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 |
|
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Table of Contents
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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
paragraphs.
These provisions may be deemed to have an anti-takeover effect and
may
delay, defer or prevent a tender offer or takeover attempt that a
stockholder
might consider in its best interest, including those attempts that
might
result in a premium over the market price for the shares held by
stockholders.
Board Vacancies and Removals. Our amended
and restated certificate of
incorporation
authorizes the board of directors to fill vacant directorships or
increase
the size of the board of directors, which may delay a stockholder from
removing
incumbent directors and simultaneously gaining control of the board of
directors
by filling the vacancies created by the removal with its own
nominees.
The amended and restated certificate of incorporation also provides
that
directors may be removed by stockholders only for cause and only by the
affirmative
vote of holders of two-thirds of the outstanding shares of voting
stock.
Stockholder Action; Special Meeting of
Stockholders. Our amended and
restated
bylaws provide that stockholders may not act by written consent. The
amended
and restated bylaws
further
provide that special meetings of our stockholders may be called only by
a
majority of the board of directors, the Chairman or the President.
Advance Notice Requirements for
Stockholder Proposals and Director
Nominations.
Our
amended and restated bylaws provide that stockholders seeking to bring
business
before an annual meeting of stockholders, or to nominate candidates
for
election as directors at an annual meeting of stockholders, must provide
timely
notice to us in writing. To be timely, a stockholder's notice must be
received
at our principal executive offices not less than 90 days nor more than
120
days prior to the anniversary date of the immediately preceding annual
meeting
of stockholders. In the event that the annual meeting is called for a
date
that is not within 30 days before or 70 days after the anniversary date,
in
order to be timely, notice from the stockholder must be received:
74
o not earlier than 120 days prior to the
annual meeting of stockholders;
and