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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
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COMMISSION FILE NUMBER 000-29739
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| REGISTER.COM,
INC. |
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| (Exact
name of registrant as specified in its charter) |
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| Delaware |
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11-3239091 |
| (State
of incorporation) |
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(I.R.S.
Employer identification number) |
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| 575
Eighth Avenue, 8th Floor |
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| New
York, New York 10018 |
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| (212)
798-9100 |
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| (Address,
including zip code, and telephone number, |
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| including
area code, of registrant’s principal executive offices) |
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| Securities
registered pursuant to Section 12(b) of the Act: |
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| None |
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| Securities
registered pursuant to Section 12(g) of the Act: |
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| Common
Stock $0.0001 par value |
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| Preferred
Stock Purchase Rights |
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Products and Services
Provided by Us |
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Products and Services
Resold By Us |
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website-creation tools under the names FirstStepSite® and WebSiteNOW!™
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email
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intellectual property and brand protection services related to domain names
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search engine submission services
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domain name forwarding
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website design services
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digital certificates
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FirstStepSiteâ.
We provide our customers who have registered domain names through www.register.com
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. |
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Domain Name
Forwarding. We allow customers to forward any domain name to any
website page they choose. Our basic service adds a small navigation
bar with advertising in a frame at the bottom of the website’s screen. |
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Domain Manager™.
This online application enables our customers to view and modify important
account information online, on a real-time basis, including their email
address, the location of the server that hosts their website and all billing
information, as well as enables customers to renew their registrations.
On a more technical level, Domain Manager allows our customers to modify
certain information about their domain names such as zone file addresses. |
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DNS Services. We are one of the largest authoritative Domain Name Server (DNS) providers in the world. DNS provides the Internet and Internet users with authoritative routing information for domain names.
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Branded 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. Our current email offering allows our customers to access their email via a web-based interface on their own email client.
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WebSiteNOW!™. We offer our customers the ability to create, host and track traffic on easy to build, template driven, professional-looking websites. Our WebSiteNOW!™ offering has greater storage space and is more flexible to customize than FirstStepSiteâ.
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Web-hosting. We offer complete web-hosting
services to our customers primarily by referring them to the offerings
of our advertisers.
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Website design services. We offer professional
design services through a partner that can help our customers build a
customized website.
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Platinum FirstStepPortal®. Our premium domain name forwarding service allows customers to point their domain names to existing sites on the Internet without a navigation bar or advertising appearing on the screen.
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Website promotion. We offer services facilitating the submission of our customers’ domain names and keywords to various search engines. This helps our customers promote their websites.
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Email marketing. We resell services that allow our customers to design, conduct and track the performance of their own email marketing campaigns.
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Digital Certificates. We offer digital certificates to our customers to provide a security key for their services which facilitates conducting e-commerce with confidence.
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trademark protection services;
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incorporation services;
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online marketing;
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site monitoring statistics; and
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virtual intranet applications for the small office and home office market.
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Multiple Domain Registrations and Transfers. We enable our customers to register and transfer large numbers of domain names in both the gTLD and ccTLD name spaces. For those customers who consolidate their domain names under our management, we can administer the renewal process with greater ease.
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International Brand Protection. We are able to register domain names in over 400 ccTLDs, including sub domains, thereby assisting customers in protecting and marketing their brands worldwide.
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NameConsole™. We provide a web-based application which allows corporate customers to provide their employees with managed registration capability, including bulk registration of gTLDs and ccTLDs, online responding capabilities and user permission levels through a customized password-protected interface.
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Internet Audit. We assist our corporate customers in identifying how their intellectual property is represented on the Internet, helping them to identify domain names and web pages that contain references to their marks and brands.
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NameWatch™. Using this service, our corporate customers can monitor for newly registered domain names that they believe are confusingly similar or otherwise potentially infringing of their trademark rights.
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Brand Patrol™. This service helps our corporate customers to monitor non-domain name related potential online intellectual property infringement, including unauthorized retailing and metatag infringement.
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Account Masking. We enable corporate customers to register domain names with anonymity so that they can confidentially secure a name for a product, service or idea before it comes to market.
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Domain Lock Down®. We offer domain name security services that “lock” names at the registry level, which significantly reduces the risk of unauthorized alterations to key registrar information.
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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
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on December 1, 1999, we implemented the UDRP as approved by ICANN.
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pricing controls at the registry level;
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the creation of additional gTLDs;
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consumer protection;
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privacy and data protection;
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cross-border domain name registration;
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trademark, copyright and patent infringement;
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domain name dispute resolution; and
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other claims based on the nature of content of domain names and domain name registration.
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our annual
report on Form 10-K; |
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our quarterly
reports on Form 10-Q; |
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our current
reports on Form 8-K; and |
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diversion of management attention from running our existing business;
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increased expenses, including travel, legal, administrative and compensation expenses resulting from newly hired employees;
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increased costs to integrate the technology, personnel, customer base and business practices of the acquired company with our own;
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adverse effects on our reported operating results due to possible write-down of goodwill associated with acquisitions;
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potential disputes with the sellers of acquired businesses, technologies, services or products; and
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inability to utilize tax benefits related to operating losses incurred by acquired businesses.
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management and integration problems resulting from cultural differences;
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political and economic instability in some international markets;
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competition with foreign companies;
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legal uncertainty regarding liability and compliance with foreign laws;
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currency fluctuations and exchange rates;
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potentially adverse tax consequences or inability to realize tax benefits;
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difficulties in protecting intellectual property rights in international jurisdictions; and
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the level of adoption of the Internet in international markets.
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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;
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the Internet community or the Department of Commerce or U.S. Congress 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;
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ICANN may attempt to impose additional fees on registrars if it fails to obtain funding sufficient to run its operations;
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accreditation criteria could change in ways that are disadvantageous to us;
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ICANN’s limited resources may seriously affect its ability to carry out its mandate; and
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International regulatory bodies, such as the International Telecommunications Union or the European Union, may gain increased influence over the management and regulation of the domain name registration system, leading to increased regulation in areas such as taxation and privacy.
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to enhance our existing products and services;
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to design, develop, launch and/or license new products, services and technologies that address the increasingly sophisticated and varied needs of our current and prospective customers; and
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to respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.
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the unwillingness of companies and consumers to shift their purchasing from traditional vendors to online vendors;
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the Internet infrastructure may not be able to support the demands placed on it, and its performance and reliability may decline as usage grows;
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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
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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.
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sales and other taxes;
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user privacy;
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the expansion of intellectual property rights;
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pricing controls;
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characteristics and quality of products and services;
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consumer protection;
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cross-border commerce;
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libel and defamation;
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copyright, trademark and patent infringement;
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security;
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pornography; and
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other claims based on the nature and content of Internet materials.
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general market and economic conditions and market conditions affecting technology companies generally;
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limited availability of our shares on the open market;
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actual or anticipated fluctuations in our quarterly or annual operating results;
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announcements of technological innovations, acquisitions or investments, developments in Internet governance or corporate actions; and
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industry conditions and trends.
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our possible noncompliance with the Nasdaq National Market’s listing requirements and the possible delisting of our shares;
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reduced trading volumes, an illiquid market for the trading of our shares, and more difficulties involved with the selling of our shares by our stockholders;
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our shares losing their appeal as a currency for future acquisitions; or
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an impairment in our ability to access the capital markets should we desire or need to raise additional capital.
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Low
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Year Ending December 31, 2002:
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Fourth Quarter
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$
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5.25
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2.93
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Third Quarter
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7.66
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2.52
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Second Quarter
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9.07
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6.95
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First Quarter
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11.60
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7.35
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Year Ending December 31, 2001:
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Fourth Quarter
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$
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12.00
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$
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7.26
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Third Quarter
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14.76
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8.30
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Second Quarter
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15.50
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5.15
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First Quarter
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8.25
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5.00
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Item 6. Selected Financial Data.
The following table sets forth certain selected consolidated financial data of the Company for the years ended December 31, 2002, 2001, 2000, 1999 and 1998. The selected consolidated data is derived from our consolidated financial statements. You should read the following selected consolidated financial data together with our consolidated financial statements and their notes as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
| Year Ended December 31, | |||||||||||||||
| 2002 | 2001 | 2000 | 1999 | 1998 | |||||||||||
| (in thousands, except per share amounts) | |||||||||||||||
| Statement of Operations Data: | |||||||||||||||
| Net revenues | $ | 106,288 | $ | 116,281 | $ | 86,110 | $ | 9,645 | $ | 1,319 | |||||
| Cost of revenues | 35,299 | 34,790 | 23,869 | 3,083 | 461 | ||||||||||
| Gross profit | 70,989 | 81,491 | 62,241 | 6,562 | 858 | ||||||||||
| Operating expenses: | |||||||||||||||
| Sales
and marketing |
31,222 | 33,532 | 47,311 | 7,150 | 864 | ||||||||||
| Research
and development |
13,357 | 7,741 | 5,580 | 1,767 | 277 | ||||||||||
General
and administrative (including non-cash
compensation of $1,937, $1,771, $2,173, $4,929, and $150, respectively). |
26,312 | 14,769 | 13,434 | 7,309 | 945 | ||||||||||
| Amortization
and writedown of goodwill and other
intangibles |
17,290 | 45,299 | 5,582 | – | – | ||||||||||
| Total
operating expenses |
88,181 | 101,341 | 71,907 | 16,226 | 2,086 | ||||||||||
| Loss from operations | (17,192 | ) | (19,850 | ) | (9,666 | ) | (9,664 | ) | (1,228 | ) | |||||
| Other income (expense), net | 5,588 | 8,664 | 9,520 | 887 | 67 | ||||||||||
| Gain on sale of investment | – | – | 4,603 | – | – | ||||||||||
Income
(loss) before provision (benefit) for income taxes |
(11,604 | ) | (11,186 | ) | 4,457 | (8,777 | ) | (1,161 | ) | ||||||
| Provision (benefit) for income taxes | (1,195 | ) | 10,401 | 4,187 | – | – | |||||||||
| Net income (loss) | $ | (10,409 | ) | $ | (21,587 | ) | $ | 270 | $ | (8,777 | ) | $ | (1,161 | ) | |
| Basic income (loss) per share | $ | (0.26 | ) | $ | (0.58 | ) | $ | 0.01 | $ | (0.46 | ) | $ | (0.07 | ) | |
| Diluted income (loss) per share | $ | (0.26 | ) | $ | (0.58 | ) | $ | 0.01 | $ | (0.46 | ) | $ | (0.07 | ) | |
Weighted
average number of shares outstanding: |
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| Basic |
40,046 | 37,424 | 31,394 | 19,117 | 15,697 | ||||||||||
| Diluted |
40,046 | 37,424 | 39,184 | 19,117 | 15,697 | ||||||||||
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| December 31, | |||||||||||||||
| 2002 | 2001 | 2000 | 1999 | 1998 | |||||||||||
| (in thousands) | |||||||||||||||
| Balance Sheet Data: | |||||||||||||||
| Cash and cash equivalents | $ | 50,557 | $ | 61,932 | $ | 60,156 | $ | 40,944 | $ | 1,285 | |||||
| Short-term investments | 105,283 | 78,186 | 65,283 | 4,723 | - | ||||||||||
| Working capital | 125,636 | 120,592 | 92,160 | 29,813 | 570 | ||||||||||
| Available-for-sale securities | 61,205 | 57,651 | 47,980 | – | – | ||||||||||
| Total assets | 285,604 | 268,789 | 292,617 | 68,336 | 1,611 | ||||||||||
| Total deferred revenues | 87,110 | 77,379 | 88,516 | 32,101 | 114 | ||||||||||
| Total liabilities | 111,962 | 93,196 | 103,722 | 46,423 | 788 | ||||||||||
| Stockholders’ equity | 173,642 | 175,593 | 188,895 | 21,913 | 823 | ||||||||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This report contains forward-looking statements relating to future events and our future performance within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expects”, “anticipates”, “intends”, “believes” or similar language. Actual results could differ materially from those anticipated in such forward-looking statements. All forward-looking statements included in this document are based on information available to us on the date hereof. It is routine for our internal projections and expectations to change as the year or each quarter in the year progress, and therefore it should be clearly understood that the internal projections and beliefs upon which we base our expectations may change prior to the end of each quarter or the year. Although these expectations may change, we may not inform you if they do. Our company policy is generally to provide our expectations only once per quarter, and not to update that information until the next quarter. We caution investors that our business and financial performance are subject to substantial risks and uncertainties. In evaluating our business, prospective investors should carefully consider the information set forth under the caption “Risk Factors” in addition to the other information set forth herein and elsewhere in our other public filings with the Securities and Exchange Commission.
Overview
We are a provider of global domain name registration and Internet services for businesses and consumers that wish to have a unique address and branded identity on the Internet. Domain names serve as addresses and identities on the World Wide Web. They enable a business or person to establish a Web presence and are integral to the use of websites (www.register.com), email (johndoe@register.com) and other types of Internet communication.
We began processing registrations in the generic top level domains (gTLD) .com, .net and .org in June 1999 and, as such, were the first registrar accredited by the Internet Corporation for Assigned Names and Numbers (ICANN) to compete in the domain name registration market after ICANN introduced competition in the industry. We had approximately 3.3 million active domain name registrations under management as of December 31, 2002, representing over 1.1 million customers. Currently, we register, renew and transfer domain names across the .com, .net and .org gTLDs, in new gTLDs such as .biz, .info and .name and in over 400 country code top level domains (ccTLDs), including sub domains, such as .co.uk and .org.uk for the United Kingdom, .de for Germany and .jp for Japan.
We believe that we offer a quick and user-friendly registration process as well as responsive and reliable customer support.
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We also offer a range of value-added products and services targeted to assist our customers in developing and maintaining their Web presence, including:
| Products and
Services Provided by Us |
Products and
Services Resold By Us |
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| • | website-creation tools under the names FirstStepSite®
and WebSiteNOW!™ |
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| • | intellectual property and brand protection services related to domain names | • | search engine submission services | |
| • | domain name forwarding | • | website design services | |
| • | digital certificates |
Domain name registration activity is driven by the use of the Internet by businesses and consumers for electronic commerce and communication, the promotion, marketing and protection of brands and identities across the world and other online activities. Our mission is to become the preferred partner for customers who seek to create, enhance and manage their Web presence.
Our Global Web Services division focuses on customers who are typically small to medium-size businesses as well as small offices/home offices and individuals. Generally, these customers purchase domain name registration services directly from our website located at www.register.com. In order to extend our distribution we maintain a Global Partner Network of companies that resell our domain name registration and Web services. Our network partners are typically Internet Service Providers (ISPs), web-hosting companies, telecom carriers and web portals, but also include online and offline retailers and business aggregators. Using our software solutions, these companies resell our domain name registration services and related products and services to their customers.
With operations in the United States, Canada and Europe, our Corporate Services division provides domain name registration and related products and services to large corporate enterprises with specialized registration needs including global registration and management services and online brand and trademark protection.
Through our RegistryPro subsidiary, we are working toward establishing a registry for the new gTLD .pro. The .pro domain will be dedicated to certified professionals such as lawyers, doctors and accountants. All .pro domain names are planned to be issued with a digital certificate to facilitate secure communications and transactions. This product is intended to assist such professionals with their heightened confidentiality obligations. We also have a small equity stake in Afilias, the consortium of registrars, which manages the registry for the new gTLD .info and provides outsourced registry services to other top level domain registries including .org.
In June 2000, we acquired Inabox, Inc. and we used Inabox’s software to develop our FirstStepSite® and WebSiteNOW!™ products and My.register.com, one of the reseller solutions offered to our Global Partner Network. We acquired Inabox, Inc. for $1.0 million cash and 280,019 shares of our common stock. In September 2000, we acquired Afternic.com, Inc., a secondary market exchange for domain names, for $10.0 million cash and 4,378,289 shares of our common stock. Each of these transactions was accounted for using the purchase method of accounting. As a result, the financial results of Inabox and Afternic.com are consolidated with our financial results from the dates of their respective acquisitions. We made a decision to abandon the Afternic business in September 2002.
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On March 8, 2002 we acquired Virtual Internet plc for £11.99 million (US $16.9 million at date of acquisition). Virtual Internet plc, a U.K. based company, has operations in the United States and Europe and, at the time of acquisition, operated through two divisions: the Corporate Services division and the Hosting division. The Corporate Services division provides online intellectual property management and protection services and the Hosting division provided web-hosting services. In May 2002, we sold Virtual Internet plc’s Hosting division for $0.5 million. Virtual Internet plc shareholders, other than shareholders in certain jurisdictions outside of the U.K., were given the opportunity to elect to receive loan notes from Register.com (U.K.) Limited in exchange for their shares and $9.6 million of these loan notes were outstanding at December 31, 2002. We expect these notes to be repaid on or before June 30, 2003. Our results of operations for 2002 include those of Virtual Internet’s Corporate Services business since March 8, 2002.
Significant Accounting Policies
Net Revenues
We derive our net revenues from domain name registrations, other products and services and advertising. We earn registration fees in connection with new, renewed, extended and transferred-in registrations. Registration periods generally range from one to ten years.
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 over the period of the subscription term during which we provide the registration services, including customer service and maintenance of the individual domain name records. We require prepayment via credit card for most online domain name registration sales, which provides us with the full cash fee at the beginning of the registration period while we recognize the revenues over the registration period. For many of our customers who register domain names through our Corporate Services division, and for many participants in our Global Partner Network, we establish lines of credit based on credit worthiness.
Under current credit card industry practices, we are liable for fraudulent and disputed credit card transactions because we do not obtain the cardholder’s signature at the time of the transaction, even though the financial institution issuing the credit card may have approved the transaction. As a result, we must estimate the amount of credit card chargebacks we will receive in the future related to credit card sales in the current period. In determining our estimate, we review historical rates of credit card chargebacks, current economic trends and changes in acceptance of our products and services on a monthly basis. Deferred revenues and revenues recognized are presented net of provisions recorded for estimated refunds to customers and chargebacks from credit card associations. The credit card associations may impose financial penalties if our chargebacks and refunds exceed certain thresholds. Such penalties are not charged to revenues, but are classified as general and administrative expense. If a significant percentage of customers continue to request refunds from us or contact their bank to request that the amount charged to their credit card be charged back to us based on claims that their credit card was used fraudulently or without their consent, our business could be materially adversely affected. See “Risk Factors” and Note 14 to the Consolidated Financial Statements “Contingencies and Commitments — Credit Card Penalties” for additional information in connection with the penalties that may be imposed by credit card associations and other risks associated with the Company’s excessive credit card chargebacks and refunds.
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In addition to our standard registration fees published on our www.register.com website, we have a number of different fee structures for our domain name registration services. Our Corporate Services division delivers a diversified range of higher-priced services for our corporate customers and extends volume-based discounts for domain name registrations and transfers. We pay referral commissions to certain participants in our Global Partner Network and to participants in our affiliate network. Other participants in our Global Partner Network pay us a wholesale price per registration, discounted off of our standard registration fee.
We believe that the high growth rate experienced in the domain name registration marketplace in late 1999 and 2000 is not an indication of anticipated future growth rates. During that period substantial numbers of domain name registrations were driven by factors including: (i) the desire by businesses to establish an online presence; (ii) significant registration activity by domain name speculators, who register names with the intention of reselling them; and (iii) extremely strong growth in new business start-ups in the Internet sector. In late 2000, the domain name registration market’s growth rate began to decrease. The overall number of domain names in the VeriSign registry decreased from a high of approximately 32 million as of September 30, 2001 to approximately 28.3 million as of December 31, 2002. We believe this was due, in large part, to the large number of names registered in 1999 and 2000 by domain name speculators that were not renewed. The decline in the overall market, together with increased competition, contributed to a sequential quarterly decline in the number of our paid domain name registrations, transfers and renewals from the first quarter of 2000 until the introduction of new gTLDs in the fourth quarter of 2001 and again from the first quarter of 2002 through the fourth quarter of 2002. As a result of all of these factors, which were slightly offset by the acquisition of Virtual Internet in March 2002, we experienced a decrease in our total names under management from approximately 3.8 million as of September 30, 2001 to approximately 3.3 million as of December 31, 2002.
Other products and services, which primarily consist of email, domain name forwarding, web-hosting, site submission to search engines, applications for new gTLDs, intellectual property protection services related to the introduction of new gTLDs and software, are sold either as one time offerings or annual or monthly subscriptions, depending on the product or service offering. Revenues from domain name applications, which may or may not result in domain registrations, and other intellectual property protection services related to the introduction of new gTLDs are recognized upon the sale of the applications and related services. Revenues from our other products and services, such as email and domain name forwarding, are recognized ratably over the period in which we provide such services.
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Advertising revenues are derived from the sale of sponsorships and banner advertisements, typically 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 other products and services. Cost of revenues for domain name registrations represents amortization on a straight-line basis over the life of the registration term of registry fees, depreciation on the equipment used to process the domain name registrations, 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. Cost of revenues does not include penalties for excessive credit card chargebacks and refunds, as such penalties are classified as general and administrative expense. We pay registry fees for gTLDs ranging from $5.30 per year for each .biz and .info domain name registration to $6 per year for each .com, .net and .org domain name registration. We pay registry fees ranging from $6 to $1,000 per year for one to ten-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 the domain name is registered, are recorded as a prepaid expense and amortized to cost of revenues ratably over the terms of the registrations.
Cost of revenues for our other 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. The cost of revenues for other products and services is recognized ratably over the periods in which the services are provided.
We have no direct cost of revenues associated with our advertising revenue and we have no incremental cost of revenues associated with delivering advertisements since we use the same equipment to deliver the advertisements as we use for our domain name registration services. Therefore, the gross profit margin on advertising revenue is 100%, and accordingly, any decrease in advertising revenue would represent a reduction of our gross profit of the same amount. We incur operational costs including salaries and commissions for our advertising sales staff, which are classified as operating expenses.
Operating Expenses
Our operating expenses consist of sales and marketing, research and development, general and administrative (including non-cash compensation), and amortization and writeoffs of intangible assets. Prior to January 1, 2002 our operating expenses also included amortization of goodwill; effective January 1, 2002 we adopted SFAS 142 and ceased amortization of goodwill. Our sales and marketing expenses consist primarily of employee salaries, marketing programs such as advertising, and commissions paid to our sales representatives. Research and development expenses consist primarily of employee salaries, fees for outside consultants, software licensing fees 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, excluding non-cash compensation, consist primarily of employee salaries and other personnel-related expenses for executive, financial and administrative personnel, as well as professional services fees, insurance premiums, penalties for excessive credit card chargebacks and refunds, and provisions for uncollectible receivables. Facilities expenses are allocated across our different operating expense categories. Non-cash compensation expense relates to grants of restricted stock, stock options and warrants to employees, directors, consultants and vendors with exercise prices below fair market value on the date of grant. Based on such grants through December 31, 2002, we expect to record approximately $1.4 million in additional non-cash compensation expense through 2009 as follows: $1.0 million in 2003, $0.3 million in 2004 and $0.1 million thereafter. Non-cash compensation expense will reduce our earnings or increase our losses, as applicable, in future periods.
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We review our goodwill and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. We assess the recoverability of goodwill using estimated undiscounted cash flows. These cash flows include an estimated terminal value based on a hypothetical sale of an acquisition at the end of the related goodwill amortization period. We also compare the total market value of our common stock with the book value of our stockholders’ equity. Based on the foregoing factors, if we conclude that an other-than-temporary impairment of goodwill has occurred, we record an impairment writedown.
Income Taxes
In preparing our financial statements, we make estimates of our current tax obligations and temporary differences resulting from timing differences for reporting items for book and tax purposes, the most significant of which is deferred revenue. We recognize deferred taxes by the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for differences between the financial statement and tax bases of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, valuation allowances are established when appropriate to reduce the carrying value of deferred tax assets to the amounts expected to be realized.
Net Income (Loss)
Although we achieved profitability for the year 2000, we were not profitable for 2001 or 2002. Our profitability in 2000 was due, in part, to a gain of $4.6 million from the sale of our investment in a private company, and to interest income. Our net loss for 2001 included a writedown of $32.5 million of intangible assets associated with the acquisition of Afternic, and the reversal of a $2.5 million tax valuation allowance which increased income by that amount. Our net loss for 2002 included a goodwill impairment writedown of $17.0 million. Although we have recently taken several initiatives to reduce our operating expenses, these expenses could still increase in future periods as we make efforts to improve our operational and financial systems. In addition, losses at Virtual Internet and RegistryPro have contributed to a decline in our profitability, and we expect losses at Virtual Internet and RegistryPro to impact our profitability negatively in 2003. In addition, unless we lower our credit card refunds and reduce our level of credit card chargebacks, we may continue to incur significant penalties from credit card companies that impact our profitability (see “Risk Factors” for additional information). Accordingly, we cannot assure you that we will be able to operate profitably or sustain or increase our positive cash flow in the future.
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Results of Operations
Years Ended December 31, 2002 and 2001
Net Revenues
Total net revenues decreased 9% to $106.3 million for the year 2002 from $116.3 million in 2001.
Domain name registrations. Recognition of revenues from domain name registrations decreased 4% to $97.3 million in 2002 from $101.4 million in 2001. This decrease was due in part to lower average prices and a longer dollar-weighted-average subscription term for domain names registered in 2002 compared with 2001, and in part to a writeoff related to credit card receivables in 2002. These reductions were offset in part by the inclusion of Virtual Internet in our results of operations after March 8, 2002, for which revenues of $7.2 million were recognized in 2002. We may face continued pricing pressure.
At December 31, 2002, we had $87.1 million of deferred revenue compared with $77.4 million at December 31, 2001, representing an increase of $9.7 million for the year 2002. The increase was due primarily to the acquisition of Virtual Internet on March 8, 2002, whose balance sheet included deferred revenue of $6.9 million at the date of acquisition. Our deferred revenue balance is an indicator of revenue to be recognized in future periods.
Other Products and Services. Revenues from other products and services decreased 13% to $4.8 million in 2002 from $5.5 million in 2001. The decrease was due primarily to the nonrecurrence in 2002 of $2.9 million of revenues received during 2001 from sales of intellectual property services in connection with the launch of new gTLDs, offset in part by increased sales in 2002 of email and WebSiteNOW! services.
Advertising. Revenues from advertising decreased 54% to $4.2 million in 2002 from $9.4 million in 2001, primarily as a result of softness in the Internet advertising market. We anticipate continued softness in the Internet advertising market.
Cost of Revenues
Total cost of revenues increased 1% to $35.3 million in 2002 from $34.8 million in 2001.
Cost of Domain Name Registrations. Costs recognized for domain name registrations increased 5% to $34.9 million in 2002 from $33.3 million in 2001. The increase was due to the inclusion of Virtual Internet in our results of operations after March 8, 2002, for which costs of $2.4 million were recognized in 2002, more than offsetting the decreased cost of domain name registrations that resulted from the lower registration revenues recognized in 2002.
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Cost of Other Products and Services. Cost of other products and services declined to $0.4 million in 2002 from $1.5 million, primarily because 2001 included $1.2 million of costs related to sales of intellectual property services in connection with the launch of new gTLDs, which did not recur in 2002.
Gross Profit Margin
Our gross profit margin declined to 66.8% in 2002 from 70.1% in 2001, in part due to lower advertising revenues, in part to lower average prices, in part to fixed costs for depreciation and data center operations which comprised a higher percentage of the lower level of revenues.
Operating Expenses
Total operating expenses decreased 13% to $88.2 million in 2002 from $101.3 million in 2001.
Sales and Marketing. Sales and marketing expenses decreased 7% to $31.2 million in 2002 from $33.5 million in 2001. The decrease was primarily due to lower expenses related to media advertising, direct mail and other promotional activities, offset in part by the inclusion of Virtual Internet in our results of operations after March 8, 2002.
Research and Development. Research and development expenses increased 74% to $13.4 million in 2002 from $7.7 million in 2001. The increase resulted primarily from higher salaries and consulting fees for personnel working to improve our systems and operations, and in part from increased costs for software licenses.
General and Administrative. General and administrative expenses increased 78% to $26.3 million in 2002 from $14.8 million in 2001. The higher expense level was due to (i) an increase of $4.3 million in credit card penalties as a result of excessive chargebacks and refunds, of which $0.8 million was paid and $3.7 million was accrued to cover our estimate of potential penalties which could be imposed for 2002 under one card association’s rules, (ii) the inclusion of $3.4 million of expenses for Virtual Internet which was acquired March 8, 2002, (iii) an increase of $1.3 million in bad debt expense, (iv) the costs of operating our customer service center in Canada which commenced operations in the third quarter of 2001, and (v) startup costs of $1.0 million for RegistryPro. For additional information in connection with credit card penalties, see “Risk Factors” and Note 14 to Consolidated Financial Statements “Contingencies and Commitments— Credit Card Penalties”.
Amortization and Writedown of Goodwill and Other Intangibles. Amortization and writedown of goodwill and other intangibles was $17.3 million in 2002 compared with $45.3 million in 2001. During 2001 the Company recorded a goodwill impairment writedown of $32.5 million related to Afternic, which was acquired in September 2000. In September 2002, the Company made a decision to abandon the Afternic business. As a consequence of that decision, as well as negative industry and economic trends affecting the Company and the general decline in technology company valuations, including the valuation of the Company’s common stock, the Company performed an impairment analysis of the goodwill and intangible assets recorded in connection with its various acquisitions. Because the total market value of the Company’s common stock at September 30, 2002 was lower than the book value of its stockholders’ equity, the Company recorded a goodwill impairment loss of $17 million in September 2002. Also in accordance with SFAS 142, the Company ceased amortization of goodwill effective January 1, 2002.
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Other Income, Net
Other income, net, which consisted primarily of interest income, net of interest expense, decreased to $5.6 million in 2002 from $8.7 million in 2001. The decrease was primarily due to lower prevailing interest rates in 2002.
Provision for Income Taxes
The provision for income taxes in 2002 was a benefit of $1.2 million, representing an effective tax rate of 11% of the pre-tax loss. That effective tax rate was lower than the statutory rate of 43% in part because only a portion of the goodwill impairment writedown is tax-deductible, in part because no tax benefits were recorded in connection with losses generated by Virtual Internet in the United Kingdom as realization is not assured, and in part because a substantial portion of our interest income is exempt from taxes. In 2001, the provision for income taxes was an expense of $10.4 million, rather than a benefit, because goodwill amortization and the impairment writedown recorded in 2001 were not tax-deductible.
Years Ended December 31, 2001 and 2000
Net Revenues
Total net revenues increased to $116.3 million in 2001 from $86.1 million in 2000.
Domain name registrations. Revenues from domain name registrations increased 43% to $101.4 million in 2001 from $70.8 million in 2000. Revenues from sales of new, renewed and transferred domain name registrations in 2001 were lower than 2000. This decrease was offset by the recognition of a greater amount of deferred revenue during 2001 compared with 2000. We had a net decrease in deferred revenue during 2001 of $11.1 million as compared to a $56.4 million increase in deferred revenue for 2000. The decrease in 2001 was primarily the result of a decrease in paid new domain registrations since March 31, 2000 compared with an increase in paid new domain registrations for periods prior to March 31, 2000, as well as a shorter average registration term in 2001. We had $77.4 million of deferred revenue at December 31, 2001, decreasing from $88.5 million at December 31, 2000.
Online Products and Services. Revenues from online products and services increased to $5.5 million in 2001 from $3.0 million in 2000. The increase resulted primarily from sales of services offered in connection with the launch of new gTLDs.
Advertising. Revenues from advertising decreased 23% to $9.4 million in 2001 from $12.3 million in 2000, primarily as a result of lower rates and volume of advertising and sponsorships sold on our www.register.com, FirstStepSite® and other web pages.
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Cost of Revenues
Total cost of revenues increased to $34.8 million in 2001 from $23.9 million in 2000.
Cost of Domain Name Registrations. Cost of domain name registrations increased 41% to $33.0 million in 2001 from $23.5 million in 2000. The dollar amounts of registry fees paid were lower in 2001 than in 2000. This decrease was offset by the recognition of a significantly greater amount of prepaid registry fees during 2001 as compared to the amounts recognized during 2000.
Cost of Online Products and Services. Cost of online products and services increased to $1.8 million in 2001 from $0.4 million in 2000, primarily due to fees paid to the .biz registry in connection with sales of services in connection with the launch of the .biz new gTLD.
Operating Expenses
Total operating expenses increased to $101.3 million in 2001 from $71.9 million in 2000.
Sales and Marketing. Sales and marketing expenses decreased 29% to $33.5 million in 2001 from $47.3 million in 2000. The decrease was primarily due to a decrease in media advertising expenditures. In addition, sales and marketing expenses in 2000 included registry fees associated with free registrations effected through promotional campaigns run principally in September 2000 and registrations effected through NameDemo.com, which we stopped accepting in February 2001.
Research and Development. Research and development expenses increased by 39% to $7.7 million in 2001 from $5.6 million in 2000. The increase resulted primarily from salaries associated with new personnel in technology to support our growth.
General and Administrative. General and administrative expenses increased 10% to $14.8 million in 2001 from $13.4 million in 2000. The increase was primarily due to salaries associated with newly hired personnel and related costs required to manage our growth and facilities expansion. Non-cash compensation expenses, included herein, decreased to $1.8 million in 2001 from $2.2 million in 2000. The non-cash compensation expenses were primarily attributable to the amortization of deferred compensation related to employee stock options.
Amortization and write-down of Goodwill and Other Intangibles. Amortization and write-down of goodwill and other intangibles increased to $45.3 million in 2001 from $5.6 million in 2000. Amortization and write-down of goodwill and other intangibles are related to the acquisitions of Inabox in June 2000 and Afternic in September 2000, and included an impairment charge of $32.5 million in 2001. Amortization of goodwill was higher in 2001 compared with 2000 because 2001 included a full year of amortization for both acquisitions.
Other Income, Net
Other Income (expense), net. Other income, net, which consisted primarily of interest income, net of interest expense, decreased to $8.7 million in 2001 from $9.5 million in 2000, primarily due to a shift in our portfolio from higher rate taxable securities to lower rate tax exempt securities, and lower interest rates in 2001.
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Gain on Sale of Investment. Gain on sale of investment of $4.6 million in 2000 was the result of a gain on the sale of shares of a private company after that company was acquired by a public company.
Income Tax Expense
The provision for income taxes was an expense of $10.4 million in 2001, which was net of the reversal of $2.6 million in valuation reserves previously recorded against our deferred tax assets. Amortization and write-down of goodwill and other intangibles is not deductible for income tax purposes. Income tax expense in 2000 was $4.2 million.
Quarterly Results of Operations
The following table sets forth selected unaudited quarterly statement of operations data, in dollar amounts and as percentages of net revenue, for the eight quarters ended December 31, 2002. In our opinion this information has been prepared on substantially the same basis as the audited financial statements appearing elsewhere in this annual report, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in order to present fairly the unaudited quarterly results of operations data. The quarterly data should be read in conjunction with our annual financial statements and related notes appearing elsewhere in this annual report. The operating results for any quarter are not necessarily indicative of results for any future period.
| Quarter Ended | |||||||||||||||||||||||||
| December 31, 2002 | September 30, 2002 | June 30,
2002 |
March 31, 2002 |
December 31, 2001 | September 30, 2001 | June 30, 2001 |
March 31, 2001 | ||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||
| Net revenues | $ | 26,531 | $ | 25,490 | $ | 26,967 | $ | 27,300 | $ | 26,102 | $ | 29,532 | $ | 29,987 | $ | 30,660 | |||||||||
| Cost of revenues | 9,207 | 8,182 | 9,157 | 8,753 | 7,376 | 10,323 | 8,640 | 8,451 | |||||||||||||||||
| Gross profit | 17,324 | 17,308 | 17,810 | 18,547 | 18,726 | 19,209 | 21,347 | 22,209 | |||||||||||||||||
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| Sales
and marketing |
7,424 | 7,270 | 8,294 | 8,234 | 10,273 | 6,549 | 8,500 | 8,210 | |||||||||||||||||
Research and development |
3,985 | 3,897 | 3,157 | 2,318 | 2,028 | 1,684 | 2,043 | 1,986 | |||||||||||||||||
| General
and administrative (including non-cash compensation of $521, $492, $469, $455, $453, 452, $441, and $424, respectively) |
7,619 | 10,030 | 4,799 | 3,864 | 3,018 | 3,945 | 3,463 | 4,343 | |||||||||||||||||
| Amortization and
writedown
of goodwill and other intangibles |
134 | 17,003 | 123 | 30 | 1,141 | 36,402 | 3,874 | 3,882 | |||||||||||||||||
| Total operating expenses | 19,162 | 38,200 | 16,373 | 14,446 | 16,460 | 48,580 | 17,880 | 18,421 | |||||||||||||||||
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| Income (loss) from
operations |
(1,838 | ) | (20,892 | ) | 1,437 | 4,101 | 2,266 | (29,371 | ) | 3,467 | 3,788 | ||||||||||||||
| Other income (expense),
net |
1,351 | 1,174 | 1,473 | 1,590 | 2,002 | 1,899 | 2,288 | 2,475 | |||||||||||||||||
| Income (loss) before
provision
(benefit) for income taxes |
(487 | ) | (19,718 | ) | 2,910 | 5,691 | 4,268 | (27,472 | ) | 5,755 | 6,263 | ||||||||||||||
| Provision (benefit)
for income
taxes |
(140 | ) | (5,155 | ) | 2,063 | 2,037 | 1,026 | 1,318 | 3,745 | 4,312 | |||||||||||||||
| Net income (loss) | $ | (347 | ) | $ | (14,563 | ) | $ | 847 | $ | 3,654 | $ | 3,242 | $ | (28,790 | ) | $ | 2,010 | $ | 1,951 | ||||||
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| Quarter Ended | |||||||||||||||||||||||||
| December 31, 2002 | September 30, 2002 | June
30, 2002 |
March
31, 2002 |
December 31, 2001 | September 30, 2001 | June
30, 2001 |
March
31, 2001 |
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| Basic (loss) income
per
share |
$ | (0.01 | ) | $ | (0.36 | ) | $ | 0.02 | $ | 0.09 | $ | 0.09 | $ | (0.77 | ) | $ | 0.05 | $ | 0.05 | ||||||
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| Diluted (loss) income
per
share |
$ | (0.01 | ) | $ | (0.36 | ) | $ | 0.02 | $ | 0.08 | $ | 0.07 | $ | (0.77 | ) | $ | 0.05 | $ | 0.04 | ||||||
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| Weighted average number of
shares outstanding: |
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| Basic
|
40,057 | 40,049 | 39,530 | 38,572 | 38,089 | 37,603 | 37,086 | 36,896 | |||||||||||||||||
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| Diluted
|
40,057 | 40,049 | 43,544 | 44,175 | 45,019 | 37,603 | 43,919 | 43,467 | |||||||||||||||||
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| Quarter Ended | |||||||||||||||||||||||||
| December 31, 2002 | September 30, 2002 | June 30, 2002 | March 31, 2002 | December 31, 2001 | September 30, 2001 | June 30, 2001 |
March 31, 2001 |
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| Net revenues | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||
| Cost of revenues | 35 | 32 | 34 | 32 | 28 | 35 | 29 | 28 | |||||||||||||||||
| Gross profit | 65 | 68 | 66 | 68 | 72 | 65 | 71 | 72 | |||||||||||||||||
| Operating costs
and expenses |
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Sales
and marketing |
28 | 29 | 31 | 30 | 39 | 22 | 28 | 27 | |||||||||||||||||
Research
and development |
15 | 15 | 12 | 9 | 8 | 6 | 7 | 6 | |||||||||||||||||
General
and administrative (including non-cash compensation) |
29 | 39 | 18 | 14 | 12 | 13 | 12 | 14 | |||||||||||||||||
Amortization
and writedown of goodwill and other intangibles |
– | 67 | – | – | 4 | 123 | 13 | 13 | |||||||||||||||||
| Total operating
costs and expenses |
72 | 150 | 61 | 53 | 63 | 164 | 60 | 60 | |||||||||||||||||
| Income (loss) from
operations |
(7 | ) | (82 | ) | 5 | 15 | 9 | (99 | ) | 11 | 12 | ||||||||||||||
| Other income (expenses),
net |
5 | 5 | 6 | 6 | 8 | 6 | 8 | 8 | |||||||||||||||||
| Income (loss) before
provision
(benefit) for income taxes |
(2 | ) | (77 | ) | 11 | 21 | 17 | (93 | ) | 19 | 20 | ||||||||||||||
| Provision (benefit)
for income
Taxes |
(1 | ) | (20 | ) | 8 | 8 | 5 | 4 | 12 | 14 | |||||||||||||||
| Net income (loss) | (1 | )% | (57 | )% | 3 | % | 13 | % | 12 | % | (97 | )% | 7 | % | 6 | % | |||||||||
Recent accounting pronouncements
SFAS 146 “Accounting for Costs Associated with Exit or Disposal Activities” was issued in June 2002, and requires that costs associated with exit or disposal activities be recognized when the liability is incurred, rather than at the date of commitment to an exit or disposal plan. Examples of covered costs are lease termination and certain employee severance. SFAS 146 is applicable to exit or disposal activities initiated after December 31, 2002.
SFAS 148 “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FAS 123” was issued in December 2002, and provides for alternative methods of transition for a voluntary change to the fair market value based method of accounting for stock-based employee compensation.
Liquidity and Capital Resources
Historically, we have funded our operations and met our capital expenditure requirements primarily through cash generated from operations, sales of equity securities and borrowings. We issued 5,222,279 shares of our common stock to the public on March 3, 2000, which generated approximately $115.3 million in proceeds after deducting the underwriting discount and other offering expenses.
At December 31, 2002, our cash and cash equivalents, short-term investments and marketable securities totaled $217.0 million, representing an increase of $19.3 million for the year 2002. At December 31, 2002, $7.7 million of our cash was pledged to support letters of credit, and $9.6 million was pledged to support a bank guarantee of a like amount of notes payable in connection with our acquisition of Virtual Internet. We generated $16.1 million of cash from operations in 2002, compared with $24.3 million in 2001. In 2002 we used $3.2 million for capital expenditures, we received $6.6 million from the exercise of options and warrants, and we used $1.6 million to repurchase 370,100 shares of our common stock.
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We issued notes payable in connection with our acquisition of Virtual Internet in March 2002. As of December 31, 2002 the dollar value of those notes was $9.6 million. The notes are repayable at the option of the holders at any time until June 30, 2003, at which time they mature.
Although we have no material commitments for capital expenditures or other long-term obligations, other than lease obligations for office space, we anticipate that we will increase our capital expenditures in connection with several ongoing and planned projects to enhance our systems. Additional capital expenditures could arise in connection with the potential addition of new products and services or additional co-location facilities.
We currently anticipate that our operating expenses will continue to represent a material use of our cash resources. We believe that our existing cash and anticipated cash to be provided from operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.
Under an agreement with ICANN, RegistryPro, our wholly owned subsidiary, is obligated to launch the .pro top level domain. We have committed to provide up to $8.5 million in funding and other non-cash contributions to RegistryPro for RegistryPro’s activities in establishing, operating and marketing the .pro top level domain through the first anniversary of its commencement-of-service date. However, we do not believe that RegistryPro’s agreement with ICANN requires RegistryPro to spend a specified amount to establish, operate and market the .pro top level domain. Accordingly, our contributions for these purposes could be less than $8.5 million. Through December 31, 2002 we had contributed approximately $1.6 million in cash, and had also made non-cash contributions. We incurred $1.0 million of startup costs for RegistryPro in 2002, and we anticipate additional net losses from RegistryPro in 2003.
A summary of our contractual cash obligations for operating leases as of December 31, 2002 is as follows:
| Year ending December 31, | (in thousands) | ||
| 2003 | $ | 1,365 | |
| 2004 | 1,043 | ||
| 2005 | 878 | ||
| 2006 | 903 | ||
| 2007 | 850 | ||
| Thereafter | 1,649 | ||
| Total contractual cash obligations | $ | 6,688 | |
The Board of Directors has authorized the repurchase of up to $10.0 million of our Common Stock through October 2004, and we have purchased 370,100 shares for a total of $1.6 million through December 31, 2002. Purchases under the stock repurchase program may be made from time to time in the open market, through block trades or otherwise. Depending on market conditions and other factors, such purchases may be commenced or suspended at any time or from time to time without prior notice.
We have hired advisors in connection with the unsolicited acquisition proposals we received in January 2003. Although the fees payable to the advisors and the related expenses are not yet determinable, we expect that such fees and expenses will be significant. In addition, in connection with our restructuring program we have been reviewing our operations, including the ongoing capital requirements of our business. While we are unable to predict the outcome of this review, the utilization of a significant portion of our cash and marketable securities is a possible result.
56
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our exposure to market risk is primarily related to interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. We believe that we are not subject to a material interest rate risk because substantially all of our investments are in fixed-rate, short-term securities having a maturity of not more than two years, with a majority having a maturity of less than one year. Accordingly, the fair value of our investment portfolio would not be significantly impacted by a 100 basis point increase or decrease in interest rates. From time to time we also invest in publicly traded stocks, and we are subject to market price risk with respect to such investments. At December 31, 2002 the fair value of our investments in publicly traded stocks was $0.3 million. We did not have any foreign currency hedging or derivative instruments at December 31, 2002.
We generally do not enter into financial instruments for trading or speculative purposes and do not currently utilize derivative financial instruments. While we have no present intention of utilizing derivative financial instruments in the future, it is possible that we may enter into such transactions or similar transactions. At December 31, 2002 we had no long-term debt.
Our consolidated financial statements are denominated in U.S. dollars. We derived 7% of our net revenues for the year 2002 from operations outside of the United States. We face foreign currency risks primarily as a result of the revenues that we receive from services delivered through our foreign subsidiaries. These subsidiaries incur most of their expenses in the local currency. Accordingly, our foreign subsidiaries use the local currency as their functional currency. We are also exposed to foreign exchange rate fluctuations, primarily with respect to the Euro and the Canadian Dollar, as the financial results of foreign subsidiaries are translated into U.S. dollars for consolidation. As exchange rates vary, such financial results, when translated into U.S. dollars, may vary from expectations and may adversely impact our operating results and our net income (loss).
57
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| PAGE | |
| Report of PricewaterhouseCoopers LLP, Independent Accountants | 59 |
| Consolidated Balance Sheets as of December 31, 2002 and 2001 | 60 |
| Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000 | 61 |
| Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2002, 2001 and 2000 | 62 |
| Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 | 63 |
| Notes to Consolidated Financial Statements | 64 |
58
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Register.com, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Register.com, Inc. at December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the Consolidated Financial Statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”
| /s/ PricewaterhouseCoopers LLP |
PricewaterhouseCoopers LLP
New York, New York
February 14, 2003
59
REGISTER.COM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
| December 31, | |||||||
| 2002 | 2001 | ||||||
| |
|
||||||
| Assets: | |||||||
| Current Assets: | |||||||
Cash
and cash equivalents |
$ | 50,557 | $ | 61,932 | |||
Short-term
investments |
105,283 | 78,186 | |||||
Accounts
receivable, less allowance of $2,695 and $2,179, respectively |
8,453 | 11,876 | |||||
Prepaid
domain name registry fees |
15,457 | 13,845 | |||||
Deferred
tax asset, net |
23,052 | 18,415 | |||||
Other
current assets |
3,303 | 5,184 | |||||
| Total current assets | 206,105 | 189,438 | |||||
| Fixed assets, net | 8,450 | 8,036 | |||||
| Prepaid domain name registry fees, net of current portion | 7,131 | 4,718 | |||||
| Other investments | 396 | 396 | |||||
| Marketable securities | 61,205 | 57,651 | |||||
| Goodwill and other intangible assets, net | 2,317 | 8,550 | |||||
| Total assets | $ | 285,604 | $ | 268,789 | |||
| Liabilities and Stockholders’ Equity: | |||||||
| Current Liabilities: | |||||||
Accounts
payable and accrued expenses |
$ | 15,227 | $ | 15,817 | |||
Deferred
revenue, net |
55,617 | 53,029 | |||||
Acquisition
note payable |
9,625 | – | |||||
| Total current liabilities | 80,469 | 68,846 | |||||
| Deferred revenue, net of current portion | 31,493 | 24,350 | |||||
| Total liabilities | 111,962 | 93,196 | |||||
| Commitments and contingencies | |||||||
| Stockholders’ equity: | |||||||
Preferred
stock—$.0001 par value, 5,000,000 shares authorized; none issued
and outstanding at December 31, 2002 and 2001 |
– | – | |||||
Common
stock—$.0001 par value, 200,000,000 shares authorized; 40,624,502
and 38,296,581 shares issued and outstanding at December 31, 2002 and
December 31, 2001, respectively |
4 | 4 | |||||
Additional
paid-in capital |
216,713 | 210,679 | |||||
Unearned
compensation |
(1,376 | ) | (3,007 | ) | |||
Accumulated
other comprehensive income |
2,179 | 1,386 | |||||
Accumulated
deficit |
(43,878 | ) | (33,469 | ) | |||
| Total stockholders’ equity | 173,642 | 175,593 | |||||
| Total liabilities and stockholders’ equity | $ | 285,604 | $ | 268,789 | |||
The accompanying notes are an integral part of these consolidated financial statements.
60
REGISTER.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Year
ended December 31, |
||||||||||
2002 |
2001 |
2000 |
||||||||
| Net revenues | $ | 106,288 | $ | 116,281 | $ | 86,110 | ||||
| Cost of revenues | 35,299 | 34,790 | 23,869 | |||||||
Gross
profit |
70,989 | 81,491 | 62,241 | |||||||
| Operating expenses: | |
|
|
|||||||
Sales
and marketing |
31,222 | 33,532 | 47,311 | |||||||
Research
and development |
13,357 | 7,741 | 5,580 | |||||||
General
and administrative (including non-cash compensation of $1,937, $1,771
and $2,173 respectively) |
26,312 | 14,769 | 13,434 | |||||||
Amortization
and writedown of goodwill and other intangibles |
17,290 | 45,299 | 5,582 | |||||||
Total
operating expenses |
88,181 | 101,341 | 71,907 | |||||||
| Loss from operations | (17,192 | ) | (19,850 | ) | (9,666 | ) | ||||
| Other income (expense), net | 5,588 | 8,664 | 9,520 | |||||||
| Gain on sale of investment | – | – | 4,603 | |||||||
| Income (loss) before provision for income taxes | (11,604 | ) | (11,186 | ) | 4,457 | |||||
| Provision (benefit) for income taxes | (1,195 | ) | 10,401 | 4,187 | ||||||
Net
income (loss) |
(10,409 | ) | (21,587 | ) | 270 | |||||
| Other comprehensive income (loss): | ||||||||||
Unrealized
gain (loss) on marketable securities |
(595 | ) | 1,002 | 384 | ||||||
Gain
on foreign currency translation |
1,388 | – | – | |||||||
Comprehensive
income (loss) |
$ | (9,616 | ) | $ | (20,585 | ) | $ | 654 | ||
Basic
income (loss) earnings per share |
$ | (0.26 | ) | $ | (0.58 | ) | $ | 0.01 | ||
Diluted
income (loss) earnings per share |
$ | (0.26 | ) | $ | (0.58 | ) | $ | 0.01 | ||
| Weighted average number of shares outstanding: | ||||||||||
Basic |
40,046 | 37,424 | 31,394 | |||||||
Diluted
|
40,046 | 37,424 | 39,184 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
61
REGISTER.COM, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’
EQUITY
(in thousands, except share data)
| Series A Convertible Preferred Stock | Common Stock |
Additional Paid-in Capital | Unearned Compen-sation | Accumulated other comprehensive income | Accumu-lated Deficit | Total | ||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||
| Balance at January 1, 2000 | 4,694,333 | $ | – | 21,065,047 | $ | 2 | $ | 36,710 | $ | (2,647 | ) | $ | – | $ | (12,152 | ) | $ | 21,913 | ||||||||||
Sale
and issuance of common stock |
– | – | 5,222,279 | 1 | 115,293 | – | – | – | 115,294 | |||||||||||||||||||
Issuance
of common stock for acquisitions |
4,658,308 | 1 | 47,428 | 47,429 | ||||||||||||||||||||||||
Conversion
of exchangeable preferred stock to common stock |
(4,694,333 | ) | – | 4,694,333 | – | – | – | – | – | – | ||||||||||||||||||
Issuance
of compensatory stock options |
– | – | – | – | 3,895 | (3,895 | ) | – | – | – | ||||||||||||||||||
Issuance
of shares for the Employee Stock Purchase Plan |
– | – | 33,619 | – | 200 | – | – | – | 200 | |||||||||||||||||||
Amortization
of unearned compensation |
– | – | – | – | (81 | ) | 2,254 | – | – | 2,173 | ||||||||||||||||||
Exercise
of stock options, inclusive of related tax benefit |
– | – | 427,457 | – | 893 | – | – | – | 893 | |||||||||||||||||||
Exercise
of warrants |
– | – | 722,238 | – | 339 | – | – | – | 339 | |||||||||||||||||||
Net
unrealized holding gain in marketable securities |
– | – | – | – | – | – | 384 | – | 384 | |||||||||||||||||||
| Net
income |
– | – | – | – | – | – | – | 270 | 270 | |||||||||||||||||||
| Balance at December 31, 2000 | – | – | 36,823,281 | 4 | 204,677 | (4,288 | ) | 384 | (11,882 | ) | 188,895 | |||||||||||||||||
Issuance
of shares for the Employee Stock Purchase Plan |
– | – | 66,774 | – | 399 | – | – | – | 399 | |||||||||||||||||||
Amortization
of unearned compensation |
– | – | – | – | (10 | ) | 1,771 | – | – | 1,761 | ||||||||||||||||||
Exercise
of stock options, inclusive of related tax benefit |
– | – | 794,011 | – | 4,905 | – | – | – | 4,905 | |||||||||||||||||||
Exercise
of warrants |
– | – | 570,428 | – | 208 | – | – | – | 208 | |||||||||||||||||||
Issuance
of restricted stock |
– | – | 42,087 | – | 500 | (490 | ) | – | – | 10 | ||||||||||||||||||
Net
unrealized holding gain in marketable securities |
– | – | – | – | – | – | 1,002 | – | 1,002 | |||||||||||||||||||
Net
income (loss) |
– | – | – | – | – | – | – | (21,587 | ) | (21,587 | ) | |||||||||||||||||
| Balance at December 31, 2001 | – | – | 38,296,581 | 4 | 210,679 | (3,007 | ) | 1,386 | (33,469 | ) | 175,593 | |||||||||||||||||
Issuance
of shares for the Employee Stock Purchase Plan |
– | – | 62,470 | – | 349 | – | – | – | 349 | |||||||||||||||||||
Amortization
of unearned compensation |
– | – | – | – | 1,937 | – | – | 1,937 | ||||||||||||||||||||
Exercise
of stock options, inclusive of related tax benefit |
1,537,899 | – | 6,969 | 6,969 | ||||||||||||||||||||||||
Exercise
of warrants |
– | – | 1,063,406 | – | 42 | – | – | – | 42 | |||||||||||||||||||
Issuance
of restricted stock |
– | – | 34,246 | – | 306 | (306 | ) | – | – | – | ||||||||||||||||||
Repurchase
and retirement of treasury stock |
– | – | (370,100 | ) | – | (1,632 | ) | – | – | – | (1,632 | ) | ||||||||||||||||
Other
comprehensive income: |
||||||||||||||||||||||||||||
Net
unrealized holding loss on marketable securities |
– | – | – | – | – | – | (595 | ) | – | (595 | ) | |||||||||||||||||
|
Foreign
currency translation |
– | – | – | – | – | – | 1,388 | – | 1,388 | |||||||||||||||||||
Net
income (loss) |
– | – | – | – | – | – | (10,409 | ) | (10,409 | ) | ||||||||||||||||||
| Balance at December 31, 2002 | – | $ | – | 40,624,502 | $ | 4 | $ | 216,713 | $ | (1,376 | ) | $ | 2,179 | $ | (43,878 | ) | $ | 173,642 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
62
REGISTER.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Year ended December 31, | ||||||||||
| 2002 | 2001 | 2000 | ||||||||
| Cash flows from operating activities | ||||||||||
| Net income (loss) | $ | (10,409 | ) | $ | (21,587 | ) | $ | 270 | ||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||
Deferred
revenues |
1,864 | (11,138 | ) | 56,415 | ||||||
Depreciation,
amortization and writedown of goodwill and other intangible assets |
21,802 | 48,829 | 7,696 | |||||||
Compensatory
stock options and warrants expense |
1,631 | 1,771 | 2,173 | |||||||
Deferred
income taxes |
(4,637 | ) | 2,339 | (12,176 | ) | |||||
Tax
benefit from exercise of employee stock options |
1,061 | 4,424 | – | |||||||
| Changes in assets and liabilities affecting operating cash flows, net of acquisitions: | ||||||||||
Accounts
receivable |
6,190 | (5,280 | ) | (4,080 | ) | |||||
Prepaid
domain name registry fees |
(638 | ) | 2,715 | (12,747 | ) | |||||
Prepaid
income taxes |
– | 3,774 | (3,774 | ) | ||||||
Other
current assets |
2,730 | (2,209 | ) | (2,779 | ) | |||||
Accounts
payable and accrued expenses |
(3,447 | ) | 612 | 917 | ||||||
Net
cash provided by operating activities |
16,147 | 24,250 | 31,915 | |||||||
| Cash flows from investing activities | ||||||||||
Capital
expenditures |
(3,247 | ) | (2,195 | ) | (9,027 | ) | ||||
Deferred
offering costs |
– | – | 390 | |||||||
Purchases
of investments |
(300,185 | ) | (139,830 | ) | (128,363 | ) | ||||
Maturities
of investments |
270,416 | 118,463 | 19,723 | |||||||
Acquisitions,
net |
(9,359 | ) | – | (11,943 | ) | |||||
Net
cash used in investing activities |
(42,375 | ) | (23,562 | ) | (129,220 | ) | ||||
| Cash flows from financing activities | ||||||||||
Issuance
of notes payable |
8,552 | – | – | |||||||
Repayment
of notes payable |
(219 | ) | – | – | ||||||
Net
proceeds from issuance of common stock and warrants |
6,605 | 1,088 | 116,550 | |||||||
Purchase of treasury stock |
(1,632 | ) | – | – | ||||||
Principal
payments on capital lease obligations |
– | – | (33 | ) | ||||||
Net
cash provided by financing activities |
13,306 | 1,088 | 116,517 | |||||||
Effect
of exchange rate changes on cash |
1,547 | – | – | |||||||
| Net increase (decrease) in cash and cash equivalents | (11,375 | ) | 1,776 | 19,212 | ||||||
| Cash and cash equivalents at beginning of period | 61,932 | 60,156 | 40,944 | |||||||
| Cash and cash equivalents at end of period | $ | 50,557 | $ | 61,932 | $ | 60,156 | ||||
| Supplemental disclosure of cash flow information: | ||||||||||
| Cash paid for interest | $ | 123 | $ | – | $ | 15 | ||||
| Cash paid for income taxes | $ | 1,731 | $ | – | $ | 25,262 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
63
REGISTER.COM, INC.
Notes to Financial Statements
1. Nature of Business And Organization
Nature of Business
Register.com, Inc. (the “Company” or “Register.com”) provides Internet domain name registration and other online products and services such as web-site creation tools, email, domain name forwarding and advertising.
The Company is an ICANN-accredited registrar of domain names. ICANN is an independent non-profit organization selected by the U.S. Department of Commerce to manage and oversee the domain name system.
In March 2000, the Company completed an initial public offering of 5,222,279 shares of its common stock and received net proceeds of $115.3 million (see Note 6).
In June 2000, the Company acquired Inabox, Inc., a developer of website creation software. In September 2000, the Company acquired Afternic.com, Inc., a secondary market exchange for domain names. In March 2002, the Company acquired Virtual Internet plc, which provides domain name registrations and online intellectual property management and protection services. See Note 13 for additional information.
Stock Split
In January 2000, the Company effected a 3.5 to 1 stock split. All common and preferred shares, options, warrants and related per-share data reflected in the accompanying financial statements and notes thereto have been adjusted to give retroactive effect to the stock split.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany balances and transactions have been eliminated.
Cash equivalents
The Company considers all highly liquid investments purchased with an initial maturity of 90 days or less to be cash equivalents. The Company maintains its cash balances in highly rated financial institutions. At most times, such cash balances exceed the Federal Deposit Insurance Corporation limit. The Company has pledged $7.7 million and $7.4 million of its cash as of December 31, 2002 and 2001, respectively, as security deposits, primarily to support outstanding letters of credit. The Company has also deposited 6.0 million pounds sterling (approximately $9.6 million at December 31, 2002) in support of a bank guarantee of a like amount of notes payable in connection with the acquisition of Virtual Internet plc in March 2002 (see Note 13).
64
Investments
The Company classifies its investments in debt securities as marketable securities in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” These securities are carried at fair market value, with unrealized gains and losses reported in stockholders’ equity as a component of other comprehensive income (loss). Gains or losses on securities sold are based on the specific identification method.
Securities with maturities of less than one year are classified as current, and securities with maturities of greater than a year are classified as non-current.
Fixed assets
Depreciation and amortization is calculated using the straight-line method. Estimated useful lives are as follows: equipment, furniture and fixtures - three to five years; buildings - fifty years; leasehold improvements - shorter of the estimated useful life of each improvement or the lease term. The costs of additions and improvements are capitalized, and repairs and maintenance costs are charged to operations as incurred.
Revenue recognition
The Company’s revenues are primarily derived from domain name registration fees, advertising and online products and services.
Domain name registration fees
Registration fees charged to end-users for registration services are recognized on a straight-line basis over the life of the registration term. A majority of end-user subscribers pay for services with credit cards for which the Company receives remittances from the credit card associations, generally within two business days after the sale transaction. A provision for estimated refunds to customers and chargebacks from credit card associations is recorded as a reduction of deferred revenue and accounts receivable. For many of our corporate customers who register domain names through our Corporate Services division and our Global Partner Network, we establish lines of credit based on credit worthiness. Referral commissions earned by participants in our Global Partner Network are deducted from gross registration revenue for presentation in our financial statements.
Online products and services
Revenue from other products and services is recognized on a straight-line basis over the period in which services are provided. Payments received in advance of services rendered are included in deferred revenue.
65
Advertising
Advertising revenues are derived principally from short-term advertising contracts. Advertising revenues are recognized in the periods in which the advertisements are displayed, or the required number of impressions are achieved.
Deferred revenue
Deferred revenue represents the unearned portion of payments received and invoices rendered, net of provisions for estimated refunds to customers and chargebacks from credit card associations, and referral commissions for certain Global Partner Network partners.
Prepaid domain name registry fees
Prepaid domain name registry fees represent advance payments to registries for domain name registrations. Registry fees are amortized to expense on a straight-line basis over the terms of the registrations.
Research and development and software development costs
Research and development costs are charged to expense as incurred. Software development costs incurred subsequent to the establishment of technological feasibility and prior to the general release of the product or service to the public, are capitalized and amortized to cost of revenues over the estimated useful life of the related product or service. Capitalized software development costs totaled $1.6 million and $0.2 million for the years 2002 and 2001, respectively.
Advertising costs
Advertising costs include media advertising, direct mail and other promotional activities, and are charged to expense as incurred. Advertising expense was $11.9 million, $15.5 million, and $36.7 million for the years 2002, 2001 and 2000, respectively.
Income taxes
The Company recognizes deferred taxes by the asset and liability method. Under that method, deferred income taxes are recognized for differences between the financial statement and tax bases of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect of a change in tax rates on deferred taxes is recognized in income in the period of the enactment date. In addition, valuation allowances are established when appropriate to reduce deferred tax assets to the amounts expected to be realized.
Fair value of financial instruments
The carrying values of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value because of the relatively short-term nature of these instruments.
66
Concentration of credit risk
Concentration of credit risk associated with accounts receivable is limited due to the large number of customers, as well as their dispersion across various industries and geographic areas. The Company has no derivative financial instruments.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company’s most significant estimates relate to potential refunds to customers and chargebacks from credit card associations, the realizability of accounts receivable and deferred tax assets, the potential liability to credit card associations for penalties for excessive credit card chargebacks and refunds, potential liability for various matters in litigation, and the amortization period of intangible assets. Actual results could differ from management’s estimates. The markets for the Company’s products and services are characterized by intense competition, technology advances and new product/service introductions, all of which could impact the future realizability of the Company’s assets.
Stock based compensation
The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and related interpretations. The Company provides the disclosures required by SFAS 123, “Accounting for Stock-Based Compensation”.
The Company’s stock-based incentive plans are more fully described in Note 8. The following table illustrates the effect on the Company’s net income (loss) and net income (loss) per share had compensation cost for the stock-based incentive plans been determined in accordance with the fair value based method of accounting for stock-based compensation as prescribed by SFAS 123. Since option grants awarded during 2002, 2001 and 2000 vest over several years and additional awards are expected to be issued in the future, the pro forma results shown below are not likely to be representative of the effects on future years of the application of the fair value based method.
67
| Year ended December 31, | ||||||||||
| (in thousands, except per share data) | ||||||||||
| 2002 | 2001 | 2000 | ||||||||
| Net income (loss): | ||||||||||
| As reported | $ | (10,409 | ) | $ | (21,587 | ) | $ | 270 | ||
| Add: Stock-based employee compensation included in reported net income | $ | 1,937 | $ | 1,771 | $ | 2,173 | ||||
| Deduct: Total stock-based employee compensation expense determined under the fair value based method | $ | (3,650 | ) | $ | (5,157) | $ | (9,215 | ) | ||
| Pro forma | $ | (12,122 | ) | $ | (24,973 | ) | $ | (6,772 | ) | |
| Net income (loss) per share: | ||||||||||
| As reported — basic and diluted | $ | (0.26 | ) | $ | (0.58 | ) | $ | 0.01 | ||
| Pro forma — basic and diluted | $ | (0.30 | ) | $ | (0.67 | ) | $ | (0.21 | ) | |
Other disclosures required by SFAS 123 have been included in Note 8.
Net Income (loss) per share
The Company calculates earnings per share in accordance with SFAS 128, “Earnings Per Share.”
Basic net income (loss) per share (“Basic EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per share is the same as basic net loss per share. Diluted net income per share (“Diluted EPS”) gives effect to all dilutive potential common shares outstanding during a period. In computing Diluted EPS, the treasury stock method is used to determine the number of shares assumed to be purchased from the conversion of common stock equivalents or the proceeds of exercises of options and warrants. Details of the calculation net income (loss) per share are as follows:
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| Year Ended December 31, | ||||||||||
| 2002 | 2001 | 2000 | ||||||||
| (in thousands, except per share amounts) | ||||||||||
| Net income (loss) per share - basic: | |
|
|
|||||||
| Net income (loss) available to common Shareholders | $ | (10,409 | ) | $ | (21, 587 | ) | $ | 270 | ||
| Weighted average shares - basic | 40,046 | 37,424 | 31,394 | |||||||
| Net income (loss) per share - basic | $ | (0.26 | ) | $ | (0.58 | ) | $ | 0.01 | ||
| |
|
|
||||||||
| Net income (loss) per share - diluted: | ||||||||||
| Net income (loss) | $ | (10,409 | ) | $ | (21,587 | ) | $ | 270 | ||
| Weighted average shares outstanding - basic | 40,046 | 37,424 | 31,394 | |||||||
| Diluted effect of stock options | 606 | 2,292 | 2,429 | |||||||
| Diluted effect of warrants | 2,193 | 4,791 | 5,361 | |||||||
| Weighted average shares - diluted | 42,845 | 44,507 | 39,184 | |||||||
| Net income (loss) per share - diluted | * | * | $ | 0.01 | ||||||
* Inclusion of common stock equivalent shares would result in an anti-dilutive net loss per share. As a result, diluted net loss per share is the same as basic net loss per share.
Comprehensive income
The Company follows SFAS 130, “Reporting Comprehensive Income”. This statement requires that items of comprehensive income be classified by their nature in the financial statements, with accumulated balances shown separately. The Company has chosen to present Comprehensive Income in the Consolidated Statements of Changes in Stockholders’ Equity.
The difference between net income and comprehensive income was $0.8 million for the year 2002, representing the net unrealized loss on marketable securities of $0.6 million, offset by an unrealized gain on foreign currency translation of $1.4 million. For the years 2001 and 2000, the difference between net income and comprehensive income was $1.0 million and $0.4 million, respectively, which represented the net unrealized gain on marketable securities.
Segment reporting
The Company follows SFAS 131, “Disclosures about Segments of an Enterprise and Related Information”, which established standards for reporting operating segments in annual financial statements, and related disclosures about products and services, geographic areas and major customers. The Company operates in one business segment. Since revenues and long-lived assets outside of the United States are not deemed material, no separate disclosure is provided.
Goodwill and other intangibles
In June 2001, SFAS 141 “Business Combinations” and SFAS 142 “Goodwill and Other Intangible Assets” were issued. These statements became effective for the Company on January 1, 2002 with respect to business combinations completed on or after June 30, 2001.
Under SFAS 142, effective January 1, 2002 goodwill is no longer subject to amortization. Management evaluates the recoverability of the carrying amount of intangible assets annually, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Current and estimated future profitability, undiscounted cash flows, and the total market value of the company’s common stock compared with the carrying value of stockholders’ equity, are the primary indicators used to assess the recoverability of intangible assets. (See Note 13).
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Following is a reconciliation of net income (loss) between the historical amounts reported for years 2001 and 2000, and the adjusted amounts reflecting this new accounting standard:
| Year 2001 | Year 2000 | ||||||
| (in thousands, except per share amounts) | |||||||
| Net income (loss): | |||||||
Reported net income (loss) |
$ | (21,587 | ) | $ | 270 | ||
Amortization of goodwill and other intangibles |
12,799 | 5,582 | |||||
Adjusted net income (loss) |
$ | (8,788 | ) | $ | 5,852 | ||
| Basic net income (loss) per share: | |||||||
Reported basic net income (loss) per share |
$ | (0.58 | ) | $ | 0.01 | ||
Amortization of goodwill and other intangibles per share |
0.34 | 0.18 | |||||
| Adjusted basic net income (loss) per share | $ | (0.23 | ) | $ | 0.19 | ||
|
|
|
||||||
| Diluted net income (loss) per share: | |||||||
Reported diluted net income (loss) per share |
$ | (0.58 | ) | $ | 0.01 | ||
Amortization of goodwill and other intangibles per share |
0.34 | 0.14 | |||||
Adjusted diluted net income (loss) per share |
$ | (0.23 | ) | $ | 0.15 | ||
Long-lived assets (excluding Goodwill)
The Company evaluates potential impairment of long-lived assets (excluding goodwill) whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when the estimated future cash flow expected to result from the use of the asset and its eventual disposition is less than its carrying amount. If an asset is considered impaired, the impairment loss is measured as the amount by which the carrying value of the asset exceeds its fair value. Fair value is determined based upon discounted cash flows or appraised values, depending on the nature of the asset. To date, the Company has identified no such impairment losses.
Recent accounting pronouncements
SFAS 146 “Accounting for Costs Associated with Exit or Disposal Activities” was issued in June 2002, requiring that costs associated with exit or disposal activities be recognized when the liability is incurred, rather than at the date of commitment to an exit or disposal plan. Examples of covered costs are lease termination and certain employee severance. SFAS 146 is applicable to exit or disposal activities initiated after December 31, 2002.
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SFAS 148 “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FAS 123” was issued in December 2002, providing for alternative methods of transition for a voluntary change to the fair market value based method of accounting for stock-based employee compensation.
Reclassification
For comparative purposes, certain amounts in the financial statements of prior periods have been reclassified to conform to the current year’s presentation.
3. Fixed Assets
Fixed assets consist of the following:
| December 31, | |||||||
| 2002 | 2001 | ||||||
| (in thousands) | |||||||
| Computer equipment | $ | 14,606 | $ | 11,011 | |||
| Furniture and fixtures | 426 | 306 | |||||
| Office equipment | 631 | 417 | |||||
| Building | 512 | – | |||||
| Leasehold improvements | 2,904 | 2,483 | |||||
| 19,079 | 14,217 | ||||||
| Less: accumulated depreciation and amortization | (10,629 | ) | (6,181 | ) | |||
| Fixed assets, net | $ | 8,450 | $ | 8,036 | |||
4. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
| December 31, | ||||||||||
| 2002 | 2001 | |||||||||
| (in thousands) | ||||||||||
| Trade accounts payable | $ | 1,095 | $ | 5,660 | ||||||
| Accrued compensation and benefits | 2,519 | 3,698 | ||||||||
| Accrued registry fees and related costs | 3,264 | 2,868 | ||||||||
| Penalties for excessive credit
card chargebacks and refunds (Note 14) |
3,739 | – | ||||||||
| Accrued advertising expense | 1,627 | 178 | ||||||||
| Accrued professional fees | 878 | 1,028 | ||||||||
| Other | 2,105 | 2,385 | ||||||||
| $ | 15,227 | $ | 15,817 | |||||||
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5. Investments
As of December 31, 2002 and 2001, short-term investments and marketable securities consisted of the following:
| 2002 (in thousands) | Fair Value | Amortized Cost | Gross Unrealized Holding Gains | Gross unrealized Holding Losses | |||||||||
| Short-term investments: | |||||||||||||
Municipal
debt obligations |
$ | 95,327 | $ | 94,872 | $ | 457 | $ | (2 | ) | ||||
Certificates
of deposit |
9,956 | 9,956 | – | – | |||||||||
Total
short-term investments |
$ | 105,283 | $ | 104,828 | $ | 457 | $ | (2 | ) | ||||
| Marketable securities | |||||||||||||
Municipal
debt obligations |
$ | 60,887 | $ | 60,404 | $ | 486 | $ | (3 | ) | ||||
Equity
securities |
318 | 470 | – | (152 | ) | ||||||||
Total
marketable securities |
$ | 61,205 | $ | 60,874 | $ | 486 | $ | (155 | ) | ||||
| 2001 (in thousands) | Fair Value | Amortized Cost | Gross Unrealized Holding Gains | Gross Unrealized Holding Losses | |||||||||
| Short-term investments: | |||||||||||||
Municipal
debt obligations |
$ | 38,913 | $ | 39,288 | $ | – | $ | (375 | ) | ||||
Corporate
debt securities |
34,266 | 34,971 | – | (705 | ) | ||||||||
International
debt obligations |
5,007 | 5,123 | – | (116 | ) | ||||||||
Total
short-term investments |
$ | 78,186 | $ | 79,382 | $ | – | $ | (1,196 | ) | ||||
| Marketable securities | |||||||||||||
Municipal
debt obligations |
$ | 57,651 | $ | 57,788 | $ | 69 | $ | (206 | ) | ||||
The Company classifies its existing debt securities as marketable securities in accordance with the provisions of SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities.” These securities are carried at fair market value, with unrealized gains and losses reported in stockholders’ equity as a component of other comprehensive income (loss). Gains or losses on securities sold are calculated based on the specific identification method. Net unrealized holding gains of $0.8 million and $1.4 million on these securities are included in accumulated comprehensive income at December 31, 2002 and 2001, respectively.
Other investments at December 31, 2002 represents a $0.4 million investment in Afilias USA, Inc., the registry for the .info generic top level domain.
6. Stockholders’ Equity
Common Stock
In March 2000, the Company sold 5,222,279 shares of common stock in an initial public offering. Net proceeds were approximately $115.3 million, after underwriting discount and other offering expenses. At the time of the initial public offering, all of the Company’s preferred stock automatically converted into 4,694,333 common shares.
During 2001, the Company issued 56,377 shares of restricted stock to employees at exercise prices ranging from $0.00 to $11.49 per share. The Company recorded $0.5 million as deferred compensation, representing the fair value of the restricted stock at the date of issuance, which is being amortized to expense over the three-year vesting period of the grants.
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Preferred Stock Purchase Rights
In October 2002, the Company declared a dividend distribution of one preferred share purchase right (the “Right”) for each outstanding share of the Company’s Common Stock, to stockholders of record at the close of business on November 12, 2002. Each Right entitles the registered holder to purchase from the Company a unit consisting of one one-thousandth of a share (a “Unit”) of Series A Junior Participating Preferred Stock (“Series A Preferred”) at a price of $32.00 per Unit. The Rights, which expire on November 12, 2012, will only become exercisable upon distribution. Distribution of the Rights will not occur until ten days after the earlier of (i) the public announcement that a person or group has acquired beneficial ownership of 15% or more of the outstanding shares of Common Stock (an “Acquiring Person”), or (ii) the commencement of, or announcement of an intention to make, a tender offer or exchange offer that would result in a person or group acquiring the beneficial ownership of 15% or more of the outstanding shares of the Company’s Common Stock. Under specified circumstances, the holders of the Rights, other than the Acquiring Person, would be entitled to receive, upon exercise of the Rights, Series A Preferred having a value equal to two times the exercise price of the Rights.
Voting
Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders.
Treasury Stock Purchases
During 2002, the Company repurchased and retired 370,100 shares of its common stock for $1.6 million.
7. Warrants
Common shares issuable upon exercise of warrants outstanding at December 31, 2002 are as follows:
| Issuance Date | Expiration Date | Shares Issuable Upon Exercise |
Exercise Price Per Share |
|||
| January 1998 | January 2003 | 135,625 | $0.36 | |||
| January 1998 | January 2003 | 135,625 | $0.86 | |||
| January 1998 | June 2005 | 2,304,813 | $0.97 | |||
| April 1998 | May 2003 | 102,085 | $0.36 | |||
| April 1998 | May 2003 | 74,085 | $0.86 | |||
| September 1998 | September 2008 | 1,500 | $0.43 | |||
| March 1999 | March 2009 | 5,250 | $0.57 | |||
| March 1999 | March 2004 | 185,490 | $4.08 | |||
| May 1999 | May 2004 | 308,959 | $4.08 | |||
| June 1999 | June 2009 | 5,250 | $1.57 | |||
| June 1999 | June 2004 | 281,819 | $3.43 | |||
| Total shares and average exercise price | 3,540,501 | $1.55 | ||||
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8. Stock Option Plans
Amended and Restated 2000 Stock Incentive Plan
The Company’s Amended and Restated 2000 Stock Incentive Plan (the “2000 Plan”) supercedes the 1997 and 1999 Stock Option Plans. The 2000 Plan permits grants of incentive stock options, non-qualified stock options, and other equity-based awards. Incentive stock options and certain other awards may be granted only to employees, whereas non-qualified stock options and certain other awards may be granted to employees, non-employee directors, and consultants. The number of shares reserved for issuance under the 2000 Plan is automatically increased on the first trading day of each calendar year by 2% of the total number of shares of common stock outstanding on the last trading day of the prior calendar year, up to a maximum annual increase of 1,750,000 shares. On January 2, 2003, 2002, and 2001 the number of shares reserved for issuance increased by 812,490, 765,932, and 735,408, respectively. Accordingly, the maximum aggregate number of shares reserved for issuance under the 2000 Plan as of January 2, 2003 was 9,663,830.
The Compensation Committee determines the exercise price and other terms of options and other awards (except automatic option grants to non-employee directors) under the 2000 Plan. All non-employee Board members, other than 3% Stockholders, are automatically granted an option to acquire 25,000 shares of common stock on the date of initial election or appointment to the Board, which option exercise price will equal the fair market value of the Company’s common stock on the date of grant, and which vests in annual installments over two years. In addition, each non-employee Board member, other than 3% Stockholders, who continues to serve as a director on the date of each regularly scheduled quarterly meeting of the Board will receive an option grant to purchase 2,500 shares of common stock on each such meeting date at an exercise price equal to the fair market value of the Company’s common stock on the date of grant. Each 2,500 share option grant will vest upon the optionee’s completion of one year of board service measured from the grant date. 3% Stockholder means a non-employee Board member who, as of March 3, 2000, directly or indirectly, owned stock possessing at least 3% of the total combined voting power of the outstanding securities of the Company (or any Parent or Subsidiary) or was affiliated with or was a representative of such a 3% or greater stockholder and is compensated for his/her membership on the Board of Directors by any such 3% or greater stockholder.
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Stock option activity under the 2000 Plan is summarized as follows:
| Number of shares | Weighted Average Exercise Price | |||||
| Outstanding at January 1, 2000 | 1,492,435 | $ | 1.01 | |||
| Granted | 3,501,674 | 23.81 | ||||
| Exercised | (420,590 | ) | 0.84 | |||
| Forfeited | (999,087 | ) | 15.44 | |||
| |
|
|||||
| Outstanding at December 31, 2000 | 3,574,432 | 19.00 | ||||
| Granted | 2,674,088 | 8.92 | ||||
| Exercised | (356,550 | ) | 1.07 | |||
| Forfeited | (1,079,895 | ) | 18.57 | |||
| |
|
|||||
| Outstanding at December 31, 2001 | 4,812,075 | 14.56 | ||||
| Granted | 3,038,827 | 6.47 | ||||
| Exercised | (286,834 | ) | 1.19 | |||
| Forfeited | (1,691,907 | ) | 11.10 | |||
| |
|
|||||
| Outstanding at December 31, 2002 | 5,872,161 | $ | 12.18 | |||
| |
|
|||||
| Options available for future grant as of December 31, 2002 | 1,733,732 | |||||
Details of options outstanding under the 2000 Plan at December 31, 2002 are as follows:
| Options Outstanding | Options Exercisable | ||||||||||||||
| Exercise Price | Number Outstanding at December 31, 2002 | Weighted-Average
Remaining Contractual Life (Years) |
Weighted Average Exercise Price |
Number Exercisable at December 31, 2002 | Weighted Average Exercise Price |
||||||||||
| |
|
|
|
|
|
||||||||||
| $ 0.17 - $ 4.43 | 920,727 | 8.84 | $ | 3.66 | 191,782 | $ | 1.80 | ||||||||
| $ 4.45 - $ 4.45 | 600,000 | 9.90 | $ | 4.45 | 12,500 | $ | 4.45 | ||||||||
| $ 4.51 - $ 6.55 | 596,746 | 8.43 | $ | 5.92 | 198,351 | $ | 6.28 | ||||||||
| $ 7.00 - $ 8.30 | 599,090 | 8.92 | $ | 7.47 | 119,746 | $ | 7.44 | ||||||||
| $ 8.52 - $ 8.72 | 200,962 | 6.17 | $ | 8.58 | 51,082 | $ | 8.59 | ||||||||
| $ 8.76 - $ 8.76 | 736,022 | 9.34 | $ | 8.76 | 37,543 | $ | 8.76 | ||||||||
| $ 8.81 - $11.45 | 603,930 | 8.61 | $ | 10.13 | 169,993 | $ | 10.19 | ||||||||
| $11.50 - $24.00 | 710,796 | 7.78 | $ | 15.68 | 507,395 | $ | 16.13 | ||||||||
| $26.40 - $38.40 | 606,411 | 7.20 | $ | 32.43 | 475,829 | $ | 31.33 | ||||||||
| $40.88 - $58.06 | 297,477 | 7.42 | $ | 41.60 | 178,708 | $ | 41.65 | ||||||||
| $0.17 - $58.06 | 5,872,161 | 8.49 | $ | 12.18 | 1,942,929 | $ | 18.31 | ||||||||
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Prior to completion of the initial public offering in March 2000, the fair value of option grants to employees was estimated using the minimum value method of the Black-Scholes option-pricing model, which assumes no volatility of the stock price. The fair values were based on assumptions derived from information provided by the Company’s management. Changes in the information would affect the assumptions and the fair values derived from the assumptions. Subsequent to the initial public offering, volatility assumptions have been utilized. The assumptions used to determine the fair value of option grants to employees in 2002, 2001 and 2000 were as follows:
| Year Ended December 31, | ||||||||
| 2002 | 2001 | 2000 | ||||||
| Risk free interest rate | 3.8 | % | 4.5 | % | 6.2 | % | ||
| Expected lives (years) | 5 | 5 | 5 | |||||
| Expected dividends | 0 | % | 0 | % | 0 | % | ||
| Volatility | 68 | % | 80 | % | 0% to 100 | % | ||
The fair value of options and warrants (see Note 7) granted to non-employees is estimated using the Black-Scholes option pricing model. The fair values were based on assumptions derived from information provided by the Company’s management. Changes in the information would affect the assumptions and the fair values derived from the assumptions. The assumptions used to determine the fair value of grants to non-employees in 2001 and 2000 were as follows: risk free interest rate of 3.8%, 4.5%, and 6.2% respectively; expected lives of 5 to 10 years; expected dividends of 0%; and volatility of 68%, 80%, and 100%, respectively.
The weighted average exercise prices and the fair values at grant dates of options granted during 2002, 2001 and 2000 were as follows:
| Year Ended December 31, | |||||||||||||||||||
| 2002 | 2001 | 2000 | |||||||||||||||||
| Exercise Price |
Fair Value |
Exercise Price |
Fair Value |
Exercise Price |
Fair Value |
||||||||||||||
| Options granted to employees and consultants: | |||||||||||||||||||
| Exercise price less than fair value of stock on grant date | – | – | $ | 0.01 | $ | 9.19 | $ | 12.86 | $ | 6.57 | |||||||||
| Exercise price equal to fair value of stock on grant date | $ | 6.47 | $ | 6.47 | $ | 8.92 | $ | 8.92 | 26.82 | 16.86 | |||||||||
| Exercise price greater than fair value of stock on grant date | – | – | – | – | 24.17 | 2.10 | |||||||||||||
9. Employee Stock Purchase Plan
An Employee Stock Purchase Plan (the “Plan”), became effective on March 3, 2000, through which employees may purchase shares of common stock through payroll deductions up to 10% of eligible compensation. The price paid by the employee is 85% of the fair market value on the offering date or the last day of the purchase period. There are two 6-month purchase periods per year commencing May 1 and November 1. A total of 350,000 shares was initially reserved for purchase under the Plan. The number of shares reserved for issuance is automatically increased on the first trading day of January of each year by 0.25% of the total shares of common stock outstanding on the last trading day of the prior calendar year. In January 2003, 2002 and 2001, the number of shares reserved for issuance increased by 101,561, 95,741, and 91,926 shares, respectively. Shares issued under the Plan were 62,470 and 66,774 during 2002 and 2001, respectively.
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10. Related Party Transactions
Booz Allen & Hamilton Inc.
In October 2000, the Company entered into a consulting arrangement with Booz Allen & Hamilton Inc. (“Booz Allen”). Under the terms of this agreement, Booz Allen provided the Company with consulting services over a ten-week period for a fee of $0.6 million. Reginald Van Lee, a member of the Company’s Board of Directors, is a Partner at Booz Allen.
11.Income Taxes
Temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes resulted in a net deferred tax asset of $23.1 million and $18.4 million at December 31, 2002 and 2001, respectively.
The provision for income taxes for the years 2002, 2001 and 2000 consists of the following:
December
31,
|
||||||||||
2002 |
2001
|
2000 |
||||||||
(in
thousands) |
||||||||||
| Current provision: | ||||||||||
| Federal | $ | 2,395 | $ | 5,634 | $ | 10,980 | ||||
| State | 1,046 | 2,252 | 3,670 | |||||||
| Total current | 3,441 | 7,886 | 14,650 | |||||||
| Deferred provision (benefit): | ||||||||||
| Federal | (3,620 | ) | 1,513 | (8,767 | ) | |||||
| State | (1,016 | ) | 1,002 | (1,696 | ) | |||||
| Total deferred | (4,636 | ) | 2,515 | (10,463 | ) | |||||
| Total provision (benefit) | $ | (1,195 | ) | $ | 10,401 | $ | 4,187 | |||
The current provision in the above schedule excludes the effect of tax deductions related to exercises of non-qualified stock options and disqualifying dispositions of incentive stock options. Under SFAS 109, tax benefits resulting from the foregoing are treated as an increase in stockholders’ equity. On a tax-return basis, after giving effect to such tax deductions, the Company expects to have a taxable loss for the year 2002 and accordingly, the Company has recorded a tax receivable of approximately $1.2 million which is included within accounts payable and accrued expenses.
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The components of the net deferred tax asset were as follows:
| December 31, | ||||||
| 2002 | 2001 | |||||
(in thousands) |
||||||
| Deferred tax assets: | ||||||
| Allowance for doubtful accounts | $ | 1,142 | $ | 811 | ||
| Accrued expenses | 184 | 169 | ||||
| Depreciation and amortization | 323 | 289 | ||||
| Unrealized gain | – | 202 | ||||
| Stock-based compensation | (55 | ) | 6 | |||
| Deferred revenue | 25,874 | 23,034 | ||||
| Credit card penalties | 1,584 | – | ||||
| Total deferred tax asset | 29,052 | 24,511 | ||||
| Deferred tax liabilities | ||||||
| Prepaid domain name registry fees | 6,101 | 5,712 | ||||
| Allowance for returns | (357 | ) | 384 | |||
| Deferred commissions | 40 | – | ||||
| Restricted stock | 216 | – | ||||
| Total deferred tax liabilities | 6,000 | 6,096 | ||||
| Net deferred tax asset | $ | 23,052 | $ | 18,415 | ||
The income tax provision (benefit) in the Statement of Operations differs from income tax provision (benefit) determined by applying the statutory Federal income tax rate to the net income (loss) shown in the financial statements as a result of the following:
| Year ended December 31, | |||||||||
| 2002 | 2001 | 2000 | |||||||
| Tax provision (benefit) at Federal statutory rate | (35.0 | )% | (35.0 | )% | 35.0 | % | |||
| State income tax benefit, net of Federal tax charge | 0.6 | (4.7 | ) | 4.0 | |||||
| Foreign tax rate differential | 34.9 | – | – | ||||||
| Tax exempt interest | (12.7 | ) | – | – | |||||
| Non-deductible amortization and writedown of goodwill and other intangible assets | 26.1 | 152.4 | 79.7 | ||||||
| Abandonment of Afternic business (Note 13) | (23.7 | ) | – | – | |||||
| Tax credits | (5.5 | ) | – | – | |||||
| Other permanent items | 5.0 | – | – | ||||||
| Valuation allowance | – | (19.8 | ) | (24.8 | ) | ||||
| Tax provision (benefit) per statement of operations | (10.3 | )% | 92.9 | % | 93.9 | % | |||
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12. Commitments
Operating leases
The Company leases office facilities under non-cancelable operating leases expiring through 2011. Future minimum lease payments are as follows:
| Years ending December 31, | (in thousands) | |
| 2003 | $ | 1,365 |
| 2004 | 1,043 | |
| 2005 | 878 | |
| 2006 | 903 | |
| 2007 | 850 | |
| Thereafter | 1,649 | |
| Total minimum lease payments | $ | 6,688 |
Rent expense for the years 2002, 2001 and 2000 was $1.5 million, $0.7 million and $0.4 million, respectively.
Employment agreements
In the normal course of business, the Company enters into employment agreements with certain executives of the company.
13. Acquisitions
In June 2000, the Company acquired all of the outstanding capital stock of Inabox, Inc. for $1.0 million cash and 280,019 shares of common stock. The total value of the transaction at the time of the acquisition was approximately $11.7 million. The acquisition was accounted for using the purchase method of accounting, and accordingly the purchase price was allocated to assets acquired and liabilities assumed based on their respective fair values. Intangible assets of $11.6 million, representing the excess of the purchase price plus transaction expenses over the fair value of assets acquired less liabilities assumed, was allocated to goodwill and other intangibles, to be amortized on a straight-line basis over a period of 39 months.
In September 2000, the Company acquired Afternic.com, Inc. for $10.0 million cash and 4,378,289 shares of common stock. A portion of the cash and stock was used to satisfy existing obligations of Afternic.com. The total value of the transaction at the time of the acquisition was approximately $47.9 million. The acquisition was accounted for using the purchase method of accounting, and accordingly, the purchase price was allocated to assets acquired and liabilities assumed based on their respective fair values. Intangible assets of $47.9 million, representing the excess of the purchase price plus transaction expenses over the fair value of assets acquired, was allocated to goodwill and other intangibles, to be amortized on a straight-line basis over a period of 48 months.
79
During 2001, due to significantly lower than expected demand for Afternic’s services experienced in the first year following the acquisition, as well as the fact that market conditions and attendant multiples used to estimate terminal values became and remained significantly depressed since the acquisition of Afternic, the Company concluded that an other than temporary impairment of goodwill has occurred. As a result, the Company recorded an impairment charge in the quarter ended September 30, 2001, in the approximate amount of $32.5 million. At December 31, 2001, there was a remaining balance of $8.6 million of goodwill and other intangible assets related to the acquisitions of Inabox and Afternic.
On March 8, 2002 the Company acquired Virtual Internet plc (“VI”) for £11.99 million (US $16.9 million at date of acquisition). VI, a U.K. based company, has operations in the United States and Europe and, at the time of acquisition, operated through two divisions: the Corporate Services division and the Hosting division. The Corporate Services division provides domain name registration and online intellectual property management and protection services, and the Hosting division provided web-hosting services. In May 2002, we sold VI’s Hosting division for $0.5 million. VI shareholders, other than shareholders in certain jurisdictions outside of the U.K., elected to receive loan notes issued by the Company in exchange for their VI shares; $9.6 million of these loan notes were outstanding at December 31, 2002. These loan notes bear interest at a floating rate equal to LIBOR minus 1% (3.93% at December 31, 2002) and may be redeemed at the request of the holders at any time between September 8, 2002 and June 30, 2003, at which time they mature. The loan notes are guaranteed by Barclays Bank plc, whose guarantee is supported by a cash deposit by the Company of 6.0 million pounds sterling ($9.6 million at December 31, 2002). The cash portion of the VI acquisition was funded with the Company’s available cash resources.
For the year 2002, VI recorded revenue of $7.2 million, and incurred a loss of $10.5 million, which included a charge of $8.3 million related to an impairment of goodwill. The Company did not record a tax benefit in connection with that loss.
Presented below are the pro forma financial results for 2001 prepared under the assumption that the acquisition of VI and the disposition of its Hosting division had been completed as of January 1, 2001. These pro forma financial results include the following significant assumptions:
| • | The acquisition was accounted for under the provisions of SFAS 141, “Business Combinations” and SFAS 142, “Goodwill and Other Intangible Assets” as if adopted January 1, 2001. Intangibles with a US dollar equivalent of $2.4 million were identified, consisting primarily of trademarks, customer relationships and software technology with a weighted average life of 5.4 years. Goodwill with a US dollar equivalent of $8.6 million was recognized at the acquisition date. Goodwill and identified intangibles reflect the allocation of the excess of the acquisition cost over the fair value of the assets and liabilities acquired. To enhance comparability with financial results for 2002, the pro forma financial results for 2001, reflect no amortization of goodwill or intangible assets with an indefinite life. |
| • | The acquisition price of approximately $16.9 million was funded with the issuance of $8.5 million of floating rate notes and $8.4 million of cash. The floating rate notes had an assumed interest rate of 4.75% in 2001 and 0.90% in 2002. An increase of 0.25% in the average short-term interest rate would result in a change to interest expense of $21,000 on an annual basis. |
80
The exchange rates used in the translation of the historical financial results of VI from U.K. pounds to U.S. dollars for the years 2002 and 2001 were US $1.59 per U.K. pound in 2002, and US $1.44 per U.K. pound in 2001, respectively.
Year
ended December 31, |
|||||||
Pro
Forma (Unaudited) |
|||||||
| (In thousands) | 2002 |
2001 |
|||||
| Net revenues | $ | 108,016 | $ | 121,907 | |||
| Net loss | $ | (11,082 | ) | $ | (28,278 | ) | |
| Basic and diluted net loss per share | $ | (0.28 | ) | $ | (0.76 | ) | |
A breakdown of the Company’s intangible assets and the related amortization is:
| As of December 31, 2002 | ||||||||||
| Gross Book Value |
Accumulated
Amortization (in thousands) |
Net Book Value |
||||||||
| Intangible assets: | ||||||||||
| Software | $ | 497 | $ | 135 | $ | 362 | ||||
| Tradename | 113 | 15 | 98 | |||||||
| Customer list | 2,150 | 293 | 1,857 | |||||||
| Total | $ | 2,760 | $ | 443 | $ | 2,317 | ||||
| Projected amortization expense: | ||||||||||
| Year 2003 | $ | 543 | ||||||||
| Year 2004 | $ | 543 | ||||||||
| Year 2005 | $ | 407 | ||||||||
| Year 2006 | $ | 377 | ||||||||
| Year 2007 | $ | 377 | ||||||||
| Year 2008 | $ | 70 | ||||||||
In September 2002 the Company made a decision to abandon its Afternic business. As a consequence of that decision, as well as negative industry and economic trends affecting the Company and the general decline in technology company valuations, including the valuation of the Company’s common stock, the Company performed an impairment analysis of the goodwill and intangible assets recorded in connection with its various acquisitions. Because the total market value of the Company’s common stock as of September 30, 2002 was lower than the book value of its stockholders’ equity, the Company recorded a goodwill impairment writedown of approximately $17.0 million in September 2002.
81
14. Contingencies and Commitments
Litigation
In November 2001, the Company, its Chairman, President, Chief Executive Officer Richard D. Forman and its former Vice President of Finance and Accounting, Alan G. Breitman (the “Individual Defendants”), and Goldman Sachs & Co. and Lehman Brothers, Inc. two of the underwriters in the syndicate for our March 3, 2000 initial public offering, were named as defendants in a class action complaint alleging violations of the federal securities laws in the United States District Court, Southern District of New York. Goldman Sachs & Co. and Lehman Brothers, Inc. distributed 172,500 of the 5,750,000 shares in the IPO. On April 19, 2002, the Company and the Individual Defendants were named as defendants in a Consolidated Amended Complaint (now the operative complaint) filed in the Southern District of New York and captioned In re: Register.com, Inc. Initial Public Offering Securities Litigation. The Consolidated Amended Complaint seeks unspecified damages as a result of various alleged securities law violations arising from activities purportedly engaged in by the underwriters in connection with our initial public offering. Plaintiffs allege that the underwriter defendants agreed to allocate stock in the Company’s initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at pre-determined prices. Plaintiffs allege that the prospectus for the Company’s initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. On October 9, 2002, the Court dismissed the Individual Defendants from the case without prejudice based on Stipulations of Dismissal filed by the plaintiffs and the Individual Defendants. On February 19, 2003, the Court denied the motion to dismiss the complaint against the Company. The action is being coordinated with approximately three hundred other nearly identical actions filed against other companies before one judge in the U.S. District Court for the Southern District of New York.
Register.com has been named as a defendant in a lawsuit filed on May 2, 2002, which alleges that the Company’s SafeRenew program violates New York law. This lawsuit was filed by Brian Wornow, on behalf of himself and all others similarly situated, in the Supreme Court of the State of New York. The Company’s SafeRenew program was implemented in January 2001 on an “opt-out basis” to .com, .net and .org registrations registered through the www.register.com website, and was subsequently expanded to cover certain ccTLDs registered through this website. Under the terms of the Company’s services agreement, at the time a covered registration comes up for renewal, the Company attempts to charge a registrant’s on-file credit card a one year renewal fee and, if the charge is successful, to renew the registration for that additional one-year period. The Company believes that the SafeRenew program was properly adopted as an effort to protect our customers’ online identities. Plaintiff seeks class certification and alleges violation of certain New York statutes as well as a breach of contract, money had and received and unjust enrichment. Plaintiff further seeks to enjoin the Company from automatically renewing domain name registrations, an award of compensatory damages, restitution, disgorgement of profits (plus interest), cost and expenses, attorneys’ fees, and punitive damages. The Company has moved to dismiss all causes of action in the complaint. This motion was argued to the Court on November 18, 2002 and the parties are awaiting a decision on that motion.
82
On or about January 17, 2003, individual stockholders of the Company filed complaints in the Delaware Court of Chancery purporting to commence class action lawsuits against the Company and each of the individual members of the Company’s Board of Directors. The complaints were styled as Lanza v. Morten, et al (C.A. No. 20123) and Norton v. Morten, et al (C.A. No. 20124). The complaints allege, among other things, breaches of fiduciary duty by the directors in connection with certain publicly disclosed indications of interest in the acquisition of Company. The complaints further allege that the directors are not fulfilling their fiduciary duties in connection with their review and response to such indications of interest and seek an order requiring the defendants to, among other things, undertake an appropriate evaluation of the Company’s worth as a merger or acquisition candidate and to take all appropriate steps to effectively sell of the Company. Among other remedies, the complaints seek to enjoin the members of the Board from continuing their purported breaches of fiduciary duty and unspecified damages from the defendants.
There are various other claims, lawsuits and pending actions against the Company incidental to the operations of its business. It is the opinion of management, after consultation with counsel, that the ultimate resolution of such claims, lawsuits and pending actions will not have a material adverse effect on the Company’s financial position, results of operations or liquidity.
Credit Card Penalties
The Company has experienced high rates of refunds to customers and chargebacks from credit card associations which have resulted in the assessment of financial penalties by two credit card associations. If the Company is unable to lower its refund and chargeback rates to levels deemed acceptable by the credit card associations, the Company could continue to face such penalties and may lose its rights to accept credit card payments from customers through one or more credit card associations. The Company had not previously incurred penalties from one of those associations until August 2002, at which time it was assessed a penalty of $0.3 million applicable to the year 2001. Under that association’s rules, additional potential penalties may be imposed at the discretion of the association. Because the imposition of any potential penalties is at the discretion of the association, subject to contractual limitations, the Company accrued a $3.7 million charge to general and administrative expense in the year 2002 to cover what the Company estimates to be the potential penalties that could be imposed under that association’s rules for transactions through December 31, 2002. Any such potential penalties would be imposed on the Company’s credit card processor by the association, and under the Company’s contract with its processor, the Company is required to reimburse such penalties. The Company had previously posted a $1 million letter of credit with its processor as security for its potential obligations. If the penalty amount ultimately imposed is less than the maximum contractual amount, the Company would reverse any excess accounts accrued as a reduction of general and administrative expense at that time.
Commitments
The Company has committed to provide up to $8.5 million in funding and other non-cash contributions to its wholly owned subsidiary, RegistryPro, for RegistryPro’s activities in establishing, operating and marketing the .pro top level domain through the first anniversary of its commencement-of-service date. However, the Company does not believe that RegistryPro’s agreement with ICANN requires RegistryPro to spend a specified amount to establish, operate and market the .pro top level domain. Accordingly, the Company’s contributions for these purposes could be less than $8.5 million. Through December 31, 2002 the Company had contributed approximately $1.6 million in cash, and had also made non-cash contributions.
83
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Register.com, Inc.
In connection with our audits of the financial statements of Register.com, Inc. as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002, which financial statements are included in the Form 10-K, we have also audited the financial statement schedule listed in Part II herein.
In our opinion, this financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
PricewaterhouseCoopers LLP
New York, New York
February 14, 2003
84
Schedule II - Valuation and Qualifying Account
| Balance at Beginning of Period | Charged to Costs and Expense | Deductions | Balance at End of Period |
||||||||||
| For the year ended December 31, 2002: | |||||||||||||
| Provision for doubtful accounts | $ | 2,179 | $ | 2,608 | $ | 2,092 | $ | 2,695 | |||||
| For the year ended December 31, 2001: | |||||||||||||
| Provision for doubtful accounts | $ | 1,749 | $ | 430 | $ | – | $ | 2,179 | |||||
| For the year ended December 31, 2000: | |||||||||||||
| Provision for doubtful accounts | $ | 315 | $ | 1,434 | $ | – | $ | 1,749 | |||||
85
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not applicable.
86
|
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
|
|
Richard
D. Forman
|
|
38
|
|
President, Chief Executive Officer and Director
|
|
Mitchell
I. Quain
|
|
51
|
|
Executive Chairman of the Board of Directors
|
|
Dewain
K. Cross
|
|
65
|
|
Director
|
|
Taher
Elgamal, Ph.D.
|
|
47
|
|
Director
|
|
Peter
A. Forman
|
|
41
|
|
Director
|
|
Stanley
Morten
|
|
59
|
|
Director
|
|
Jim
Rosenthal
|
|
39
|
|
Director
|
|
Reginald
Van Lee
|
|
45
|
|
Director
|
|
Jonathan Stern
|
|
58
|
|
Chief Financial Officer
|
|
Walt
Meffert, Jr.
|
|
37
|
|
Chief Technology Officer
|
|
Lori Faye Fischler
|
|
46
|
|
General Manager, Corporate Services - Europe
|
|
David W. Hirschler
|
|
41
|
|
General Manager, Global Web Services
|
|
Alan Kipust
|
|
41
|
|
Vice President, Operations
|
|
Jack S. Levy
|
|
33
|
|
Vice President, General Counsel and Secretary
|
|
Michael Pollack
|
|
38
|
|
General
Manager, Corporate Services - U.S.
|
| |
|
|
|
|
Annual
Compensation |
|
Long-Term
Compensation Awards Underlying |
|
|
|
|
|||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Name
and Principal Position |
|
Year |
|
Salary($) |
|
Bonus($) |
|
All
Other Annual Compensation ($) |
|
Restricted Stock Awards ($) |
|
Securities Underlying Options |
|
All
Other Compensation ($) |
|
|||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Richard
D. Forman |
|
|
2002 |
|
|
277,885 |
|
|
— |
|
|
32,055
|
(1) |
|
— |
|
|
150,000 |
|
|
— |
|
| President
and Chief |
|
|
2001 |
|
|
204,616 |
|
|
200,000 |
|
|
— |
|
|
— |
|
|
50,000 |
|
|
— |
|
| Executive
Officer |
|
|
2000 |
|
|
200,000 |
|
|
25,000 |
|
|
— |
|
|
— |
|
|
525,000 |
|
|
— |
|
| Jonathan
Stern (2) |
|
|
2002 |
|
|
129,808 |
|
|
80,800 |
|
|
— |
|
|
— |
|
|
350,000 |
|
|
— |
|
| Chief
Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Walt
Meffert, Jr.(3) |
|
|
2002 |
|
|
225,000 |
|
|
12,000 |
|
|
25,754
|
(4) |
|
— |
|
|
35,000 |
|
|
— |
|
| Chief
Technology |
|
|
2001 |
|
|
22,499 |
|
|
12,000 |
|
|
— |
|
|
100,000 |
|
|
120,000 |
|
|
— |
|
| Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Jack
S. Levy |
|
|
2002 |
|
|
166,538 |
|
|
37,000 |
|
|
— |
|
|
|
|
|
35,000 |
|
|
— |
|
| Vice
President, General |
|
|
2001 |
|
|
157,692 |
|
|
40,000 |
|
|
— |
|
|
— |
|
|
60,000 |
|
|
— |
|
| Counsel
and Secretary |
|
|
2000 |
|
|
121,811 |
|
|
25,000 |
|
|
75,000
|
(5) |
|
— |
|
|
70,875 |
|
|
— |
|
| Michael
Pollack (6) |
|
|
2002 |
|
|
200,000 |
|
|
10,000 |
|
|
6,988
|
(7) |
|
— |
|
|
14,000 |
|
|
— |
|
| General
Manager, |
|
|
2001 |
|
|
109,615 |
|
|
64,000 |
|
|
— |
|
|
50,000 |
|
|
120,000 |
|
|
— |
|
| Corporate
Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Rajiv
Samant (8) |
|
|
2002 |
|
|
224,135 |
|
|
— |
|
|
— |
|
|
300,000 |
|
|
100,000 |
|
|
132,236
|
(9) |
| Chief
Operating Officer |
|
|
2001 |
|
|
118,269 |
|
|
75,000 |
|
|
— |
|
|
200,000 |
|
|
350,000 |
|
|
— |
|
| (1) |
In accordance
with Richard Forman’s employment agreement with the Company, he is
entitled to reimbursements for car expenses and other perquisites up to
$20,000 per annum. Also pursuant to Mr. Forman’s employment
agreement with the Company, we reimbursed him for certain expenses which
he incurred in connection with obtaining professional tax and financial
planning advice. |
| |
|
| (2) |
Jonathan Stern
started with us on June 11, 2002. |
| |
|
| (3) |
Walt Meffert,
Jr. started with us in November 2001. Mr. Meffert was issued a restricted
stock award for 8,734 shares of Common Stock on December 20, 2001, at
a purchase price of $0.0001 per share (par value) under our 2000 Plan.
The closing price per share was $11.35 on the grant date. These
shares are subject to our repurchase right which expires on November
12, 2004. At December 31, 2002, the aggregate market value of these
shares was $39,303. Mr. Meffert is entitled to receive regular cash
dividends paid on these shares. |
|
(4)
|
Consists of a reimbursement of $13,389 in connection with taxes due on the portion of Mr. Meffert’s restricted stock that vested in 2002, and the forgiveness of a portion of the loan made to Mr. Meffert in connection with his relocation.
|
|
|
|
|
(5)
|
Consists solely of special bonus payments paid under Mr. Levy’s employment agreement.
|
|
|
|
|
(6)
|
Michael Pollack started with us in June
2001. Mr. Pollack was issued a restricted stock award for 5,587
shares on June 11, 2001, at a purchase price of $0.0001 per share (par
value) under our 2000 Plan. The closing price per share was $7.55
on the grant date. These shares are subject to our repurchase
right which expires on June 11, 2004. At December 31, 2002, the
aggregate market value of these shares was $25,141.50. Mr. Pollack
is entitled to receive regular cash dividends paid on these shares.
|
|
|
|
|
(7)
|
Consists of a reimbursement of taxes due on the portion of Mr. Pollack’s restricted stock that vested in 2002.
|
|
|
|
|
(8)
|
Rajiv Samant started with us in June 2001
and his employment was terminated on October 29, 2002. His rate of
annual salary in 2001 was $250,000. Mr. Samant received two restricted
stock awards under our 2000 Plan, both at a purchase price of $0.0001 per
share (par value). The first was for 15,420 shares of our Common Stock
on June 28, 2001, at which
date
the
closing
price per
share
was $12.97,
and
the
second was
for 34,247 shares on May 2, 2002, at which date the closing price per share
as $8.76. At December 31, 2002, the aggregate market value of
these shares was $69,390.
|
|
|
|
|
(9)
|
In connection with our termination of Mr. Samant’s employment, we forgave the loan of $102,236 made in connection with his first restricted stock grant and we paid him $30,000 in severance. Subsequent to Mr. Samant’s termination, we repurchased all of his restricted stock.
|
|
|
|
Individual Grants
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
Number of Shares Underlying Options Granted (1)
|
|
% of Total Options Granted to Employees in Fiscal Year (2)
|
|
Exercise Price Per Share
|
|
Expiration Date
|
|
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term (3)
|
|
||||||||
|
|
|
|
|
|
|
|
|
||||||||||||
|
Name
|
|
|
|
|
|
|
5%
|
|
|
10%
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard D. Forman
|
|
|
150,000
|
|
|
4.9
|
|
$
|
8.76
|
|
|
5/2/12
|
|
$
|
826,368
|
|
$
|
2,094,178
|
|
|
Jonathan Stern
|
|
|
150,000
|
|
|
5.0
|
|
|
7.48
|
|
|
6/11/12
|
|
|
704,398
|
|
|
1,784,382
|
|
|
|
|
|
100,000
|
|
|
3.3
|
|
|
7.24
|
|
|
6/11/12
|
|
|
450,757
|
|
|
1,139,703
|
|
|
|
|
|
100,000
|
|
|
3.3
|
|
|
4.72
|
|
|
6/11/12
|
|
|
290,595
|
|
|
732,900
|
|
|
Walt
Meffert, Jr.
|
|
|
35,000
|
|
|
1.2
|
|
|
8.76
|
|
|
5/2/12
|
|
|
192,819
|
|
|
488,641
|
|
|
Jack S. Levy
|
|
|
35,000
|
|
|
1.2
|
|
|
8.76
|
|
|
5/2/12
|
|
|
192,819
|
|
|
488,641
|
|
|
Michael Pollack
|
|
|
14,000
|
|
|
0.5
|
|
|
8.76
|
|
|
5/2/12
|
|
|
77,128
|
|
|
195,457
|
|
|
Rajiv Samant (4)
|
|
|
100,000
|
|
|
3.3
|
|
|
8.76
|
|
|
5/2/12
|
|
|
550,912
|
|
|
1,396,118
|
|
|
(1)
|
The options shown in this table become exercisable in 42 equal monthly installments upon the optionee’s completion of each month of service commencing on the date six months after the date of grant. In the event of certain change of control transactions of the Company, the options will become immediately exercisable if not assumed or replaced with comparable rights.
|
|
|
|
|
(2)
|
During 2002, the Company granted employees options to purchase an aggregate of 3,038,827 shares of Common Stock.
|
|
|
|
|
(3)
|
The potential realizable value is calculated based upon the term of the option at its time of grant. It is calculated assuming that the stock price 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.
|
|
|
|
|
(4)
|
Mr. Samant’s employment with us was terminated on October 29, 2002. All of his options expired unexercised on January 29, 2003.
|
|
|
|
|
|
|
|
|
|
Number of Shares Underlying
Unexercised Options at Fiscal Year End |
|
Value of Unexercised In-the-
Money Options at December 31, 2002 (2) |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Name
|
|
Shares
Acquired on Exercise (#) |
|
Value
Realized (1) |
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard D. Forman
|
|
|
1,228,000
|
|
$
|
4,939,601
|
|
|
451,189
|
|
|
273,811
|
|
$
|
—
|
|
$
|
—
|
|
|
Jonathan Stern
|
|
|
—
|
|
|
—
|
|
|
8,333
|
|
|
341,667
|
|
|
—
|
|
|
—
|
|
|
Walt
Meffert, Jr.
|
|
|
—
|
|
|
—
|
|
|
24,523
|
|
|
130,477
|
|
|
—
|
|
|
—
|
|
|
Jack S. Levy
|
|
|
7,500
|
|
|
53,774
|
|
|
167,210
|
|
|
103,665
|
|
|
268,625
|
|
|
53,725
|
|
|
Michael Pollack
|
|
|
—
|
|
|
—
|
|
|
37,809
|
|
|
96,191
|
|
|
—
|
|
|
—
|
|
|
Rajiv Samant (3)
|
|
|
—
|
|
|
—
|
|
|
91,666
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1)
|
Based upon the market price of the purchased shares on the exercise date less the option exercise price paid for those shares.
|
|
|
|
|
(2)
|
Based upon the market price of $4.50 per share, determined on the basis of the closing selling price per share of Common Stock on the Nasdaq National Market on December 31, 2002, less the option exercise price payable per share.
|
|
|
|
|
(3)
|
Mr. Samant’s employment with us was terminated on October 29, 2002. All of his options expired unexercised on January 29, 2003.
|
| |
• |
Taher Elgamal:
granted on April 4, 2002 with an exercise price per share of $8.52. |
| |
|
|
| |
• |
Stanley Morten:
granted on November 19, 2002 with an exercise price per share of $4.51. |
| |
|
|
| |
• |
Dewain K. Cross:
granted on March 5, 2003 with an exercise price per share of $5.40. |
|
|
•
|
July 23, 2002 at an exercise price per share of $7.08; and
|
|
|
|
|
|
|
•
|
October 22, 2002 at an exercise price per share of $3.45
|
|
|
•
|
options to purchase 175,000 shares have an exercise price of $26.40;
|
|
|
|
|
|
|
•
|
options to purchase 175,000 shares have an exercise price of $33.60; and
|
|
|
|
|
|
|
•
|
options to purchase 175,000 shares have an exercise price of $38.40.
|
|
|
•
|
options to purchase 150,000 shares have an exercise price of $7.48;
|
|
|
|
|
|
|
•
|
options to purchase 100,000 shares have an exercise price of $7.24; and
|
|
|
|
|
|
|
•
|
options to purchase 100,000 shares have an exercise price of $4.72.
|
|
|
•
|
our change in control, in which case vesting will accelerate to the six-month anniversary of the closing of the transaction; or
|
|
|
|
|
|
|
•
|
the termination of Mr. Levy’s employment 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.
|
|
|
|
Shares Beneficially Owned**
|
|
||||
|
|
|
|
|
||||
|
|
|
Number
|
|
Percent
|
|
||
|
|
|
|
|
|
|
|
|
|
Named Executive Officers
|
|
|
|
|
|
|
|
|
Richard D. Forman (1)
|
|
|
4,780,921
|
|
|
11.4
|
%
|
| Jonathan
Stern (2) |
|
|
49,999 |
|
|
* |
|
| Walt
Meffert, Jr. (3) |
|
|
51,830 |
|
|
* |
|
| Jack
S. Levy (4) |
|
|
239,154 |
|
|
* |
|
| Michael
Pollack (5) |
|
|
60,468 |
|
|
* |
|
| Directors |
|
|
|
|
|
|
|
| Dewain
K. Cross |
|
|
— |
|
|
* |
|
| Taher
Elgamal (6) |
|
|
15,000 |
|
|
* |
|
| Peter
A. Forman (7) |
|
|
3,290,765 |
|
|
7.9 |
|
| Stanley
Morten |
|
|
— |
|
|
* |
|
| Mitchell
I. Quain (8) |
|
|
127,400 |
|
|
* |
|
| Jim
Rosenthal (9) |
|
|
70,000 |
|
|
* |
|
| Reginald
Van Lee (10) |
|
|
74,450 |
|
|
* |
|
| All
directors and executive officers as a group (15 persons) (11) |
|
|
9,006,264 |
|
|
20.7 |
|
| Principal
Stockholders |
|
|
|
|
|
|
|
| Royce
& Associates, LLC (12) |
|
|
3,745,700 |
|
|
9.2 |
|
| Farallon
Capital Management Partners (13) |
|
|
2,040,000 |
|
|
5.0 |
|
| * |
Represents
less than 1%. |
| |
|
| ** |
Gives effect
to the shares of Common Stock issuable upon the exercise of all options
exercisable within 60 days of March 20, 2003 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 and investment power with respect to shares.
Unless otherwise indicated, the persons named in the table have sole voting
and sole investment control with respect to all shares beneficially owned.
Percentage ownership is calculated based on shares of our Common Stock
outstanding as of March 20, 2003. To the Company’s knowledge,
except as disclosed in this table, no other stockholder beneficially owned
more than 5% of the outstanding shares of Common Stock as of March 20,
2003. |
| |
|
| (1) |
Includes 2,986,113
shares of Common Stock held by RDF Ventures LLC, 37,800 shares of Common
Stock held by the RDF 1999 Family Trust, warrants to purchase 699,717
shares of Common Stock at an exercise price of $0.97 per share, warrants
to purchase 291 shares of Common Stock at an exercise price of $3.43 per
share and currently exercisable options to purchase 525,000 shares of
Common Stock at a weighted average price of $29.86 per share. |
| |
|
| (2) |
Includes currently
exercisable options to purchase 49,999 shares of Common Stock at a weighted
average price of $6.62. |
| (3) |
Includes currently
exercisable options to purchase 42,976 shares of Common Stock at a weighted
average price of $11.08 and a restricted stock grant of 8,734 shares,
which shares are subject to our repurchase right that expires on November
12, 2004. |
| |
|
| (4) |
Includes currently
exercisable options to purchase 201,103 shares of Common Stock at a weighted
average price of $9.46 and a restricted stock grant of 37,951 shares,
which shares are subject to our repurchase right, which right lapses with
respect to one quarter of the total shares granted on each of November
1, 2003, February 1, May 1, and August 1, 2004. |
| (5) |
Includes currently
exercisable options to purchase 53,762 shares of Common Stock at a weighted
average price of $12.78 and a restricted stock grant of 5,587 shares,
which shares are subject to our repurchase right that expires on June
11, 2004. |
| |
|
| (6) |
Includes currently
exercisable options to purchase 15,000 shares of Common Stock at a weighted
average price of $8.53. |
| |
|
| (7) |
Includes 2,699,438
shares of Common Stock held by Forman Capital Management, LLC, warrants
to purchase 548,247 shares of Common Stock at an exercise price of $0.97
per share, warrants to purchase 980 shares of Common Stock at an exercise
price of $3.43 per share and currently exercisable options to purchase
10,000 shares of Common Stock at a weighted average price of $9.23.
|
| |
|
| (8) |
Includes 7,400
shares held in trust for Mr. Quain’s children and currently exercisable
options to purchase 110,000 shares of Common Stock at a weighted average
price of $5.76. |
| |
|
| (9) |
Includes currently
exercisable options to purchase 60,000 shares of Common Stock at a weighted
average price of $12.68. |
| |
|
| (10) |
Includes currently
exercisable options to purchase 74,450 shares of Common Stock at a weighted
average price of $18.04. |
| |
|
| (11) |
Includes: Dewain
K. Cross, Taher Elgamal, Richard D. Forman, Peter A. Forman, Stanley Morten,
Mitchell I. Quain, Jim Rosenthal, Reginald Van Lee, Lori Faye Fischler,
David W. Hirschler, Alan Kipust, Jack S. Levy, Michael Pollack, Walt Meffert,
Jr. and Jonathan Stern. |
| |
|
| (12) |
Based on a
Schedule 13G filed with the Securities and Exchange Commission on
February 5, 2003. Royce & Associates, LLC (“Royce”)
is a registered Investment Advisor and has sole voting and dispositive
power over these shares. Royce’s principal business address
is 1414 Avenue of the Americas, New York, NY 10019. |
| |
|
| (13) |
Based upon
information provided to us by Farallon Capital Management Partners (“Farallon”)
in February 2003, such shares were acquired after December 31, 2002. Farallon’s
principal business address is One Maritime Plaza, San Francisco, CA 94111.
|
| Plan
Category |
|
Number
of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights |
|
Weighted
Average Exercise Price of Outstanding Options, Warrants and Rights |
|
Number
of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) |
|
|||
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
| |
|
|
|
|
|
|
|
|
|
|
| Equity
Compensation Plans Approved by Security Holders (1) |
|
|
5,872,161
|
(2) |
$ |
12.18 |
|
|
3,022,587 |
(3) |
| Equity
Compensation Plans Not Approved by Security Holders (4) |
|
|
12,000 |
|
$ |
1.13 |
|
|
— |
|
| Total |
|
|
5,804,161 |
|
$ |
12.16 |
|
|
3,022,587 |
|
| (1) |
Includes options
to purchase shares under the following plans: the 2000 Plan and the ESPP. |
| |
|
| (2) |
Excludes purchase
rights accruing under the ESPP, which has a shareholder approved reserve
of 547,302 shares of Common Stock (639,228 shares of Common Stock as of
January 1, 2003). Under the ESPP, each eligible employee may purchase
shares of Common Stock through payroll deductions of up to 10% of their
eligible compensation. The price paid by the employee is 85% of
the fair market value on the offering date or the last day of the purchase
period. There are two 6-month purchase periods per year commencing
May 1 and November 1. |
| |
|
| (3) |
Consists of
shares available for future issuance under the 2000 Plan and the ESPP.
|
| |
|
| (4) |
Consists of
the following warrants to purchase shares of Common Stock issued prior
to the Company’s initial public offering, pursuant to compensation
arrangements with advisors: 1,500 shares at an exercise price of $0.43
per share, which expires September 21, 2008; 5,250 shares at an exercise
price of $0.57 per share, which expires March 17, 2009; and 5,250 shares
at an exercise price of $1.57 per share, which expires June 10, 2009. |
|
|
(a)
|
1. Consolidated Financial Statements.
|
|
|
|
|
|
|
|
The financial statements
as set forth under Item 8 of this report are incorporated herein by reference.
|
|
|
|
|
|
|
|
2. Financial Statement Schedules.
|
|
|
|
|
|
|
|
The Valuation and
Qualifying Account Schedule as set forth under Item 8 of this report is
incorporated herein by reference.
|
|
|
|
|
|
|
|
3. Exhibits.
|
|
|
|
|
|
|
|
The following Exhibits are incorporated herein by reference or are filed with this report as indicated below.
|
|
Exhibit
Number |
Description
|
|
2.1++
|
Agreement and Plan of Merger and Reorganization, dated as of September 15, 2000, by and among Register.com, Inc., RCOM Acquisition Corp. II, Afternic.com, Inc., eXtraActive Incorporated and the Stockholders of Afternic.com, Inc. identified on Schedule 1 thereto.
|
|
3.1y
|
Amended and Restated Certificate of Incorporation.
|
|
3.2##
|
Certificate of Correction of Amended and Restated Certificate of Incorporation
|
|
3.3•
|
Amended and Restated Bylaws
|
|
3.4x
|
Certificate of Designation of Rights, Preferences and Privileges of the Series A Junior Participating Preferred Stock
|
|
4.1*
|
Specimen common stock certificate.
|
|
4.2*
|
See Exhibits 3.1, 3.2, and 3.3 for provisions of the certificate of incorporation and bylaws defining the rights of holders of Common Stock.
|
|
4.3.1**
|
Registration Rights Agreement dated June 30, 1999.
|
|
4.3.2+
|
Registration Rights Agreement dated June 4, 2000.
|
|
4.3.3++
|
Registration Rights Agreement dated September 15, 2000.
|
|
4.5*
|
Certificate of designations, preferences and relative, participating, optional and other special rights of preferred stock and qualifications, limitations and restrictions of Series A Convertible Preferred Stock.
|
|
4.6.1*
|
Form of warrant to purchase common stock issued to Series A Convertible Preferred Stockholders.
|
|
4.6.4*
|
Form of warrant to purchase common stock issued to Niles H. Cohen and Zachary Prensky.
|
|
4.6.5*’
|
Form of Amended and Restated Common Stock Purchase Warrant -- Series A issued to Richard D. Forman, Peter A. Forman, Dan Levine and Capital Express LLC.
|
|
Exhibit
Number |
Description
|
|
4.6.6*
|
Warrants to purchase common stock issued to Legg Mason Wood Walker, Incorporated.
|
|
4.6.7*
|
Form of warrant to purchase common stock issued to consultants.
|
|
4.7.1*’
|
Employee Stock Option Certificate issued to Richard D. Forman.
|
|
4.8.1^^’
|
Stock Option Agreement, dated June 28, 2001, with Rajiv Samant.
|
|
4.8.2^^’
|
Stock Issuance Agreement, dated June 28, 2001, with Rajiv Samant.
|
|
4.9’¤
|
Stock Issuance Agreement, dated March 20,
2002, with Walt Meffert, Jr.
|
|
4.10o’
|
Stock Option Agreement with Jonathan Stern.
|
|
4.11o’
|
Stock Issuance Agreement, dated August 13, 2002, with Rajiv Samant.
|
|
4.12xx
|
Rights Agreement, dated as of October 28,
2002, between Register.com, Inc. and American Stock Transfer & Trust
Company, which includes the form of Certificate of Designation of Rights,
Preferences and Privileges of the Series A Junior Participating Preferred
Stock as Exhibit A, the form of Rights Certificate as Exhibit B and
the Summary of Rights to Purchase Series A Preferred Stock as Exhibit C.
|
|
10.1*
|
1997 Stock Option Plan.
|
|
10.2*
|
1999 Stock Option Plan.
|
|
10.3.1+++
|
Registrar Accreditation Agreement, dated November 30, 1999, by and between ICANN and Register.com, Inc.
|
|
10.3.2+
|
Registrar Accreditation Agreement, dated April 27, 2000, by and between ICANN and Register.com, Inc.
|
|
10.4*
|
Registrar License and Agreement, dated December 13, 1999, by and between Network Solutions, Inc. and Register.com, Inc.
|
|
10.5*
|
Lease between Pennbus Realties, Inc. and Forman Interactive Corp.
|
|
10.6*
|
2000 Stock Incentive Plan.
|
|
10.6.2¤
|
Amended and Restated 2000 Stock Incentive Plan (effective as of March 22, 2002).
|
|
10.7*
|
Employee Stock Purchase Plan.
|
|
10.8*’
|
Employment Agreement, dated November 15, 1995, with Richard D. Forman.
|
|
10.8.2*’
|
Employment Agreement, dated February 27, 2000, with Richard D. Forman.
|
|
10.9*’
|
Employment Agreement with Jack S. Levy.
|
|
10.10*
|
Marketing Agreement, dated as of May 21, 1999, with Staples, Inc.
|
|
10.11*
|
Joint Marketing and Distribution Agreement, dated as of June 25, 1999, with Concentric Network Corporation.
|
|
10.11.2+
|
Amendment No. 1, dated as of June 30, 2000, with Concentric Network Corporation.
|
|
10.15^^^’
|
Letter Agreement of Employment, dated June 11, 2001, with Rajiv Samant.
|
|
10.16^^^’
|
Promissory Note, dated July 24, 2001, with Rajiv Samant.
|
|
10.18’¤
|
Offer Letter, dated October 8, 2001, with
Walt Meffert, Jr.
|
|
10.19’¤
|
Promissory Note, dated December 20, 2001,
with Walt Meffert, Jr.
|
|
10.20
|
Lease between Yarmouth Area Industrial Commission and RCOM Canada, Corp.
|
|
10.21o’
|
Separation Agreement and General Release, dated June 7, 2002, with René M. Mathis.
|
|
10.22o’
|
Consulting Agreement, dated as of June 7, 2002, with René M. Mathis.
|
| Exhibit Number |
Description |
| 10.23o’ |
Letter Agreement
of Employment, dated as of June 11, 2002, with Jonathan Stern. |
| 10.24 † ’ |
Employment
Agreement by and between Register.com and Mitchell Quain, dated November
25, 2002. |
| 10.25’ |
Separation
Agreement and General Release dated November 18, 2002, with Rajiv Samant. |
| 10.26 |
Form of Indemnification
Agreement between the Company and certain executive officers and directors. |
| 10.27’ |
Amendment to
Offer Letter with Walt Meffert, Jr. dated November 26, 2002. |
| 10.28’ |
Offer Letter,
dated June 8, 2001 with Michael Pollack. |
| 10.29 Ë’ |
Promissory
Note, dated June 11, 2001 with Michael Pollack. |
| 10.30 ¥’ |
Stock Issuance
Agreement with Michael Pollack. |
| 10.31Þ’ |
Stock Option
Agreement with Mitchell I. Quain. |
| 21.1 |
Subsidiaries
of Registrant. |
| 23.1 |
Consent of
PricewaterhouseCoopers LLP. |
| 99.1 |
Certification
of Richard D. Forman, Chief Executive Officer of the Company, pursuant
to 18 U.S.C. § 1350, dated March 31, 2003. |
| 99.2 |
Certification
of Jonathan Stern, Chief Financial Officer of the Company, pursuant to
18 U.S.C. § 1350, dated March 31, 2003. |
| * |
Incorporated by reference
to the identically numbered exhibit of Registration Statement No. 333-93533. |
| y |
Incorporated by reference
to Exhibit 3.2 of Registration Statement No. 333-93533. |
| • |
Incorporated by reference
to Exhibit 3.4 of Registration Statement No. 333-93533. |
| ** |
Incorporated by reference
to Exhibit 4.3 of Registration Statement No. 333-93533. |
| ## |
Incorporated by reference
to the identically numbered exhibit of Registrant’s Quarterly Report
on Form 10-Q filed for the quarter ended March 31, 2000. |
| + |
Incorporated by reference
to the identically numbered exhibit of Registrant’s Quarterly Report
on Form 10-Q filed for the quarter ended June 30, 2000. |
| ++ |
Incorporated by reference
to the identically numbered exhibit of Registrant Current Report on Form
8-K dated September 29, 2000. |
| +++ |
Incorporated by reference
to Exhibit 10.3 of Registration Statement No. 333-93533. |
| ^ |
Incorporated by reference
to the identically numbered exhibit of Registrant’s Annual Report
on Form 10-K for the year ended December 31, 2000. |
| ^^ |
Incorporated by reference
to the identically numbered exhibit of Registrant’s Quarterly Report
on Form 10-Q filed for the quarter ended March 31, 2001. |
| ^^^ |
Incorporated by reference
to the identically numbered exhibit of Registrant’s Quarterly Report
on Form 10-Q filed for the quarter ended June 30, 2001. |
| |
Incorporated by reference
to Exhibit 10.15 of the Registrant’s Quarterly Report on Form 10-Q
filed for the quarter ended March 31, 2001. |
| o |
Incorporated by reference
to the identically numbered exhibit of Registrant’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2002. |
| x |
Incorporated by reference
to Exhibit 3.1 of Registrant’s Current Report on Form 8-K dated October
29, 2002. |
| xx |
Incorporated by reference
to Exhibit 4.1 of Registrant’s Current Report on Form 8-K dated October
29, 2002. |
| † |
Incorporated
by reference to the identically numbered exhibit of Registrant’s
Current Report on Form 8-K dated November 25, 2002. |
| Ë |
Incorporated
by reference to Exhibit d (9) of the Registrant’s Schedule T-O filed
with the SEC on December 16, 2002. |
| ¥ |
Incorporated
by reference to Exhibit d (10) of the Registrant’s Schedule T-O filed
with the SEC on December 16, 2002. |
| Þ |
Incorporated
by reference to Exhibit d (12) of the Registrant’s Schedule T-O filed
with the SEC on December 16, 2002. |
| ¤ | Incorporated by reference to the identically numbered exhibit of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001. |
| ’ |
Indicates management
contract or compensatory plan or arrangement. |
|
|
(b) Reports on Form 8-K
|
|
|
REGISTER.COM, INC.
|
|
|
|
|
|
|
|
By:
|
/s/ Richard D. Forman
|
|
|
|
Richard D. Forman
|
|
|
|
President and Chief Executive Officer
|
| Signature |
|
Title |
|
Date |
| /s/
Richard D. Forman |
|
|
|
|
| Richard
D. Forman |
|
President,
Chief Executive Officer and Director (Principal Executive Officer) |
|
April 4, 2003 |
| |
|
|
|
|
| /s/
Jonathan Stern |
|
|
|
|
| Jonathan Stern |
|
Chief
Financial Officer (Principal Accounting and Financial Officer) |
|
April 4, 2003 |
| |
|
|
|
|
| /s/
Mitchell I. Quain |
|
|
|
|
| Mitchell I. Quain |
|
Chairman
of the Board of Directors |
|
April 4, 2003 |
| |
|
|
|
|
| /s/
Dewain
K. Cross |
|
|
|
|
| Dewain
K. Cross |
|
Director |
|
April 4, 2003 |
| |
|
|
|
|
| /s/
Taher Elgamal |
|
|
|
|
| Taher
Elgamal |
|
Director |
|
April 4, 2003 |
|
/s/
Peter A. Forman
|
|
|
|
|
|
Peter A. Forman
|
|
Director
|
|
April 4, 2003
|
|
|
|
|
|
|
|
/s/
Stanley Morten
|
|
|
|
|
|
Stanley Morten
|
|
Director
|
|
April 4, 2003
|
|
|
|
|
|
|
|
/s/
Jim Rosenthal
|
|
|
|
|
|
Jim
Rosenthal
|
|
Director
|
|
April 4, 2003
|
|
|
|
|
|
|
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/s/
Reginald Van Lee
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Reginald Van Lee
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Director
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April 4, 2003
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Date: April 4, 2003
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By:
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/s/ Richard D. Forman
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Richard D. Forman
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President and Chief Executive Officer
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Date: April 4, 2003
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By:
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/s/ Jonathan Stern
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Jonathan Stern
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Chief Financial Officer
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| Exhibit Index | |
| Exhibit Number |
Description |
| 2.1++ |
Agreement and
Plan of Merger and Reorganization, dated as of September 15, 2000, by
and among Register.com, Inc., RCOM Acquisition Corp. II, Afternic.com,
Inc., eXtraActive Incorporated and the Stockholders of Afternic.com, Inc.
identified on Schedule 1 thereto. |
| 3.1y |
Amended and
Restated Certificate of Incorporation. |
| 3.2## |
Certificate
of Correction of Amended and Restated Certificate of Incorporation |
| 3.3• |
Amended and
Restated Bylaws |
| 3.4x |
Certificate
of Designation of Rights, Preferences and Privileges of the Series A Junior
Participating Preferred Stock |
| 4.1* |
Specimen common
stock certificate. |
| 4.2* |
See Exhibits
3.1, 3.2, and 3.3 for provisions of the certificate of incorporation and
bylaws defining the rights of holders of Common Stock. |
| 4.3.1** |
Registration
Rights Agreement dated June 30, 1999. |
| 4.3.2+ |
Registration
Rights Agreement dated June 4, 2000. |
| 4.3.3++ |
Registration
Rights Agreement dated September 15, 2000. |
| 4.5* |
Certificate
of designations, preferences and relative, participating, optional and
other special rights of preferred stock and qualifications, limitations
and restrictions of Series A Convertible Preferred Stock. |
| 4.6.1* |
Form of warrant
to purchase common stock issued to Series A Convertible Preferred Stockholders. |
| 4.6.4* |
Form of warrant
to purchase common stock issued to Niles H. Cohen and Zachary Prensky. |
| 4.6.5*’ |
Form of Amended
and Restated Common Stock Purchase Warrant -- Series A issued to Richard
D. Forman, Peter A. Forman, Dan Levine and Capital Express LLC. |
| 4.6.6* |
Warrants to
purchase common stock issued to Legg Mason Wood Walker, Incorporated. |
| 4.6.7* |
Form of warrant
to purchase common stock issued to consultants. |
| 4.7.1*’ |
Employee Stock
Option Certificate issued to Richard D. Forman. |
| 4.8.1^^’ |
Stock Option
Agreement, dated June 28, 2001, with Rajiv Samant. |
| 4.8.2^^’ |
Stock Issuance
Agreement, dated June 28, 2001, with Rajiv Samant. |
| 4.9’¤ |
Stock Issuance
Agreement, dated March 20, 2002, with Walt Meffert, Jr. |
| 4.10o’ |
Stock Option
Agreement with Jonathan Stern. |
| 4.11o’ |
Stock Issuance
Agreement, dated August 13, 2002, with Rajiv Samant. |
| 4.12xx |
Rights Agreement,
dated as of October 28, 2002, between Register.com, Inc. and American
Stock Transfer & Trust Company, which includes the form of Certificate
of Designation of Rights, Preferences and Privileges of the Series A
Junior Participating Preferred Stock as Exhibit A, the form of Rights
Certificate as Exhibit B and the Summary of Rights to Purchase Series
A Preferred Stock as Exhibit C. |
| 10.1* |
1997 Stock
Option Plan. |
| 10.2* |
1999 Stock
Option Plan. |
| 10.3.1+++ |
Registrar Accreditation
Agreement, dated November 30, 1999, by and between ICANN and Register.com,
Inc. |
| 10.3.2+ |
Registrar Accreditation
Agreement, dated April 27, 2000, by and between ICANN and Register.com,
Inc. |
| 10.4* |
Registrar License
and Agreement, dated December 13, 1999, by and between Network Solutions,
Inc. and Register.com, Inc. |
| 10.5* |
Lease between
Pennbus Realties, Inc. and Forman Interactive Corp. |
| 10.6* |
2000 Stock
Incentive Plan. |
| 10.6.2¤ |
Amended and
Restated 2000 Stock Incentive Plan (effective as of March 22, 2002). |
| 10.7* |
Employee Stock
Purchase Plan. |
| 10.8*’ |
Employment
Agreement, dated November 15, 1995, with Richard D. Forman. |
| 10.8.2*’ |
Employment
Agreement, dated February 27, 2000, with Richard D. Forman. |
| 10.9*’ |
Employment
Agreement with Jack S. Levy. |
| 10.10* |
Marketing Agreement,
dated as of May 21, 1999, with Staples, Inc. |
| 10.11* |
Joint Marketing
and Distribution Agreement, dated as of June 25, 1999, with Concentric
Network Corporation. |
| 10.11.2+ |
Amendment No.
1, dated as of June 30, 2000, with Concentric Network Corporation. |
| 10.15^^^’ |
Letter Agreement
of Employment, dated June 11, 2001, with Rajiv Samant. |
| 10.16^^^’ |
Promissory
Note, dated July 24, 2001, with Rajiv Samant. |
| 10.18’¤ |
Offer Letter,
dated October 8, 2001, with Walt Meffert, Jr. |
| 10.19’¤ |
Promissory
Note, dated December 20, 2001, with Walt Meffert, Jr. |
| 10.20 |
Lease between
Yarmouth Area Industrial Commission and RCOM Canada, Corp. |
| 10.21o’ |
Separation
Agreement and General Release, dated June 7, 2002, with René M. Mathis. |
| 10.22o’ |
Consulting
Agreement, dated as of June 7, 2002, with René M. Mathis. |
| Exhibit Number |
Description |
| 10.23o’ |
Letter Agreement
of Employment, dated as of June 11, 2002, with Jonathan Stern. |
| 10.24 † ’ |
Employment
Agreement by and between Register.com and Mitchell Quain, dated November
25, 2002. |
| 10.25’ |
Separation
Agreement and General Release dated November 18, 2002, with Rajiv Samant. |
| 10.26 |
Form of Indemnification
Agreement between the Company and certain executive officers and directors. |
| 10.27’ |
Amendment to
Offer Letter with Walt Meffert, Jr. dated November 26, 2002. |
| 10.28’ |
Offer Letter,
dated June 8, 2001 with Michael Pollack. |
| 10.29 Ë’ |
Promissory
Note, dated June 11, 2001 with Michael Pollack. |
| 10.30 ¥’ |
Stock Issuance
Agreement with Michael Pollack. |
| 10.31Þ’ |
Stock Option
Agreement with Mitchell I. Quain. |
| 21.1 |
Subsidiaries
of Registrant. |
| 23.1 |
Consent of
PricewaterhouseCoopers LLP. |
| 99.1 |
Certification
of Richard D. Forman, Chief Executive Officer of the Company, pursuant
to 18 U.S.C. § 1350, dated March 31, 2003. |
| 99.2 |
Certification
of Jonathan Stern, Chief Financial Officer of the Company, pursuant to
18 U.S.C. § 1350, dated March 31, 2003. |
| * |
Incorporated by reference
to the identically numbered exhibit of Registration Statement No. 333-93533. |
| y |
Incorporated by reference
to Exhibit 3.2 of Registration Statement No. 333-93533. |
| • |
Incorporated by reference
to Exhibit 3.4 of Registration Statement No. 333-93533. |
| ** |
Incorporated by reference
to Exhibit 4.3 of Registration Statement No. 333-93533. |
| ## |
Incorporated by reference
to the identically numbered exhibit of Registrant’s Quarterly Report
on Form 10-Q filed for the quarter ended March 31, 2000. |
| + |
Incorporated by reference
to the identically numbered exhibit of Registrant’s Quarterly Report
on Form 10-Q filed for the quarter ended June 30, 2000. |
| ++ |
Incorporated by reference
to the identically numbered exhibit of Registrant Current Report on Form
8-K dated September 29, 2000. |
| +++ |
Incorporated by reference
to Exhibit 10.3 of Registration Statement No. 333-93533. |
| ^ |
Incorporated by reference
to the identically numbered exhibit of Registrant’s Annual Report
on Form 10-K for the year ended December 31, 2000. |
| ^^ |
Incorporated by reference
to the identically numbered exhibit of Registrant’s Quarterly Report
on Form 10-Q filed for the quarter ended March 31, 2001. |
| ^^^ |
Incorporated by reference
to the identically numbered exhibit of Registrant’s Quarterly Report
on Form 10-Q filed for the quarter ended June 30, 2001. |
| |
Incorporated by reference
to Exhibit 10.15 of the Registrant’s Quarterly Report on Form 10-Q
filed for the quarter ended March 31, 2001. |
| o |
Incorporated by reference
to the identically numbered exhibit of Registrant’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2002. |
| x |
Incorporated by reference
to Exhibit 3.1 of Registrant’s Current Report on Form 8-K dated October
29, 2002. |
| xx |
Incorporated by reference
to Exhibit 4.1 of Registrant’s Current Report on Form 8-K dated October
29, 2002. |
| † |
Incorporated by reference
to the identically numbered exhibit of Registrant’s Current Report
on Form 8-K dated November 25, 2002. |
| Ë |
Incorporated by reference
to Exhibit d (9) of the Registrant’s Schedule T-O filed with the
SEC on December 16, 2002. |
| ¥ |
Incorporated by reference
to Exhibit d (10) of the Registrant’s Schedule T-O filed with the
SEC on December 16, 2002. |
| Þ |
Incorporated by reference
to Exhibit d (12) of the Registrant’s Schedule T-O filed with the
SEC on December 16, 2002. |
| ¤ | Incorporated by reference to the identically numbered exhibit of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001. |
| ’ |
Indicates management contract
or compensatory plan or arrangement. |