. Breitman (1) ..........................   1999       97,019        60,000         175,000

Vice President Finance and Treasurer ..........   1998       10,096            --              --

Sascha A. Mornell (2) .........................   1999      102,000        50,000          17,500

Vice President Marketing ......................   1998       47,500            --         210,000

Robert D. Gardos (3) ..........................   1999       88,538        50,000         105,000

Vice President Technology .....................   1998       45,923            --         105,000

 

       

 

(1) Alan G. Breitman started with us in November 1998.

(2) Sascha A. Mornell started with us in May 1998.

(3) Robert D. Gardos started with us in June 1998.

 

 

Option Grants in Last Fiscal Year

 

     The following table sets forth grants of stock options for the year ended

December 31, 1999 to each of our named executive officers. The potential

realizable value is calculated based on the term of the option at its time of

grant. It is calculated assuming that the fair market value of common stock on

the date of grant appreciates at the indicated annual rate compounded annually

for the entire term of the option and that the option is exercised and sold on

the last day of its term for the appreciated stock price. These numbers are

calculated based on the requirements of the Securities and Exchange Commission

and do not reflect our estimate of future stock price growth. The percentage of

total options granted to employees in the last fiscal year is based on options

to purchase an aggregate of 1,063,510 shares of common stock granted under our

plans.

 

 

 

      

        

                                              Individual Grants

                             ---------------------------------------------------

                                               % of                                       Potential Realizable

                                              Total                                         Value at Assumed

                                             Options                                        Annual Rates of

                                Number       Granted                                          Stock Price

                               of Shares        to                                            Appreciation

                                                                                              Option Term

                              Underlying    Employees     Exercise                ------------------------------------

                                Options     in Fiscal    Price Per    Expiration

Name                            Granted        Year        Share         Date         0%           5%          10%

---------------------------  ------------  -----------  -----------  -----------  ----------  -----------  -----------

                                                                                                              

Alan G. Breitman ..........    105,000          10%     0.86          2/1/2009     $67,500     $156,514     $318,514

                                70,000           7%     1.43          5/1/2009      78,800      191,246      363,761

Sascha A. Mornell .........     17,500           2%     0.86          6/1/2009      29,700       57,812      100,940

Robert D. Gardos ..........     35,000           3%     1.14          1/1/2009       2,500       29,228       70,234

                                35,000           3%     1.43          5/1/2009      20,000       64,023      131,562

                                35,000           3%     1.43          6/1/2009      39,400       95,623      181,881

 

       

 

                                       57

     

 

Aggregated Option Exercises in the Year Ended December 31, 1999 and Year-End

Option Values

 

     The following table sets forth information concerning the options held by

each of our named executive officers at December 31, 1999. There was no public

trading market for the common stock as of December 31, 1999. Accordingly, the

values set forth below have been calculated on the basis of an assumed initial

public offering price of $20.00 per share, less the applicable exercise price

per share, multiplied by the number of shares underlying the options.

 

 

 

 

      

        

                                     Number of Shares                Value of Unexercised

                                  Underlying Unexercised             In-the-Money Options

                                Options at Fiscal Year End          at Fiscal Year End ($)

                              -------------------------------   ------------------------------

Name                           Exercisable     Unexercisable     Exercisable     Unexercisable

---------------------------   -------------   ---------------   -------------   --------------

                                                                                   

Richard D. Forman .........     1,750,000              --       $33,550,000             --

Alan G. Brietman ..........        39,584         135,416           750,131     $2,559,869

Sascha A. Mornell .........       109,375         118,125         2,131,250      2,298,750

Robert D. Gardos ..........        74,583         135,417         1,437,613      2,572,387

 

       

 

Stock Option Plans

 

     We adopted our stock option plans for the purpose of promoting our

long-term growth and profitability by providing key persons the incentive to

improve stockholder value and to contribute to our growth and success, as well

as to enable us to attract and retain talented and skilled persons for

positions of substantial responsibility. We have used stock options as a

component of compensation for our officers and key employees.

 

     1997 Stock Option Plan.

 

     Our predecessor company, Forman Interactive Corp., adopted our 1997 Stock

Option Plan in December 1997. We assumed the 1997 plan in our merger with

Forman Interactive. A total of 1,750,000 shares of common stock have been

authorized for issuance under the plan. As of December 31, 1999, options to

purchase an aggregate of 1,726,935 shares of common stock were outstanding

under the plan, and an aggregate of 23,065 shares of common stock are

authorized but have not yet been granted as awards under the plan. The number

and price of shares covered by outstanding stock options and the number of

shares authorized under the plan will be proportionately adjusted, as

determined by the board, to take into account any stock split, reverse stock

split, stock dividend, combination, recapitalization or similar event.

 

     Our officers, employees, non-employee directors and consultants are

eligible to participate in the plan. As plan administrator, our board of

directors has the sole discretion to determine which eligible individuals may

receive awards, the type of awards to be made and the terms and conditions of

each award.

 

     If we merge with another company and do not survive the merger, or we sell

substantially all of our common stock to another person, or enter into any

similar transaction, all outstanding options must be assumed by the surviving

company, unless the board determines in its sole discretion to terminate all

outstanding options effective at the closing of the transaction by delivering a

notice of termination to each optionholder at least 20 days prior to the

closing. Each optionholder would, however, have the right to exercise the

vested portion of the option during the period from the delivery of the notice

until the closing.

 

     No options may be granted under the plan after December 2007, but options

granted prior to that date may continue to be exercised until their stated

terms.

 

 

                                       58

     

 

     1999 Stock Option Plan.

 

 

     In April 1999, our board of directors adopted our 1999 Stock Option Plan,

which was approved by our stockholders in January 2000. A total of 2,275,000

shares of common stock have been authorized for issuance under the plan, and no

more than 1,750,000 shares may be issued under the plan to any one individual.

As of December 31, 1999, no options to purchase shares of common stock were

outstanding under the plan. The number and price of shares covered by

outstanding stock options and the number of shares authorized under the plan

will be proportionately adjusted, as determined by the board, to take into

account any stock split, reverse stock split, stock dividend, combination,

recapitalization or similar event.

 

 

     Our directors, officers, employees and consultants and other advisors are

eligible to participate in the plan. As plan administrator, the compensation

committee of our board of directors has the sole discretion to determine which

eligible individuals may receive awards, the type of awards to be made and the

terms and conditions of each award. Unless otherwise fixed by the plan

administrator, each option shall expire ten years from the date of grant. No

options may be granted under the plan after April 2009, but options granted

prior to that date may continue to be exercised until their stated terms.

 

 

     2000 Stock Incentive Plan.

 

 

     In January 2000, our board of directors adopted and our stockholders

approved our 2000 Stock Incentive Plan. Our 2000 Stock Incentive Plan is

intended to serve as the successor equity incentive program to our 1997 Stock

Option Plan and our 1999 Stock Option Plan. Outstanding options under the

predecessor plans will be incorporated into the 2000 Stock Incentive Plan upon

the consummation of this offering, and the incorporated options will continue

to be governed by their existing terms.

 

 

     We have authorized the issuance of up to 7,350,000 shares of common stock

under the 2000 Stock Incentive Plan. This share reserve consists of the shares

issuable under the predecessor plans on the effective date of the 2000 Stock

Incentive Plan plus an additional increase of 3,500,000 shares. The share

reserve will automatically be increased on the first trading day of January of

each calendar year, beginning in January 2001, by a number of shares equal to

2% of the total number of shares of common stock outstanding on the last

trading day of the prior calendar year, but no such annual increase will exceed

1,750,000 shares. In no event may any one participant receive option grants or

direct stock issuances for more than 1,750,000 shares in the aggregate per

calendar year.

 

 

     Except as otherwise noted below, the outstanding options under the

predecessor plans contain substantially the same terms and conditions

summarized below for the discretionary option grant program under the 2000

Stock Incentive Plan. The 2000 Stock Incentive Plan has five separate programs:

 

 

 

   o the discretionary option grant program under which eligible individuals

     in our employ or service (including officers, non-employee board members

     and consultants) may be granted options to purchase shares of our common

     stock;

 

 

   o the stock issuance program under which such individuals may be issued

     shares of common stock directly, through the purchase of such shares or as

     a bonus tied to the performance of services;

 

 

   o the salary investment option grant program under which executive officers

     and other highly compensated employees may elect to apply a portion of

     their base salary to the acquisition of special below-market stock option

     grants;

 

 

   o the automatic option grant program under which option grants will

     automatically be made at periodic intervals to eligible non-employee board

     members; and

 

 

                                       59

     

 

   o the director fee option grant program under which non-employee board

     members may elect to apply a portion of their retainer fee to the

     acquisition of special below-market stock option grants.

 

     The discretionary option grant and stock issuance programs will be

administered by our compensation committee. This committee will determine which

eligible individuals are to receive option grants or stock issuances, the time

or times when the option grants or stock issuances will be made, the number of

shares subject to each grant or issuance, exercise or purchase price for each

grant or issuance (which may be less than, equal to or greater than the fair

market value of the shares), the status of any granted option as either an

incentive stock option or a non-statutory stock option under the federal tax

laws, the vesting schedule to be in effect for the option grant or stock

issuance and the maximum term for which any granted option is to remain

outstanding. The committee will also select the executive officers and other

highly compensated employees who may participate in the salary investment

option grant program in the event that the program is activated for one or more

calendar years. Neither the compensation committee nor the board will exercise

any administrative discretion with respect to option grants made under the

salary investment option grant program or under the automatic option grant

program or director fee option grant program for the non-employee board

members.

 

     The exercise price for the options may be paid in cash or in shares of our

common stock valued at fair market value on the exercise date. The option may

also be exercised through a same-day sale program without any cash outlay by

the optionee. In addition, the compensation committee may allow a participant

to pay the option exercise price or direct issue price and any associated

withholding taxes incurred in connection with the acquisition of shares with a

full-recourse, interest-bearing promissory note.

 

     If we are acquired, each outstanding option under the discretionary option

grant program that is not to be assumed by the successor corporation or

otherwise continued will automatically accelerate in full, and all unvested

shares under the discretionary option grant and stock issuance programs will

immediately vest, except to the extent the repurchase rights with respect to

those shares are to be assigned to the successor corporation or otherwise

continued in effect. The compensation committee may grant options and issue

shares that will accelerate

   o in connection with an acquisition even if the options are assumed and

     repurchase rights are assigned;

   o in connection with a hostile change in control (effected through a

     successful tender offer for more than 50% of our outstanding voting stock

     or by proxy contest for the election of board members); or

   o upon a termination of the individual's service following a change in

     control or hostile takeover.

     If we are acquired, options currently outstanding under the 1997 and 1999

plans may be assumed by the successor corporation or the options may terminate.

The compensation committee may provide for acceleration of any options that

terminate in connection with the acquisition. These options are not by their

terms subject to acceleration in connection with any other change in control or

hostile takeover.

 

     Stock appreciation rights may be issued under the discretionary option

grant program that will permit holders to elect to surrender their outstanding

options for an appreciation distribution from us equal to the fair market value

of the vested shares subject to the surrendered option less the aggregate

exercise price payable for the shares. This appreciation distribution may be

made in cash or in shares of common stock. There are currently no outstanding

stock appreciation rights under the predecessor plans.

 

     The compensation committee has the authority to cancel outstanding options

under the discretionary option grant program, including options incorporated

from the predecessor plans, in return for the grant of new options for option

shares with an exercise price per share based upon the fair market value of the

common stock on the new grant date.

 

 

                                       60

     

 

     If the compensation committee elects to activate the salary investment

option grant program for one or more calendar years, each of our executive

officers and other highly compensated employee selected for participation may

elect to reduce his or her base salary for that calendar year by a specified

dollar amount not less than $10,000 nor more than $50,000. In return, the

individual will automatically be granted, on the first trading day in the

calendar year for which the salary reduction is to be in effect, a

non-statutory option to purchase that number of shares of common stock

determined by dividing the salary reduction amount by two-thirds of the fair

market value per share of our common stock on the grant date. The option

exercise price will be equal to one-third of the fair market value of the

option shares on the grant date. As a result, the fair market value of the

option shares on the grant date less the exercise price payable for those

shares will be equal to the salary reduction amount. The option will become

exercisable in a series of 12 equal monthly installments over the calendar year

for which the salary reduction is to be in effect and will be subject to full

and immediate vesting in the event of our acquisition or change in control.

 

 

     Under the automatic option grant program, each individual who first joins

the board on or after January 26, 2000, and who is not an employee board member

or an affiliate or representative of a beneficial owner of 3% or more of our

common stock, will automatically be granted an option for 35,000 shares of our

common stock at the time of his or her commencement of board service, unless

the individual has previously been in our employ. In addition, each individual

who continues to serve as a non-employee board member after an annual

stockholders meeting will receive an option grant to purchase 5,250 shares of

common stock on the date of the annual stockholders meeting beginning with the

first annual stockholders meeting held after the initial 35,000-share grant

under the automatic option grant program is fully vested. Each automatic grant

will have an exercise price equal to the fair market value per share of our

common stock on the grant date and will have a maximum term of 10 years,

subject to earlier termination following the optionee's cessation of board

service. Each option will be immediately exercisable, subject to our right to

repurchase any unvested shares, at the original exercise price, at the time of

the board member's cessation of service. Each 35,000-share option grant will

vest, and the repurchase right will lapse, in a series of two equal successive

annual installments upon the optionee's completion of each year of board

service over the two-year period measured from the grant date. Each 5,250-share

option grant will vest, and the repurchase right will lapse, upon the

optionee's completion of one year of board service measured from the grant

date. However, each such outstanding option will immediately vest upon a change

in control, a hostile takeover or the death or disability of the optionee while

serving as a board member.

 

 

     If the director fee option grant program is put into effect in the future,

then each non-employee board member may elect to apply all or a portion of any

cash retainer fee for the year to the acquisition of a below-market option

grant. The option grant will automatically be made on the first trading day in

January in the year for which the non-employee board member would otherwise be

paid the cash retainer fee in the absence of his or her election. The option

will have an exercise price per share equal to one-third of the fair market

value of the option shares on the grant date, and the number of shares subject

to the option will be determined by dividing the amount of the retainer fee

applied to the program by two-thirds of the fair market value per share of our

common stock on the grant date. As a result, the fair market value of the

option shares on the grant date less the exercise price payable for those

shares will be equal to the portion of the retainer fee applied to that option.

The option will become exercisable in a series of 12 equal monthly installments

over the calendar year for which the election is in effect. However, the option

will become immediately exercisable for all the option shares upon the death or

disability of the optionee while serving as a board member.

 

 

     Limited stock appreciation rights will automatically be included as part

of each grant made under the automatic option grant and salary investment

option grant programs and may

 

 

                                       61

     

 

be granted to one or more officers as part of their option grants under the

discretionary option grant program. Options with such a limited stock

appreciation right may be surrendered to us upon the successful completion of a

hostile tender offer for more than 50% of our outstanding voting stock. In

return for the surrendered option, the optionee will be entitled to a cash

distribution from us in an amount per surrendered option share equal to the

highest price per share of common stock paid in connection with the tender

offer less the exercise price payable for such share.

 

     The board may amend or modify the 2000 Stock Incentive Plan at any time,

subject to any required stockholder approval. The 2000 Stock Incentive Plan

will terminate no later than January 25, 2010.

 

     Employee Stock Purchase Plan.

 

     Our Employee Stock Purchase Plan was adopted by the board and approved by

the stockholders on January 26, 2000. The plan will become effective

immediately upon the execution of the underwriting agreement for this offering.

The plan is designed to allow our eligible employees and participating

subsidiaries, if any, to purchase shares of our common stock, at semi-annual

intervals, through their periodic payroll deductions. A total of 350,000 shares

of our common stock will initially be authorized for issuance under the plan.

The share reserve will automatically increase on the first trading day of

January each year beginning in January 2001, by 0.25% of the total shares of

common stock outstanding on the last trading day of the prior calendar year,

but no such annual increase will exceed 140,000 shares. In no event may any

participant purchase more than 700 shares, nor may all participants in the

aggregate purchase more than 122,500 shares on any one semi-annual purchase

date.

 

     The plan will have a series of successive offering periods, each with a

maximum duration of 24 months, except that the initial offering period will

begin on the date that the underwriting agreement is executed in connection

with this offering and will end on the last business day in April 2002. The

next offering period will begin on the first business day in May 2002, and

subsequent offering periods will be set by the compensation committee. Shares

will be purchased for the participants semi-annually during the offering

period. The first purchase date will occur on October 31, 2000. If the fair

market value of our common stock on any semi-annual purchase date is less than

the fair market value on the first day of the offering period, then the current

offering period will automatically end and a new offering period will begin,

based on the lower fair market value.

 

     Individuals who are eligible employees on the start date of any offering

period may enter the plan on that start date or on any subsequent semi-annual

entry date. Individuals who become eligible employees after the start date of

the offering period may join the plan on any subsequent semi-annual entry date

within that period.

 

     A participant may contribute up to 10% of his or her cash compensation

through payroll deductions and the accumulated payroll deductions will be

applied to the purchase of shares on the participant's behalf on each

semi-annual purchase date. The purchase price per share will be 85% of the

lower of the fair market value of our common stock on the participant's entry

date into the offering period or the fair market value on the semi-annual

purchase date.

 

     Generally, the board may at any time amend or modify the plan. The plan

will terminate no later than the last business day in April 2010.

 

 

                                       62

     

 

                CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

 

Equity Issuances and Financings

 

 

     In August 1996, we borrowed an aggregate of $100,000 from our co-founders,

Richard D. Forman, our President, Chief Executive Officer and Chairman of our

board of directors, Peter A. Forman, one of our directors, and Dan B. Levine, a

director at the time of the transaction, to fund our operations. In connection

with this transaction, we issued warrants to purchase shares of our common

stock at an exercise price of $0.24 per share as follows:

 

 

 

                                                             Value of

                                                         Underlying Shares

                                   Common Stock        Net of Exercise Price

Name of Investor               Underlying Warrants      at $20.00 per share

---------------------------   ---------------------   ----------------------

Richard D. Forman .........          156,244                $3,087,381

Peter A. Forman ...........          156,244                 3,087,381

Dan B. Levine .............           99,278                 1,961,733

 

     In January 1998, each exercised in full his warrants and used the amount

due from us under the loan to pay the exercise price.

 

     In September 1996, pursuant to a letter agreement among Capital Express,

LLC, Peter A. Forman, Richard D. Forman and Dan B. Levine, and in consideration

for personally guaranteeing a commercial loan to us in the amount of $162,000

from Citibank, N.A., we issued to each of Richard D. Forman and Peter A. Forman

warrants to purchase 472,500 shares of our common stock at an exercise price of

$0.17 per share. In January 1998, each forfeited accrued but unpaid

compensation in order to effect a cashless conversion of these warrants. The

aggregate value of these shares based on an assumed initial public offering

price of $20.00 per share would be $18,900,000.

 

     In December 1997, we borrowed an aggregate of $80,000 at an annual rate of

10% from Kenneth Greif, the managing member of Internet Web Builders, LLC. In

connection with this transaction, we issued 11,200 shares of our common stock

to Mr. Greif for no additional consideration. The value of these shares based

on an assumed initial public offering price of $20.00 per share would be

$224,000. We repaid this loan in January 1998.

 

 

     Also, in January 1998, we sold 2,800,000 shares of our common stock at a

price of $0.36 per share to Internet Web Builders, LLC for a purchase price of

$1.0 million. The aggregate value of these shares based on an assumed initial

public offering price of $20.00 per share would be $56,000,000. Concurrently

with the closing of this transaction, we issued warrants to purchase up to an

aggregate of 2,450,001 shares of our common stock based upon our reaching

specified revenue targets at an exercise price of $0.36 per share. In June

1999, we modified the terms of the warrants to remove the revenue targets, to

fix the number of shares underlying the warrants at 2,450,001 and to increase

the exercise price to $0.97 per share. These warrants were issued on a pro rata

basis to the stockholders immediately prior to the Internet Web Builders

investment as follows:

 

 

      

        

                                                                Value of

                                                            Underlying Shares

                                      Common Stock        Net of Exercise Price

Name of Investor                  Underlying Warrants      at $20.00 per share

------------------------------   ---------------------   ----------------------

                                                            

Richard D. Forman ............         699,717                 $13,315,615

Peter A. Forman ..............         548,247                  10,433,140

Dan B. Levine ................         283,798                   5,400,676

Capital Express, LLC .........         918,239                  17,474,088

 

       

 

     As payment of a finder's fee in connection with the Internet Web Builders

investment, we issued to each of Zachary Prensky, our then director, and Niles

Cohen, our current director, warrants to purchase 350,000 shares of our common

stock, at exercise prices of $0.36 for 50%

 

 

                                       63

     

 

of the shares and $0.86 for the remaining shares. The aggregate value of the

shares underlying these warrants, net of the exercise price, based on an

assumed initial public offering price of $20.00 per share, would be

$13,573,000. At the time of the transactions, Zachary Prensky was both one of

our directors and the managing member of Internet Web Builders. In addition,

Niles Cohen is, and at the time of the transactions was, the managing member of

Capital Express, LLC.

 

     In May 1998, we sold 3,640,000 shares of our common stock at a purchase

price of $0.36 per share. The aggregate value of these shares based on an

assumed initial public offering price of $20.00 per share would be $72,800,000.

Of these, our directors, executive officers, stockholders beneficially owning

5% or more in the aggregate of our common stock and Melvin Forman, an immediate

family member of two of our directors, purchased shares as follows:

 

 

 

 

                                                      Value of Shares

Name of Investor                   Common Stock     at $20.00 per share

-------------------------------   --------------   --------------------

Richard D. Forman .............        308,000          $ 6,160,000

Peter A. Forman ...............        308,000            6,160,000

Capital Express, LLC ..........        140,000            2,800,000

Internet Web Builders .........      1,764,000           35,280,000

Melvin Forman .................        280,000            5,600,000

 

 

     Concurrently with the closing of this transaction, as payment of a

finder's fee, we issued to each of Zachary Prensky and Niles Cohen warrants to

purchase 221,669 shares of our common stock, at exercise prices of $0.36 for

50% of the shares and $0.86 for the remaining shares. The aggregate value of

the shares underlying these warrants, net of the exercise price, based on an

assumed initial public offering price of $20.00 per share, would be $8,596,324.

 

 

     In March 1999, we issued 1,499,999 shares of our Exchangeable Preferred

Stock to Palisade Private Partnership, L.P. at a purchase price of $2.00 per

share. These shares were automatically converted to common stock on August 15,

1999, in accordance with their terms. The value of these shares based on an

assumed initial public offering price of $20.00 per share would be $29,999,980.

In addition, we entered into a service agreement with Palisade Private

Partnership, LP, whereby Palisade agreed to provide us six months of financial

and strategic advisory services in exchange for a warrant to purchase 420,000

shares of our common stock at a price of $2.14 per share. The aggregate value

of the shares underlying these warrants, net of the exercise price, based on an

assumed initial public offering price

of $20.00 per share, would be $7,501,200. Mr. Hoffman, one of our current

   directors,

is a member of Palisade Private Holdings, LLC, the General Partner of Palisade

Private Partnership L.P.

 

     In May 1999, we sold 2,041,666 shares of our common stock to Staples, Inc.

at a price of $3.43 per share. The value of these shares based on an assumed

initial public offering price of $20.00 per share would be $40,833,320. In

connection with the transaction, we issued to Staples warrants to purchase up

to 700,000 shares of our common stock at an exercise price of $0.0029. The

aggregate value of the shares underlying these warrants, net of the exercise

price, based on an assumed initial public offering price of $20.00 per share,

would be $13,997,970.

 

     From June 1999 through July 1999, we sold 4,694,333 shares of our Series A

Convertible Preferred Stock at a purchase price of $3.43 per share. The value

of these shares based on an assumed initial public offering price of $20.00 per

share would be $93,886,660. In connection with these transaction, we issued

warrants to purchase 938,888 shares of our common stock, each at an exercise

price of $3.43 per share. The aggregate value of the shares underlying these

warrants, net of the exercise price, based on an assumed initial public

offering price of $20.00 per share, would be $15,557,374. Of these, our

directors, officers and stockholders beneficially owning 5% or more in the

aggregate of our common stock purchased shares and were issued warrants as

follows:

 

 

                                       64

     

 

  

 

      

        

                                                                                              Aggregate Value

                                                                                               of Securities

                                            Series A Convertible        Common Stock       Net of Exercise Price

Name of Investor                               Preferred Stock      Underlying Warrants     at $20.00 per share

-----------------------------------------  ----------------------  ---------------------  ----------------------

                                                                                            

Richard D. Forman .......................             1,460                   291               $    34,022

Peter A. Forman .........................             4,893                   980                   114,099

Dan B. Levine ...........................               459                    95                    10,754

Alan G. Breitman ........................            15,585                 2,919                   360,068

Concentric Network Corporation ..........         1,458,335               291,669                33,999,655

Internet Web Builders, LLC ..............             6,934                 1,386                   161,646

Sandler Capital IV FTE Partners L.P.                381,500                76,300                 8,894,291

Sandler Capital Management ..............           145,835                29,169                 3,400,030

Sandler Capital IV Partners L.P. ........           931,000               186,200                21,705,334

Staples, Inc. ...........................           120,659                24,136                 2,813,114

 

       

   

     Samantha McCuen, one of our current directors, is a Vice President of

Sandler Capital Management and a principal of Sandler Internet Partners L.P. At

the time of the Series A Convertible Preferred Stock financing, Zachary Prensky

was one of our directors and a managing member of Internet Web Builders, LLC.

 

 

Related Party Transactions

 

  

     Legg Mason Wood Walker, Incorporated earned an advisory fee in connection

with the sale of our Exchangeable Preferred Stock, our common stock to Staples

and our Series A Convertible Preferred Stock, consisting of $1.1 million in

cash and warrants to purchase 494,449 shares of our common stock at an exercise

price of $4.08 per share. The aggregate value of the shares underlying these

warrants, net of the exercise price, based on an assumed initial public

offering price of $20.00 per share, would be $7,871,628. In addition, we

granted Legg Mason piggyback registration rights with respect to the common

stock issuable upon exercise of their warrants. We also agreed that Legg Mason

could be included as a managing underwriter in connection with our initial

public offering. Upon consummation of our initial public offering, Legg Mason

will beneficially own approximately 0.2% of our common stock.

 

     In May 1999, we entered into a cooperative marketing agreement with

Staples. The agreement gives us the exclusive right to market our domain name

registration services on all of Staples' branded properties, including

Staples.com's website and the Staples retail stores. Further, the agreement

gives Staples the exclusive right to market its office supplies on our website.

In addition, the agreement restricts us from entering into similar marketing

agreements with entities that derive more than 20% of their revenue from the

sale of office supplies. The initial term of the agreement ends on May 31,

2002, but automatically renews for consecutive one-year terms unless terminated

by either party upon 60 days' written notice. No cash payments are required to

be paid by either Staples or us under this cooperative marketing agreement.

Upon consummation of our initial public offering, Staples will beneficially own

approximately 12.9% of our common stock.

 

     In June 1999, we entered into a marketing and distribution agreement with

Concentric Network Corporation. The agreement makes us the exclusive provider

of domain name registration services in generic top level domains for

Concentric's branded web-hosting and electronic services. The agreement also

provides that Concentric will be one of up to three web-hosting or electronic

commerce service providers on our website. Concentric has agreed to purchase

advertising space on our website through December, 2000, at a rate of $100,000

per month, and for the seven months commencing March 2000 at a rate of $100,000

per month, plus an additional $800,000 for the period from September to

December 2000. In addition, Concentric has agreed to pay us a $75 commission

for each of our customers who use Concentric's services. We pay Concentric

$41,666.67 per month under the agreement for co-branded marketing programs. We

also pay Concentric a commission not to exceed 20% of the net revenue generated

by new registrations originating from Concentric based upon the volume of these

new registrations. The term of our agreement with Concentric expires on

December 31, 2000. Upon consummation of our initial public offering, Concentric

will beneficially own approximately 5.9% of our common stock.

   

 

 

                                       65

     

 

Registration Rights Agreement

 

 

     In connection with the sale of our Series A Convertible Preferred Stock,

we entered into a Registration Rights Agreement with Dan B. Levine, Peter A.

Forman, Richard D. Forman, Capital Express, L.L.C., Internet Web Builders,

L.L.C., Palisade Private Partnership, L.P., Staples, Inc. and the purchasers of

our Series A Preferred Stock. This Registration Rights Agreement amends and

restates the registration rights agreement that we entered into in connection

with the sale of our Exchangeable Preferred Stock and our sale of common stock

to Staples. For a description of the Registration Rights Agreement, please see

"Description of Capital Stock--

Registration Rights Agreement."

 

 

Stockholders Agreement

 

 

     Also in connection with the sale of our Series A Convertible Preferred

Stock, we entered into a Stockholders Agreement with the parties to our

Registration Rights Agreement. This Stockholders Agreement will terminate upon

the occurrence of a number of specified conditions, including the consummation

of this offering. Our Stockholders Agreement amends and restates the

stockholders agreement that we entered into in connection with the sale of our

Exchangeable Preferred Stock and our sale of common stock to Staples. Under the

current Stockholders Agreement, the parties agreed to restrictions on the

transferability of their shares in number of specified circumstances, including

rights of first refusal, tag along rights and drag along rights. In addition,

the Stockholders Agreement, which will terminate upon the consummation of our

initial public offering, provides that we must obtain Staples' written consent

prior to entering into a merger, consolidation or sale of all or substantially

all of our assets unless the merger consideration equals at least $3.43 per

share of common stock, with adjustments for stock splits, dividends and similar

events.

 

 

     The Stockholders Agreement also requires the stockholders to vote all of

their voting stock, subject among other things to minimum stock holding

requirements, in favor of

 

 

     o three directors designated by Richard D. Forman, Peter A. Forman and Dan

       B. Levine;

 

     o one director designated by Capital Express, LLC;

 

     o one director designated by Internet Web Builders, LLC;

 

     o one director designated by Palisade Private Partnership, L.P; and

 

     o one director designated by the holders of at least 50% of the outstanding

       Series A Preferred Stock.

 

 

     In February 2000, Internet Web Builders, LLC agreed to forfeit its right

to designate a board member. In connection with this agreement, we granted

Kenneth Greif, the managing member of Internet Web Builders, LLC, the right to

attend meetings of the board of directors as a non-voting observer, except in

limited contexts. Mr. Greif's observer right is non-transferrable and will

expire upon the earliest of:

 

 

   o 18 months after the consummation of our initial public offering;

 

 

   o the closing of a merger or acquisition in which we do not survive the

     transaction or our stockholders immediately prior to the transaction own

     less than 50% of the surviving company's voting securities;

 

 

   o the date upon which Mr. Greif no longer beneficially owns at least 5% of

     our outstanding securities; or

 

 

   o the date upon which Mr. Greif sends us a certified letter indicating his

     intention to terminate his observer rights.

 

 

                                       66

     

 

Transactions Between Principal Stockholders

 

     In February 2000, Capital Express, LLC entered into an agreement to sell

to Staples, Inc. warrants to purchase 918,239 shares of our common stock with

an exercise price of $0.97 per share. Niles H. Cohen, one of our directors, is

the managing member of Capital Express, LLC. The purchase price per warrant

will equal the initial public offering price per share of our common stock less

the exercise price. The aggregate value of the shares underlying these

warrants, based on an assumed initial public offering price of $20.00 per

share, would be $17,474,088. The sale price of the warrants will be at a price

less than the deemed fair value of the warrants, as calculated using the

Black-Scholes model. As a result, we will record approximately $400,000 of

expense related to this transaction in the first quarter of 2000.

 

     On February 28, 2000 Staples also entered into an agreement with Richard

D. Forman, our President, Chief Executive Officer and the chairman of our board

of directors, to purchase 75,000 shares of common stock at a purchase price per

share equal to the initial public offering price per share of our common stock.

The aggregate value of these shares, based on an assumed initial public

offering price of $20.00 per share, would be $1,500,000. As part of the same

agreement, Staples has agreed with Palisade Private Partnership, L.P., to

purchase an additional 75,000 shares of our common stock at a purchase price

per share equal to the initial public offering price per share of our common

stock. Mark S. Hoffman, one of our current directors, is a member of Palisade

Private Holdings, LLC, the General Partner of Palisade Private Partnership L.P.

The aggregate value of these shares based on an assumed initial public offering

price of $20.00, would be $1,500,000.

 

     Each of these Staples transactions will be consummated on the day after

the date on which the registration statement for this offering becomes

effective. Staples, Inc. has entered into two lock-up and voting agreements

with us, which generally require Staples not to transfer or otherwise dispose

of any of our securities for a period of one year following the date of our

initial public offering, unless the initial public offering is not consummated

by May 2000 or if the transfer is to an affiliate of Staples. As a condition of

any transfer, the transferee must agree to receive and hold the securities

subject to the lock-up and voting agreement. In addition, the agreements

provide that, for as long as Staples beneficially owns more than 5% of our

outstanding voting securities, Staples must not vote against any matter put

before our stockholders if the holders of at least a majority of our voting

securities, excluding Staples, have voted in favor of the matter, with limited

exceptions.

 

  

     No monetary exchanges between Staples and us are required under these

agreements.

   

 

Other Transactions

 

     From inception until May 1998, we utilized office space and received

administrative services from Ben Forman & Sons, Inc. for which we paid $18,682

in 1997 and $577 in 1998. Melvin Forman, an executive officer of Ben Forman &

Sons, is the father of Richard D. Forman and Peter A. Forman. During 1998,

Peter A. Forman served as an executive officer of Ben Forman & Sons.

 

     We pay $500 per month to one of Lease On Line, Inc.'s employees for

facilities management services provided to us. We have also issued options to

purchase 5,000 shares of our common stock to this employee. In addition, we

provide Lease On Line the use of approximately 200 square feet of our office

space and various office services without charge. Richard D. Forman is the

President and principal owner of Lease On Line.

 

     We have entered into employment agreements with Richard D. Forman and Jack

S. Levy. For a detailed description of these agreements, please see

"Management--Employment Agreements."

 

 

                                       67

     

 

     In addition, in consideration for consulting services that Mr. Van Lee

will provide to us, we have issued him options to purchase an additional 9,450

shares of our common stock, with an exercise price equal to the initial public

offering price and a vesting schedule identical to the vesting schedule for his

other options.

 

     We believe that all of the transactions set forth in this section were

made on terms no less favorable to us than could have been obtained from

unaffiliated third parties. We intend that all future transactions between us

and any of our officers, directors, principal stockholders and their affiliates

will be approved by a majority of the independent and disinterested directors

on our board of directors and will be on terms no less favorable to us than

could be obtained from unaffiliated third parties.

 

 

Board of Advisors

 

     We have established a Board of Advisors to assist with the planning of our

strategic growth and development. The Board of Advisors currently consists of

Robert H. Lessin, Co-Chief Executive Officer of Wit Capital Corporation, Stuart

D. Levi, a partner in the firm of Skadden, Arps, Slate, Meagher & Flom LLP,

Peter J. Varvara, the President and Chief Executive Officer of Customer

Strategies Worldwide, and Steve W. Klebe, Vice President of Payment Alliances

Cybersource. Members of the Board of Advisors do not receive a stated salary

for their services as members. From time to time, the Board of Directors has

granted warrants to purchase common stock as compensation to the members of the

Board of Advisors. As of December 31, 1999, we have granted warrants to

purchase an aggregate of 31,500 shares to the members of the Board of Advisors,

at exercise prices ranging from $0.43 to $2.86 per share.

 

 

                                       68

     

 

                      PRINCIPAL AND SELLING STOCKHOLDERS

 

 

     The following table sets forth information with respect to the beneficial

ownership of our common stock as of February 3, 2000, and as adjusted to

reflect the sale of the shares of common stock offered hereby, by each person

or group of affiliated persons whom we know to beneficially own 5% or more of

our common stock, each director, each named executive officer, all of our

directors and executive officers as a group and each selling stockholder.

Unless otherwise indicated, the address of each officer, director and principal

stockholder listed below is c/o Register.com, Inc., 575 Eighth Avenue, 11th

Floor, New York, New York 10018.

 

 

     As of February 3, 2000, we had 25,761,130 shares of common stock

outstanding, assuming the conversion of all outstanding shares of Series A

Convertible Preferred Stock. The following table gives effect to the shares of

common stock issuable within 60 days of February 3, 2000 upon the exercise of

all options and other rights beneficially owned by the indicated stockholders

on that date. Beneficial ownership is determined in accordance with the rules

of the Securities and Exchange Commission and includes voting or investment

power with respect to securities. To our knowledge, except as set forth in the

footnotes to the following table, each stockholder identified in the table

possesses sole voting and investment power with respect to all shares of common

stock shown as being beneficially owned by the stockholder.

 

  

      

        

                                      Shares Beneficially         Percentage

                                         Owned Before              of Shares

                                         the Offering

                                    -----------------------   Beneficially Owned

                                       Number      Percent    After the Offering

                                    ------------  ---------  --------------------

                                                               

Executive Officers and

 Directors

Richard D. Forman (1)(2) .........    6,009,391   21.3%      17.9%

Peter A. Forman (3) ..............    3,774,149   14.3       12.0

Mark S. Hoffman (4)(5) ...........    1,919,999    7.3        5.9

Niles H. Cohen (6)(7) ............    5,154,358   19.2       13.6

Samantha McCuen (8) ..............    1,575,000    5.8        4.9

Reginald Van Lee .................           --     --         --

All directors and executive

 officers as a group (12

 persons) (2)(7)(8) ..............   18,923,115   61.3       51.0

Principal Stockholders

Kenneth Greif (9) ................    5,263,385   19.7       16.7

Capital Express, LLC (7)(10)          4,932,689   18.5       13.0

Internet Web Builders,

 LLC (9)(11) .....................    4,564,000   17.7       14.8

Staples, Inc. (2)(5)(7)(12) ......    2,886,461   10.9       12.9

Palisade Private Partnership

 LP (13) .........................    1,919,999    7.3        5.9

Concentric Network

 Corporation (7)(14) .............    1,750,004    6.7        5.6

Sandler Capital Entities (15).....    1,575,000    5.8        4.9

Other Selling

 Stockholders

Hikari Tsushin Inc. (16) .........      700,004    2.7        2.3

Dawn Patrick (17) ................      175,000    0.7        0.6

   

 

       

 

     

 

  

      

        

                                                               Shares Beneficially

                                                                 Owned After the

                                                                Offering Assuming

                                        Number of Shares      Over-Allotment Option

                                                               is Exercised in Full

                                           Subject to        ------------------------

                                     Over-Allotment Option      Number       Percent

                                    -----------------------  ------------  ----------

                                                                             

Executive Officers and

 Directors

Richard D. Forman (1)(2) .........          300,470            5,633,921   16.6%

Peter A. Forman (3) ..............               --            3,774,149   11.7

Mark S. Hoffman (4)(5) ...........           96,000            1,748,999    5.5

Niles H. Cohen (6)(7) ............               --            4,236,121   13.3

Samantha McCuen (8) ..............               --            1,575,000    4.7

Reginald Van Lee .................               --                   --     --

All directors and executive

 officers as a group (12

 persons) (2)(7)(8) ..............          396,470           18,526,645   49.6

Principal Stockholders

Kenneth Greif (9) ................               --            5,263,385   16.3

Capital Express, LLC (7)(10)                     --            4,014,450   12.7

Internet Web Builders,

 LLC (9)(11) .....................               --            4,564,000   14.4

Staples, Inc. (2)(5)(7)(12) ......               --            3,954,700   11.9

Palisade Private Partnership

 LP (13) .........................           96,000            1,748,999    5.5

Concentric Network

 Corporation (7)(14) .............           87,501            1,662,503    5.2

Sandler Capital Entities (15).....               --            1,575,000    4.7

Other Selling

 Stockholders

Hikari Tsushin Inc. (16) .........           35,000              665,004    2.1

Dawn Patrick (17) ................            8,750              166,250    0.5

 

       

   

-------------

 (1) Includes 3,521,583 shares of common stock held by RDF Ventures LLC, 37,800

     shares of common stock held by the RDF 1999 Family Trust, warrants to

     purchase 699,717 shares of common stock at an exercise price of $0.97 per

     share, warrants to purchase 291 shares of common stock at an exercise

     price of $3.43 per share and currently exercisable options to purchase

     1,750,000 shares of common stock at a weighted average price of $0.83 per

     share.

 

 

 (2) Post-offering columns reflect the sale to Staples, Inc. of 75,000 shares

     of common stock, upon the exercise of options which is expected to occur

     on the day after the registration statement relating to our initial public

     offering becomes effective.

 

 

                                       69

     

 

 (3) Includes 350,000 shares of common stock held by Forman Capital Partners I,

     LP, warrants to purchase 548,247 shares of common stock at an exercise

     price of $0.97 per share and warrants to purchase 980 shares of common

     stock at an exercise price of $3.43 per share.

 

 (4) Includes 1,499,999 shares of common stock owned by Palisade Private

     Partnership LP and a warrant to purchase 420,000 shares of common stock at

     an exercise price of $2.14 per share. Mr. Hoffman is a member of Palisade

     Private Holdings, LLC, the General Partner of Palisade Private Partnership

     LP. Mr. Hoffman shares voting and investment power with respect to all

     shares beneficially owned by Palisade Private Partnership LP.

 

 (5) Post-offering columns reflect the sale to Staples, Inc. of 75,000 shares

     of common stock, expected to occur on the day after the registration

     statement relating to our initial public offering becomes effective.

 

 (6) Includes warrants to purchase 110,835 shares of common stock at an

     exercise price of $0.36 per share and warrants to purchase 110,835 shares

     of common stock at an exercise price of $0.86 per share. Also includes

     4,014,451 shares of common stock owned by Capital Express, LLC and

     warrants to purchase 918,239 shares of common stock at an exercise price

     of $0.97 per share held by Capital Express LLC. Mr. Cohen is the managing

     member of Capital Express, LLC. Mr. Cohen shares voting and investment

     power with respect to all shares beneficially owned by Capital Express,

     LLC.

 

  

 (7) Post-offering columns reflect the sale by Capital Express LLC to Staples,

     Inc. of warrants to purchase 918,239 shares of common stock, which is

     expected to occur on the day after the registration statement relating to

     our initial public offering becomes effective.

 

 (8) Includes 931,000 shares of common stock and warrants to purchase 186,200

     shares of common stock at an exercise price of $3.43 per share owned by

     Sandler Capital IV Partners, LP; and 381,500 shares of common stock and

     warrants to purchase 76,300 shares of common stock at an exercise price of

     $3.43 per share owned by Sandler Capital IV FTE Partners, LP. Ms. McCuen

     is a Vice President of Sandler Capital Management and may be deemed to

     share voting and investment power with respect to all shares beneficially

     owned by the Sandler Capital Entities. Ms. McCuen disclaims beneficial

     ownership of such shares except to the extent of her pecuniary interest in

     these entities.

   

 

(9) Includes warrants to purchase 277,085 shares of common stock at an exercise

    price of $0.36 per share, 249,085 shares of common stock at an exercise

    price of $0.86 per share, 153,696 shares of common stock at an exercise

    price of $0.97 per share and warrants to purchase 1,386 shares of common

    stock at an exercise price of $3.43 per share. Mr. Greif disclaims

    beneficial ownership of an aggregate of 218,750 shares of common stock

    underlying these warrants, which he has informed us he holds on behalf of

    a group of business associates and family members. Also includes 4,564,000

    shares of common stock owned by Internet Web Builders, LLC. Mr. Greif is

    the managing member and majority owner of Internet Web Builders, LLC and

    shares voting and investment power with respect to all shares beneficially

    owned by Internet Web Builders, LLC. Mr. Greif's address is c/o Internet

    Web Builders, LLC, 1270 Avenue of the Americas, Suite 1905, New York, New

    York 10019.

 

(10) Includes warrants to purchase 918,239 shares of common stock at an

     exercise price of $0.97 per share. The address of Capital Express, LLC is

     1100 Valleybrook Avenue, Lyndhurst, New Jersey 07071.

 

(11) The address of Internet Web Builders, LLC is 1270 Avenue of the Americas,

     Suite 1905, New York, New York 10019.

 

(12) Includes warrants to purchase 700,000 shares of common stock at an

     exercise price of $.0029 per share and 24,136 shares of common stock at an

     exercise price of $3.43 per share. The address of Staples, Inc. is 500

     Staples Drive, Framingham, Massachusetts 01702.

 

 

                                       70

     

 

(13) Includes warrants to purchase 420,000 shares of common stock at an

     exercise price of $2.14 per share. The address of Palisade Private

     Partnership LP is One Bridge Plaza, Fort Lee, New Jersey 07024.

 

(14) Includes warrants to purchase 291,669 shares of common stock at an

     exercise price of $3.43 per share. The address of Concentric Network

     Corporation is 1400 Parkmoor Avenue, San Jose, California 95126.

 

  

(15) Includes 931,000 shares of common stock and warrants to purchase 186,200

     shares of common stock at an exercise price of $3.43 per share owned by

     Sandler Capital IV Partners, LP; and 381,500 shares of common stock and

     warrants to purchase 76,300 shares of common stock at an exercise price of

     $3.43 per share owned by Sandler Capital IV FTE Partners, LP. The address

     of the Sandler Capital Entities is 767 Fifth Avenue, 45th Floor, New York,

     New York 10153.

   

 

(16) The address of Hikari Tsushin Inc. is 1285 Avenue of the Americas, 35th

     Floor, New York, New York 10019.

 

(17) The address of Dawn Patrick is 1237 Knickerbocker Avenue, Mamaroneck, New

     York 10543.

 

 

                                       71

     

 

                         DESCRIPTION OF CAPITAL STOCK

 

General

 

     The following description of our common stock and preferred stock and the

relevant provisions of our amended and restated certificate of incorporation

and amended and restated bylaws as will be in effect upon the closing of this

offering are summaries and are qualified by reference to these documents. Forms

have been filed with the Securities and Exchange Commission as exhibits to our

registration statement, of which this prospectus forms a part.

 

     Upon the closing of this offering, our authorized capital stock will

consist of 200,000,000 shares of common stock, par value $0.0001 per share, and

5,000,000 shares of preferred stock, par value $0.0001 per share.

 

 

Common Stock

 

     As of December 31, 1999, there were 25,759,380 shares of common stock

outstanding held of record by stockholders, after giving effect to the

conversion of our outstanding preferred stock. Holders of common stock are

entitled to one vote for each share held on all matters submitted to a vote of

stockholders and do not have cumulative voting rights. Accordingly, holders of

a majority of the shares of common stock entitled to vote in any election of

directors may elect all of the directors standing for election. Holders of

common stock are entitled to receive ratably those dividends, if any, as the

board of directors may declare out of funds legally available for the payment

of dividends, subject to any preferential dividend rights of any outstanding

preferred stock. If we liquidate, dissolve or wind up the company, the holders

of our common stock will be entitled to receive ratably our net assets

available after the payment of all debts and liabilities and after the prior

rights of any outstanding preferred stock have been satisfied. Holders of the

common stock have no preemptive, subscription, redemption or conversion rights.

The outstanding shares of common stock are, and the shares that we are offering

will be, when issued, after payment of consideration, fully paid and

nonassessable. The rights, preferences and privileges of holders of common

stock are subject to, and may be adversely affected by, the rights of the

holders of preferred stock that we may designate and issue in the future.

 

 

Preferred Stock

 

     As of the date of this prospectus, there were no outstanding shares of

preferred stock, other than the 4,694,333 shares of Series A Convertible

Preferred Stock, all of which will be converted into common stock upon the

consummation of the offering. Following the conversion of all outstanding

shares of Series A Preferred Stock upon the consummation of this offering, no

shares of preferred stock will be outstanding. Upon the consummation of this

offering, the board of directors will be authorized, without further

stockholder approval, to issue from time to time up to an aggregate of

5,000,000 shares of preferred stock in one or more series and to fix or alter

the designations, preferences, rights and any qualifications, limitations or

restrictions of the shares of each series of preferred stock, including the

dividend rights, dividend rates, conversion rights, voting rights, terms of

redemption, including sinking fund provisions, redemption price or prices,

liquidation preferences and the number of shares constituting any series or

designation of series. We have no present plans to issue any shares of

preferred stock.

 

 

                                       72

     

 

Warrants

 

 

     As of December 31, 1999, there were warrants outstanding to purchase a

total of 6,155,675 shares of common stock, including:

 

 

 

 Shares Issuable     Exercise Price

  Upon Exercise        Per Share       Expiration Date

-----------------   ---------------   ----------------

        350,000     $ 0.36            January 2003

        350,000      0.86             January 2003

      2,397,501      0.97             June 2005

        221,669      0.36             May 2003

        221,669      0.86             May 2003

          3,500      0.43             September 2008

         29,999      0.57             February 2009

          5,250      0.57             March 2009

        420,000      2.14             February 2004

        185,490      4.08             March 2004

        700,000      0.0029           May 2002

          5,250      1.43             May 2009

        308,959      4.08             May 2004

          5,250      1.57             June 2009

        938,888      3.43             June 2004

         12,250      2.86             November 2009

 

 

 

     The warrants are subject to customary adjustments for stock splits,

mergers, reclassification and similar transactions.

 

 

Options

 

 

     Options to purchase a total of 7,350,000 shares of common stock may be

granted under our stock option plans. This share reserve will automatically be

increased on the first trading day of January of each calendar year, beginning

in January 2001, by a number of shares equal to 2% of the total number of

shares of common stock outstanding on the last trading day of the prior

calendar year, but no such annual increase will exceed 1,750,000 shares. As of

December 31, 1999, there were outstanding options to purchase a total of

1,492,435 shares of common stock. In addition, as of December 31, 1999, there

were outstanding non-plan options to purchase 1,785,000 shares of common

stocks. Since we intend to file a registration statement on Form S-8 as soon as

practicable following the closing of this offering, any shares issued upon

exercise of these options will be immediately available for sale in the public

market, subject to the terms of lock-up agreements entered into with the

underwriters.

 

 

Registration Rights

 

 

     Under the terms of our registration rights agreement, dated as of June 30,

1999, and other existing registration rights after the consummation of this

offering, the holders of 29,894,846 shares of common stock and shares of common

stock issuable upon the exercise of outstanding options and warrants will be

entitled to have us register their shares under the Securities Act. These

holders will be entitled to exercise a total of up to six demands for the

registration of their shares and securities under the Securities Act, subject

to certain limitations. The registration rights agreement also entitles these

holders to piggyback registration rights with respect to the registration of

their shares under the Securities Act, subject to various limitations. Although

the Company has permitted the selling stockholders to include shares of common

stock in this offering in connection with the underwriters' over-allotment

option, piggyback registration rights to include shares in this offering have

been waived.

 

                                       73

     

 

     The registration rights are subject to specified conditions and

limitations, among them the right of the underwriters of an offering to limit

the number of shares of common stock held by security holders with registration

rights to be included in a registration. In addition, we have a right,

exercisable only once in any 12-month period, to defer or delay the

registration process for a period of up to 90 days if our board of directors

determines that registration would not be in our best interests at that time.

We also have the right not to effect a demand registration within 180 days

after the effective date of any prior underwritten registration of our common

stock. We are generally required to bear all of the expenses of these

registrations, except underwriting discounts and selling commissions. If we

register any of these shares, these shares would become freely tradable without

restriction under the Securities Act immediately upon effectiveness of the

registration.

 

Anti-Takeover Effects of Provisions of Delaware Law and Our Amended and

Restated Certificate of Incorporation and Amended and Restated Bylaws

 

     Delaware Law. We are subject to the provisions of Section 203 of the

Delaware General Corporation Law. Subject to some exceptions, Section 203

prohibits a publicly held Delaware corporation from engaging in a "business

combination" with an "interested stockholder" for a period of three years after

the date of the transaction in which the person became an interested

stockholder, unless the interested stockholder attained that status with the

approval of the board of directors or unless the business combination is

approved in a prescribed manner. Generally, "business combinations" mean

mergers, asset sales and other transactions resulting in a financial benefit to

the interested stockholder. Subject to various exceptions, an "interested

stockholder" is a person who, together with affiliates and associates, owns, or

within three years did own, 15% or more of the corporation's voting stock. This

statute could prohibit or delay mergers or other attempts to effect a change in

control and, accordingly, may discourage attempts to acquire us.

 

     Amended and Restated Certificate of Incorporation and Amended and Restated

Bylaws. Various provisions of our amended and restated certificate of

incorporation and our amended and restated bylaws, which provisions will be in

effect upon the consummation of this offering, are summarized in the following

paragr