D13.2.0.13 Financial Analysis
Pro-Forma
Financial statement are included in the attachment to this document
entitled Financial Projections in the pages numbered F1 - F19.
D13.2.0.13.1
Scenarios Examined
Pessimistic,
Expected, and Optimistic Revenue Scenarios
For
each report we will present financial projections under three scenarios: the
Pessimistic Scenario (90% probability), the Expected Scenario (50%
probability) and the Optimistic Scenario (10% probability). In all cases we
assume that there will be no Registrations during the first 6-month
start-up
period. In the pessimistic case we assume that we register 5,000
Primary SLDs
during the first year of operations (18 months from the start
date). In the
expected scenario we assume that we register 10,000 names
during the
first year of operations. In the Optimistic scenario we
register 100,000
names in the first year.
In
each case we assume that registrations will double in the second year and
then increase at 30% per year in years 3,4, and 5.
Costs Scenarios (Growth and No-Growth):
In
our cost projections given on pages F7-F9 we examine two different scenarios.
The first of these the “Growth Scenario” details the planned level of
expenditures that will be made if our realized revenues in the first year
correspond to either those of our 50% probability “Expected Scenario” or the
10% likelihood “Optimistic Scenario” detailed above. The other cost
scenario examined will be called the “No Growth Scenario” and details the
planned level of expenditures if our realized revenues in the first year
correspond
to those of our 90% likelihood pessimistic scenario. The Growth and the
No-Growth cost
scenarios apply only to fixed costs. Variable costs are the
same across
both scenarios.
The
level of expenditures is the same in the first year for both the Growth
Scenario and for the No-Growth Scenario. Expenditures differ in the second year
and thereafter for these two scenarios are as described in the sections
below. Under both scenarios,
however it is assumed that costs grow at the same
rate. It should be noted
therefore that “no-growth” only applies to the level of
increase in
expenditure in year 2.
D13.2.0.13.2 Pricing of Services
The
following table on shows a break down of the price of each service offered
by the registry.
For
an explanation of each of these services see section D13.2.0.12.
D13.2.0.13.3
Marketing Projections
The
tables on pages F1-F3 show the sales of each of these services on
a
quarterly basis over the first five years on a quarterly basis of
operations under
the 10%, 50%, and 90% scenarios. The following
assumptions were made
in these projections:
(a)
Registration of primary names as given above.
(b)
It is assumed that each registrant registers 1 Active Substantially
Similar
Name and 1 Inactive Substantially Similar Name per Primary Name
Registration.
(c)
It is assumed that 75% of existing primary and secondary names will be
renewed each year.
(d)
It is assumed that 2% of names are transferred each year.
This
following table summarizes this data, showing the expected number of
Primary Registration at the end of each year under each scenario.
D13.2.0.13.4 Revenue Projections
The
tables on pages F4-F6 show a break down of revenue over the first
five
years of operations under the 10%, 50%, and 90% scenarios.
The
following table summarizes this information by showing revenues on an
annual basis under each scenario.
D13.2.0.13.5
Variable Costs
The
following notes refer to the above table:
(1)
In house staff will carry out some of the work of processing application
materials for registration or renewal. The majority, however, will be
outsourced, to major accounting or law firms who will be instructed to
work according to our policies. We estimate the cost of such work to
be
$150 per hour.
(2)
Primary Reg.- Refers to the registration of the main or “Primary Name”
registered.
a.
The cost of the “Trade Mark Check” is based on a survey of
companies providing this service, for a check of a specific trade
mark and
a few similar spellings to the requested name in the
United States and the
E.U. As specified in the Description of
TLD Policies, section E5.0.3 this is the search that will be
carried
out if a “worldwide” Market Location is specified. Otherwise,
a trade mark
search will be carried out in the specific country
specified as the
primary market.
b.
Business Status Check. In the U.S. this is a check to determine that
the “business is in good standing”. In other countries this is a
check to determine that the status of the business is still
current with
the relevant administrative authority.
c.
Application Processing. This refers to the check of company
accounts for eligibility criteria as described in section E16.7.1 or
E16.7.2 of the Description of TLD Policies. We estimate that
the
processing of each application will take an average of 1
1/2 hours of
work.
d.
Other administrative costs include telephone, postage, copying and
documents storage and other miscellaneous costs.
e.
A fee of $100 will be paid to registrars for each Registration. We
estimate that during the first year our registrar services will
carry our
50% of registrations but that this will reduce to an a
level of 25% for
later years. In case where our own registrar
registers SLDs there will be
not need to pay any commission.
(This estimate is fully taken into account
in our pro-forma
projections).
f.
Although Insurance is not truly a variable cost, our requirements for
liability insurance will certainly increase with the volume of
registrations. Our preliminary estimate, based on discussion
with those in
the industry, is that we can expect to pay 2% of
gross revenues as an
insurance cost.
(3)
Primary Renewal - refers to the annual renewal of a primary name
a.
Application Processing. As described in Description of TLD Policies
16.9, in order to qualify for renewal a registrant will be required
to
send a statement confirming that they meet the specified
renewal criteria.
We estimate an average time of 10 minutes
of processing time for each
renewal.
b.
Active Web Site Check. The web site of each registrant will be
checked a number of times during the year to check that the site is
active
as described in Description of TLD Policies
E16.7.1 We
estimate an annual time of approximately 20 minutes per
registrant.
c.
Registrars will be paid a $5 fee for each Registration Renewal
(4)
Sub. Similar Names - refers to Active Substantially Similar Names as
referred to in section E5.0.5 where the SLDs points to the same web site
as that designated by the registrant’s Primary Name. Inactive
Substantially Similar Names are those where the registrant blocks the use
by others of that SLD but where the SLD does not point to the
registrant’s
web site. Substantially Similar Names can only differ by
hyphens or by
regular plurals or possessives in English or in some other
language from
the registrants Primary Name SLD.
a.
The Application processing costs for Substantially Similar Names
are the costs incurred in checking whether those submitted
names are
actually regular plurals or possessives and
responding to the applicant
informing them which Substantially
Similar Names have been accepted and
which have been rejected.
b.
There are no significant additional processing costs for the renewal
of Substantially Similar Names.
(5)
Reg. Transfer – Refers to the transfers of registrations from one
registrant
to another as referred to Description of TLD Policies in
section
E16.11 and E16.15.
a.
Business Status Check and Application Processing are estimated
at
entailing costs double those of Registration as the same
elements must be
checked for two companies instead of one.
b.
There are costs associated with checking for trademark
infringement
as the name has already been registered.
c.
A $150 fee is paid to the registrar for Registration Transfer.
(6)
Reservation. Details of the Reservation process are given in sections
E16.8 and E16.14 of the Description of TLD Policies document.
Reservation is not listed in the above table because the margin is variable.
There are no significant costs associated with processing a request
for Reservation as most of the process is carried out automatically.
The
cost of Reservation to the Applicant is $500. If the Reservation is
converted to a Registration $350 of the Reservation cost is allowable
against the cost of Registration. The additional profit from
Reservation
of a name is therefore $150. If a reservation is extended then
and additional
$500 is charged. If an extended Reservation is
converted to a Registration
$700 of fees is allowable against the
Registration cost. The additional
profit from an extended Reservation is
therefore $300 – ($1,000 paid less
$700 allowable against
Registration). A $50 commission will be paid to the
registrar when a
reservation is made. An additional $25 will be paid to
the registrar if the
Reservation is extended. An additional fee of $50
will be paid to the
registrar if and when a Reservation is converted to a
Registration.
D13.2.0.13.6 Fixed Costs
Full
projections of costs are given for the first five years of operations in F7-F9
Projections show the first two years on a monthly basis and years
3-5 on a
quarterly basis. Projections are shown for both the Growth and
for the No-
Growth Scenario. The following table shows summarizes these
expenses
on an annual basis:
The
following notes apply to these tables.
Salaries:
(a)
The following table shows the salaries of each employee and the number of
months worked by each in the first year.
(b)
These operations do not include the cost of running the computational
operations of the Registry. These operations will be run by 7Ways.com in return
for a payment of 5% of gross revenues of the TLD Management Group.
These costs therefore appear as a variable cost as “7Ways.com royalty” in
the listing given above in section D13.2.0.13.5.
(c) Payroll taxes and benefits are estimated to be
25% of salary costs.
(d) In the Growth Scenario it is assumed that salary
costs double over the course
of the second year (increasing by 1/12 of the
end of first year value each
month.)
(e)
In the No-Growth Scenario it is assumed that salary costs remain constant
during the second year at the same monthly rate as at the end of year 1.
(f) In both the Growth and No-Growth cost scenarios it is assumed that salary
costs grow at an annual rate of 25% per year in years 3 through 5.
Contract Programmers
(a) It is assumed that one contract programmer is retained for the first
year and
works 40 hours a week each for 48 weeks at a cost of $100 per
hour.
(b) In the Growth Scenario one contract programmer
is retained for the second
year and works 40 hours a week each for 48
weeks at a cost of $100 per hour.
(c) In the No-Growth Scenario No Contract Programmers are retained in the
Second Year.
Rent
(a) Initial rental cost is assumed to be $10,000 per month. In the Growth
Scenario rent is assumed to double in the 18th month. In the
No-Growth Scenario
rent is assumed to remain constant in the second year.
Office equipment:
The
expected cost initial cost is $185,000. This includes $28,500 for fixtures and
fittings ($1,500 for each of 19 employees) and the remainder of equipment.
Equipment includes 19 desktop computers and 5 laptops, 10 printers, 5 fax
machines and three high volume photocopiers (we will be a paper intensive
business) and an office telephone system. Further expenditure of $42,750
is
expected after six months. In the Growth Scenario we expect to spend an
additional $42,750 for fixtures and fittings one year after that (month 18
of
operations). In the No-Growth Scenario no further fixtures and fittings
are
added in the second year. We will capitalize fixtures and fittings so
they are
not reflected in our statement of expenses (pages F7-F9). These
expenditures are however reflected in our cash flow statements (pages
F16-F18) .
Computer Equipment for
Registry:
We will supply all initial computer equipment to be
used by 7Ways in running the
Registry operation. Further details of the
uses and requirements of this
equipment are given is section III of this
document. The initially required
computer equipment is listed in the
following table.
.
We will capitalize this equipment so it is
not reflected in our statement of
expenses (page F7-F9). These
expenditures are however reflected in our cash
flow statements (pages
F16-F18).
Travel and entertainment:
Expenses
assume 50 trips within the United States, 16 to Europe, and 6 to the
Far
East during the first year. The
following breakdown of expenses is
assumed:
Total
Travel and Entertainment: $122,600
In the Growth Scenario Travel and Entertainment expenses are assumed to
double during the second year (increasing by 1/12 of the end of first year
value
each month). In the No-Growth scenario Travel and Entertainment
Expenses are assumed to remain constant during the second year.
Telephone expenses:
Telephone
expenses are estimated at $9,000 per month in the first year. This
includes domestic and international calls. In the Growth Scenario telephone
expenses are assumed to double during the second year (increasing by
1/12 of the end of first year value each month). In the No-Growth scenario
telephone expenses are assumed to remain constant during the second year.
Marketing and Promotion
A budget of $2,500,000 been allocated for promotion in the last 6 months
of the
first year which will be the first 6 months of operations. In either the Growth
or the No-Growth
scenario we intend to spend 5 Million on advertising in the
second year.
This will allow us to pursue an aggressive outdoor billboard,
print and
Internet based advertising campaign and to allocate $200,000 to
public
relations in our first year of operations.
Accounting and Legal
Expenses
Accounting and Legal expenses are estimated at $35,000 per month
in the first
year. In the Growth Scenario these expenses are assumed to
double during
the second year (increasing by 1/12 of the end of first year
value each
month). In the No-Growth scenario Accounting and Legal expenses
are assumed
to remain constant during the second year.
Industry Organizational
Fees
We estimate that we will be paying $500,000 per year
in Industry Organizational
Fees. $300,000 will go to our Sponsoring Organization
bizTRAC and we
estimate that we will be making an annual payment of
$200,000 to ICANN.
Increase in fixed costs
years 3 - 5:
All fixed
costs are expected to increase at 25% per year from the end of the
second
year onwards in either the Growth or the No-Growth Scenario. It should
be
noted therefore that “no-growth” only applies to the level of increase in
expenditure in year 2.
D13.2.0.13.7
Profit and Loss
D13.2.0.13.8
Cash-Flow Projections
Cash
flow projections are given on pages F16-F18 for the first three years of
operations assuming that all cash is left in the company. Projections are
shown for each of the
three specified scenarios. In each case we assume
an initial capital
injection of $5,000,000.
D13.2.0.13.9
Capital Requirements
We
will initially allocate $5,000,000 to this project, as this is the amount that
ensures even under the 10% Pessimistic Scenario cash allocated to the
project
does not drop below $750,000
At
the time of its organization Affinity Internet, Inc. (then known as Ebiznet,
Inc.)
had commitments form its initial investors who are J.P. Morgan
Investment
Corporation, Sixty Wall Street, SBIC Fund, L.P. (an affiliate
of J.P. Morgan
Investment Corporation), First Union Capital Partners, Inc,
Columbia eBiz
Partners L.L.C. ( an affiliate of Columbia Capital),
Affinity’s two founders
John Zdanowski, and John McIntyre and Building C
Partners (an affiliate of
Morrison and Foerster).
The
initial capitalization was $23,100,000 (see Section 2.2 and Schedule 2.2 of
the Shareholder’s Agreement attached hereto as part of section D13.4). The
initial investors are obligated to fund the remaining $36,900,000 as
further
set forth in section 2.2 of the Shareholder’s Agreement. As of the
date
hereof, the initial investors have funded approximately $45,000,000
from such
$60,000,000 commitment.