<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 13, 1999.
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ASHFORD.COM, INC.
(Exact Name of Registrant as Specified in Its Charter)
----------------------
<TABLE>
<S> <C> <C>
DELAWARE 5945 76-0565398
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
3355 WEST ALABAMA, SUITE 175
HOUSTON, TEXAS 77098
(713) 369-1300
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
----------------------
KENNETH E. KURTZMAN
3355 WEST ALABAMA, SUITE 175
HOUSTON, TEXAS 77098
(713) 369-1300
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
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Copies to:
<TABLE>
<S> <C>
BRIAN K. BEARD ROBERT F. GRAY, JR.
ANTHONY M. ALLEN MICHAEL D. HANSEN
GUNDERSON DETTMER STOUGH FULBRIGHT & JAWORSKI L.L.P.
VILLENEUVE FRANKLIN & HACHIGIAN, LLP 1301 MCKINNEY STREET, SUITE 5100
8911 CAPITAL OF TEXAS HIGHWAY, SUITE 4240 HOUSTON, TEXAS 77010
AUSTIN, TEXAS 78759 (713) 651-5151
(512) 342-2300
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this registration statement.
----------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ------------------
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
----------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C>
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PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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Common Stock, par value $.001...................... $100,000,000 $27,800
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o).
----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION. DATED JULY 13, 1999.
Shares
ASHFORD.COM, INC.
Common Stock
----------------------
This is an initial public offering of shares of common stock of
Ashford.com, Inc. All of the shares of common stock are being sold by
Ashford.com.
Prior to this offering, there has been no public market for the common
stock. It is currently estimated that the initial public offering price per
share will be between $ and $ . Ashford.com intends to list the common
stock on the Nasdaq National Market under the symbol "ASFD".
See "Risk Factors" beginning on page 8 to read about certain factors you
should consider before buying shares of the common stock.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------------
<TABLE>
<CAPTION>
Per Share Total
---------- --------
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Ashford.com................... $ $
</TABLE>
The underwriters may, under specific circumstances, purchase up to an
additional shares from Ashford.com at the initial public offering
price, less the underwriting discount.
---------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
GOLDMAN, SACHS & CO.
BANCBOSTON ROBERTSON STEPHENS
DEUTSCHE BANC ALEX. BROWN
E*TRADE SECURITIES, INC.
---------------------
Prospectus dated , 1999.
<PAGE> 3
[ART WORK]
----------------------
ASHFORD(R) and Ashford.com(R) are registered trademarks of Ashford.com. All
other brand names or trademarks appearing in this prospectus are the property of
the companies that own them. The inclusion of those products in this prospectus
is not an endorsement of Ashford.com. These companies are not involved with the
offering of our securities.
<PAGE> 4
PROSPECTUS SUMMARY
You should read this summary together with the more detailed information
regarding Ashford.com and the financial statements and notes appearing elsewhere
in this prospectus. Unless otherwise indicated, this prospectus assumes the
automatic conversion of all of our outstanding preferred stock into shares of
common stock upon the closing of this offering. This prospectus also assumes no
exercise of the underwriters' over-allotment option. References in this
prospectus to "we", "us" or "our" refer to Ashford.com unless otherwise noted.
ASHFORD.COM, INC.
OUR BUSINESS
We are a leading Web-based retailer focused exclusively on luxury and
premium products, including new and vintage premium watches and fine writing
instruments. By combining our expertise in luxury products and our commitment to
excellent customer service with the benefits of Internet retailing, we are able
to deliver a unique shopping experience to consumers. Our initial product focus
has been fine watches and, since our inception, we have grown into one of the
leading online retailers of new and vintage premium watches. We carry over 7,000
new and vintage watch SKUs, or styles, from more than 70 of the finest brands.
We also offer more than 600 different styles of fine writing instruments from 12
leading brands. We believe that additional luxury and premium product
categories, such as leather goods, sunglasses, fragrances, ties and scarves, and
jewelry, also represent significant online commerce opportunities. We believe
these luxury and premium product categories are well suited for online commerce
given brand recognition, generally high average sales prices and relatively low
average distribution and shipping costs.
OUR MARKET OPPORTUNITY
We believe that many people find shopping for luxury and premium products
to be time-consuming and inconvenient because few traditional store-based
retailers currently combine an extensive selection, convenient shopping hours,
broad geographic coverage and knowledgeable staff.
Our online store is designed to provide consumers with a convenient and
enjoyable shopping experience in a Web-based retail environment. The key
components of the Ashford.com experience include:
- - EXTENSIVE PRODUCT SELECTION. We offer a variety of luxury and premium
products, including one of the largest selections of premium watches available
on the Internet.
- - COMPELLING CONTENT AND DETAILED PRODUCT INFORMATION. Our Web site includes
significant content and detailed product information, such as displaying over
7,500 product photos, specific brand histories and key messages. We also
employ numerous specialists to provide a convenient and enjoyable shopping
experience and to help customers make informed purchasing decisions.
- - COMPETITIVE PRICES AND COMPELLING VALUE. Compared to our traditional
store-based retail competitors, we believe that our cost structure is lower.
As a result, we offer our customers products at competitive prices and,
combined with our high-quality shopping experience, provide compelling value.
- - COMMITMENT TO EXCELLENT CUSTOMER SERVICE. Luxury and premium goods consumers
expect the highest level of personalized customer service. We are committed to
superior customer service by providing trained customer service
representatives, extended warranties, complimentary shipping and
gift-wrapping, a generous return policy and comprehensive repair services for
watches.
3
<PAGE> 5
- - PERSONALIZED SHOPPING EXPERIENCE. We provide convenient and useful services
that enhance the shopping experience. Our Web site includes features such as
an innovative online product showcase that allows customers to choose and
compare products side-by-side, gift suggestions and software that allows
real-time online customer interaction.
- - GEOGRAPHIC COVERAGE. By selling online, we are able to offer an extensive
selection of products throughout the U.S. and worldwide where the products
might not otherwise be available.
OUR STRATEGY
Our objective is to be one of the leading online retailers of luxury and
premium products. Key elements of our strategy include:
- - FOCUS ON THE PREMIUM RETAIL WATCH MARKET. We intend to capitalize on our
leading online market position in watches to become the primary destination
for consumers to purchase premium watches. Our objective is to grow our market
position and expand our customer base through superior execution and strong
relationships with leading brands.
- - EXTEND LEADERSHIP POSITION IN FINE WATCHES TO OTHER LUXURY AND PREMIUM PRODUCT
CATEGORIES. We intend to enhance our product offerings by expanding into
additional luxury and premium product categories that we believe present
significant online market opportunities, including leather goods, sunglasses,
fragrances, ties and scarves, and jewelry. We believe that offering a broader
selection of luxury goods will enable us to increase sales per customer visit,
encourage repeat purchases and expand our customer base.
- - BUILD ASHFORD.COM EXPERIENCE AND BRAND. We intend to establish a brand
identity that will support the creation of an Internet luxury community and
provide leading brands a powerful new distribution channel consistent with
their luxury identities. We will focus our brand campaign on selection,
convenience, value, trust and service.
- - EXPAND RELATIONSHIPS WITH LEADING LUXURY BRANDS. Our intent is to be the
Internet retailer of choice for leading luxury and premium brands. We intend
to maintain and strengthen our existing relationships while establishing
relationships with additional luxury brands as we increase the number of
products we offer.
- - PURSUE WAYS TO INCREASE OUR SALES. We intend to pursue new opportunities to
increase our sales by expanding into new product categories, increasing
product selection in our existing departments and continuing to take steps to
add new customers and to promote repeat purchases. In addition, we intend to
pursue international market opportunities, establish strategic alliances and
acquire complementary businesses, products and technologies.
- - EXPAND OUR OPERATIONAL AND SYSTEMS INFRASTRUCTURE. We plan to continue to
devote resources to growing our systems and operational infrastructure to
handle increased volume, enhance our service offerings and take advantage of
the unique characteristics of online luxury goods retailing.
4
<PAGE> 6
RISK FACTORS
An investment in our common stock involves a high degree of risk. Since our
inception in March 1998, we have incurred significant losses, and as of March
31, 1999, we had an accumulated deficit of $1.3 million. We expect our operating
losses and negative cash flow to continue for the foreseeable future. Before
deciding whether to invest in shares of our common stock, you should carefully
consider the risks and uncertainties described in "Risk Factors" beginning on
page 8 of this prospectus.
CORPORATE INFORMATION
We were incorporated in Texas in March 1998 under the name NewWatch Company
and began doing business as Ashford.com in May 1999. In July 1999, we changed
our name to Ashford.com, Inc. and reincorporated in Delaware. Our corporate
offices are located at 3355 West Alabama, Suite 175, Houston, Texas 77098. The
telephone number is (713) 369-1300. Information contained on our Web site does
not constitute part of this prospectus.
5
<PAGE> 7
THE OFFERING
The following information assumes that the underwriters do not exercise the
option granted by us to purchase additional shares in the offering. The number
below excludes 2,371,000 shares of common stock reserved for issuance under our
stock plans, of which 264,960 shares were subject to outstanding options as of
March 31, 1999 with a weighted average exercise price of $0.20 per share and
617,855 were subject to outstanding options as of June 30, 1999 with a weighted
average exercise price of $1.23 per share. See "Underwriting",
"Management -- Stock Plans" and Notes 4 and 8 of the notes to our financial
statements.
Shares offered by Ashford.com......... shares
Shares to be outstanding after the
offering.............................. shares
Use of proceeds....................... For general corporate purposes,
principally working capital and other
operating expenses. See "Use of
Proceeds".
Proposed Nasdaq National Market
symbol................................ "ASFD"
6
<PAGE> 8
SUMMARY FINANCIAL INFORMATION
The following summary financial information is derived from our financial
statements included at the back of this prospectus. You should read this summary
financial information in conjunction with our financial statements and the
related notes. For example, Note 2 of the notes to our financial statements
explains the determination of the number of shares and share equivalents used in
computing the pro forma per share amounts shown below. You should also read "Use
of Proceeds" and "Capitalization".
This summary financial information reflects the fact that we were
incorporated on March 6, 1998, but did not commence operations or activities
until April 1998. The pro forma share amounts in the statement of operations
data reflect the conversion of Series A preferred stock into common stock. The
balance sheet data displayed in the "Pro Forma" column reflect the receipt of
$30.1 million for the issuance of Series B preferred stock in April 1999, the
issuance of 390,000 shares of common stock in May 1999 pursuant to a
full-recourse promissory note for $780,000 and the receipt of $16.3 million for
the issuance of Series C preferred stock in July 1999.
The balance sheet data displayed in the "Pro Forma As Adjusted" column
reflect the pro forma adjustments discussed in the preceding paragraph and the
application of the net proceeds from the sale of shares of common
stock offered by us at an assumed initial public offering price of $ per
share, after deducting the underwriting discount and estimated offering
expenses.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 6, 1998)
THROUGH
MARCH 31, 1999
---------------
(IN THOUSANDS,
EXCEPT SHARE
AND PER SHARE
DATA)
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................... $ 5,938
Gross profit................................................ 828
Operating expenses:
Marketing and sales....................................... 1,013
General and administrative................................ 1,086
----------
Loss from operations........................................ (1,271)
Net loss.................................................... $ (1,264)
Net loss per share -- basic and diluted..................... $ (0.58)
Pro forma net loss per share for conversion of Series A
preferred stock -- basic and diluted...................... $ (0.45)
Shares used to compute net loss per share -- basic and
diluted................................................... 2,188,757
Shares used to compute pro forma net loss per share for
conversion of Series A preferred stock -- basic and
diluted................................................... 2,792,338
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 893 $46,313
Working capital...................................... 2,556 48,950
Total assets......................................... 5,108 50,528
Total stockholders' equity........................... 2,809 49,203
</TABLE>
7
<PAGE> 9
RISK FACTORS
You should carefully consider the risks and uncertainties described below
and the other information in this prospectus before deciding whether to invest
in shares of our common stock. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations.
If any of the following risks actually occur, our business, financial
condition or operating results could be materially adversely affected. In such
case, the trading price of our common stock could decline and you may lose part
or all of your investment.
RISKS RELATED TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAKES FUTURE FORECASTING DIFFICULT. BECAUSE MOST
OF OUR EXPENSES ARE FIXED BASED ON PLANNED OPERATING RESULTS, FAILURE TO
ACCURATELY FORECAST REVENUE COULD CAUSE NET LOSSES IN A GIVEN QUARTER TO BE
GREATER THAN EXPECTED.
We were incorporated in March 1998. We began selling products on our Web
site in April 1998 and the results for the 1999 fiscal year are the same as
those for the period from inception, March 6, 1998, through March 31, 1999.
Accordingly, we have an extremely limited operating history upon which to base
an evaluation of our business and prospects. Our business and prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as online commerce. As a
result of our limited operating history, it is difficult to accurately forecast
our net sales and we have limited meaningful historical financial data upon
which to base planned operating expenses. We base our current and future expense
levels on our operating plans and estimates of future net sales, and our
expenses are to a large extent fixed. Sales and operating results are difficult
to forecast because they generally depend on the volume and timing of the orders
we receive, which is uncertain. As a result, we may be unable to adjust our
spending in a timely manner to compensate for any unexpected revenue shortfall.
This inability could cause our net losses in a given quarter to be greater than
expected.
WE ANTICIPATE FUTURE LOSSES AND NEGATIVE CASH FLOW, WHICH MAY LIMIT OR DELAY OUR
ABILITY TO BECOME PROFITABLE.
Since our formation, we have expended significant resources on our
technology, Web site development, advertising, hiring of personnel and startup
costs. As a result, we have incurred losses since our inception and expect to
experience operating losses and negative cash flow for the foreseeable future.
We anticipate our losses will continue to increase from current levels because
we expect to incur additional costs and expenses related to:
- - brand development, marketing and other promotional activities;
- - the expansion of our fulfillment operations, which includes supply
procurement, warehousing, order receipt, packaging and shipment;
- - the addition of customer service personnel;
- - the continued development of our Web site, the systems and staff that process
customer orders and payments, and our computer network;
- - the expansion of our product offerings and Web site content; and
- - development of relationships with strategic business partners.
As of March 31, 1999, we had an accumulated deficit of $1.3 million. We
incurred net losses of $1.3 million for the fiscal year ended March 31, 1999.
8
<PAGE> 10
Our ability to become profitable depends on our ability to generate and
sustain substantially higher net sales while maintaining reasonable expense
levels. If we do achieve profitability, we cannot be certain that we would be
able to sustain or increase profitability on a quarterly or annual basis in the
future. See "Selected Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
OUR OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT. IF WE FAIL TO MEET
THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE OF
OUR COMMON STOCK MAY DECLINE SIGNIFICANTLY.
Our quarterly operating results have fluctuated in the past and we expect
both our quarterly and annual operating results to fluctuate significantly in
the future. Because our operating results are volatile and difficult to predict,
we believe that quarter-to-quarter comparisons of our operating results are not
a good indication of our future performance. In some future quarter our
operating results may fall below the expectations of securities analysts and
investors. In this event, the trading price of our common stock may decline
significantly. Factors that may harm our business or cause our operating results
to fluctuate include the following:
- - our inability to obtain new customers at reasonable cost, retain existing
customers or encourage repeat purchases;
- - decreases in the number of visitors to our Web site or our inability to
convert visitors to our Web site into customers;
- - our inability to maintain an adequate selection of products;
- - seasonality;
- - our inability to manage inventory levels or control inventory theft;
- - our inability to manage our fulfillment operations;
- - our inability to adequately maintain, upgrade and develop our Web site, the
systems that we use to process customer orders and payments or our computer
network;
- - the ability of our competitors to offer new or enhanced Web sites, services or
products;
- - price competition;
- - an increase in the level of our product returns;
- - fluctuations in the demand for premium watches and other luxury goods;
- - our inability to obtain product lines from our suppliers;
- - the availability and pricing of merchandise from vendors;
- - consumer confidence in online encrypted transactions;
- - the termination of existing or failure to develop new marketing relationships
with key business partners;
- - increases in the cost of online or offline advertising;
- - the amount and timing of operating costs and capital expenditures relating to
expansion of our operations;
- - unexpected increases in shipping costs, particularly during the holiday
season, and our inability to recover these costs from customers;
- - unexpected increases in delivery times, particularly during the holiday
season, which could harm our reputation, increase returns and cause customer
dissatisfaction;
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- - technical difficulties, system downtime or Internet brownouts;
- - government regulations related to use of the Internet for commerce or for
sales and distribution of watches and other luxury goods; and
- - economic conditions specific to the Internet, online commerce and the luxury
goods market.
A number of factors will cause our gross margins to fluctuate in future
periods, including the mix of watches and other products sold by us, inventory
management, marketing and supply decisions, inbound and outbound shipping and
handling costs, the level of product returns and the level of discount pricing
and promotional coupon usage. Any change in one or more of these factors could
reduce our gross margins in future periods. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quarterly Results
of Operations".
WE EXPECT TO EXPERIENCE SEASONAL FLUCTUATIONS IN OUR NET SALES, WHICH WILL CAUSE
OUR QUARTERLY RESULTS TO FLUCTUATE AND COULD CAUSE OUR ANNUAL RESULTS TO BE
BELOW EXPECTATIONS.
We expect to experience significant seasonal fluctuations in our net sales
that will cause quarterly fluctuations in our operating results. In particular,
we realized two-thirds of our net sales for fiscal year 1999 during the fourth
calendar quarter primarily due to gift purchases made during the holiday season
and this trend may continue in the future.
In anticipation of increased sales activity during the fourth calendar
quarter, we expect to hire a significant number of temporary employees to
bolster our permanent staff and significantly increase our inventory levels. For
this reason, if our net sales are below seasonal expectations during this
quarter, our annual operating results could be below the expectations of
securities analysts and investors.
Due to our limited operating history, it is difficult to predict the
seasonal pattern of our sales and the impact of seasonality on our business and
financial results. In the future, our seasonal sales patterns may become more
pronounced, may strain our personnel and warehousing and order shipment
activities and may cause a shortfall in net sales as compared to expenses in a
given period. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
WE PURCHASE CERTAIN OF OUR PRODUCT LINES DIRECTLY FROM THE MANUFACTURER. IF WE
ARE UNABLE TO PURCHASE OR CONTINUE TO PURCHASE CERTAIN PRODUCT LINES DIRECTLY
FROM THE MANUFACTURER, OUR NET SALES COULD DECREASE.
We currently purchase watches directly from the manufacturer on
approximately 50 of the 70 watch brands that we sell. We are negotiating with
manufacturers of the remaining and additional brands to purchase those brands
directly, in both the watch and other product categories. Part of our success is
contingent on attaining or maintaining our ability to buy directly from the
manufacturer. If we lose our ability to buy direct from the manufacturer, our
net sales or margins may decrease.
OUR ABILITY TO MEET CONSUMER DEMAND IS IN PART DEPENDENT UPON THE AVAILABILITY
OF PRODUCTS PURCHASED INDIRECTLY FROM SOURCES OTHER THAN THE MANUFACTURER. IF WE
ARE UNABLE TO OBTAIN POPULAR PRODUCTS THROUGH INDIRECT SOURCES, OUR NET SALES
WILL DECLINE.
As is customary in our business, we purchase brands indirectly from
distributors and other third parties that we do not purchase directly from the
manufacturer. The availability of products purchased indirectly depends on many
factors, including consumer demand, manufacturer production and fashion trends.
Since there are no guarantees that we will be able to obtain a sufficient supply
of products indirectly from third-party distributors and other suppliers,
customer demand may, at times, exceed our supply of those products. If this
occurs we could lose customers and our net sales would decline. In addition, the
luxury goods manufacturers could
10
<PAGE> 12
establish procedures to limit or control our ability to purchase products
indirectly. This could impact our ability to obtain sufficient quantities of
popular luxury goods, such as watches, and alienate our customers.
IF WE ARE UNABLE TO OBTAIN SUFFICIENT QUANTITIES OF KEY PRODUCTS, OUR NET SALES
COULD DECREASE.
If we are not able to offer our customers a sufficient supply and selection
of products in a timely manner, we could lose customers and our net sales could
be below expectations. Our success depends on our ability to purchase products
in sufficient quantities at competitive prices, particularly for the holiday
shopping season. As is common in the industry, we do not have long-term or
exclusive arrangements with any manufacturer, distributor or broker that
guarantee the availability of products for resale.
From time to time, we may have trouble obtaining sufficient product
allocations of key brands. In addition, our key suppliers have established, and
may expand, their own online retailing efforts, which may impact our ability to
get sufficient product allocations from suppliers. In several cases, the
manufacturers of brands that we wish to carry have delayed establishing a
relationship with us until they have their own Web site up and running. In other
cases, manufacturers produce only a small amount of product and rely partially
on the scarcity of that product to provide a merchandising mystique. It is
unlikely that we will obtain product for our Web site from manufacturers who
follow the scarcity mystique, and there is no assurance that we will actually
obtain relationships within all sectors that we have planned to offer.
Therefore, we do not have a predictable or guaranteed supply of products.
WE FACE SIGNIFICANT INVENTORY RISK BECAUSE CONSUMER DEMAND CAN CHANGE FOR
PRODUCTS AFTER WE RECEIVE THEM.
We carry a significant level of inventory. As a result, the rapidly
changing trends in consumer tastes in the market for luxury and premium products
subject us to significant inventory risks. It is critical to our success that we
accurately predict these trends and do not overstock unpopular products. The
demand for specific products can change between the time the products are
ordered and the date of receipt. We are particularly exposed to this risk
because we derive a majority of our net sales in the fourth calendar quarter of
each year. Our failure to sufficiently stock popular products in advance of the
fourth calendar quarter would harm our operating results for the entire fiscal
year. In the event that one or more products do not achieve widespread consumer
acceptance, we may be required to take significant inventory markdowns, which
could reduce our net sales and gross margins. This risk may be greatest in the
first calendar quarter of each year, after we have significantly increased
inventory levels for the holiday season. We believe that this risk will increase
as we begin to offer additional luxury items due to our lack of experience in
purchasing these items. In addition, to the extent that demand for our products
increases over time, we may be forced to increase inventory levels. Any increase
would subject us to additional inventory risks. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business".
WE FACE THE RISK OF INVENTORY THEFT.
In the past, we have experienced theft of merchandise shipments in route
from our facility to our customers. In the future, we expect that we may also
experience theft of merchandise while it is being held in our fulfillment
facility. We have worked with our shipping carriers and have taken steps aimed
at preventing theft. If these steps are inadequate or if security measures fail
at our fulfillment facility, we could incur significant inventory theft, which
could cause gross profit margins and results of operations to decrease
significantly.
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SALES OF LUXURY GOODS ARE PARTICULARLY SUSCEPTIBLE TO GENERAL ECONOMIC
DOWNTURNS. IF GENERAL ECONOMIC CONDITIONS DETERIORATE, OUR SALES COULD SUFFER.
Purchases of luxury products are typically discretionary for consumers and
may be particularly affected by negative trends in the general economy. The
success of our operations depends to a significant extent on a number of factors
relating to discretionary consumer spending and affecting disposable consumer
income, such as employment, wages and salaries, business conditions, interest
rates, exchange rates, availability of credit and taxation. In addition, because
the purchase of luxury products is relatively discretionary, any reduction in
disposable income in general may affect us more significantly than companies in
other industries.
TO MANAGE OUR GROWTH AND EXPANSION, WE NEED TO RELOCATE TO NEW FACILITIES,
IMPROVE AND IMPLEMENT FINANCIAL AND MANAGERIAL CONTROLS AND IMPROVE OUR
REPORTING SYSTEMS AND PROCEDURES. IF WE ARE UNABLE TO DO SO SUCCESSFULLY, WE MAY
NOT BE ABLE TO MANAGE GROWTH EFFECTIVELY AND OUR OPERATING RESULTS WOULD BE
HARMED.
Our rapid growth in personnel and operations has placed, and will continue
to place, a significant strain on our management, information systems and
resources. In order to manage this growth effectively, we need to continue to
improve our financial and managerial controls and reporting systems and
procedures. In addition, we are moving to new headquarters facilities in the
second quarter of fiscal year 2000, which we expect will be a disruptive, time
consuming and expensive process. Our management team has been assembled recently
and has not worked together extensively in the past. There can be no assurance
that the management team can work together effectively and can implement our
internal growth and acquisition strategies. Any inability of our management to
integrate additional companies, customer databases, merchandise lines,
categories of merchandise, technology advances, fulfillment systems, and
customer service into operations and to eliminate unnecessary duplication may
have a materially adverse effect on our business, financial condition and
results of operations.
IF WE ARE UNABLE TO SUCCESSFULLY IMPLEMENT OUR NEW ACCOUNTING AND FINANCIAL
REPORTING SYSTEMS, OUR STOCK PRICE COULD DECLINE.
We anticipate expanding our financial and management information systems to
accommodate new data. If we fail to successfully implement and integrate our new
financial reporting and management information systems with our existing systems
or if we are not able to expand these systems to accommodate our growth, we may
not have adequate, accurate or timely financial information. Our failure to have
adequate, accurate or timely financial information would hinder our ability to
manage our business and operating results. If we grow rapidly, we will face
additional challenges in upgrading and maintaining our financial and reporting
systems.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS.
The online commerce market is new, rapidly evolving and intensely
competitive. We expect competition to intensify in the future because current
and new competitors can launch new Web sites at a relatively low cost and enter
our market with little difficulty. Increased competition is likely to result in
price pressure, reduced gross margins and loss of market share, any of which
could seriously harm our net sales and operating results. In addition, the watch
retail industry is intensely competitive. We currently or potentially compete
with a variety of other companies, including:
- - traditional retailers of watches, pens and other luxury products, which may
compete with both an online and offline presence, including high-end
department stores, jewelers and national department stores;
- - manufacturers of our products that decide to sell directly to end-customers,
either through physical retail outlets or through an online store;
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- - other online retailers of watches and other luxury products, including online
service providers that feature shopping services; and
- - catalog retailers of watches, pens and other luxury products.
Many of our current and potential traditional store-based and online
competitors have longer operating histories, larger customer or user bases,
greater brand recognition and significantly greater financial, marketing and
other resources than we do. Many of these current and potential competitors can
devote substantially more resources to Web site and systems development than we
can. In addition, larger, well-established and well-financed entities may
acquire, invest in or form joint ventures with online competitors.
Certain of our competitors may be able to secure products from vendors on
more favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than we can. Traditional
store-based retailers also enable customers to see and feel products in a manner
that is not possible over the Internet. Given our limited operating history,
many of our competitors have significantly greater experience selling watches.
Our online competitors are particularly able to use the Internet as a
marketing medium to reach significant numbers of potential customers. Finally,
new technologies and the expansion of existing technologies, such as price
comparison programs that select specific titles from a variety of Web sites and
may direct customers to other online watch sellers, may increase competition.
IF WE ARE UNABLE TO BUILD AWARENESS OF THE ASHFORD.COM BRAND, WE MAY NOT BE ABLE
TO COMPETE EFFECTIVELY AGAINST COMPETITORS WITH GREATER NAME RECOGNITION AND OUR
SALES COULD BE ADVERSELY AFFECTED.
If we are unable to economically achieve or maintain a leading position in
online commerce or to promote and maintain our brand, our business, results of
operations and financial condition could suffer. We believe that the importance
of brand recognition will increase as more companies engage in commerce over the
Internet. Development and awareness of our brand will depend largely on our
success in increasing our customer base. If the leading brands do not perceive
us as an effective marketing and sales channel for their merchandise, or
consumers do not perceive us as offering a desirable way to purchase
merchandise, we may be unsuccessful in promoting and maintaining our brand.
Furthermore, in order to attract and retain customers and to promote and
maintain our brand in response to competitive pressures, we plan to increase our
marketing and advertising budgets and otherwise to increase substantially our
financial commitment to creating and maintaining brand loyalty among vendors and
consumers. See "Business -- Business Strategy" and "-- Marketing and Promotion".
Many traditional store-based and online competitors have longer operating
histories, larger customer or user bases, greater brand recognition and
significantly greater financial, marketing and other resources than we do. Many
of these competitors can devote substantially more resources to Web site
development than we can. In addition, larger, well-established and well-
financed entities may join with online competitors or watch manufacturers as the
use of the Internet and other online services increases. Our competitors may be
able to secure products from vendors on more favorable terms, fulfill customer
orders more efficiently and adopt more aggressive pricing or inventory
availability policies than we can. Traditional store-based retailers also enable
customers to see and feel products in a manner that is not possible over the
Internet. See "Business -- Competition".
IF WE ENTER NEW BUSINESS CATEGORIES THAT DO NOT ACHIEVE MARKET ACCEPTANCE, OUR
BRAND AND REPUTATION COULD BE DAMAGED AND WE COULD FAIL TO ATTRACT NEW
CUSTOMERS.
If we launch or acquire a new department or product category that is not
favorably received by consumers, our brand or reputation could be damaged. This
damage could impair our ability
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to attract new customers, which could cause our net sales to fall below
expectations. An expansion of our business to include other luxury goods will
require significant additional expenses, and strain our management, financial
and operational resources. This type of expansion would also subject us to
increased inventory risk. We may choose to expand our operations by developing
other new departments or product categories, promoting new or complementary
products, expanding the breadth and depth of products and services offered or
expanding our market presence through relationships with third parties. In
addition, we may pursue the acquisition of other new or complementary
businesses, products or technologies, although we have no present
understandings, commitments or agreements with respect to any material
acquisitions or investments.
IF OUR STRATEGY TO SELL PRODUCTS OUTSIDE OF THE UNITED STATES IS NOT SUCCESSFUL,
OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD BE MATERIALLY
ADVERSELY AFFECTED.
If we are not able to successfully market, sell and distribute our products
in foreign markets or if certain risks and uncertainties of doing business in
foreign markets prove insurmountable then these factors could have a material
adverse effect on our future global operations, and consequently, on our
business, results of operations and financial condition. Although we currently
may not sell merchandise to customers outside the United States, we intend to do
so in the future. We do not currently have any overseas fulfillment or
distribution facility or arrangement or any Web site content localized for
foreign markets, and we cannot be certain that we will be able to establish a
global presence. In addition, there are certain risks inherent in doing business
on a global level, including:
- - regulatory requirements;
- - export restrictions;
- - tariffs and other trade barriers;
- - difficulties in staffing and managing foreign operations;
- - difficulties in protecting intellectual property rights;
- - longer payment cycles;
- - problems in collecting accounts receivable;
- - political instability;
- - fluctuations in currency exchange rates; and
- - potentially adverse tax consequences.
IF WE DO NOT SUCCESSFULLY EXPAND OUR FULFILLMENT OPERATIONS, OUR NET SALES MAY
FALL BELOW EXPECTATIONS.
We must be able to quickly and efficiently fill customer orders. If we do
not successfully expand our fulfillment operations to accommodate increases in
demand, particularly during the fourth calendar quarter of each year, we will
not be able to increase our net sales in accordance with the expectations of
securities analysts and investors. Our success depends on our ability to rapidly
expand our fulfillment operations in order to accommodate a significant increase
in customer orders. We must also be able to rapidly grow our fulfillment
operations and information systems to accommodate significant increases in
demand, which may require us to automate tasks that are currently performed
manually. Our planned expansion may cause disruptions in our business. Our
current fulfillment operations are not adequate to accommodate significant
increases in customer demand that may occur during the fourth calendar quarter
of 1999.
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IF WE EXPERIENCE PROBLEMS WITH OUR THIRD-PARTY SHIPPING SERVICES, WE COULD LOSE
CUSTOMERS.
We rely upon third-party carriers for product shipments, including
shipments to and from our warehouse. We are therefore subject to the risks,
including employee strikes and inclement weather, associated with these
carriers' ability to provide delivery services to meet our shipping needs. In
addition, failure to deliver products to our customers in a timely manner would
damage our reputation and brand.
OUR OPERATING RESULTS DEPEND ON OUR INTERNALLY DEVELOPED WEB SITE, NETWORK
INFRASTRUCTURE AND TRANSACTION-PROCESSING SYSTEMS. IF WE DO NOT SUCCESSFULLY
EXPAND OUR WEB SITE AND THE SYSTEMS THAT PROCESS CUSTOMER ORDERS, WE COULD LOSE
CUSTOMERS AND NET SALES COULD BE REDUCED.
The satisfactory performance, reliability and availability of our Web site,
transaction-processing systems and network infrastructure are critical to our
operating results, as well as to our ability to attract and retain customers and
maintain adequate customer service levels. Any system interruptions that result
in the unavailability of our Web site or reduced performance of the transaction
systems would reduce the volume of sales and the attractiveness of our service
offerings. This would seriously harm our business, operating results and
financial condition. We are currently upgrading our system architecture to
accommodate increased traffic and processing needs. We expect this process to be
time consuming and expensive and our upgrade may not be successful.
We use internally developed systems for our Web site and substantially all
aspects of transaction processing, including customer profiling and order
verifications. We have experienced periodic systems interruptions due to server
failure, which we believe will continue to occur from time to time. If the
volume of traffic on our Web site or the number of purchases made by customers
substantially increases, we will need to further expand and upgrade our
technology, transaction processing systems and network infrastructure. We have
experienced and expect to continue to experience temporary capacity constraints
due to sharply increased traffic during sales or other promotions, which cause
unanticipated system disruptions, slower response times, degradation in levels
of customer service, impaired quality and delays in reporting accurate financial
information.
If we fail to rapidly upgrade our Web site or toll-free call center in
order to accommodate increased traffic, we may lose customers, which would
reduce our net sales. Furthermore, if we fail to rapidly expand the computer
systems that we use to process and ship customer orders and process payments, we
may not be able to successfully fulfill customer orders. As a result, we could
lose customers and our net sales could be reduced. In addition, our failure to
rapidly upgrade our Web site or expand these computer systems without system
downtime, particularly during the fourth calendar quarter, would further reduce
our net sales. We may experience difficulty in improving and maintaining our
systems if our employees or contractors that develop or maintain our computer
systems become unavailable to us. We have experienced periodic systems
interruptions, which we believe will continue to occur, while enhancing and
expanding these computer systems.
OUR FACILITIES AND SYSTEMS ARE VULNERABLE TO NATURAL DISASTERS AND OTHER
UNEXPECTED PROBLEMS. THE OCCURRENCE OF A NATURAL DISASTER OR OTHER UNEXPECTED
PROBLEM COULD DAMAGE OUR REPUTATION AND BRAND AND REDUCE OUR NET SALES.
The occurrence of a natural disaster or unanticipated problems at our
leased or offsite hosting facilities that house substantially all of our
computer and communications hardware systems could cause interruptions or delays
in our business, destroy data or render us unable to accept and fulfill customer
orders. Any of these interruptions or delays at these facilities would
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reduce our net sales. In addition, our systems and operations are vulnerable to
damage or interruption from fire, flood, power loss, telecommunications failure,
break-ins, earthquake and similar events. We have not established specific
procedures for handling damage or interruptions caused by these events and our
business interruption insurance may not adequately compensate us for losses that
may occur. In addition, the failure by the third-party facility to provide the
data communications capacity required by us, as a result of human error, natural
disaster or other operational disruptions, could interrupt our service. The
occurrence of any or all of these events could damage our reputation and brand
and impair our business.
OUR NET SALES COULD DECREASE IF OUR ONLINE SECURITY MEASURES FAIL.
Our relationships with our customers may be adversely affected if the
security measures that we use to protect their personal information, such as
credit card numbers, are ineffective. If, as a result, we lose many customers,
our net sales could decrease. We rely on security and authentication technology
that we license from third parties. With this technology, we perform real-time
credit card authorization and verification with our bank. We cannot predict
whether events or developments will result in a compromise or breach of the
technology we use to protect a customer's personal information. Furthermore, our
servers may be vulnerable to computer viruses, physical or electronic break-ins
and similar disruptions. We may need to expend significant additional capital
and other resources to protect against a security breach or to alleviate
problems caused by any breaches. We cannot assure that we can prevent all
security breaches.
OUR NET SALES AND GROSS MARGINS WOULD DECREASE IF WE EXPERIENCE SIGNIFICANT
CREDIT CARD FRAUD.
A failure to adequately control fraudulent credit card transactions would
reduce our net sales and our gross margins because we do not carry insurance
against this risk. We have developed procedures to help us to detect the
fraudulent use of credit card information. Nonetheless, to date, we have
suffered losses as a result of orders placed with fraudulent credit card data
even though the associated financial institution approved payment of the orders.
Under current credit card practices, we are liable for fraudulent credit card
transactions because we do not obtain a cardholder's signature.
IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR SERVICES COULD BECOME
OBSOLETE AND WE COULD LOSE CUSTOMERS.
If we face material delays in introducing new services, products and
enhancements, our customers may forego the use of our services and use those of
our competitors. To remain competitive, we must continue to enhance and improve
the functionality and features of our online store. The Internet and the online
commerce industry are rapidly changing. If competitors introduce new products
and services, or if new industry standards and practices emerge, our existing
Web site and proprietary technology and systems may become obsolete. To develop
our Web site and technology entails significant technical and business risks. We
may use new technologies ineffectively or we may fail to adapt our technology to
meet customer requirements or emerging industry standards.
INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND COULD IMPAIR OUR
BUSINESS.
Other parties may assert infringement or unfair competition claims against
us. We cannot predict whether they will do so, or whether any past or future
assertions or prosecutions will harm our business. If we are forced to defend
against any infringement claims, whether they are with or without merit or are
determined in our favor, then we may face costly litigation, diversion of
technical and management personnel, or product shipment delays. Further, the
outcome of a dispute may be that we would need to develop non-infringing
technology or enter into royalty or
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licensing agreements. Royalty or licensing agreements, if required, may be
unavailable on terms acceptable to us, or at all.
IF THE PROTECTION OF OUR TRADEMARKS AND PROPRIETARY RIGHTS IS INADEQUATE, OUR
BRAND AND REPUTATION COULD BE IMPAIRED AND WE COULD LOSE CUSTOMERS.
The steps we take to protect our proprietary rights may be inadequate. We
regard our copyrights, service marks, trademarks, trade dress, trade secrets and
similar intellectual property as critical to our success. We rely on trademark
and copyright law, trade secret protection and confidentiality or license
agreements with our employees, customers, partners and others to protect our
proprietary rights. In April 1999, we filed an application with the United
States Patent and Trademark Office for the registered trademarks "ASHFORD" and
"Ashford.com" for online retail services. Effective trademark, service mark,
copyright and trade secret protection may not be available in every country in
which we will sell our products and services online. Furthermore, the
relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear. Therefore, we may be
unable to prevent third parties from acquiring domain names that are similar to,
infringe upon or otherwise decrease the value of our trademarks and other
proprietary rights.
THE LOSS OF THE SERVICES OF ONE OR MORE OF OUR KEY PERSONNEL, OR OUR FAILURE TO
ATTRACT, ASSIMILATE AND RETAIN OTHER HIGHLY QUALIFIED PERSONNEL IN THE FUTURE,
COULD DISRUPT OUR OPERATIONS AND RESULT IN LOSS OF NET SALES.
Our future performance will depend on the continued services of our
management and key personnel and the ability to attract additional management
and key personnel. The loss of the services of one or more of our key personnel
could seriously interrupt our business. We depend on the continued services and
performance of our senior management and other key personnel. Our future success
also depends upon the continued service of our executive officers and other key
sales, marketing and support personnel. Several of our senior management joined
us in the last six months, including our Chief Executive Officer, Chief
Financial Officer, Vice President of Marketing, Vice President of Business
Development and Vice President of Merchandising. Our future success depends on
these officers effectively working together with our original management team.
Our relationships with these officers and key employees are at will and none of
our officers or key employees is bound by an employment agreement for any
specific term. We currently have key person life insurance policies covering
Kenneth E. Kurtzman and James H. Whitcomb, Jr.
WE MAY NOT ACHIEVE EXPECTED BENEFITS OF ANY INVESTMENTS OR ACQUISITIONS THAT WE
COMPLETE.
Although we are not currently negotiating any acquisitions, if we identify
appropriate opportunities, we intend to make acquisitions of or investments in
complementary companies, products or technologies. We may not correctly identify
or realize the anticipated benefits of any acquisition or investment. For
example, we may not be able to successfully assimilate the additional personnel,
operations, acquired technology and products into our business. Acquisitions may
further strain our existing financial and managerial controls and reporting
systems and procedures. In addition, key personnel of acquired companies may
decide not to work for us. These difficulties could disrupt our ongoing
business, distract our management and employees or increase our expenses.
Further, any physical expansion in facilities due to an acquisition may result
in disruptions that seriously impair our business. We are not experienced in
managing facilities or operations in geographically distant areas. Finally, in
connection with any future acquisitions, we may incur debt or issue equity
securities as part or all of the consideration for the acquired company's assets
or capital stock. We may be unable to obtain sufficient additional financing on
favorable terms, or at all. Equity issuances could be dilutive to our existing
stockholders or us.
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WE MAY BE ADVERSELY IMPACTED IF THE SOFTWARE, COMPUTER TECHNOLOGY AND OTHER
SYSTEMS WE USE ARE NOT YEAR 2000 COMPLIANT.
Any failure of our material systems, our suppliers' material systems or the
Internet to be year 2000 compliant would have material adverse consequences for
us. These consequences would include difficulties in operating our Web site
effectively, taking product orders, making product deliveries or conducting
other fundamental parts of our business. We are currently assessing the year
2000 readiness of the software, computer technology and other services that we
use. At this time, we have not yet developed a contingency plan to address
situations that may result if we or our suppliers are unable to achieve year
2000 compliance. The cost of developing and implementing a plan, if necessary,
could be material. We also depend on the year 2000 compliance of the computer
systems and financial services used by consumers. A significant disruption in
the ability of consumers to reliably access the Internet or portions of it or to
use their credit cards would have an adverse effect on demand for our services
and would have a material adverse effect on us. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Year 2000".
EXECUTIVE OFFICERS, DIRECTORS AND ENTITIES AFFILIATED WITH THEM WILL CONTINUE TO
HAVE SUBSTANTIAL CONTROL OVER ASHFORD.COM AFTER THE OFFERING WHICH COULD DELAY
OR PREVENT A CHANGE IN OUR CORPORATE CONTROL FAVORED BY OUR OTHER STOCKHOLDERS.
Executive officers, directors and entities affiliated with them, if acting
together, would be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions. These
stockholders will, in aggregate, beneficially own approximately % of our
outstanding common stock following the completion of this offering. See
"Principal Stockholders".
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US EVEN IF DOING SO WOULD BE
BENEFICIAL TO OUR STOCKHOLDERS.
Provisions of our Certificate of Incorporation, our By-laws and Delaware
law could make it more difficult for a third party to acquire us, even if doing
so would be beneficial to our stockholders. See "Description of Capital Stock".
INVESTORS IN THE OFFERING WILL EXPERIENCE IMMEDIATE DILUTION.
We expect the initial public offering price to be substantially higher than
the book value per share of the outstanding common stock immediately after this
offering. Accordingly, if you purchase common stock in this offering, you will
experience immediate dilution of approximately $ in the book value per
share of the common stock from the price you pay for the common stock. See
"Dilution".
RISKS RELATED TO OUR INDUSTRY
WE DEPEND ON INCREASING USE OF THE INTERNET AND ON THE GROWTH OF ONLINE
COMMERCE.
Our future revenues substantially depend upon the increased acceptance and
use of the Internet and other online services as a medium of commerce. Rapid
growth in the use of the Internet, the Web and online services is a recent
phenomenon. As a result, acceptance and use may not continue to develop at
historical rates and a sufficiently broad base of customers may not adopt,
and/or continue to use, the Internet and other online services as a medium of
commerce. Demand and market acceptance for recently introduced services and
products over the Internet are subject to a high level of uncertainty and there
exist few proven services and products.
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In addition, the Internet may not be accepted as a viable long-term
commercial marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. If the Internet continues to
experience significant expansion in the number of users, frequency of use or
bandwidth requirements, the infrastructure for the Internet may be unable to
support the demands placed upon it. In addition, the Internet could lose its
viability as a commercial medium due to delays in the development or adoption of
new standards and protocols required to handle increased levels of Internet
activity, or due to increased governmental regulation. Changes in, or
insufficient availability of, telecommunications services to support the
Internet also could result in slower response times and adversely affect usage
of the Internet generally.
Our business, financial condition and results of operations would be
seriously harmed if:
- - use of the Internet, the Web and other online services does not continue to
increase or increases more slowly than expected;
- - the infrastructure for the Internet, the Web and other online services does
not effectively support expansion that may occur;
- - the Internet, the Web and other online services do not become a viable
commercial marketplace; or
- - traffic to our Web site decreases or fails to increase as expected or if we
spend more than we expect to attract visitors to our Web site.
IF WE ARE UNABLE TO ACQUIRE THE NECESSARY WEB DOMAIN NAMES, OUR BRAND AND
REPUTATION COULD BE DAMAGED AND WE COULD LOSE CUSTOMERS.
We may be unable to acquire or maintain Web domain names relating to our
brand in the United States and other countries in which we may conduct business.
As a result, we may be unable to prevent third parties from acquiring and using
domain names relating to our brand, which could damage our brand and reputation
and take customers away from our Web site. We currently hold the "Ashford.com"
and "newwatch.com" domain names and may seek to acquire additional domain names.
Governmental agencies and their designees generally regulate the acquisition and
maintenance of domain names. The regulation of domain names in the United States
and in foreign countries is subject to change in the near future. The changes in
the United States are expected to include a transition from the current system
to a system that is controlled by a non-profit corporation and the creation of
additional top-level domains. Governing bodies may establish additional
top-level domains, appoint additional domain name registrars or modify the
requirements for holding domain names.
WE MAY NEED TO CHANGE THE MANNER IN WHICH WE CONDUCT OUR BUSINESS IF GOVERNMENT
REGULATION INCREASES.
The adoption or modification of laws or regulations relating to the
Internet could adversely affect the manner in which we currently conduct our
business. In addition, the growth and development of the market for online
commerce may lead to more stringent consumer protection laws, both in the United
States and abroad, that may impose additional burdens on us. Laws and
regulations directly applicable to communications or commerce over the Internet
are becoming more prevalent. The United States Congress recently enacted
Internet laws regarding children's privacy, copyrights, taxation and the
transmission of sexually explicit material. The European Union recently enacted
its own privacy regulations. Laws regulating the Internet, however, remain
largely unsettled, even in areas where there has been some legislative action.
It may take years to determine whether and how existing laws such as those
governing intellectual property, privacy, libel, and taxation apply to the
Internet.
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In order to comply with new or existing laws regulating online commerce, we
may need to modify the manner in which we do business, which may result in
additional expenses. For instance, we may need to spend time and money revising
the process by which we fulfill customer orders to ensure that each shipment
complies with applicable laws. We may need to hire additional personnel to
monitor our compliance with applicable laws. We may also need to modify our
software to further protect our customers' personal information.
WE MAY BE SUBJECT TO LIABILITY FOR THE INTERNET CONTENT THAT WE PUBLISH.
As a publisher of online content, we face potential liability for
defamation, negligence, copyright, patent or trademark infringement, or other
claims based on the nature and content of materials that we publish or
distribute. If we face liability, then our reputation and our business may
suffer. In the past, plaintiffs have brought these types of claims and sometimes
successfully litigated them against online companies. In addition, we could be
exposed to liability with respect to the unauthorized duplication of content or
unauthorized use of other parties' proprietary technology. Although we carry
general liability insurance, our insurance currently does not cover claims of
these types. We cannot be certain that we will be able to obtain insurance to
cover the claims on reasonable terms or that it will be adequate to indemnify us
for all liability that may be imposed on us. Any imposition of liability that is
not covered by our insurance or is in excess of insurance coverage could harm
our business.
OUR NET SALES COULD DECREASE IF WE BECOME SUBJECT TO SALES OR OTHER TAXES.
If one or more states or any foreign country successfully asserts that we
should collect sales or other taxes on the sale of our products, our net sales
and results of operations could be harmed. We do not currently collect sales or
other similar taxes for physical shipments of goods into states other than
Texas. However, one or more local, state or foreign jurisdictions may seek to
impose sales tax collection obligations on us. In addition, any new operation
could subject our shipments in other states to state sales taxes under current
or future laws. If we become obligated to collect sales taxes, we will need to
update our system that processes customer orders to calculate the appropriate
sales tax for each customer order and to remit the collected sales taxes to the
appropriate authorities. These upgrades will increase our operating expenses. In
addition, our customers may be discouraged from purchasing products from us
because they have to pay sales tax, causing our net sales to decrease. As a
result, we may need to lower prices to retain these customers.
RISKS RELATED TO SECURITIES MARKETS
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS.
We cannot be certain that additional financing will be available to us on
favorable terms when required, or at all. If we raise additional funds through
the issuance of equity, equity-related or debt securities, the securities may
have rights, preferences or privileges senior to those of the rights of our
common stock and our stockholders may experience additional dilution. We require
substantial working capital to fund our business. Since our inception, we have
experienced negative cash flow from operations and expect to experience
significant negative cash flow from operations for the foreseeable future. We
currently anticipate that the net proceeds of this offering, together with our
available funds, will be sufficient to meet our anticipated needs for working
capital and capital expenditures through at least the next 12 months. After
that, we may need to raise additional funds.
Prior to this offering, there has been no public market for our common
stock. We cannot be certain that an active trading market for our common stock
will develop or be sustained following this offering. Further, we cannot be
certain that the market price of our common stock will not
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decline below the initial public offering price. The initial public offering
price will be determined by negotiation among us and the underwriters based upon
several factors and may not be indicative of future market prices for our common
stock.
OUR COMMON STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES
FOR INDIVIDUAL STOCKHOLDERS.
The market price for our common stock is likely to be highly volatile and
subject to wide fluctuations in response to factors including the following,
some of which are beyond our control:
- - actual or anticipated variations in our quarterly operating results;
- - announcements of technological innovations or new products or services by us
or our competitors;
- - changes in financial estimates by securities analysts;
- - conditions or trends in the Internet and/or online commerce industries;
- - changes in the economic performance and/or market valuations of other
Internet, online commerce or retail companies;
- - announcements by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
- - additions or departures of key personnel;
- - release of lock-up or other transfer restrictions on our outstanding shares of
common stock or sales of additional shares of common stock; and
- - potential litigation.
In addition, the stock market has from time to time experienced extreme
price and volume fluctuations. These broad market fluctuations may adversely
affect the market price of our common stock.
IF OUR STOCK PRICE IS VOLATILE, WE COULD FACE A SECURITIES CLASS ACTION LAWSUIT.
In the past, following periods of volatility in the market price of their
stock, many companies have been the subject of securities class action
litigation. If we were sued in a securities class action, it could result in
substantial costs and a diversion of management's attention and resources and
would cause our stock price to fall.
AFTER THE OFFERING, 6,445,143, OR %, OF OUR TOTAL OUTSTANDING SHARES WILL BE
RESTRICTED FROM IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE NEAR
FUTURE. THIS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP
SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL.
After this offering, we will have outstanding shares of common
stock. This includes the we are selling in this offering, which may be
resold in the public market immediately. The remaining %, or 6,445,143 shares,
of our total outstanding shares will become available for resale in the public
market from time to time beginning 180 days after the closing of this offering.
As restrictions on resale end, the market price could drop significantly if
the holders of these restricted shares sell them or are perceived by the market
as intending to sell them. For a more detailed description, see "Shares Eligible
for Future Sale".
21
<PAGE> 23
USE OF PROCEEDS
The net proceeds to Ashford.com from the sale of the shares of common
stock offered hereby are estimated to be $ , assuming an initial public
offering price of $ per share, and after deducting estimated underwriting
discounts and commissions and estimated offering expenses. The net proceeds of
this offering are estimated to be $ if the underwriters' over-allotment
option is exercised in full.
The primary purposes of this offering are to increase our working capital,
create a public market for the common stock to facilitate our future access to
public capital markets, and to increase our visibility in the retail
marketplace. We expect to use the net proceeds for general corporate purposes,
including working capital and other operating expenses. A portion of the net
proceeds may also be used for the acquisition of businesses, products and
technologies that are complementary to ours. We have no current plans,
agreements or commitments with respect to any acquisition. Pending these uses,
we will invest the net proceeds of this offering in investment grade,
interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends in the foreseeable future.
22
<PAGE> 24
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999 on
an actual, pro forma, and as adjusted basis. The "Actual" column reflects our
capitalization as of March 31, 1999 on an historical basis, without any
adjustments to reflect subsequent events or anticipated events. The "Pro Forma"
column reflects our capitalization as of March 31, 1999 with adjustments for the
following:
- - the filing of our certificate of incorporation to provide for authorized
capital stock of 100,000,000 shares of common stock and 10,000,000 shares of
undesignated preferred stock;
- - the issuance of 1,505,000 shares of Series B preferred stock in April 1999;
- - the issuance of 390,000 shares of common stock in May 1999 pursuant to a
full-recourse promissory note for $780,000;
- - the issuance of 300,143 shares of Series C preferred stock in July 1999; and
- - the automatic conversion of all shares of outstanding preferred stock into
3,805,143 shares of common stock on a one-to-one basis upon the closing of
this offering.
The "Pro Forma As Adjusted" column reflects our capitalization as of March
31, 1999 with the preceding pro forma adjustments plus the receipt of the
estimated net proceeds from our sale of shares of common stock at an
assumed initial public offering price of $ per share.
None of the columns reflects the 2,371,000 shares of common stock reserved
for issuance under our stock plans, of which 264,960 shares were subject to
outstanding options as of March 31, 1999 and 617,855 were subject to outstanding
options as of June 30, 1999. The table below reflects that we recorded
amortization expense related to deferred compensation of $17,500 for the fiscal
year ended March 31, 1999.
The table below should be read in conjunction with our balance sheet as of
March 31, 1999 and the related notes, which are included elsewhere in this
prospectus. You should review Notes 4 and 8 to the notes to our financial
statements for descriptions of our Series A preferred stock, Series B preferred
stock and Series C preferred stock.
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA ADJUSTED
----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Note payable................................................ $ 1,000 $ -- $ --
------- ------- -------
Stockholders' equity:
Convertible preferred stock, $.001 par value per share,
4,035,000 shares authorized, 2,000,000 shares issued
and outstanding actual; no shares authorized, issued
and outstanding pro forma and as adjusted.............. 2 -- --
Preferred stock, $.001 par value per share, no shares
authorized, issued or outstanding actual; 10,000,000
shares authorized, no shares issued and outstanding pro
forma and as adjusted.................................. -- -- --
Common stock, $.001 par value per share, 11,400,000 shares
authorized, 2,250,000 shares issued and outstanding
actual; 100,000,000 shares authorized, 6,445,143 shares
issued and outstanding pro forma; 100,000,000 shares
authorized,
issued and outstanding as adjusted..................... 2 6
Additional paid-in capital................................ 4,483 51,655
Deferred compensation..................................... (414) (414)
Subscription receivable................................... -- (780)
Accumulated deficit....................................... (1,264) (1,264)
------- ------- -------
Total stockholders' equity........................ 2,809 49,203
------- ------- -------
Total capitalization.............................. $ 3,809 $49,203 $
======= ======= =======
</TABLE>
23
<PAGE> 25
DILUTION
Our pro forma net tangible book value as of March 31, 1999 was
approximately $49.2 million or $7.63 per share. Pro forma net tangible book
value per share represents the amount of our total tangible assets at March 31,
1999 increased by the net proceeds of the Series B and Series C preferred stock
issuances in April and July 1999, reduced by the amount of our total liabilities
and divided by the total number of shares of common stock outstanding after
giving effect to the automatic conversion of the Series A, Series B and Series C
preferred stock. Dilution in pro forma net tangible book value per share
represents the difference between the amount per share paid by purchasers of
shares of common stock in this offering and the pro forma net tangible book
value per share of common stock immediately after the completion of this
offering. After giving effect to the sale of shares of common stock offered
by us at an assumed initial public offering price of $ per share, and after
deducting the underwriting discount and estimated offering expenses payable by
us, our pro forma net tangible book value at March 31, 1999 would have been
approximately $ million or $ per share of common stock. This represents
an immediate increase in pro forma net tangible book value of $ per share to
existing stockholders and an immediate dilution of $ per share to new
investors of common stock. The following table illustrates this dilution on a
per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share before the
offering............................................... $ 7.63
Increase per share attributable to new investors..........
------
Pro forma net tangible book value per share after the
offering (as adjusted)....................................
------
Dilution per share to new investors......................... $
======
</TABLE>
The following table summarizes on an as adjusted basis after giving effect
to the offering, as of March 31, 1999, the differences between the existing
stockholders and new investors with respect to the number of shares of common
stock purchased from us, the total consideration paid to us and the average
price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. % $ % $
New investors.........................
-------- ----- -------- -----
Totals...................... 100.0% $ 100.0%
======== ===== ======== =====
</TABLE>
The preceding tables exclude 2,371,000 shares of common stock reserved for
issuance under our option plans, of which 264,960 shares were subject to
outstanding options as of March 31, 1999 with a weighted average exercise price
of $0.20 per share and 617,855 were subject to outstanding options as of June
30, 1999 with a weighted average exercise price of $1.23 per share.
24
<PAGE> 26
SELECTED FINANCIAL DATA
The following selected financial and operating data should be read in
conjunction with the financial statements and the notes to the financial
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations", which are included elsewhere in this prospectus. You
should review Note 2 to the notes to our financial statements for an explanation
of the determination of the number of shares and share equivalents used in
computing the pro forma per share amounts shown below. The pro forma share
amounts reflect the conversion of preferred stock into common stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
The selected financial data reflect that prior to March 31, 1998, we had no
operations or activities. The statement of operations data shown below for the
period from inception, March 6, 1998 through March 31, 1999, and the selected
balance sheet data as of March 31, 1999 have been derived from our audited
financial statements appearing elsewhere in this prospectus. Although we were
incorporated in March 1998, we did not commence operations or activities until
April 1998. Our general and administrative operating expenses include expenses
related to the amortization of deferred compensation, which is $17,500 for the
period from inception through March 31, 1999.
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(MARCH 6, 1998) THROUGH
MARCH 31, 1999
---------------------------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................... $ 5,938
Cost of sales............................................... 5,110
----------
Gross profit................................................ 828
Operating expenses:
Marketing and sales....................................... 1,013
General and administrative................................ 1,086
----------
Total operating expenses.......................... 2,099
----------
Loss from operations........................................ (1,271)
Interest income (expense), net.............................. 7
----------
Net loss.................................................... $ (1,264)
==========
Net loss per share -- basic and diluted..................... $ (0.58)
==========
Pro forma net loss per share for conversion of preferred
stock -- basic and diluted(1)............................. $ (0.45)
==========
Shares used to compute net loss per share -- basic and
diluted................................................... 2,188,757
==========
Shares used to compute pro forma net loss per share for
conversion of preferred stock -- basic and diluted(1)..... 2,792,338
==========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------
ACTUAL PRO FORMA(2)
------ ------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 893 $46,313
Working capital............................................. 2,556 48,950
Total assets................................................ 5,108 50,528
Total stockholders' equity.................................. 2,809 49,203
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares and share equivalents used in
computing pro forma per share amounts.
(2) Pro forma balance sheet data include the issuance of 1,505,000 shares of
Series B preferred stock for $29.1 million in cash and conversion of a $1.0
million note payable, including accrued interest in April 1999, the issuance
of 390,000 shares of common stock in May 1999 pursuant to a full-recourse
promissory note for $780,000 and the issuance of 300,143 shares of Series C
preferred stock for $16.3 million in cash in July 1999.
25
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for historical information, the discussion in this prospectus
contains forward-looking statements that involve risks and uncertainties. These
statements refer to our future plans, objectives, expectations and intentions.
These statements may be identified by the use of words such as "expects",
"anticipates", "intends", "plans" and similar expressions. Our actual results
could differ materially from those anticipated in the forward-looking
statements. Factors that could contribute to these differences include, but are
not limited to, the risks discussed in the section titled "Risk Factors".
OVERVIEW
We are a leading Web-based retailer focused exclusively on luxury and
premium products, including new and vintage premium watches and fine writing
instruments. Our online store offers an extensive selection of fine watches,
writing instruments and other luxury goods. We carry over 7,000 new and vintage
watch styles from more than 70 of the finest brands. We also offer more than 600
different styles of fine writing instruments from 12 leading brands. We believe
that additional luxury and premium product categories, such as leather goods,
sunglasses, fragrances, ties and scarves, and jewelry, also represent
significant online commerce opportunities.
We were incorporated on March 6, 1998 and commenced operations and began
offering products for sale on our Web site in April 1998. Accordingly, the
results for the 1999 fiscal year are the same as those for the period from our
inception through March 31, 1999. Since launching the site, we have focused on
broadening our product offerings, establishing relationships with leading
brands, generating sales momentum and expanding our operational and customer
service capabilities. Our cost of sales and our operating expenses have
increased significantly since inception. This trend reflects increased product
costs associated with net sales growth and additional marketing and sales costs
to attract new customers and build brand awareness. In addition, general and
administrative expenses increased in connection with building infrastructure and
developing our Web site and associated systems to process customer orders and
payments and manage our anticipated growth in revenue.
We have grown rapidly since launching our site in April 1998. Our net sales
for the fiscal year ended March 31, 1999 totaled $5.9 million. The market for
luxury and premium products is highly seasonal, with a disproportionate amount
of net sales occurring during the fourth calendar quarter. Although less
significant, seasonal sales periods occur in May and June due to graduation gift
giving, Mother's Day and Father's Day. We expect that these trends will continue
in future periods. In addition, since a disproportionate amount of our net sales
are realized during the fourth calendar quarter, we significantly increase our
purchases of inventory during and in advance of that quarter. Accordingly, we
expect that our accounts payable will be at their highest levels during the
fourth calendar quarter. Our gross margin was 14% for the fiscal year ended
March 31, 1999. Our gross margin will fluctuate in future periods based on
factors such as:
- - product sales mix;
- - the mix of direct and indirect sources of inventory;
- - pricing strategy;
- - promotional activities;
- - inventory management; and
- - inbound and outbound shipping costs.
26
<PAGE> 28
Since inception, we have significantly increased the depth of our
management team in order to implement our growth strategy. Key additions to our
senior management team include a Chief Executive Officer, Chief Financial
Officer, Vice President of Marketing, Vice President of Business Development and
Vice President of Merchandising.
Since inception, we have incurred significant net losses and, for the
fiscal year ended March 31, 1999, our net losses were $1.3 million. We expect
our net losses to increase and to generate negative cash flows for the
foreseeable future. We expect operating expenses and net losses will continue to
rise as we pursue an aggressive marketing and advertising campaign to attract
new customers and build our brand identity, develop new strategic partnerships,
invest in new operational and customer service infrastructure and recruit
additional employees.
We have a limited operating history upon which to base an evaluation of our
business and prospects. You must consider our business and prospects in light of
the risks, expenses and difficulties frequently encountered by companies in
their early stage of development, particularly companies in new and rapidly
evolving markets such as online commerce. As a result of our limited operating
history, it is difficult to accurately forecast our net sales and we have
limited meaningful historical financial data upon which to base projected
operating expenses. We base our current and future expense levels on our
operating plans and estimates of future net sales, and our expenses are fixed to
a large extent. Sales and operating results are difficult to forecast because
they generally depend on the volume and timing of the orders we receive. As a
result, we may be unable to adjust our spending in a timely manner to compensate
for any unexpected revenue shortfall. This inability could cause our net losses
in a given quarter to be greater than expected.
In connection with this offering of shares of our common stock, certain
options granted have been considered to be granted at exercise prices below the
deemed fair value. Deferred compensation associated with options granted through
March 31, 1999 amounted to $431,500. Of this amount, $17,500 was charged to
operations for the fiscal year ended March 31, 1999, and $414,000 will be
amortized over the vesting periods of the applicable options through the fiscal
year ended March 31, 2003. From April 1, 1999 through June 30, 1999, we granted
options to employees and consultants to purchase an aggregate of 743,635 shares
of our common stock at exercise prices of $2.00 per share. Deferred compensation
associated with options granted from April 1, 1999 through June 30, 1999 is
approximately $16.0 million. This amount will be amortized to expense on a
straight-line basis over the four-year vesting periods of the applicable options
through the fiscal year ending March 31, 2004.
27
<PAGE> 29
QUARTERLY RESULTS OF OPERATIONS
Because we commenced operations in April 1998 and have a short operating
history, we believe that annual period-to-period comparisons are less meaningful
than an analysis of recent quarterly operating results. Accordingly, we are
providing a discussion and analysis of our operating results that is focused on
the four quarters ended March 31, 1999.
In the following table, we show certain unaudited statement of operations
data both in absolute dollars and as a percentage of net sales for each of our
last four quarters. This unaudited quarterly information has been derived from
our audited financial statements for the fiscal year ended March 31, 1999. In
the opinion of management, this information includes all adjustments, consisting
only of normal recurring adjustments necessary for a fair presentation in
accordance with generally accepted accounting principles. The operating results
for any quarter are not necessarily indicative of the operating results for any
future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1998 1998 1998 1999
-------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................................... $ 296 $ 798 $ 2,370 $ 2,474
Cost of sales................................. 280 651 1,998 2,181
------- ------- ------- -------
Gross profit.................................. 16 147 372 293
Operating expenses:
Marketing and sales......................... 23 81 260 649
General and administrative.................. 37 52 261 736
------- ------- ------- -------
Total operating expenses............ 60 133 521 1,385
------- ------- ------- -------
Income (loss) from operations................. (44) 14 (149) (1,092)
Interest income (expense), net................ -- -- (4) 11
======= ======= ======= =======
Net income (loss)............................. $ (44) $ 14 $ (153) $(1,081)
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1998 1998 1998 1999
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
AS A PERCENTAGE OF NET SALES:
Net sales..................................... 100% 100% 100% 100%
Cost of sales................................. 95 82 84 88
------- ------- ------- -------
Gross profit.................................. 5 18 16 12
Operating expenses:
Marketing and sales......................... 8 10 11 26
General and administrative.................. 13 7 11 30
------- ------- ------- -------
Total operating expenses............ 20 17 22 56
------- ------- ------- -------
Income (loss) from operations................. (15) 2 (6) (44)
Interest income (expense), net................ -- -- (0) 0
------- ------- ------- -------
Net income (loss)............................. (15)% 2% (6)% (44)%
======= ======= ======= =======
</TABLE>
NET SALES
Net sales consist of product sales to customers and are net of product
returns and promotional discounts. Net sales increased from approximately $0.3
million during the quarter ended June 30, 1998 to approximately $2.5 million
during the quarter ended March 31, 1999. The growth in net sales is principally
due to increased site traffic and awareness resulting from advertising
expenditures and additional product offerings. During each of the four quarters
ended
28
<PAGE> 30
March 31, 1999, watches comprised 100% of our sales as we added writing
instruments to our Web site in June 1999. Net sales increased during the quarter
ended March 31, 1999 compared to the quarter ended December 31, 1998 principally
due to promotional activities and increased product offerings and availability
that we financed with the proceeds received from our Series A preferred stock
financing in December 1998.
COST OF SALES
Cost of sales consists primarily of the cost of products sold, inbound and
outbound shipping costs and warranty and inventory obsolescence costs. Cost of
sales grew during each quarter as our sales increased. Gross margin ranged from
5% to 18% during the four quarters presented. The fluctuation in gross margin is
principally due to the impact of the mix of product sold, pricing strategy and
certain promotional activities. Gross margin decreased during the quarter ended
March 31, 1999 compared to the quarter ended December 31, 1998 principally due
to promotional pricing during March 1999.
OPERATING EXPENSES
MARKETING AND SALES. Marketing and sales expenses consist primarily of
advertising costs, credit card fees, product distribution expenses and related
employee salaries and benefits expenses. Our advertising is intended to build
brand awareness, generate site traffic and increase overall sales. The increase
in marketing and sales expenses is primarily due to increased levels of
advertising activity as well as incremental selling and distribution costs
associated with our growing sales volume. We intend to continue to pursue an
aggressive branding and marketing campaign and, therefore, expect marketing and
sales expenses to increase significantly in absolute dollars in future periods.
In addition, to the extent that our sales volume increases in future periods, we
expect marketing and sales expenses to increase in absolute dollars as we expand
our distribution capabilities to accommodate the increases in sales volume.
Marketing and sales expenses increased during the quarter ended March 31, 1999
compared to the quarter ended December 31, 1998 principally due to increased
levels of advertising activity including expenses related to a promotion
agreement with Yahoo! and other online banner advertising.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
administrative employee salaries and benefits, professional fees, Web site
design and maintenance, office lease expenses, depreciation and other costs.
These costs increased throughout the fiscal year as we added management depth
and expanded our operations to meet growing sales. We expect general and
administrative expenses to increase as we expand our staff and leased
facilities, continue to develop our Web site and incur additional costs related
to the growth of our business and being a public company. General and
administrative expenses increased during the quarter ended March 31, 1999
compared to the quarter ended December 31, 1998 primarily due to increased
staffing levels in operations, finance and development as well as incremental
professional fees associated with attracting new employees.
In the fiscal year ended March 31, 1999, we recorded total deferred stock
compensation of $431,500 in connection with stock options granted during the
period. This amount is amortized to expense over the vesting periods of the
applicable options, generally four years, resulting in $17,500 for the fiscal
year ended March 31, 1999, which is included in general and administrative
expenses. From April through June 1999, we will record additional deferred
compensation of approximately $16.0 million in connection with further grants of
stock options to new employees and consultants. These amounts represent the
difference between the exercise price of stock option grants and the deemed fair
value of our common stock at the time of the grants.
29
<PAGE> 31
Amortization of the deferred compensation expense for each of the next five
fiscal years is expected to be as follows:
<TABLE>
<CAPTION>
YEAR ENDED AMOUNT
- ------------------------------------------------------------ ---------------
(IN THOUSANDS)
<S> <C>
March 31, 2000.............................................. $3,677
March 31, 2001.............................................. 4,096
March 31, 2002.............................................. 4,096
March 31, 2003.............................................. 4,079
March 31, 2004.............................................. 418
</TABLE>
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net consists of earnings on our cash and cash
equivalents, net of interest expense attributable to a note payable to an
investor of $1.0 million that was outstanding as of March 31, 1999. The amount
was advanced to us in March 1999 to fund ongoing marketing and operating costs.
The note was converted into Series B preferred stock in April 1999.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Our quarterly operating results have fluctuated in the past and may
fluctuate significantly in the future due to a variety of factors, many of which
are outside of our control. Because our operating results are volatile and
difficult to predict, we believe that quarter-to-quarter comparisons of our
operating results are not a good indication of our future performance. It is
likely that in some future quarter our operating results may fall below the
expectations of securities analysts and investors. In this event, the trading
price of our common stock may fall significantly. We refer you to the more
complete discussion of the factors that could harm our business or cause our
operating results to fluctuate in "Risk Factors -- Our Operating Results Are
Volatile and Difficult to Predict. If We Fail to Meet the Expectations of Public
Market Analysts and Investors, the Market Price of Our Common Stock May Decline
Significantly".
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through the private sale of
preferred stock. During the fiscal year ended March 31, 1999, we sold $4.0
million of Series A preferred stock, including conversion of a note payable and
related interest of $755,000 that funded ongoing operations and purchases of
inventory.
During the fiscal year ended March 31, 1999, net cash used in operating
activities was $3.7 million. Net cash used in operating activities primarily
consisted of increases in inventories and net losses, and, to a lesser extent,
increases in prepaid expenses and accounts receivable. These items were
partially offset by increases in accounts payable, accrued liabilities,
compensation expense charges, depreciation and amortization.
In February 1999, we entered into a 12-month advertising and promotion
agreement with Yahoo!. In connection with this agreement, we are obligated to
make payments of $1.3 million during the term, $0.6 million of which was paid at
execution. The balance is due in installments ending in November 1999.
In April 1999, we sold $30.1 million of Series B preferred stock, including
the conversion of a $1.0 million note payable that was made in March 1999. In
July 1999, we sold $16.3 million of Series C preferred stock.
We currently anticipate that the balance of the net proceeds from our April
1999 sale of Series B preferred stock, our July 1999 sale of Series C preferred
stock and the net proceeds of this offering will be sufficient to meet our
anticipated needs for working capital and capital
30
<PAGE> 32
expenditures through at least the next 12 months. We plan to use the rest of the
proceeds primarily for funding operating losses and an expansive marketing
campaign. We may need to raise additional funds in less than 12 months if, for
example, we pursue business or technology acquisitions or experience operating
losses that exceed our current expectations. If we raise additional funds
through the issuance of equity, equity-related or debt securities, these
securities may have rights, preferences or privileges senior to those of the
rights of our common stock and our stockholders may experience additional
dilution. We cannot be certain that additional financing will be available to us
on favorable terms when required, or at all.
YEAR 2000
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We use software, computer technology and other services internally
developed and provided by third-party vendors that may fail due to the year 2000
phenomenon. For example, we are dependent on the financial institutions involved
in processing our customers' credit card payments for Internet services and a
third party that hosts our servers. We are also dependent on telecommunications
vendors to maintain our network and the United States Postal Service and other
third-party carriers to deliver orders to customers.
We have assessed the year 2000 readiness of our third-party supplied
software, computer technology and other services and of our vendors, and we will
continue to assess year 2000 readiness of products and services from
third-parties. Based upon the results of this assessment we have not needed to
develop a remediation plan. We will develop and implement, if necessary, a
remediation plan with respect to third-party software, third-party vendors and
computer technology and services that may fail to be year 2000 compliant. At
this time, the expenses associated with this assessment and potential
remediation plan have been immaterial, although expenses that we may have to
incur in the future cannot be determined. The failure of our software and
computer systems and of our third-party suppliers to be year 2000 compliant
would have a material adverse effect on us.
Since inception, we have internally developed substantially all of the
systems for the operation of our Web site. These systems include the software
used to provide our Web site's search, customer interaction, and
transaction-processing and fulfillment functions, as well as firewall, security,
monitoring and back-up capabilities. We have reviewed the year 2000 compliance
of our internally developed proprietary software. Based upon our assessment to
date, we believe that our internally developed proprietary software is year 2000
compliant.
The year 2000 readiness of the general infrastructure necessary to support
our operations is difficult to assess. For instance, we depend on the integrity
and stability of the Internet to provide our services. We also depend on the
year 2000 compliance of the computer systems and financial services used by
consumers. A significant disruption in the ability of consumers to reliably
access the Internet or portions of it or to use their credit cards would have an
adverse effect on demand for our services and would have a material adverse
effect on us.
At this time, we have not yet developed a contingency plan to address
situations that may result if our vendors or we are unable to achieve year 2000
compliance because we currently do not believe that a contingency plan is
necessary. The cost of developing and implementing a plan, if necessary, could
be material and we may not have enough time to implement it before 2000. Any
failure of our material systems, our vendors' material systems or the Internet
to be year 2000 compliant could include difficulties in operating our Web site
effectively, taking product orders, making product deliveries or conducting
other fundamental parts of our business.
31
<PAGE> 33
BUSINESS
ASHFORD.COM
We are a leading Web-based retailer focused exclusively on luxury and
premium products, including new and vintage premium watches and fine writing
instruments. By combining our expertise in luxury products and our commitment to
excellent customer service with the benefits of Internet retailing, we are able
to deliver a unique shopping experience to consumers. Our initial product focus
has been fine watches and, since our inception, we have grown into one of the
leading online retailers of new and vintage premium watches. We carry over 7,000
new and vintage watch styles from more than 70 of the finest brands. We also
offer more than 600 different styles of fine writing instruments from 12 leading
brands. We believe that additional luxury and premium product categories, such
as leather goods, sunglasses, fragrances, ties and scarves, and jewelry, also
represent significant online commerce opportunities. We believe these luxury and
premium product categories are well suited for online commerce given brand
recognition, generally high average sales prices and relatively low average
distribution and shipping costs.
Our Web site features detailed product information, helpful and useful
shopping services and innovative merchandising through easy-to-navigate Web
pages. We offer customers the convenience and flexibility of shopping 24 hours a
day, seven days a week, from their homes, offices or other locations. In
addition, we hold an extensive selection of our products in inventory, which
enables us to ship most products to our customers within 24 hours. Our customer
service representatives are available through phone, e-mail and an online chat
service and are trained to answer a broad array of questions regarding product
styles, features and technical specifications, as well as provide product
recommendations. This informative and high-quality shopping experience provides
leading brands a Web-based retail channel consistent with the luxury character
and premium quality of their products.
INDUSTRY OVERVIEW
GROWTH OF THE INTERNET AND ONLINE COMMERCE
Internet usage and online commerce continue to grow worldwide.
International Data Corporation, or IDC, estimates that there were 159 million
Web users worldwide at the end of 1998. IDC anticipates that number will grow to
approximately 510 million users by the end of 2003. IDC also estimates that
revenue generated worldwide from online commerce will exceed $1.3 trillion by
2003. This growth can be attributed to many factors, including:
- - a large and growing installed base of personal computers and other
Internet-connected devices in the workplace and home;
- - advances in performance and speed of personal computers and modems;
- - improvements in network security, infrastructure and bandwidth;
- - easier and cheaper access to the Internet; and
- - the rapidly expanding availability of online content and commerce sites.
The growth in online commerce can also be attributed to a number of
advantages the Internet provides to online retailers. Online retailers can
display a larger number of products at a lower cost than traditional store-based
or catalog retailers. In addition, online retailers can rapidly adjust their
selections, editorial content and pricing, providing significant merchandising
flexibility. Online retailers also benefit from the minimal cost to publish on
the Web, the ability to reach a large group of customers from a central
location, and the potential for low-cost customer interaction. Unlike
traditional retail channels, online retailers do not have the cost of managing
and maintaining a retail store infrastructure or the significant printing and
mailing costs of
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catalogs. Online retailers can also easily obtain demographic and behavioral
data about customers, increasing opportunities for direct marketing and
personalized services.
TRADITIONAL LUXURY GOODS MARKET
The luxury goods market includes a broad selection of product categories.
Based on data from Global Industry Analysts, or GIA, and DataMonitor, leading
independent market research companies, we estimate the worldwide market for
luxury and premium lifestyle products to be greater than $70 billion. This
market includes fine watches and other luxury and premium product categories,
such as leather goods, sunglasses, fragrances, ties and scarves, and jewelry.
Our initial focus within this market has been the sale of fine watches. GIA
reports approximately $6 billion in total worldwide retail sales in 1998 of
mid-range to high-end watches, which typically have retail prices ranging from
approximately $75 to more than $5,000. In addition, GIA estimates total
worldwide retail sales of writing instruments to be over $1 billion in 1998. We
believe that these and other luxury and premium product categories represent
significant online commerce opportunities.
TRADITIONAL RETAIL CHANNELS FOR LUXURY AND PREMIUM PRODUCTS. We believe
that the traditional retailers for luxury and premium products in the United
States today can be grouped as follows:
- - high-end department stores and jewelry stores often strive to provide a high
level of customer service and a knowledgeable sales staff, but typically offer
a limited selection of mid-range to high-end products;
- - national department stores tend to carry broad selections of low-end to
mid-range products from brands that are complementary to the stores' other
offerings, but typically offer limited product-specific customer service;
- - specialty and single brand stores are retail locations that carry a broad
selection of specific product categories, but are limited to the geographic
region in which the few physical stores are located; and
- - boutiques are small stores often located in malls that generally carry a
selection of the latest trends in lower-priced, fashion products and
accessories.
CHALLENGES IN TRADITIONAL LUXURY GOODS RETAILING. We believe that
traditional store-based retailers face a number of challenges in providing a
satisfactory shopping experience for buyers of luxury and premium products.
- - Selection is limited because physical retail space constrains the number of
styles and the amount of product inventory that may be carried by any one
store. In addition, the significant carrying costs of physical inventory in
multiple store locations require traditional store-based retailers to focus
their product selection on the most popular products that produce the highest
inventory turns, further limiting consumer selection.
- - Traditional store-based retailers have a high cost structure. Most of the
leading luxury and premium product retailers are located either in the most
exclusive and expensive shopping locales or in high-cost retail outlets or
malls, both of which must be in close proximity to the target buyers. This is
because their sales are dependent on serving customers who are willing to
physically visit their stores. Traditional retailers sell luxury products
often at a significantly higher price than wholesale to cover high operating
costs. As a result, consumers ultimately pay for the high cost structure of
the retail store.
- - The needs of luxury goods customers are changing. Increasingly, luxury goods
brands are appealing to a broader, time-constrained customer base that is not
willing or able to spend the time necessary to shop in traditional store-based
retail locations.
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- - In many cases, customers are served by employees with limited knowledge
regarding the features of the products they sell, whether due to high employee
turnover, limited training or other factors.
- - Traditional store-based retailers can only serve those customers who have
convenient access to their stores. These store-based retailers must open new
stores to serve additional geographic areas, resulting in significant
investments in inventory, physical space, leasehold improvements and the
hiring and training of store personnel.
We believe that few traditional store-based retailers currently offer an
extensive selection of luxury and premium products, broad geographic coverage
and convenient access, and staff that is sufficiently knowledgeable to assist
with significant customer decisions typically involving purchases of several
hundred dollars. As a result, we believe customers often do not find shopping
for luxury and premium products to be a convenient or enjoyable experience.
THE ASHFORD.COM SOLUTION
Ashford.com is a leading Web-based retailer focused exclusively on luxury
and premium products, including new and vintage premium watches and fine writing
instruments. Our initial product focus has been fine watches and, since our
inception, we have grown into one of the leading retailers of new and vintage
premium watches. Our online store also offers an extensive selection of premium
writing instruments and other luxury goods and services. Our online store is
designed to provide consumers with a convenient and enjoyable shopping
experience in a Web-based retail environment. We provide an extensive selection,
detailed product information that enables consumers to make informed decisions,
competitive pricing compared to traditional retail channels, a commitment to the
highest level of customer service and the convenience of online shopping. The
key components of the Ashford.com experience include:
EXTENSIVE PRODUCT SELECTION. We offer a broad selection of luxury and
premium products that would be economically and physically difficult to offer in
a traditional store, together with the unique environment of the Internet that
enables us to dynamically adjust our product mix and merchandising strategy. Our
online store offers over 7,000 watch styles representing over 70 brands, over
600 styles of fine writing instruments from 12 major brands and an assortment of
related luxury goods. Additionally, some of the brands we offer lack a U.S.
distribution network, making them hard to find in traditional retail outlets. We
believe that our extensive selection increases the likelihood that the consumer
will find the product they would like to purchase.
COMPELLING CONTENT AND DETAILED PRODUCT INFORMATION. Our Web site includes
significant content and detailed product information to provide our customers
with a convenient and enjoyable shopping experience. Our Web site displays
detailed product descriptions and over 7,500 product photos. For certain brands,
we have dedicated pages to communicating specific brand histories and key
messages. We also employ specialists with product expertise, such as master
watchmakers and a certified gemologist, who are available to address detailed
customer questions by phone, e-mail or online chat. Our goal is to provide our
customers with the product information they need to make educated and highly
satisfactory purchase decisions.
COMPETITIVE PRICES AND COMPELLING VALUE. Compared to our traditional
store-based retail competitors, we believe that our cost structure is lower. As
a result, we offer our customers products at competitive prices and, combined
with our high-quality shopping experience, provide compelling value.
COMMITMENT TO EXCELLENT CUSTOMER SERVICE. Luxury and premium goods
consumers expect the highest level of personalized customer service, which we
are committed to providing. Our customer service representatives are available
through phone, e-mail and an online chat service and are trained to answer a
broad array of questions regarding product styles, features and technical
specifications, as well as provide product recommendations. Before shipping, we
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inspect each product, and in the case of watches, adjust the size and set the
time for the customer. We also offer our watch customers a certification of
authenticity, repair and battery replacement services and an extended,
three-year warranty. In addition, we offer complimentary shipping and
gift-wrapping. We also confirm every order by e-mail and offer a 30-day full
product refund to ensure customer satisfaction.
PERSONALIZED SHOPPING EXPERIENCE. We provide a convenient and enjoyable
shopping experience that addresses the dynamic needs of the luxury goods
customer. These services are designed to help consumers search through our
product offerings and make informed selections. Our services include:
- - Search Capability. Our site offers search capabilities making it easy for
customers to find products on the site. Key search criteria include brand,
price, keyword, size, features and other criteria.
- - Product Showcase. An innovative feature of our site enables customers to
create their own virtual product showcases. The showcase is a tool that allows
customers to set aside and view several products simultaneously on their own
customized web pages. A customer can save the showcase on the site, enabling
the customer to return to the showcase in a future shopping visit.
- - Real-Time Customer Interaction. Using real-time, online customer interaction
software, our customer service representatives are able to answer specific
questions about our products and services. This feature allows customers
shopping from home with just one phone line to communicate in real-time with a
customer service representative without losing their Internet connection and
leaving our online store.
- - In-Stock Notification. We carry most of our products in inventory. For items
in stock, we clearly indicate to the customer on our Web site that we can ship
the product generally within 24 hours. For an item not currently in stock, we
indicate on our Web site that the customer can expect a longer delivery time.
- - Price Alert. Customers can ask to be notified by e-mail if the price for a
product changes. Customers can also specify a desired target price and ask to
be notified by e-mail if the product reaches that target price.
- - Gifts and Wish List. We provide a variety of gift suggestions and feature
product suggestions for particular holidays. We also provide a wish list
service that customers can use to provide friends and relatives with gift
ideas by e-mail. Customers buying gifts can choose among a variety of
gift-wrap styles at the time of order.
- - Shopping Hours. Our online store provides consumers the opportunity to shop
from their homes, offices or other locations 24 hours a day, seven days a
week.
GEOGRAPHIC COVERAGE. By selling online, we are able to sell products
throughout the U.S. and worldwide where the products might not otherwise be
available. In addition, consumers are able to go to one location and find an
extensive selection as opposed to visiting several stores with limited product
offerings.
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BUSINESS STRATEGY
Our objective is to be one of the leading online retailers of luxury and
premium products. We intend to extend our leadership in the Internet-based
retail of fine watches to other luxury and premium products, such as writing
instruments, leather goods, sunglasses, fragrances, ties and scarves, and
jewelry. Key elements of our strategy include:
FOCUS ON THE PREMIUM RETAIL WATCH MARKET. We have become one of the leading
sellers of watches on the Internet by providing thousands of styles of new and
vintage watches from the finest major brands at competitive prices. We intend to
capitalize on our leading online market position in watches to become the
primary destination for consumers to purchase premium watches. Our objective is
to grow our market position and expand our customer base through superior
execution and strong relationships with leading brands.
EXTEND LEADERSHIP POSITION IN FINE WATCHES TO OTHER PRODUCT CATEGORIES. We
believe that there are excellent online market opportunities for a variety of
luxury and premium products, including leather goods, sunglasses, fragrances,
ties and scarves, and jewelry. We intend to enhance our product offerings by
expanding into additional luxury and premium product categories, which will
enable us to leverage our customer base, brand name, merchandising expertise and
distribution capabilities. For example, we introduced fine writing instruments
and an assortment of other luxury products in June 1999. We believe that
offering a broader selection of luxury goods will enable us to increase sales
per customer visit, encourage repeat purchases and expand our customer base.
BUILD ASHFORD.COM EXPERIENCE AND BRAND. We intend to establish a brand
identity that will support the creation of an Internet luxury community and
provide leading brands a powerful new distribution channel consistent with their
luxury identities. We will focus our brand campaign on convenience, value,
selection, trust and service. We intend to create an environment where
Ashford.com shoppers are confident that they have found a smarter, easier and
more compelling way to buy luxury goods. We believe this approach will support
an ongoing relationship with and sales to our target customers who are more
likely to purchase Ashford.com's products.
EXPAND RELATIONSHIPS WITH LEADING LUXURY BRANDS. Our intent is to be the
Internet retailer of choice for leading luxury and premium brands. We currently
have over 50 direct relationships with leading watch brands, and nine direct
relationships with manufacturers of fine writing instruments. We plan to expand
the direct relationships with leading brands we have in watches and fine writing
instruments, and to develop strong relationships in new product categories.
Direct relationships enable us to purchase product more efficiently. We believe
that our merchandising history and well-established relationships with leading
brands enable us to provide our customers with compelling product offerings,
while giving us access to additional sources of merchandise.
PURSUE WAYS TO INCREASE OUR SALES. We intend to pursue new opportunities to
increase our sales by:
- - expanding into new product categories;
- - increasing product selection in our existing departments;
- - continuing to take steps to add new customers and to promote repeat purchases;
- - pursuing international market opportunities;
- - establishing strategic alliances; and
- - acquiring complementary businesses, products and technologies.
EXPAND OUR OPERATIONAL AND SYSTEMS INFRASTRUCTURE. We plan to continue to
devote resources to growing our systems and operational infrastructure to handle
increased volume, enhance our service offerings and take advantage of the unique
characteristics of online luxury goods retailing. We have developed technologies
and implemented systems to support secure and reliable online retailing. Among
other technology objectives, we intend to incorporate features
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that provide personalized customer interaction to enhance the customer's
shopping experience and build customer loyalty. We are committed to growing
capacity rapidly in order to sustain high levels of customer service.
THE ASHFORD.COM ONLINE RETAIL STORE
We have designed our online retail store to be the primary place for
consumers to purchase luxury and premium products online. We believe our Web
site provides a secure, reliable and enjoyable shopping experience in an
attractive, easy-to-use online store. The user interface is simple and
consistent throughout the site. The interface also has powerful search features
that allow customers to search product by brand, price, keyword, size, features
and other criteria. A consumer on our site can browse the different departments
of our store, conduct targeted searches, view recommended products, verify
product availability, visit our gifts department and participate in promotions.
Unlike a traditional retail store, consumers can shop in the comfort and
convenience of their homes or offices.
OUR STORE DEPARTMENTS
We have categorized products into different departments, including new
watches, vintage watches, writing instruments and gifts. Within each department,
products can be viewed by brand, or sorted by price, keyword, size, features and
other criteria. The following is a summary of each of these departments.
NEW WATCHES. Since inception, we have focused on becoming the leading
retailer of fine watches on the Internet. A customer visiting the site first
arrives in the new watch department. Here we offer over 6,500 styles from over
70 brands, providing outstanding selection for the customer. Our prices in this
department generally range from $75 to over $5,000. To date, our average
purchase price in this department has been approximately $500 per watch.
VINTAGE WATCHES. This department offers our collection of fine, vintage
watches in various price ranges. Vintage watches are generally high-quality
brand, previously owned watches. These watches often attract collectors or watch
enthusiasts in search of a specific model. Unlike many other sellers of vintage
watches, we offer a broad selection combined with outstanding service, including
maintenance, cleaning, a certification of authenticity and extended warranties.
WRITING INSTRUMENTS. The writing instruments department offers fine pens
and pencils from leading brands, with prices generally ranging from $40 to over
$200. The collection includes over 600 styles from 12 leading brands.
GIFTS. The gifts department highlights products that we recommend based on
holiday seasons or personal events, such as birthdays, anniversaries or
graduations. In June 1999, for example, this department featured several watches
and pens as graduation gift ideas. We also offer complimentary gift-wrapping to
simplify the gift giving experience.
MERCHANDISING
We believe that the breadth and depth of our product selection, together
with the flexibility of our online store and our range of helpful and useful
shopping services, enable us to pursue a unique merchandising strategy. Unlike
store-based retail formats, our online store provides us with significant
flexibility with regard to the organization and presentation of our product
selection. To encourage purchases, we feature various promotions on a rotating
basis throughout the store and continually update our online recommendations. We
also actively create and maintain pages that are designed to highlight certain
products and brands. The following are examples of some of our specific
merchandising strategies.
ONLINE BRAND BOUTIQUES. In partnership with major luxury and premium
brands, we have dedicated pages that communicate a brand's marketing message.
These pages often detail a
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brand's history, product features, quality statements and other key messages. We
provide more consistent and comprehensive information for more products to the
customer than a sales representative in a traditional retail store would be able
to communicate.
PRODUCT SHOWCASE. We offer customers the ability to create their own
virtual product showcases. The showcase is a tool that allows customers to set
aside and view several products simultaneously on their own customized pages. A
customer can save the showcase on the site, enabling the customer to return to
the showcase in a future shopping visit.
FEATURED PRODUCTS. We frequently give a product prominent placement on the
site, describe its key features and potentially highlight it as our Collector's
Choice. Products that receive this merchandising focus generally receive a boost
in sales.
PRODUCT BUNDLING. To promote purchases of higher value items, we combine
products from our large selection to offer bundling promotions. For example, in
June 1999 we offered a complimentary premium pen with the purchase of a watch of
a certain value.
SPECIAL PROMOTIONS. We offer certain products on promotion and provide
special pricing. The technological advantages of online retailing, compared to
traditional store-based retailing, allow us to adjust our promotions rapidly to
promote targeted sales.
We employ a dedicated team of buyers and merchandisers that continually
monitor the consistency and quality of our merchandising efforts. This team,
combined with our technology, is able to pursue a merchandising strategy in
which we dynamically change our product offerings to enhance the consumer's
shopping experience.
MARKETING & PROMOTION
We have designed our marketing and promotion strategy to build the
Ashford.com brand, increase customer traffic, promote the sales of new products,
maximize repeat purchases and build strong customer loyalty. Our marketing and
promotional activities primarily target a customer demographic that is more
likely to buy Ashford.com's luxury and premium products. These activities
include both offline and online advertising.
OFFLINE ADVERTISING. We use offline advertising to promote both our brand
and specific merchandising opportunities. To date, our offline advertising has
primarily consisted of print advertisements in newspapers. Specifically, we have
placed ads in The Wall Street Journal, The New York Times, as well as newspapers
in cities with high Internet use, such as Austin, Boston, San Francisco and San
Jose. We plan to increase our use of traditional offline advertising, including
television, radio, magazines, outdoor advertising and direct mail, in order to
continue building our brand recognition.
ONLINE ADVERTISING. We have an agreement with Yahoo! under which our
advertisement banner will appear on the screen each time one of over 300
keywords relating to watches is entered as a search term by a user. We also
advertise on the sites of major online portals, including Excite@Home, Infoseek,
Lycos and others. We also intend to partner with other major online portals,
Internet service providers and luxury and premium market-related Web sites to
build our brand and increase our reach on the Internet. In addition, we have an
affiliate program and other initiatives aimed at increasing traffic and
supporting our brand development. Under our affiliate program, we pay our
registered affiliates referral fees for sales generated via their links to our
Web site.
ONLINE DIRECT MARKETING. As our customer base grows, we continue to collect
significant data about our customers' buying preferences and habits in an effort
to increase repeat purchases. We intend to maximize the value of this
information by delivering meaningful information and special offers to our
customers via e-mail and other means. In addition, we
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publish a weekly, online newsletter delivered by e-mail to subscribers in which
we highlight important developments and special promotions.
FULFILLMENT OPERATIONS
We obtain our products from brands and a diverse network of distributors,
brokers and retailers. In the watch business, we have established over 50 direct
relationships with leading brands. For our fine writing instruments business, we
have direct relationships with nine leading brands. We have ongoing efforts to
expand the number of direct relationships with brands in all our product
categories over time. For other brands where we do not have direct
relationships, we buy products from a network of distributors, brokers and
retailers.
We carry inventory on most of the products available for sale on our site.
We store our products and conduct our fulfillment operations in our headquarters
facility located in Houston, Texas. When we receive an order, we immediately
begin the packaging and shipping operation. Most orders are shipped out of our
warehouse within 24 hours of receipt. Our inventory management system tracks the
quantities of all stock keeping units, which enables us to display information
about the availability of the products on our Web site.
We offer three choices of shipment for our products: next-day delivery,
three-day delivery and ground delivery. We have developed relationships with
both United Parcel Service and Federal Express to maximize our overall service
level to all 50 states. The ability to provide overnight delivery is an
important ongoing service for our customers.
CUSTOMER SERVICE
We believe that our ability to establish and maintain long-term
relationships with our customers, earn their trust and encourage repeat visits
and purchases, largely depends on the strength of our customer support and
service operations and staff. We are committed to providing the high level of
personalized customer service that luxury and premium goods consumers expect. We
have a high-quality customer service staff with a broad range of experience and
knowledge. We provide extensive training to our customer service
representatives, including on-site training from manufacturers, to allow our
representatives to answer a broad array of questions regarding product styles,
features and technical specifications, as well as provide product
recommendations.
Our customer service representatives are available through phone, e-mail
and an online chat service during business hours across all U.S. time zones and
on Saturday. Before shipment, we inspect each product, and in the case of
watches, adjust the size and set the time for the customer. Once shipment is
made, we immediately send e-mail confirmation to the customer. If the customer
is not satisfied with the product for any reason, the customer generally may
return the product for a full refund within 30 days. We also offer our watch
customers a certification of authenticity, repair and battery replacement
services and an extended warranty.
OPERATIONS AND TECHNOLOGY
We have implemented a broad array of scaleable site management, search,
customer interaction and distribution services and systems that we use to
process customer orders and payments. These services and systems use a
combination of our own and commercially available, licensed technologies. These
applications also manage the process of accepting, authorizing and charging
customer credit card orders with an address verification and approval
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system provided by Chase Bank of Texas. We focus our internal development
efforts on creating, implementing and enhancing specialized software that we use
to:
- - accept and validate customer orders;
- - enable customer service representatives to engage in real-time, online
interaction with multiple customers simultaneously;
- - organize, place and manage orders with vendors;
- - receive product and assign it to customer orders; and
- - manage shipment of products to customers based on various ordering criteria.
Our systems are based on industry-standard architectures and have been
designed to reduce downtime in the event of outages or catastrophic occurrences.
Our Web site is available 24 hours a day, seven days a week. Our system hardware
is hosted at a third-party facility in Houston, Texas, which provides redundant
communications lines and emergency power backup. We have implemented load
balancing systems and redundant servers to provide fault tolerant service.
The market in which we compete is characterized by rapidly changing
technology, evolving industry standards, frequent new service and product
announcements and enhancements, and changing customer demands. Accordingly, our
future success will depend on our ability to:
- - adapt to rapidly changing technologies;
- - adapt our services to evolving industry standards; and
- - continually improve the performance, features and reliability of our service
in response to competitive service and product offerings and evolving demands
of the marketplace.
Our failure to adapt to market changes would harm our business. In
addition, the widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could require
substantial expenditures by us to modify or adapt our services or
infrastructure. This could have a material adverse effect on our business,
results of operations and financial condition.
GOVERNMENT REGULATION
We are not currently subject to direct federal, state or local regulation
other than regulations applicable to businesses generally and directly
applicable to online commerce, as well as the secondhand watch statutes enacted
in several states, as discussed below. However, as Internet use gains
popularity, it is possible that a number of laws and regulations may be adopted
with respect to the Internet. These laws may cover issues such as user privacy,
freedom of expression, pricing, content and quality of products and services,
taxation, advertising, intellectual property rights and information security.
Furthermore, the growth of online commerce may prompt calls for more stringent
consumer protection laws. Several states have proposed legislation to limit the
uses of personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has also initiated
action against at least one online service regarding the manner in which
personal information is collected from users and provided to third parties. We
do not currently provide personal information regarding our users to third
parties. However, the adoption of additional consumer protection laws could
create uncertainty in Web usage and reduce the demand for our products and
services.
We are not certain how our business may be affected by the application of
existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel, obscenity
and export or import matters. The vast majority of these laws were adopted prior
to the advent of the Internet. As a result, they do not contemplate or address
the unique issues of the Internet and related technologies. Changes in laws that
are intended to address these issues could create uncertainty in the Internet
market place. This
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uncertainty could reduce demand for our services or our cost of doing business
may increase as a result of litigation costs or increased service delivery
costs.
In addition, because our services are available over the Internet in
multiple states and foreign countries, other jurisdictions may claim that we are
required to qualify to do business in that state or foreign country. We are
qualified to do business only in Texas. Our failure to qualify in a jurisdiction
where we are required to do so could subject us to taxes and penalties. It could
also hamper our ability to enforce contracts in these jurisdictions. The
application of laws or regulations from jurisdictions whose laws do not
currently apply to our business could have a material adverse effect on our
business, results of operations and financial condition.
Several states have laws regulating the sale of secondhand watches. We have
implemented procedures to ensure that we comply with these statutes, however, if
a court were to find that we have violated these statutes, our business could be
materially adversely affected.
COMPETITION
The online commerce market is new, rapidly evolving and intensely
competitive. We expect to face stiff competition in every product category that
we enter. Barriers to entry are minimal, and current and new competitors can
launch new Web sites at a relatively low cost.
We currently or potentially will compete with a variety of competitors,
including the following:
- - traditional retailers of watches, pens and other luxury products, which may
compete with both an online and offline presence, including high-end
department stores, jewelers and national department stores;
- - manufacturers of our products that decide to sell directly to end-customers,
either through physical retail outlets or through an online store;
- - other online retailers of watches and other luxury products, including online
service providers that feature shopping services; and
- - catalog retailers of watches, pens and other luxury products.
We believe that the following are the principal competitive factors in our
market:
- - brand recognition;
- - selection;
- - convenience;
- - order delivery performance;
- - customer service;
- - site features and content; and
- - price.
Many of our current and potential traditional store-based and online
competitors have longer operating histories, larger customer or user bases,
greater brand recognition and significantly greater financial, marketing and
other resources than we do. Many of these current and potential competitors can
devote substantially more resources to Web site and systems development than we
can. In addition, larger, well-established and well-financed entities may
acquire, invest in or form joint ventures with online competitors.
Certain of our competitors may be able to secure products from vendors on
more favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than we can. Traditional
store-based retailers also enable customers to see and feel products in a manner
that is not possible over the Internet. Given our limited operating history,
many of our competitors have significantly greater experience selling watches.
Our online competitors are particularly able to use the Internet as a
marketing medium to reach significant numbers of potential customers. Finally,
new technologies and the expansion of
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existing technologies, such as price comparison programs that select specific
titles from a variety of Web sites and may direct customers to other online
watch sellers, may increase competition.
INTELLECTUAL PROPERTY
We rely on various intellectual property laws and contractual restrictions
to protect our proprietary rights in products and services. These include
confidentiality, invention assignment and nondisclosure agreements with our
employees, contractors, vendors and strategic partners. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our intellectual property without our authorization. In addition, we
pursue the registration of our trademarks and service marks in the U.S. and
internationally. However, effective intellectual property protection may not be
available in every country in which our services are made available online.
We rely on technologies that we license from third parties. These licenses
may not continue to be available to us on commercially reasonable terms in the
future. As a result, we may be required to obtain substitute technology of lower
quality or at greater cost, which could materially adversely affect our
business, results of operations and financial condition.
As of the date of this prospectus, we have not been notified that our
technologies infringe the proprietary rights of third parties. However, there
can be no assurance that third parties will not claim infringement by us with
respect to our current or future technologies. We expect that participants in
our markets will be increasingly subject to infringement claims as the number of
services and competitors in our industry segment grows. Any infringement claim,
with or without merit, could be time-consuming, result in costly litigation,
cause service upgrade delays or require us to enter into royalty or licensing
agreements. These royalty or licensing agreements might not be available on
terms acceptable to us or at all. As a result, any claim of infringement against
us could have a material adverse effect upon our business.
EMPLOYEES
As of June 30, 1999, we had 67 full-time employees. None of our employees
is represented by a labor union. We have not had any work stoppages and consider
our employee relations to be good.
Our future performance depends in significant part upon the continued
service of our key technical, sales and senior management personnel, none of
whom are bound by an employment agreement requiring service for any defined
period of time. The loss of services of one or more of our key employees could
have a material adverse effect on our business, financial condition and results
of operations. Our future success also depends in part upon our continued
ability to attract, hire, train and retain highly qualified technical, sales and
managerial personnel. Competition for these employees is intense and there can
be no assurance that we can retain our key personnel in the future.
FACILITIES
Our corporate offices and fulfillment operations are located in Houston,
Texas, where we lease approximately 10,000 square feet. We plan to relocate our
operations in August 1999 to a new facility in Houston, Texas, which we expect
will be a disruptive, time consuming and expensive process. The new facility
consists of approximately 62,000 square feet.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. We believe that there are no
claims or actions pending or threatened against us, the ultimate disposition of
which would materially adversely affect us.
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<PAGE> 44
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following tables sets forth specific information regarding our
executive officers and directors as of June 30, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
J. Robert Shaw........................ 34 Chairman of the Board
Kenneth E. Kurtzman................... 36 Chief Executive Officer and Director
James H. Whitcomb, Jr. ............... 33 President, Chief Operating Officer,
Secretary and Director
David F. Gow.......................... 36 Vice President, Finance and Chief
Financial Officer
William M. Stewart.................... 36 Vice President, Marketing
James E. Gerber....................... 37 Vice President, Business Development
Elizabeth A. Greenfield............... 38 Vice President, Merchandising
Kevin R. Harvey....................... 34 Director
</TABLE>
J. ROBERT SHAW co-founded Ashford.com and has served as the Chairman of the
Board since April 1998. In 1989, Mr. Shaw founded Synergy Development Corp., an
information-technology consulting firm that provides equipment and services to
online commerce companies, and has been President and Chief Executive Officer
since its inception. From 1985 to 1989, Mr. Shaw served as Vice President of
Sales and Finance for StyleWare, Inc., a software company that was subsequently
sold to Claris Corporation. Mr. Shaw received a Bachelor of Business
Administration in Economics summa cum laude from the University of St. Thomas.
KENNETH E. KURTZMAN joined Ashford.com in May 1999 as our Chief Executive
Officer and a Director. From August 1995 to April 1999, Mr. Kurtzman served as
Vice President and General Manager of several divisions of Compaq Computer
Corporation, including the Small and Medium Business Division and Compaq.com.
From September 1989 to August 1995, Mr. Kurtzman worked for McKinsey & Co., an
international consulting firm, where most recently he served as a Principal
working in the computing, telecommunications, systems integration, banking and
energy industries. Mr. Kurtzman received a Bachelor of Arts degree in Economics
magna cum laude from Rice University, an undergraduate degree in economics from
Cambridge University and a Masters in Business Administration degree from the
Graduate School of Business at Stanford University.
JAMES H. WHITCOMB, JR. co-founded Ashford.com and has served as our
President, Chief Operating Officer and as a Director since March 1998. From our
inception to May 1999, he served as Chief Executive Officer. From February 1990
to March 1998, Mr. Whitcomb served as Vice President and Chief Technology
Officer at Synergy Development Corp. Mr. Whitcomb currently serves as a director
of Synergy Development Corp. Mr. Whitcomb received a Bachelor of Business
Administration in Accounting from the University of Texas.
DAVID F. GOW has served as our Vice President, Finance and Chief Financial
Officer since March 1999. From January 1996 to February 1999, Mr. Gow was the
Director of Strategic Planning at Compaq Computer Corporation. From August 1993
to January 1996, Mr. Gow worked as a consultant with McKinsey & Co., serving the
technology, energy, banking and retail industries. Mr. Gow received a Bachelor
of Arts in Economics from Williams College and a Masters degree from the Kennedy
School of Government at Harvard University.
WILLIAM M. STEWART has served as our Vice President of Marketing since
April 1999. From April 1994 to April 1999, Mr. Stewart worked for the Coca-Cola
Company where he served as Director of Strategic Innovation, Global Group
Manager and Brand Manager. From August 1990 to April 1994, he was a brand
manager for General Mills, Inc. Mr. Stewart received a Bachelor of
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<PAGE> 45
Business Administration in Accounting from the University of Texas and a Masters
in Business Administration in Marketing from The Wharton School at the
University of Pennsylvania.
JAMES E. GERBER has served as our Vice President of Business Development
since June 1999. Prior to joining Ashford.com, Mr. Gerber spent seven years with
Clarify, Inc., a front office electronic business solutions provider, most
recently as Southwestern Branch Manager. Mr. Gerber received a Bachelor of Arts
in Political Economy of Industrial Societies from the University of California
at Berkeley and a Masters in Business Administration from the Graduate School of
Business at Stanford University.
ELIZABETH A. GREENFIELD has served as our Vice President of Merchandising
since June 1999. From 1992 to 1999, Ms. Greenfield served as a general manager
of Cartier, Inc. Prior to joining Cartier, Ms. Greenfield was General Manager of
CIRO/Kenneth Jay Lane. Ms. Greenfield received a Bachelor of Science cum laude
and an Associate degree from the Fashion Institute of Technology. Ms. Greenfield
also received a Masters in Business Administration with honors from the
University of Houston.
KEVIN R. HARVEY has served as a Director of Ashford.com since December
1998. Mr. Harvey has been a General Partner of Benchmark Capital, a venture
capital firm, since January 1995. From July 1993 to January 1995, he served as
General Manager for Lotus Development Corporation. In August 1990, Mr. Harvey
founded Approach Software Corporation, a software company, where he served as
the President and Chief Executive Officer until July 1993 when Approach was sold
to Lotus Development Corporation. Prior to founding Approach, Mr. Harvey founded
Styleware Inc. Mr. Harvey is also a director of Silicon Gaming, Inc., an
entertainment and gaming technology company, Critical Path, Inc., an e-mail
hosting services company, and a director of several privately held companies.
Mr. Harvey received a B.S.E.E. degree from Rice University.
BOARD COMMITTEES
Our Board of Directors established the Audit Committee and the Compensation
Committee in July 1999. The Audit Committee makes recommendations to the Board
of Directors regarding the selection of independent accountants, reviews the
results and scope of audit and other services provided by our independent
accountants and reviews and evaluates our audit and control functions. The
Compensation Committee makes recommendations regarding our stock plans and makes
decisions concerning salaries and incentive compensation for our employees and
consultants.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Kurtzman participates in all discussions and decisions regarding
salaries and incentive compensation for all of our employees and consultants,
except that he is excluded from discussions regarding his own salary and
incentive compensation. No member of our Compensation Committee serves as a
member of the Board of Directors or compensation committee of any entity that
has one or more executive officers serving as a member of our Board of Directors
or Compensation Committee.
DIRECTOR COMPENSATION
Directors currently do not receive any cash compensation from Ashford.com
for their services as members of the Board of Directors. Directors are eligible
to participate in our stock plans and, following this offering, non-employee
directors will receive automatic option grants under our 1999 Equity Incentive
Plan. A non-employee director who first joins our board following the offering
will receive a fully vested option for 500 shares of our common stock. At each
annual meeting of stockholders, beginning in 2000, all non-employee directors
who will continue to be board members after the annual meeting will receive an
option for 1,500 shares of our common
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<PAGE> 46
stock. In no event will a non-employee director receive an option for 1,500
shares in the same calendar year that he receives the option for 500 shares.
EXECUTIVE COMPENSATION
The following table presents compensation information for the fiscal year
ended March 31, 1999 paid by Ashford.com for services to us by our current Chief
Executive Officer and our former Chief Executive Officer and current President
and Chief Operating Officer. No other executive officer earned more than
$100,000 in total salary and bonus for the last fiscal year:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -----------------------
-------------------- NUMBER OF SECURITIES
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) UNDERLYING OPTIONS(#)
- --------------------------- --------- -------- -----------------------
<S> <C> <C> <C>
Kenneth E. Kurtzman.............................. -- -- --
Chief Executive Officer
James H. Whitcomb, Jr. .......................... $76,923 -- --
President, Chief Operating Officer and former
Chief Executive Officer
</TABLE>
Mr. Kurtzman commenced service with Ashford.com in May 1999 and received a
signing bonus of $50,000 in connection with his employment. Mr. Kurtzman's
current annual salary is $250,000. In May 1999, Ashford.com granted him an
option for 390,000 shares of our common stock at an exercise price of $2.00 per
share. Mr. Whitcomb ceased to be Ashford.com's Chief Executive Officer in May
1999.
OPTION GRANTS IN LAST FISCAL YEAR, AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION VALUES
No options or stock appreciation rights were granted to our current Chief
Executive Officer, Mr. Kurtzman, and our former Chief Executive Officer and
current President and Chief Operating Officer, Mr. Whitcomb, during the fiscal
year ended March 31, 1999. In May 1999, Ashford.com granted to Mr. Kurtzman an
option to purchase 390,000 shares of Ashford.com's common stock at an exercise
price per share of $2.00 per share. Messrs. Kurtzman and Whitcomb did not
exercise any options during the fiscal year ended March 31, 1999, and neither
officer held outstanding options at the end of the last fiscal year.
EMPLOYMENT AGREEMENT AND CHANGE OF CONTROL ARRANGEMENTS
Under our 1999 Equity Incentive Plan, if a change in control of Ashford.com
occurs, an option or other award will become fully exercisable and fully vested
if the option or award is not assumed by the surviving corporation or its parent
or if the surviving corporation or its parent does not substitute comparable
awards for the awards granted under the 1999 Equity Incentive Plan.
We entered into an employment agreement with Mr. Kurtzman, our Chief
Executive Officer, as of May 1, 1999, which provides for Mr. Kurtzman's salary,
bonus, option and certain severance payments. Under this agreement, Mr. Kurtzman
was granted an option for 390,000 shares of our common stock. If a change in
control occurs, the vesting of the option shares will accelerate, and an
additional 25% of Mr. Kurtzman's unvested option shares will become vested. If
Mr. Kurtzman is terminated without cause, Mr. Kurtzman will receive a severance
payment equal to nine months of salary and additional vesting of his option
shares as if he provided another nine months of service with us.
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<PAGE> 47
In addition, we entered into a stock restriction agreement, dated December
4, 1998, with Mr. Whitcomb, our President and Chief Operating Officer. Pursuant
to that agreement, if a change in control occurs and our repurchase right that
applies to his shares is not assigned to the successor corporation, then Mr.
Whitcomb's shares will become fully vested. Pursuant to an employment agreement
all shares vest upon termination with or without cause and would no longer be
subject to the stock restriction agreement upon such termination.
1999 EQUITY INCENTIVE PLAN
Our Board of Directors adopted our 1999 Equity Incentive Plan on July 9,
1999. We will also seek stockholder approval of this plan. We have reserved
500,000 shares of our common stock for issuance under the 1999 Equity Incentive
Plan. As of April 1 of each year, starting in 2000, the number of shares
reserved for issuance under our 1999 Equity Incentive Plan will be increased
automatically by 5% of the total number of shares of our common stock then
outstanding or, if less, 400,000 shares. No options have yet been granted under
the 1999 Equity Incentive Plan.
Under the 1999 Equity Incentive Plan, the individuals eligible to receive
awards are:
- - employees;
- - non-employee members of the Board of Directors; and
- - consultants.
The types of awards that may be made under the 1999 Equity Incentive Plan
are:
- - options to purchase shares of common stock;
- - stock appreciation rights;
- - restricted shares; and
- - stock units.
Options may be incentive stock options that qualify for favorable tax
treatment for the optionee under Section 422 of the Internal Revenue Code of
1986 or nonstatutory stock options not designed to qualify for favorable tax
treatment. With limited restrictions, if shares awarded under the 1999 Equity
Incentive Plan are forfeited, those shares will again become available for new
awards under the 1999 Equity Incentive Plan.
The compensation committee of our Board of Directors administers the 1999
Equity Incentive Plan. The committee has complete discretion to make all
decisions relating to the interpretation and operation of our 1999 Equity
Incentive Plan. The committee has the discretion to determine which eligible
individuals are to receive any award, and to determine the type, number, vesting
requirements and other features and conditions of each award.
The exercise price for incentive stock options granted under the 1999
Equity Incentive Plan may not be less than 100% of the fair market value of our
common stock on the option grant date. The exercise price for non-statutory
options granted under the 1999 Equity Incentive Plan may not be less than 85% of
the fair market value of our common stock on the option grant date.
Our 1999 Equity Incentive Plan provides that no participant may receive
options or stock appreciation rights covering more than 100,000 shares in the
same year, except that a newly hired employee may receive options or stock
appreciation rights covering up to 300,000 shares in the first year of
employment.
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<PAGE> 48
The exercise price may be paid with:
- - cash;
- - outstanding shares of common stock;
- - the cashless exercise method through a designated broker;
- - a pledge of shares to a broker; or
- - a promissory note.
The purchase price for newly issued restricted shares awarded under the
1999 Equity Incentive Plan may be paid with:
- - cash;
- - a promissory note; or
- - the rendering of past services.
Any amount payable under a stock appreciation right or stock unit may be
paid with cash or outstanding shares of common stock.
The committee may reprice options and may modify, extend or assume
outstanding options and stock appreciation rights. The committee may accept the
cancellation of outstanding options or stock appreciation rights in return for
the grant of new options or stock appreciation rights. The new option or right
may have the same or a different number of shares and the same or a different
exercise price.
In specific circumstances, the committee may adjust the number of options,
stock appreciation rights, restricted shares, stock units and shares covered by
options, or reprice options or stock appreciation rights to protect against
dilution.
If a change in control of Ashford.com occurs, an option or other award
under the 1999 Equity Incentive Plan will become fully exercisable and fully
vested if the option or award is not assumed by the surviving corporation or its
parent or if the surviving corporation or its parent does not substitute
comparable awards for the awards granted under the 1999 Equity Incentive Plan.
A change in control includes:
- - a merger or consolidation of Ashford.com after which our then-current
stockholders own less than 50% of the surviving corporation;
- - a sale of all or substantially all of our assets;
- - a change in the composition of the board that results in replacement of more
than one-half of the directors who were directors on the date 24 months prior
to the date of the event that may be a change in control; or
- - an acquisition of 50% or more of our outstanding stock by a person other than
a person related to Ashford.com, including a corporation owned by our
stockholders.
If a merger or other reorganization occurs, the agreement of merger or
reorganization may provide that outstanding options and other awards under the
1999 Equity Incentive Plan shall be assumed by the surviving corporation or its
parent, shall be substituted by options or other awards of the surviving
corporation or its parent, shall be continued by Ashford.com if it is the
surviving corporation, shall have accelerated vesting and then expire early, or
shall be cancelled for a cash payment.
Each individual who first joins our Board of Directors as a non-employee
director after the effective date of this offering will receive at that time a
fully vested option for 500 shares of our
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<PAGE> 49
common stock. In addition, at each of our annual stockholders meetings,
beginning in 2000, each non-employee director who will continue to be a director
after that meeting will automatically be granted at that meeting a fully vested
option for 1,500 shares of our common stock. However, any non-employee director
who receives an option for 500 shares under this plan will first become eligible
to receive the annual option for 1,500 shares at the annual meeting that occurs
during the calendar year following the year in which he received the option for
500 shares.
Our Board of Directors may amend or terminate the 1999 Equity Incentive
Plan at any time. If our board amends the plan, stockholder approval of the
amendment will be sought only if required by an applicable law. The 1999 Equity
Incentive Plan will continue in effect indefinitely unless the board decides to
terminate the plan earlier.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our Board of Directors adopted our employee stock purchase plan on July 9,
1999. We will also seek stockholder approval of this plan. We have reserved
200,000 shares of our common stock for issuance under our 1999 employee stock
purchase plan. As of April 1 each year, starting in 2000, the number of shares
reserved for issuance under our 1999 employee stock purchase plan will be
increased automatically by 2% of the total number of shares of common stock then
outstanding or, if less, 150,000 shares. Our 1999 employee stock purchase plan
is intended to qualify under Section 423 of the Internal Revenue Code.
Eligible employees may begin participating in the 1999 employee stock
purchase plan at the start of an offering period. Each offering period lasts 24
months. Two overlapping offering periods will start on May 1 and November 1 of
each calendar year. However, the first offering period will start on the
effective date of this offering and end on October 31, 2001. Purchases of our
common stock will occur on approximately April 30 and October 31 of each
calendar year during an offering period.
The compensation committee of our Board of Directors will administer our
1999 employee stock purchase plan. Each of our employees is eligible to
participate if the employee is employed by us for more than 20 hours per week
and for more than five months per year. No employee may participate in the plan
if the employee would possess 5% or more of the company or if the employee's
participation exceeds specific dollar limits.
Our 1999 employee stock purchase plan permits each eligible employee to
purchase our common stock through payroll deductions. Each employee's payroll
deductions may not exceed 15% of the employee's cash compensation. The initial
period during which payroll deductions may be contributed will begin on the
effective date of this offering and end on April 30, 2000. No participant may
purchase more than 200 shares on any purchase date.
The price of each share of common stock purchased under our 1999 employee
stock purchase plan will be 85% of the lower of:
- - the fair market value per share of our common stock on the date immediately
before the first date of the applicable offering period; or
- - the fair market value per share of our common stock on the purchase date.
In the case of the first offering period, the price per share under the
plan will be 85% of the lower of:
- - the price offered to the public in this offering; or
- - the fair market value per share of our common stock on the purchase date.
Employees may end their participation in the 1999 employee stock purchase
plan at any time. Participation ends automatically upon termination of
employment with Ashford.com.
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<PAGE> 50
In specific circumstances, the committee will proportionately adjust the
number of shares offered under the plan, the share limits and the share prices
to protect against dilution. If a change in control of Ashford.com occurs, our
1999 employee stock purchase plan will end, and shares will be purchased with
the payroll deductions accumulated to date by participating employees, unless
this plan is assumed by the surviving corporation or its parent. Our Board of
Directors may amend or terminate the 1999 employee stock purchase plan at any
time. If our Board of Directors increases the number of shares of common stock
reserved for issuance under the 1999 employee stock purchase plan, it must seek
the approval of our stockholders.
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<PAGE> 51
CERTAIN TRANSACTIONS
Since March 6, 1998, we have issued and sold preferred stock to the
following persons who are our principal stockholders, executive officers or
directors.
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
INVESTOR PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
- -------- --------------- --------------- ---------------
<S> <C> <C> <C>
Benchmark Capital Partners II, L.P............ 2,000,000 250,000 36,774
Entities affiliated with Sequoia Capital...... -- 500,000 24,432
Markas Holdings, BV........................... -- 500,000 --
</TABLE>
In connection with the purchase by Benchmark Capital Partners II, L.P. of
our Series A preferred stock, Kevin R. Harvey, a general partner of Benchmark
Capital, became a member of our Board of Directors. In addition, we have granted
options to some of our directors and executive officers. See "Principal
Stockholders".
In May 1999, we loaned $780,000 to Kenneth E. Kurtzman, Chief Executive
Officer and director, in connection with Mr. Kurtzman's exercise of an option to
purchase 390,000 shares of common stock. Mr. Kurtzman issued a promissory note
to us bearing interest at the rate of 5.22% per annum that is secured by a
pledge of the shares acquired and is payable in full by May 2004.
J. Robert Shaw, the Chairman of the Board of Ashford.com and one of our
founders, is the President and Chief Executive Officer of Synergy Development
Corp., an information-technology consulting firm that provides equipment and
services to online commerce companies. In addition, James H. Whitcomb, Jr., our
President, Chief Operating Officer and one of our directors, is also a director
of Synergy Development Corp. In March 1998, we issued 655,000 shares of common
stock to Mr. Shaw and 19,000 shares of common stock to Synergy in consideration
for services provided to Ashford.com in connection with its formation. We
purchase computer equipment, receive consulting services and rent certain office
space at prices and terms that we believe are equivalent to those available to
and transacted with unrelated parties. During the period from inception, March
6, 1998, through March 31, 1999, charges for consulting services and office
rent, and payments for computer equipment to Synergy totaled $172,848.
Our certificate of incorporation limits the liability of our directors for
monetary damages arising from a breach of their fiduciary duty as directors,
except to the extent otherwise required by the Delaware General Corporation Law.
This limitation of liability does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our by-laws provide that we shall indemnify our directors and officers to
the fullest extent permitted by Delaware law, including any circumstances in
which indemnification is otherwise discretionary under Delaware law. We have
also entered into indemnification agreements with our officers and directors
containing provisions that may require us to, among other things:
- - indemnify our officers and directors against certain liabilities that may
arise by reason of their status or service as directors or officers, other
than liabilities arising from willful misconduct of a culpable nature;
- - advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified; and
- - obtain directors' and officers' insurance if available on reasonable terms.
We believe that all of these transactions were made on terms no less
favorable to us than we could have obtained from unaffiliated third parties. All
future transactions, including loans, between us and our officers, directors,
principal stockholders and their affiliates will be approved by a majority of
the Board of Directors, including a majority of the independent and
disinterested outside directors on the Board of Directors, and will continue to
be on terms no less favorable to us we could have obtained from unaffiliated
third parties.
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<PAGE> 52
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of July 9, 1999, as adjusted to
reflect the sale of the common stock that we are offering under this prospectus,
by:
- - each stockholder known by us to own more than 5% of our common stock;
- - each director;
- - Mr. Kurtzman, our Chief Executive Officer, and Mr. Whitcomb, our President and
Chief Operating Officer; and
- - all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING(1) AFTER OFFERING(1)(2)
------------------------- -------------------------
NUMBER PERCENTAGE(3) NUMBER PERCENTAGE(3)
------ ------------- ------ -------------
<S> <C> <C> <C> <C>
Benchmark Capital Partners II, L.P.(4).... 2,286,774 35.48% 2,286,774
2480 Sand Hill Road, Suite 200
Menlo Park, California 94025
Entities affiliated with Sequoia
Capital(5).............................. 524,523 8.14 524,523
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, California 94025
Markas Holding B.V........................ 500,000 7.76 500,000
Locatellikade, 1
Parnassustoren 1076 AZ Amsterdam
The Netherlands
John P. McNamara.......................... 448,000 6.95 448,000
c/o Ashford.com
Jeffrey R. Helms.......................... 350,000 5.43 350,000
c/o Ashford.com
Kevin R. Harvey(4)........................ 2,286,774 35.48 2,286,774
J. Robert Shaw............................ 655,000 10.16 655,000
Kenneth E. Kurtzman....................... 390,000 6.05 390,000
James H. Whitcomb, Jr. ................... 655,000 10.16 655,000
All directors and executive officers as a
group (8 persons)....................... 3,986,774 61.86 3,986,774
</TABLE>
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power
with respect to securities.
(2) Assumes no exercise of the underwriters' over-allotment option. See
"Underwriting".
(3) The number of shares of common stock deemed outstanding prior to this
offering includes the shares issuable pursuant to stock options and warrants
that may be exercised within 60 days after June 30, 1999. Shares issuable
pursuant to stock options and warrants are deemed outstanding for computing
the percentage of the person holding these options but are not outstanding
for computing the percentage of any other person. The number of shares of
common stock outstanding after this offering includes the shares of
common stock we are offering in this offering.
(4) Consists of shares held by Benchmark Capital Partners II, L.P. as nominee
for Benchmark Capital Partners II, L.P., Benchmark Founders Fund II, L.P.,
Benchmark Founders Fund II-A, L.P. and Benchmark Members' Fund II, L.P.
Kevin R. Harvey is a general partner of the general partner of the Benchmark
entities and is a director of Ashford.com. He disclaims beneficial ownership
of the shares held by the entities except to the extent of his proportionate
interest therein.
(5) Includes 190,117 shares held by Sequoia Capital VIII, 2,412 shares held by
Sequoia International Technology Partners VIII, 12,586 shares held by
Sequoia International Technology(q), 4,196 shares held by CMS Partners LLC,
462 shares held by Sequoia 1997, 312,460 shares held by Sequoia Capital
Franchise Fund and 2,190 shares held by Sequoia Capital Franchise Partners.
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<PAGE> 53
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
100,000,000 shares of common stock, $.001 par value, and 10,000,000 shares of
undesignated preferred stock, $.001 par value. The following description of our
capital stock is not complete and is subject to and qualified in its entirety by
our certificate of incorporation and by-laws and by the provisions of applicable
Delaware law. Our certificate of incorporation and by-laws are included as
exhibits to the registration statement of which this prospectus forms a part.
COMMON STOCK
As of July 9, 1999, we had 6,445,143 shares of common stock outstanding,
held of record by approximately 30 stockholders, assuming the conversion of all
outstanding shares of preferred stock into common stock. In addition, as of June
30, 1999, there were 617,855 shares of common stock subject to outstanding
options. When this offering is completed, there will be shares of common
stock outstanding, assuming no exercise of the underwriter's over-allotment
option or additional exercise of outstanding options.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, holders of common stock are
entitled to receive ratably any dividends that may be declared by the Board of
Directors out of funds legally available for that purpose. See "Dividend
Policy". In the event of our liquidation, dissolution or winding up, the holders
of common stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of any outstanding
preferred stock. The common stock has no preemptive or conversion rights, other
subscription rights, or redemption or sinking fund provisions. All outstanding
shares of common stock are fully paid and non-assessable, and the shares of
common stock to be issued upon completion of this offering will be fully paid
and non-assessable.
PREFERRED STOCK
As of July 9, 1999, we had three series of preferred stock: Series A,
Series B, and Series C preferred stock. Each series of preferred stock has the
rights, preferences and privileges described in our current certificate of
incorporation, which is included as an exhibit to the registration statement of
which this prospectus forms a part. As of July 9, 1999, the number of
outstanding shares for each series of our preferred stock was:
- - 2,000,000 shares of Series A preferred stock;
- - 1,505,000 shares of Series B preferred stock; and
- - 300,143 shares of Series C preferred stock.
Upon the closing of the offering, all outstanding shares of our preferred
stock will be converted on a share-by-share basis into 3,805,143 shares of
common stock. Thereafter, the Board of Directors will have the authority,
without further action by the stockholders, to issue up to 10,000,000 shares of
preferred stock in one or more series and to designate the rights, preferences,
privileges and restrictions of each preferred stock series. The issuance of
preferred stock could have the effect of restricting dividends on the common
stock, diluting the voting power of the common stock, impairing the liquidation
rights of the common stock or delaying or preventing our change in control
without further action by the stockholders. We have no present plans to issue
any shares of preferred stock after the completion of this offering.
52
<PAGE> 54
REGISTRATION RIGHTS
The holders of the 3,805,143 shares of preferred stock, or the registrable
securities, are entitled to have their shares registered by us under the
Securities Act under the terms of an agreement between us and the holders of
these registrable securities. Subject to limitations specified in the agreement,
these registration rights include the following:
- - The holders of at least 50% of the then outstanding registrable securities may
require, on two occasions beginning 180 days after the date of this
prospectus, that we use our reasonable best efforts to register the
registrable securities for public resale.
- - If we register any common stock, either for our own account or for the account
of other security holders, the holders of registrable securities are entitled
to include their shares of common stock in the registration, subject to the
ability of the underwriters to limit the number of shares included in the
offering in view of market conditions.
- - The holders of at least 30% of the then outstanding registrable securities may
require us to register all or a portion of their registrable securities on
Form S-3 when use of that form becomes available to us, provided that the
proposed aggregate selling price is at least $1,000,000.
We will bear all registration expenses other than underwriting discounts
and commissions. All registration rights terminate on the date five years
following the closing of this offering, or, with respect to each holder of
registrable securities, at the time that the holder is entitled to sell all of
its shares in any three-month period under Rule 144 of the Securities Act.
DELAWARE ANTI-TAKEOVER LAW AND OUR CERTIFICATE OF INCORPORATION AND BY-LAW
PROVISIONS
Provisions of Delaware law and our certificate of incorporation and by-laws
could make more difficult our acquisition by a third party and the removal of
our incumbent officers and directors. These provisions, summarized below, are
expected to discourage coercive takeover practices and inadequate takeover bids
and to encourage persons seeking to acquire control of Ashford.com to first
negotiate with us. We believe that the benefits of increased protection of our
ability to negotiate with the proponent of an unfriendly or unsolicited
acquisition proposal outweigh the disadvantages of discouraging these proposals
because negotiation could result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law,
which regulates corporate acquisitions. In general, Section 203 prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years following the date
the person became an interested stockholder, unless:
- - the Board of Directors approved the transaction in which the stockholder
became an interested stockholder prior to the date the interested stockholder
attained that status;
- - when the stockholder became an interested stockholder, he or she owned at
least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding shares owned by persons who are directors and
also officers; or
- - on or subsequent to the date the business combination is approved by the Board
of Directors and authorized at an annual or special meeting of stockholders.
A "business combination" generally includes a merger, asset or stock sale,
or other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
53
<PAGE> 55
Our certificate of incorporation and by-laws do not provide for the right
of stockholders to act by written consent without a meeting or for cumulative
voting in the election of directors. In addition, our Certificate of
Incorporation permits the Board of Directors to issue preferred stock with
voting or other rights without any stockholder action. Our certificate of
incorporation provides for the Board of Directors to be divided into three
classes, with staggered three-year terms. As a result, only one class of
directors will be elected at each annual meeting of stockholders. Each of the
two other classes of directors will continue to serve for the remainder of its
respective three-year term. These provisions, which require the vote of
stockholders holding at least a majority of the outstanding common stock to
amend, may have the effect of deterring hostile takeovers or delaying changes in
our management.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is . The
transfer agent's address is and telephone number is .
54
<PAGE> 56
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. As described below, no shares
currently outstanding will be available for sale immediately after this offering
because of contractual restrictions on resale. Sales of substantial amounts of
our common stock in the public market after the restrictions lapse could
adversely affect the prevailing market price and impair our ability to raise
equity capital in the future.
Upon completion of the offering, we will have outstanding shares
of common stock and options to purchase 617,855 shares of common stock, assuming
no additional option grants or exercises after June 30, 1999. Of these shares,
the shares sold in the offering, plus any shares issued upon exercise
of the underwriters' over-allotment option, will be freely tradable without
restriction under the Securities Act, unless purchased by our "affiliates" as
that term is defined in Rule 144 under the Securities Act. In general,
affiliates include officers, directors or 10% stockholders.
The remaining 6,445,143 shares outstanding are "restricted securities"
within the meaning of Rule 144. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are
summarized below. Sales of the restricted securities in the public market, or
the availability of restricted shares for sale, could adversely affect the
market price of the common stock.
Our directors, officers and security holders have entered into lock-up
agreements in connection with this offering. These agreements provide that they
will not offer, sell, contract to sell or grant any option to purchase or
otherwise dispose of our common stock or any securities exercisable for or
convertible into our common stock owned by them for a period of 180 days after
the date of this prospectus. The shares subject to lock-up agreements may not be
sold without the prior written consent of Goldman, Sachs & Co. until these
agreements expire, even if the shares are eligible for sale under the provisions
of Rules 144, 144(k) and 701. Taking into account the lock-up agreements, and
assuming Goldman, Sachs & Co. does not release stockholders from these
agreements, the following shares will be eligible for sale in the public market
at the following times:
- - Beginning on the effective date of this prospectus, the shares sold in the
offering will be immediately available for sale in the public market.
- - Beginning 180 days after the effective date, approximately 1,311,000 shares
will be eligible for sale pursuant to Rule 701, no shares will be eligible for
sale pursuant to Rule 144(k), and approximately 3,879,143 additional shares
will be eligible for sale pursuant to Rule 144.
In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- - one percent of the number of shares of common stock then outstanding, which
will equal approximately shares immediately after the offering; or
- - the average weekly trading volume of the common stock during the four calendar
weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to
manner of sale, notice, and the availability of current public information about
us. A person may sell shares under Rule 144(k) and not be subject to the Rule
144 requirements if the person has not been our affiliate at anytime during the
three months preceding a sale and has beneficially owned the shares proposed to
be sold for at least two years.
55
<PAGE> 57
Rule 701, as currently in effect, permits our employees, officers,
directors or consultants who purchased shares pursuant to a written compensatory
plan or contract to resell their shares subject to certain Rule 144
restrictions. Affiliates may sell their Rule 701 shares under Rule 144 without
complying with the holding period requirement and non-affiliates may sell their
Rule 701 shares in reliance on Rule 144 without complying with the holding
period, public information, volume limitation or notice provisions of Rule 144.
In addition, we intend to file registration statements under the Securities
Act as promptly as possible after the effective date to register shares to be
issued pursuant to our employee benefit plans. As a result, any options or
rights exercised under the 1998 Stock Plan or any other benefit plan after the
effectiveness of the registration statements will also be freely tradable in the
public market. However, the shares held by affiliates will still be subject to
Rule 144's volume limitation, manner of sale, notice and public information
requirements unless they may otherwise be sold under Rule 701. As of June 30,
1999 there were outstanding options for the purchase of 617,855 shares of common
stock. See "Management -- Stock Plans" and "Description of Capital
Stock -- Registration Rights".
56
<PAGE> 58
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby will be
passed upon for us by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP, Austin, Texas. Members of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP participating in the consideration of legal matters relating to
the common stock offered hereby beneficially own 9,505 shares of our common
stock. Legal matters in connection with this offering will be passed upon for
the underwriters by Fulbright & Jaworski L.L.P., Houston, Texas. Fulbright &
Jaworski L.L.P. acts as counsel for Ashford.com from time to time in various
matters.
EXPERTS
The financial statements as of March 31, 1999 included in this prospectus
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto and are included herein in
reliance upon the authority of said firm as experts in giving said report.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered in this offering. This prospectus does not contain all of the
information in the registration statement and its exhibits and schedules. For
further information with respect to Ashford.com and the common stock offered in
this offering, we refer you to the registration statement and to the attached
exhibits and schedules. Statements made in this prospectus concerning the
contents of any document referred to in this prospectus are not necessarily
complete. With respect to each document filed as an exhibit to the registration
statement, we refer you to the exhibit for a more complete description of the
matter involved.
You may inspect our registration statement and the attached exhibits and
schedules without charge at the public reference facilities maintained by the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the Commission located at Seven World
Trade Center, 13th Floor, New York, New York 10048, and the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may
obtain copies of all or any part of our registration statement from the
Securities and Exchange Commission upon payment of prescribed fees. You may also
inspect reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission without charge at a Web site maintained by the Securities and
Exchange Commission at http://www.sec.gov.
57
<PAGE> 59
INDEX TO FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
Report of Arthur Andersen LLP, Independent Public
Accountants............................................... F-2
Balance Sheet............................................... F-3
Statement of Operations..................................... F-4
Statement of Stockholders' Equity........................... F-5
Statement of Cash Flows..................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 60
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Ashford.com, Inc.:
We have audited the accompanying balance sheet of Ashford.com, Inc. (the
Company), a Delaware corporation, as of March 31, 1999, and the related
statements of operations, stockholders' equity and cash flows for the period
from inception (March 6, 1998) through March 31, 1999. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ashford.com, Inc. as of
March 31, 1999, and the results of its operations and its cash flows for the
period from inception (March 6, 1998) through March 31, 1999, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Houston, Texas
May 14, 1999
F-2
<PAGE> 61
ASHFORD.COM, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
1999
---------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 893,447
Certificate of deposit.................................... 100,000
Accounts receivable....................................... 135,619
Merchandise inventory..................................... 3,273,112
Prepaids and other........................................ 452,760
-----------
Total current assets.............................. 4,854,938
Property and equipment, net of accumulated depreciation of
$48,595................................................... 253,258
-----------
Total assets...................................... $ 5,108,196
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 976,513
Accrued liabilities....................................... 322,303
Note payable.............................................. 1,000,000
-----------
Total current liabilities......................... 2,298,816
-----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 4,035,000 shares
authorized, 2,000,000 shares issued and outstanding.... 2,000
Common stock, $.001 par value, 11,400,000 shares
authorized, 2,250,000 shares issued and outstanding.... 2,250
Additional paid-in capital................................ 4,483,400
Deferred compensation..................................... (414,000)
Accumulated deficit....................................... (1,264,270)
-----------
Total stockholders' equity........................ 2,809,380
-----------
Total liabilities and stockholders' equity........ $ 5,108,196
===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-3
<PAGE> 62
ASHFORD.COM, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 6, 1998)
THROUGH
MARCH 31, 1999
---------------
<S> <C>
Net sales................................................... $ 5,937,555
Cost of sales............................................... 5,109,610
-----------
Gross profit................................................ 827,945
Operating expenses:
Marketing and sales....................................... 1,013,007
General and administrative................................ 1,086,356
-----------
Total operating expenses.......................... 2,099,363
-----------
Loss from operations........................................ (1,271,418)
Interest income............................................. 13,189
Interest expense............................................ (6,041)
-----------
Net loss.................................................... $(1,264,270)
===========
Net loss per share, basic and diluted....................... $ (0.58)
===========
Pro forma net loss per share, basic and diluted............. $ (0.45)
===========
Shares used to compute net loss per share:
Basic and diluted......................................... 2,188,757
Pro forma basic and diluted............................... 2,792,338
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-4
<PAGE> 63
ASHFORD.COM, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A
PREFERRED STOCK COMMON STOCK
------------------ ------------------ ADDITIONAL TOTAL
PAR PAR PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES VALUE SHARES VALUE CAPITAL COMPENSATION DEFICIT EQUITY
------ ----- ------ ----- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at inception, March 6,
1998........................ -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock for
cash upon formation on
March 6, 1998............. -- -- 1,329,000 1,329 262 -- -- 1,591
Issuance of common stock for
services in April 1998.... -- -- 921,000 921 53,638 -- -- 54,559
Issuance of preferred stock
in exchange for cash and
conversion of note payable
on December 4, 1998....... 2,000,000 2,000 -- -- 3,998,000 -- -- 4,000,000
Deferred compensation
related to grants of
options to purchase common
stock..................... -- -- -- -- 431,500 (431,500) -- --
Amortization of deferred
compensation.............. -- -- -- -- -- 17,500 -- 17,500
Net loss.................... -- -- -- -- -- -- (1,264,270) (1,264,270)
--------- ------ --------- ------ ---------- --------- ----------- -----------
Balance at March 31, 1999..... 2,000,000 $2,000 2,250,000 $2,250 $4,483,400 $(414,000) $(1,264,270) $ 2,809,380
========= ====== ========= ====== ========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-5
<PAGE> 64
ASHFORD.COM, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 6, 1998)
THROUGH
MARCH 31, 1999
---------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(1,264,270)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................... 48,595
Amortization of deferred compensation related to common
stock options......................................... 17,500
Compensation expense related to issuance of common
stock................................................. 53,900
Changes in assets and liabilities:
Accounts receivable.................................. (135,619)
Merchandise inventory................................ (3,273,112)
Prepaids and other................................... (452,760)
Accounts payable..................................... 976,513
Accrued liabilities.................................. 322,303
-----------
Net cash used in operating activities............. (3,706,950)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (301,853)
Certificate of deposit.................................... (100,000)
-----------
Net cash used in investing activities............. (401,853)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.................................. 2,250
Issuance of Series A preferred stock...................... 3,245,000
Proceeds from notes payable............................... 1,755,000
-----------
Net cash provided by financing activities......... 5,002,250
-----------
Net increase in cash and cash equivalents................. 893,447
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... --
-----------
End of period............................................. $ 893,447
===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of preferred stock upon conversion of note
payable, including accrued interest.................... $ 755,000
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-6
<PAGE> 65
ASHFORD.COM, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
1. OPERATIONS AND ORGANIZATION OF BUSINESS
BACKGROUND
Ashford.com, Inc. (Ashford.com or the Company), formerly NewWatch Company,
is a Delaware corporation which was incorporated on March 6, 1998, but did not
commence operations until April 1998. The Company is engaged in the distribution
of brand name watches and other luxury and premium products primarily through
online sales. The Company has emerged as a leading online commerce retailer in
the watch category, providing one of the industry's largest selections of
watches. Payment for substantially all of the Company's sales are made through
third-party credit cards.
The Company has experienced negative cash flows from operations and has
incurred a net loss for the period from inception, March 6, 1998, through March
31, 1999. The Company has funded its activities to date primarily from equity
financings. The Company may continue to incur losses, and there can be no
assurance that the Company will attain successful operations. The business
activities in which the Company is engaged involve a high degree of risk, and
future success is dependent upon a number of factors which include, among
others, generating sufficient revenues, attracting and retaining key personnel
and consultants, expanding and maintaining a supply of products and successfully
developing sales and marketing operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) requires the Company's management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue is recognized on sales of merchandise held for sale when the
product is sold and shipped, net of estimated returns.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and short-term, highly
liquid investments with original maturities of three months or less.
CERTIFICATE OF DEPOSIT
A certificate of deposit was issued to the Company in January 1999 for the
purpose of securing the Company's account with a bank. The certificate of
deposit will remain pledged to the bank until its final maturity in January
2000.
MERCHANDISE INVENTORY
Inventory consists of merchandise held for sale, principally watches and
watch accessories, and is stated at the lower of cost or market. The Company
uses the first-in, first-out (FIFO) method of determining cost of inventory
obtained directly from manufacturers. For inventory obtained from brokers, cost
is determined principally using the average cost method.
F-7
<PAGE> 66
ASHFORD.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING COSTS
The costs of advertising are expensed as incurred. For the period from
inception, March 6, 1998, through March 31, 1999, the Company incurred
advertising expense of approximately $694,000.
TECHNOLOGY AND DEVELOPMENT COSTS
Technology and development costs consist principally of payroll and related
expenses for development, systems and telecommunications operations personnel
and consultants. To date, approximately $129,000 in development costs have been
expensed as incurred as general and administrative expenses.
START-UP COSTS
In accordance with the American Institute of Certified Public Accountants'
Statement of Position (SOP) No. 98-5, the Company has expensed all start-up
costs, including organization costs, as incurred.
WARRANTY
The Company guarantees its watches to be genuine, in new condition and free
from defects for a period of at least two years. If the Company is an authorized
agent or service center for the manufacturer, it will extend the original
manufacturer's warranty for a period of two years. The Company estimates future
warranty costs not covered by the original manufacturer's warranty. For the
period from inception, March 6, 1998, to March 31, 1999, the Company has
recorded warranty expense of approximately $40,000.
INCOME TAXES
The Company is a C corporation for U.S. federal income tax purposes and
uses the liability method in accounting for income taxes. Under this method,
deferred taxes are recorded based upon differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted rates and laws that will be in effect when the differences are expected
to reverse. A valuation allowance has been established where necessary to reduce
deferred tax assets to the amount more likely than not expected to be realized
in future tax returns.
COMPREHENSIVE INCOME
The Company has adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS No. 130
establishes standards for reporting comprehensive income and its components in
financial statements. Comprehensive income, as defined, includes all changes in
equity (net assets) during a period from nonowner sources. To date, the Company
has not engaged in transactions that are required to be reported in
comprehensive income.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation", establishes a fair
value-based method of accounting for stock-based compensation plans. SFAS No.
123 allows the Company to adopt one of two methods for accounting for stock
options. The Company has elected the method that requires disclosure only of
stock-based compensation. Because of this election, the
F-8
<PAGE> 67
ASHFORD.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company accounts for its employee stock-based compensation plans under
Accounting Principles Board (APB) Opinion No. 25 and the related
interpretations. Accordingly, deferred compensation is recorded for stock-based
compensation grants based on the excess of the estimated fair value of the
common stock on the measurement date over the exercise price. The deferred
compensation is amortized over the vesting period of each unit of stock-based
compensation grant. If the exercise price of the stock-based compensation grants
is equal to the estimated fair value of the Company's stock on the date of
grant, no compensation expense is recorded.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Shares associated with stock options and the
convertible preferred stock are not included because they are antidilutive.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's Series A preferred stock into shares of the
Company's common stock effective upon the closing of the Company's initial
public offering as if such conversion occurred on December 4, 1998, the date of
original issuance.
The following table sets forth the computation of basic and dilutive, and
pro forma basic and dilutive, net loss per share for the period from inception,
March 6, 1998, through March 31, 1999:
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(MARCH 6, 1998) THROUGH
MARCH 31, 1999
-----------------------
<S> <C>
Numerator:
Net Loss................................................ $(1,264,270)
===========
Denominator:
Weighted average common shares.......................... 2,188,757
===========
Denominator for basic and diluted calculation........... 2,188,757
Weighted average effect of pro forma securities:
Series A preferred stock............................. 603,581
-----------
Denominator for pro forma basic and diluted
calculation.......................................... 2,792,338
===========
Net loss per share:
Basic and diluted....................................... $ (0.58)
===========
Pro forma basic and diluted............................. $ (0.45)
===========
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment is stated at original cost and includes primarily
computer equipment, office equipment and leasehold improvements. Depreciation is
provided based on the straight-line method over the estimated useful lives of
the respective assets, generally three years to five years for computer and
office equipment. Leasehold improvements are amortized over six months, the
estimated useful lives of the improvements. Repair and maintenance costs are
F-9
<PAGE> 68
ASHFORD.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
charged to expense as incurred. Property and equipment consists of the following
at March 31, 1999:
<TABLE>
<S> <C>
Computer and office equipment............................... $255,599
Leasehold improvements...................................... 46,254
--------
301,853
Less -- Accumulated depreciation............................ (48,595)
--------
Property and equipment, net....................... $253,258
========
</TABLE>
4. STOCKHOLDERS' EQUITY
SERIES A PREFERRED STOCK
In December 1998, the Company entered into a stock purchase agreement with
an investor whereby the Company issued 2,000,000 shares of Series A preferred
stock in exchange for approximately $3,245,000 in cash and conversion of a
$755,000 note payable, including accrued interest. The holder of the Series A
preferred stock is entitled to receive dividends, prior and in preference to any
declaration or payment of dividends on the common stock, at the rate of $0.16
per share per annum, or, if greater, an amount equal to that paid on any other
outstanding shares of the Company. The dividends are not cumulative, and the
holder can waive any dividend preference.
In the event of any liquidation, dissolution or winding up of the Company,
the holder of the Series A preferred stock is entitled to receive, prior and in
preference to any distribution to the holders of common stock, an amount per
share equal to the sum of $2.00 and declared but unpaid dividends on such share.
Each share of Series A preferred stock is convertible, at the option of the
holder, into common stock on a share-for-share basis. Each share of preferred
stock automatically converts to common stock upon the Company's sale of its
common stock in a firm commitment underwritten public offering. The conversion
feature is adjusted for certain dilutive issuances, splits and combinations of
common stock so that the number of shares of common stock issuable upon
conversion is increased or decreased in proportion to any increase or decrease
in the aggregate shares of common stock outstanding.
As long as at least a majority of the shares of Series A preferred stock
originally issued remain outstanding, the holders are entitled to elect two
directors of the Company at each annual election of directors.
COMMON STOCK
The holders of the common stock are entitled to receive dividends when and
as declared by the Board of Directors. Upon the liquidation, dissolution or
winding up of the Company, all of the remaining assets of the Company available
for distribution after that required for holders of Series A preferred stock
shall be distributed among the holders of common stock pro rata based on the
number of shares held by each. The common stock is not redeemable. The holders
of outstanding common stock are entitled to elect two directors of the Company
at each annual election of directors.
On December 4, 1998, the Company entered into an agreement with certain
existing stockholding employees whereby the employees agreed to allow 1,254,126
shares of previously issued common stock to be subject to certain restrictions
(Restricted Stock). The restrictions
F-10
<PAGE> 69
ASHFORD.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
provide the Company with the right, but not the obligation, to repurchase any
unvested shares of Restricted Stock upon termination of employment. Under this
agreement, one holder's Restricted Stock, representing 399,126 shares, vests
ratably over a 39-month service period. Of the other holders' Restricted Stock,
213,750 shares vested on March 6, 1999; the remaining shares vest ratably over a
36-month service period. During fiscal 1999, restrictions on 267,143 lapsed into
unrestricted common stock. With the exception of the vesting period, holders of
Restricted Stock retain all the rights of common stock stockholders including
voting, dividend and liquidation rights. The remaining 986,983 shares subject to
restrictions are included in outstanding common stock in the accompanying
balance sheet at March 31, 1999.
STOCK OPTIONS
In April 1998, the Company adopted an incentive compensation plan (the 1998
Stock Incentive Plan) which provides the ability to grant incentive stock
options, nonqualified stock options and restricted stock. The 1998 Stock
Incentive Plan is administered by the Board of Directors of the Company, which
has the authority to determine the option recipients, the number of shares
subject to each option grant, the term of the grants, the exercise price and the
vesting schedule. The Company may grant a total of 1,671,000 shares of options
and Restricted Stock under the 1998 Stock Incentive Plan.
Pursuant to the provisions of SFAS No. 123 applicable to nonpublic
entities, the Company computed the fair value of options granted during fiscal
1999 using the minimum value method. Significant weighted average assumptions
used to estimate fair value include a risk-free interest rate of 5.6 percent,
expected lives of 10 years and no expected dividends. Had compensation expense
been determined consistent with the provisions of SFAS No. 123, the Company's
net loss for the period ended March 31, 1999, would have been increased to the
following pro forma amount:
<TABLE>
<S> <C>
Net loss:
As reported............................................... $(1,264,270)
Pro forma................................................. (1,272,900)
</TABLE>
Stock option activity during the period from inception, March 6, 1998,
through March 31, 1999, includes the grants of 265,000 shares of common stock at
exercise prices of $0.20 per share issued to employees of the Company. The
options granted to these individuals generally vest over a period of four years.
The options expire 10 years from the date of grant if not exercised. The Company
recorded $431,500 in deferred compensation relating to these options for the
excess of the deemed fair value of the common stock on the date of grant over
the exercise price. The deferred compensation is being amortized over the
vesting period of the options. Of those shares granted, 40 shares were canceled
during the period from inception, March 6, 1998, through March 31, 1999, and
10,938 shares were exercisable as of March 31, 1999.
As of March 31, 1999, 485,040 shares of common stock were available for
grant under the 1998 Stock Incentive Plan.
5. INCOME TAXES
Differences between accounting rules and tax laws cause differences between
the bases of certain assets and liabilities for financial reporting and tax
purposes primarily as a result of different treatments of start-up costs. The
tax effects of these differences, to the extent they are
F-11
<PAGE> 70
ASHFORD.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
temporary, are recorded as deferred tax assets and liabilities and consisted of
the following components as of March 31, 1999:
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------
<S> <C>
Deferred tax assets:
Net operating loss carryforward........................... $592,146
Capitalized start-up costs for tax purposes............... 14,661
Accruals and reserves..................................... 10,200
Other..................................................... 7,693
--------
Total deferred tax assets................................. 624,700
Deferred tax liabilities:
Prepaids and other........................................ (129,545)
--------
Total deferred tax liabilities............................ (129,545)
Valuation allowance....................................... (495,155)
--------
Deferred tax assets, net.................................. $ --
========
</TABLE>
Due to the uncertainty surrounding the realization of these assets, a
valuation allowance has been provided to fully offset the deferred tax assets.
As of March 31, 1999, the Company had a net operating loss carryforward of
approximately $1.7 million, which may be used to offset taxable income in future
years. The net operating loss carryforward will begin to expire in the Company's
fiscal year 2014. A change in control, as defined by federal income tax
regulations, could significantly limit the Company's ability to utilize its
carryforwards.
6. RELATED-PARTY TRANSACTIONS
Certain key members of management and the board of Ashford.com are
stockholders of a company from which Ashford.com purchases computer equipment,
receives consulting services and rents certain office space at prices and terms
that management believes are equivalent to those available to and transacted
with unrelated parties. During the period from inception, March 6, 1998, through
March 31, 1999, charges for consulting services and office rent, and payments
for computer equipment to this related party totaled $172,848.
7. COMMITMENTS AND CONTINGENCIES
LEASES
There were no amounts charged to expense for the period from inception
(March 6, 1998) through March 31, 1999, pursuant to noncancelable and
month-to-month operating leases. Rent expense through March 31, 1999, was
approximately $47,000.
The Company has entered into various leases for equipment used in its
operations, which expire at various dates through 2002. Future minimum lease
payments relating to noncancelable operating leases are as follows for the year
ending March 31:
<TABLE>
<S> <C>
2000........................................................ $2,160
2001........................................................ 2,160
2002........................................................ 360
------
$4,680
======
</TABLE>
401(k) PLAN
Effective February 1, 1999, the Company established a defined contribution
401(k) plan. Employees eligible to join the plan are those 21 years of age or
older and have a minimum of 1,000 hours of service within a 12-month period
after their date of hire. Eligible employees may enter the plan on the effective
date and thereafter on any January 1 or July 1. The service
F-12
<PAGE> 71
ASHFORD.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
requirement is waived for those employed on the effective date. The Company does
not contribute to the plan.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of its
employees. Either party may terminate such employment agreement at any time. The
employment agreements provide for employees to receive the compensation and
benefits offered to and accepted by them. The employment agreements also provide
the Company with protection for its trade secrets, intellectual property rights
and other confidential information.
ADVERTISING AGREEMENT
In February 1999, the Company entered into a 12-month advertising and
promotion agreement with an Internet search engine company, which is being
expensed ratably over the period of the agreement. The Company is obligated to
pay a $1,274,000 fee, of which $550,000 was paid upon execution of the
agreement. The remaining balance is due in certain installment payments ending
in November 1999.
OTHER MATTERS
From time to time, the Company is a party to various claims and legal
proceedings generally incidental to its business. Although the ultimate
disposition of these matters is not presently determinable, management does not
believe that ultimate settlement of any or all of such matters will have a
material adverse effect upon the financial condition or results of operations of
the Company.
8. SUBSEQUENT EVENTS (UNAUDITED)
STOCK OPTION GRANTS
From April 1, 1999 through June 30, 1999, the Company granted options to
purchase 743,635 shares of common stock at exercise prices of $2.00 per share to
employees and consultants. The options granted to these individuals vest over a
period of four years. The options expire 10 years from the date of grant if not
exercised. The Company will record approximately $16.0 million in deferred
compensation during fiscal 2000 relating to these options for the excess of the
estimated fair value of the common stock on the date of grant over the exercise
price. The deferred compensation will be amortized over the four-year vesting
period of the options.
EMPLOYEE LOAN
In May 1999, the Company entered into a $780,000 full-recourse promissory
note with its Chief Executive Officer and director, in connection with the
exercise of options to purchase 390,000 shares of common stock. The note bears
interest at the rate of 5% per annum, is secured by a pledge of the shares
acquired and is payable in full by May 2004.
1999 EQUITY INCENTIVE PLAN
In July 1999, the Company adopted an incentive compensation plan (the 1999
Equity Incentive Plan) which provides the ability to award incentive stock
options, nonqualified stock options, restricted stock, stock units and stock
appreciation rights. The 1999 Equity Incentive Plan is administered by the Board
of Directors of the Company, which has the authority to determine the type,
number, vesting requirements and other features and conditions of such awards.
The aggregate number of awards shall not exceed 500,000 shares of common stock.
F-13
<PAGE> 72
ASHFORD.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The 1999 Equity Incentive Plan allows for annual increases of the lesser of 5%
of the total number of shares of common stock then outstanding or 400,000 shares
of common stock.
PREFERRED STOCK FINANCINGS
In April 1999, the Company increased the number of authorized shares of its
common and preferred stock to 11,400,000 shares and 3,600,000 shares,
respectively, each with a par value of $.001 per share. In addition, 1,600,000
shares of the Company's preferred stock was designated as Series B preferred
stock. Also in April 1999, the Company entered into a stock purchase agreement
with five investors whereby the Company issued 1,505,000 shares of Series B
preferred stock in exchange for approximately $29.1 million in cash and
conversion of a $1.0 million note payable, including accrued interest. The terms
of the Series B preferred stock purchase agreement are substantially the same as
those of the Series A preferred stock purchase agreement, except the holders of
Series B preferred stock are entitled to receive dividends at the rate of $1.60
per share per annum, a liquidation preference of $20.00 per share and are not
entitled to elect a specified number of directors of the Company at each annual
election of directors.
In July 1999, the Company increased the number of authorized shares of its
preferred stock to 4,035,000 shares with a par value of $.001 per share. In
addition, 435,000 shares of the Company's preferred stock was designated as
Series C preferred stock. Also in July 1999, the Company entered into a stock
purchase agreement with six investors whereby the Company issued 300,143 shares
of Series C preferred stock in exchange for approximately $16.3 million in cash.
The terms of the Series C preferred stock agreement are substantially the same
as those of the Series A and Series B preferred stock agreements, except the
holders of Series C preferred stock are not entitled to receive dividends, do
not have a specified liquidation preference and are not entitled to elect a
specified number of directors of the Company at each annual election of
directors.
Had the above stock issuances occurred on March 31, 1999, the pro forma
effect of the total Series B and Series C net proceeds would be as follows:
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------
HISTORICAL PRO FORMA
---------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Cash...................................................... $ 893 $46,313
Total assets.............................................. 5,108 50,528
Accrued liabilities....................................... 322 348
Note payable.............................................. 1,000 --
Preferred stock........................................... 2 4
Common stock.............................................. 2 2
Additional paid-in capital................................ 4,483 50,875
Total stockholders' equity................................ 2,809 49,203
</TABLE>
REGISTRATION WITH SECURITIES AND EXCHANGE COMMISSION
On July 9, 1999, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission permitting
the Company to sell shares of its common stock to the public. In addition, upon
the effectiveness of a registration statement, the Board of Directors authorized
200,000 shares of common stock be made available for an employee stock purchase
plan.
F-14
<PAGE> 73
UNDERWRITING
Ashford.com and the underwriters named below will enter into an
underwriting agreement with respect to the shares being offered. Subject to
certain conditions, each underwriter has severally agreed to purchase the number
of shares indicated in the following table. Goldman, Sachs & Co., BancBoston
Robertson Stephens Inc., Deutsche Bank Securities Inc. and E*TRADE Securities,
Inc. are the representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co.........................................
BancBoston Robertson Stephens Inc. .........................
Deutsche Bank Securities Inc. ..............................
E*TRADE Securities, Inc. ...................................
-------
Total.............................................
=======
</TABLE>
---------------------
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
shares from Ashford.com to cover such sales. They may exercise that
option for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in approximately the same proportion
as on the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid by the Company to the underwriters. In addition, the
table includes certain other items considered by the NASD to be underwriting
compensation for purposes of the NASD's Rules of Fair Practice. Such amounts are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
PER SHARE TOTAL
-------------------- --------------------
No Full No Full
Exercise Exercise Exercise Exercise
Paid by Ashford.com -------- -------- -------- --------
<S> <C> <C> <C> <C>
Underwriting discounts and commissions... $ $
-------- -------- -------- --------
Other items..............................
-------- -------- -------- --------
Total............................... $ $ $ $
======== ======== ======== ========
</TABLE>
The Goldman Sachs Group, Inc., the parent of Goldman, Sachs & Co., owns
13,790 shares of Ashford.com Series C preferred stock. All shares of Series C
preferred stock will automatically convert into shares of common stock of
Ashford.com at the time of this offering. Shares of common stock held by The
Goldman Sachs Group, Inc. will be subject to an agreement with the NASD that
restricts the sale, transfer, pledge, assignment or hypothecation of such shares
for one year from the effective date of this offering. The additional
compensation included in the chart above was computed based on the difference in
the maximum offering price and $54.39, the price paid for the shares of Series C
preferred stock held by The Goldman Sachs Group, Inc., less the applicable
discount permitted under the NASD's Rules of Fair Practice.
Shares sold by the Underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this Prospectus. Any
shares sold by the Underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the Underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
offering price, the representatives may change the offering price and the other
selling terms.
U-1
<PAGE> 74
Ashford.com and its directors, officers, employees and other security
holders have agreed with the underwriters not to dispose of or hedge any of
their common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 180 days after the date of this prospectus, except with the
prior written consent of the representatives. See "Shares Eligible for Future
Sale" for a discussion of certain transfer restrictions.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price for the common stock will be negotiated
among Ashford.com and the representatives of the underwriters. Among the factors
to be considered in determining the initial public offering price of the shares,
in addition to prevailing market conditions, will be Ashford.com's historical
performance, estimates of Ashford.com's business potential and earnings
prospects, an assessment of Ashford.com's management and the consideration of
the above factors in relation to market valuation of companies in related
businesses.
Ashford.com has applied to have the common stock approved for quotation on
the Nasdaq National Market under the symbol "ASFD".
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short-sale covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of the common stock offered hereby for certain
individuals designated by Ashford.com who have expressed an interest in
purchasing such shares of common stock in the offering. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased will
be offered by the underwriters to the general public on the same basis as other
shares offered hereby.
Ashford.com estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $ .
Ashford.com has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
U-2
<PAGE> 75
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
offer to sell only the shares offered hereby, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 8
Use of Proceeds..................... 22
Dividend Policy..................... 22
Capitalization...................... 23
Dilution............................ 24
Selected Financial Data............. 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 26
Business............................ 32
Management.......................... 43
Certain Transactions................ 50
Principal Stockholders.............. 51
Description of Capital Stock........ 52
Shares Eligible for Future Sale..... 55
Legal Matters....................... 57
Experts............................. 57
Additional Information.............. 57
Index to Financial Statements....... F-1
Underwriting........................ U-1
</TABLE>
----------------------
Through and including , 1999 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as an underwriter and with respect to an unsold allotment or
subscription.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
Shares
ASHFORD.COM, INC.
Common Stock
----------------------
[LOGO]
----------------------
GOLDMAN, SACHS & CO.
BANCBOSTON ROBERTSON STEPHENS
DEUTSCHE BANC ALEX. BROWN
E*TRADE SECURITIES, INC.
Representatives of the Underwriters
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 76
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Ashford.com in connection
with the sale of common stock being registered. All amounts are estimates except
the SEC registration fee, the NASD filing fees and the Nasdaq National Market
listing fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
---------
<S> <C>
SEC Registration fee........................................ $27,800
NASD fee.................................................... 10,500
Nasdaq National Market initial listing fee.................. 17,500
Printing and engraving......................................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Directors and Officers Liability Insurance..................
Blue sky fees and expenses..................................
Transfer agent fees.........................................
Miscellaneous...............................................
-------
Total.............................................
=======
</TABLE>
- ---------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
Article IX of Ashford.com's Amended and Restated Certificate of
Incorporation, to be filed in connection with the offering, provides for
indemnification of directors to the fullest extent permissible under Delaware
law.
Article VII of Ashford.com's Amended and Restated By-laws provides for the
indemnification of officers, directors and third parties acting on behalf of
Ashford.com if such person acted in good faith and in a manner reasonably
believed to be in and not opposed to the best interests of Ashford.com, and,
with respect to any criminal action or proceeding, the indemnified party had no
reason to believe his or her conduct was unlawful.
Ashford.com has entered into indemnification agreements with its directors
and executive officers, in addition to indemnification provided for in
Ashford.com's Amended and Restated By-laws, and intends to enter into
indemnification agreements with any new directors and executive officers in the
future.
Delaware law permits Ashford.com to purchase and maintain insurance on
behalf of any director, officer, employee or agent of Ashford.com against any
liability asserted against or incurred by them in such capacity or arising out
of their status as such whether or not Ashford.com would have the power to
indemnify such director, officer, employee or agent against such liability under
the applicable provisions of Delaware law, the Amended and Restated Certificate
of Incorporation or the Amended and Restated By-laws.
II-1
<PAGE> 77
The general effect of the foregoing provisions is to reduce the
circumstances in which an officer or director may be required to bear the
economic burdens of the foregoing liabilities and expenses.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since Ashford.com's inception on March 6, 1998, Ashford.com has sold and
issued the following securities:
(1) On December 4, 1998, Ashford.com issued 2,000,000 shares of Series
A preferred stock to one accredited investor for aggregate consideration of
approximately $3,245,000 in cash and conversion of a $755,000 note payable.
The issuance of the shares of Series A preferred stock was made in a
transaction exempt from registration under the Securities Act in reliance
on Section 4(2) of the Securities Act as transactions by an issuer not
involving any public offering.
(2) On April 17, 1999, Ashford.com issued 1,505,000 shares of Series B
preferred stock to five accredited investors for aggregate consideration of
approximately $29,096,000 in cash and conversion of a $1,004,000 note
payable. The issuance of the shares of Series B preferred stock was made in
a transaction exempt from registration under the Securities Act in reliance
on Section 4(2) of the Securities Act as transactions by an issuer not
involving any public offering.
(3) On July 8, 1999, Ashford.com issued 300,143 shares of Series C
preferred stock to eight accredited investors for aggregate consideration
of approximately $16,324,000 in cash. The issuance of the shares of Series
C preferred stock was made in a transaction exempt from registration under
the Securities Act in reliance on Section 4(2) of the Securities Act as
transactions by an issuer not involving any public offering.
(4) Since inception, Ashford.com has issued an aggregate of 2,640,000
shares of common stock and 1,008,635 options to purchase shares of its
common stock to a number of our employees, directors and consultants. These
options and direct stock issuances have been issued in transactions exempt
from registration under the Securities Act in reliance upon Rule 701 under
the Securities Act.
The recipients of securities in Items (1), (2) and (3) described above
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates issued in such
transactions. All recipients had adequate access, through their relationships
with Ashford.com, to information about Ashford.com.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 -- Form of Underwriting Agreement.
3.1* -- Amended and Restated Certificate of Incorporation of the
Registrant.
3.2* -- Form of Amended and Restated Certificate of Incorporation
of the Registrant, to be filed after the closing of the
offering made pursuant to this Registration Statement.
3.3* -- By-laws of the Registrant, as currently in effect.
3.4* -- Form of Amended and Restated By-laws of the Registrant to
be in effect after the closing of the offering made
pursuant to this Registration Statement.
</TABLE>
II-2
<PAGE> 78
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
4.1* -- Amended and Restated Investor Rights Agreement, dated
July 9, 1999, among the Registrant and the investors and
founders named therein.
4.2* -- Specimen Certificate of the Registrant's common stock.
4.3 -- See Exhibits 3.1 and 3.2 for provisions of the Company's
Amended and Restated Articles of Incorporation defining
the rights of the holders of common stock.
4.4 -- See Exhibits 3.3 and 3.4 for provisions of the Company's
By-laws defining the rights of holders of common stock.
5.1* -- Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, counsel to the Registrant.
10.1* -- Form of Indemnification Agreement entered into between
the Registrant and its directors and officers.
10.2* -- 1998 Stock Incentive Plan.
10.3* -- 1999 Equity Incentive Plan.
10.4* -- 1999 Employee Stock Purchase Plan.
10.5*+ -- Watch Merchant Program Advertising and Promotion
Agreement dated February 26, 1996 between the Registrant
and Yahoo!, Inc.
10.6* -- Office Lease dated July , 1999 between the Registrant
and Crescent Real Estate Funding III, L.P.
21.1 -- List of Subsidiaries of the Registrant.
23.1 -- Consent of Arthur Andersen LLP, independent public
accountants.
23.2* -- Consent of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, counsel to the Registrant. Reference is
made to Exhibit 5.1.
24.1 -- Power of Attorney. Reference is made to page II-5.
27.1 -- Financial Data Schedule.
</TABLE>
- ---------------
* To be supplied by amendment.
+ Confidential treatment requested as to certain portions of this exhibit.
(b) FINANCIAL STATEMENT SCHEDULE
Schedule II -- Valuations and Qualifying accounts.
Schedules not listed above have been omitted because the information
required to be shown therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the
II-3
<PAGE> 79
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 80
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Houston,
State of Texas, on this 13th day of July, 1999.
ASHFORD.COM, INC.
By: /s/ KENNETH E. KURTZMAN
----------------------------------
Kenneth E. Kurtzman
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Kenneth E. Kurtzman and James H.
Whitcomb, Jr. and each of them, his or her true and lawful attorneys-in-fact and
agents with full power of substitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
sign any registration statement for the same offering covered by this
Registration Statement that is to be effective on filing pursuant to Rule 462(b)
promulgated under the Securities Act of 1933, and all post-effective amendments
thereto, and to file the same, with all exhibits thereto and all documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his or her or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<C> <S> <C>
/s/ J. ROBERT SHAW Chairman of the Board July 13, 1999
- -----------------------------------------------------
J. Robert Shaw
/s/ KENNETH E. KURTZMAN Chief Executive Officer, Director July 13, 1999
- ----------------------------------------------------- (Principal Executive Officer)
Kenneth E. Kurtzman
/s/ DAVID F. GOW Vice President, Finance and Chief July 13, 1999
- ----------------------------------------------------- Financial Officer (Principal
David F. Gow Financial and Accounting
Officer)
/s/ JAMES H. WHITCOMB, JR. President and Chief Operating July 13, 1999
- ----------------------------------------------------- Officer, Director
James H. Whitcomb, Jr.
/s/ KEVIN R. HARVEY Director July 13, 1999
- -----------------------------------------------------
Kevin R. Harvey
</TABLE>
II-5
<PAGE> 81
ASHFORD.COM, INC. -- SCHEDULE II VALUATION
AND QUALIFYING ACCOUNTS
MARCH 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE
BALANCE AT THE AMOUNTS AT
BEGINNING OF CHARGED TO THE END OF
DESCRIPTION YEAR EXPENSE DEDUCTIONS YEAR
- ----------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
March 31, 1999:
Allowance for Inventory
Obsolesence.................... $-- $100 $-- $100
Allowance for Warranty Costs...... -- 40 (4) 36
</TABLE>
<PAGE> 82
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 -- Form of Underwriting Agreement.
3.1* -- Amended and Restated Certificate of Incorporation of the
Registrant.
3.2* -- Form of Amended and Restated Certificate of Incorporation
of the Registrant, to be filed after the closing of the
offering made pursuant to this Registration Statement.
3.3* -- By-laws of the Registrant, as currently in effect.
3.4* -- Form of Amended and Restated By-laws of the Registrant to
be in effect after the closing of the offering made
pursuant to this Registration Statement.
4.1* -- Amended and Restated Investor Rights Agreement, dated
July 9, 1999, among the Registrant and the investors and
founders named therein.
4.2* -- Specimen Certificate of the Registrant's common stock.
4.3 -- See Exhibits 3.1 and 3.2 for provisions of the Company's
Amended and Restated Articles of Incorporation defining
the rights of the holders of common stock.
4.4 -- See Exhibits 3.3 and 3.4 for provisions of the Company's
By-laws defining the rights of holders of common stock.
5.1* -- Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, counsel to the Registrant.
10.1* -- Form of Indemnification Agreement entered into between
the Registrant and its directors and officers.
10.2* -- 1998 Stock Incentive Plan.
10.3* -- 1999 Equity Incentive Plan.
10.4* -- 1999 Employee Stock Purchase Plan.
10.5*+ -- Watch Merchant Program Advertising and Promotion
Agreement dated February 26, 1996 between the Registrant
and Yahoo!, Inc.
10.6* -- Office Lease dated July , 1999 between the Registrant
and Crescent Real Estate Funding III, L.P.
21.1 -- List of Subsidiaries of the Registrant.
23.1 -- Consent of Arthur Andersen LLP, independent public
accountants.
23.2* -- Consent of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, counsel to the Registrant. Reference is
made to Exhibit 5.1.
24.1 -- Power of Attorney. Reference is made to page II-5.
27.1 -- Financial Data Schedule.
</TABLE>
- ---------------
* To be supplied by amendment.
+ Confidential treatment requested as to certain portions of this exhibit.
<PAGE> 1
EXHIBIT 1.1
ASHFORD.COM, INC.
COMMON STOCK, $.001 PAR VALUE PER SHARE
---------
UNDERWRITING AGREEMENT
,1999
------------------
Goldman, Sachs & Co.,
BancBoston Robertson Stephens Inc.,
Deutsche Bank Securities, Inc. and
E*Trade Securities, Inc.
as representatives of the several Underwriters named
in Schedule I hereto,
c/o Goldman, Sachs & Co.,
1000 Louisiana, Suite 550
Houston, Texas 77002
Ladies and Gentlemen:
Ashford.com, Inc., a Delaware corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
_______________ (the "Firm Shares") and, at the election of the Underwriters,
up to ____________ additional shares (the "Optional Shares") of common stock,
$.001 par value per share ("Stock"), of the Company (the Firm Shares and the
Optional Shares that the Underwriters elect to purchase pursuant to Section 2
hereof being collectively called the "Shares").
1. The Company represents and warrants to, and agrees with, each of
the Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-________) (the
"Initial Registration Statement") in respect of the Shares has been filed with
the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in the
form heretofore delivered to you, and, excluding exhibits thereto, to you for
each of the other Underwriters, have been declared effective by the Commission
in such form; other than a registration statement, if any, increasing the size
of the offering (a "Rule 462(b) Registration Statement"), filed pursuant to
Rule 462(b) under the Securities Act of 1933, as amended (the "Act"), which
became effective upon filing, no other document with respect to the Initial
Registration Statement has heretofore been filed with the Commission; and no
stop order suspending the effectiveness of the Initial Registration Statement,
any post-effective amendment thereto or the Rule 462(b) Registration Statement,
if any, has been issued and no proceeding for that purpose has been initiated
or threatened by the Commission (any preliminary prospectus included in the
Initial Registration Statement or filed with the Commission pursuant to Rule
424(a) of the rules and
<PAGE> 2
regulations of the Commission under the Act is hereinafter called a
"Preliminary Prospectus"; the various parts of the Initial Registration
Statement and the Rule 462(b) Registration Statement, if any, including all
exhibits thereto and including the information contained in the form of final
prospectus filed with the Commission pursuant to Rule 424(b) under the Act in
accordance with Section 5(a) hereof and deemed by virtue of Rule 430A under the
Act to be part of the Initial Registration Statement at the time it was
declared effective, each as amended at the time such part of the Initial
Registration Statement became effective or such part of the Rule 462(b)
Registration Statement, if any, became or hereafter becomes effective, are
hereinafter collectively called the "Registration Statement"; and such final
prospectus, in the form first filed pursuant to Rule 424(b) under the Act, is
hereinafter called the "Prospectus";
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder, and did not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein;
(c) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the
Act and the rules and regulations of the Commission thereunder and do not and
will not, as of the applicable effective date as to the Registration Statement
and any amendment thereto, and as of the applicable filing date as to the
Prospectus and any amendment or supplement thereto, contain an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter through
Goldman, Sachs & Co. expressly for use therein;
(d) The Company has not sustained since the date of the latest audited
financial statements included in the Prospectus any material loss or
interference with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since the respective dates as of which
information is given in the Registration Statement and the Prospectus, there
has not been any change in the capital stock or long-term debt of the Company
or any material adverse change, or any development involving a prospective
material adverse change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations of the
Company otherwise than as set forth or contemplated in the Prospectus;
(e) The Company has good and marketable title in fee simple to all
real property and good and marketable title to all personal property owned by
it, in each case free and clear of all liens, encumbrances and defects except
such as are described in the Prospectus or such as do not materially affect the
value of such property and do not interfere with the use made and proposed to
be made of such property by the Company; and any real property and buildings
held under lease by the Company are held by it under valid, subsisting and
enforceable leases with such exceptions as
2
<PAGE> 3
are not material and do not interfere with the use made and proposed to be made
of such property and buildings by the Company;
(f) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware, with
power and authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus, and has been duly qualified as a
foreign corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases properties
or conducts any business so as to require such qualification, or is subject to
no material liability or disability by reason of the failure to be so qualified
in any such jurisdiction;
(g) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and conform to the description of the Stock contained in the Prospectus;
(h) The Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when issued
and delivered against payment therefor as provided herein, will be duly and
validly issued and fully paid and non-assessable and will conform to the
description of the Stock contained in the Prospectus;
(i) The issue and sale of the Shares by the Company and the compliance
by the Company with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated will not conflict with or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company is a party or
by which the Company is bound or to which any of the property or assets of the
Company is subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or Bylaws of the Company or any
statute or any order, rule or regulation of any court or governmental agency or
body having jurisdiction over the Company or any of its properties; and no
consent, approval, authorization, order, registration or qualification of or
with any such court or governmental agency or body is required for the issue
and sale of the Shares or the consummation by the Company of the transactions
contemplated by this Agreement, except the registration under the Act of the
Shares and such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the
Underwriters;
(j) The Company is not in violation of its Certificate of
Incorporation or Bylaws or in default in the performance or observance of any
material obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust, loan agreement, lease or other agreement or
instrument to which it is a party or by which it or any of its properties may
be bound;
(k) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a summary
of the terms of the Stock and under the caption "Underwriting", insofar as they
purport to describe the provisions of the laws and documents referred to
therein, are accurate, complete and fair;
(l) The Company is not in violation of any law, order, rule,
regulation, writ, injunction, judgment or decree of any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or over its properties; and other than as set forth in the Prospectus,
there are no legal or governmental proceedings pending to which the Company is
a party
3
<PAGE> 4
or of which any property of the Company is the subject which, if determined
adversely to the Company, would individually or in the aggregate have a
material adverse effect on the current or future financial position,
stockholders' equity or results of operations of the Company; and, to the
Company's knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others;
(m) The Company is not and, after giving effect to the offering and
sale of the Shares, will not be an "investment company", as such term is
defined in the Investment Company Act of 1940, as amended (the "Investment
Company Act");
(n) Neither the Company nor any of its affiliates does business with
the government of Cuba or with any person or affiliate located in Cuba within
the meaning of Section 517.075, Florida Statutes;
(o) The Company owns or possesses adequate rights to use all patents,
patent rights, inventions, trade secrets, know-how, trademarks, service marks,
trade names, copyrights and other intellectual property rights that are
necessary to conduct its business as described in the Prospectus; the
expiration of any patents, patent rights, trade secrets, trademarks, service
marks, trade names, copyrights or other intellectual property rights would not
have a material adverse effect on the general affairs, management, the current
or future financial position, business prospects, stockholders' equity or
results of operations of the Company; and the Company has not received any
notice of, and has no knowledge of, any infringement of or conflict with
asserted rights of the Company by others with respect to any patent, patent
rights, inventions, trade secrets, know-how, trademarks, service marks, trade
names, copyrights or other intellectual property rights that, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
have a material adverse effect on the general affairs, management, the current
or future financial position, business prospects, stockholders' equity or
results of operations of the Company;
(p) The Company maintains insurance with insurers of recognized
financial responsibility of the types and in the amounts generally deemed
adequate for its business and consistent with insurance coverage maintained by
similar companies in similar businesses, including, but not limited to,
insurance covering real and personal property owned or leased by the Company
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force and
effect; the Company has not been refused any insurance coverage sought or
applied for; and the Company has no reason to believe that it will not be able
to renew its existing insurance coverage as and when such coverage expires or
to obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not have a material adverse effect
on the general affairs, management, the current or future financial position,
business prospects, stockholders' equity or results of operations of the
Company;
(q) The Company has timely filed all necessary federal, state and
foreign income and franchise tax returns and has paid all taxes shown thereon
as due, and there is no tax deficiency that has been or, to the Company's
knowledge, might be asserted against the Company that might have a material
adverse effect on the general affairs, management, the current or future
financial position, business prospects, stockholders' equity or results of
operations of the Company; and all tax liabilities are adequately provided for
on the books of the Company;
(r) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general
4
<PAGE> 5
or specific authorizations, (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets, (iii)
access to assets is permitted only in accordance with management's general or
specific authorization, and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences;
(s) There are no contracts or other documents that are required to be
described in the Prospectus or to be filed as exhibits to the Initial
Registration Statement by the Act which are not so filed;
(t) No labor disturbance by the employees of the Company exists or, to
the knowledge of the Company, is imminent which will have a material adverse
effect on the business, financial condition, results of operations or prospects
of the Company;
(u) The Company does not own, directly or indirectly, any interest in
any corporation, partnership, business trust or other entity, which would be
required to be set forth in Exhibit 21 to the Registration Statement;
(v) The Company does not have any debt securities or preferred stock
that is rated by any "nationally recognized statistical rating organization",
as that term is defined by the Commission for purposes of Rule 426(g)(2) under
the Act;
(w) Arthur Anderson LLP, who have certified certain financial
statements of the Company, are independent public accountants as required by
the Act and the rules and regulations of the Commission thereunder; and
(x) The Company has reviewed its operations and any third parties with
which the Company has a material relationship to evaluate the extent to which
the business or operations of the Company will be affected by the Year 2000
Problem. As a result of such review, the Company has no reason to believe, and
does not believe, that the Year 2000 Problem will have a material adverse
effect on the general affairs, management, the current or future financial
position, business prospects, stockholders' equity or results of operations of
the Company or result in any material loss or interference with the Company's
business or operations. The "Year 2000 Problem" as used herein means any
significant risk that computer hardware or software used in the receipt,
transmission, processing, manipulation, storage, retrieval, retransmission or
other utilization of data or in the operation of mechanical or electrical
systems of any kind will not, in the case of dates or time periods occurring
after December 31, 1999, function at least as effectively as in the case of
dates or time periods occurring prior to January 1, 2000.
2. Subject to the terms and conditions herein set forth, (a) the
Company agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company,
at a purchase price per share of $____________, the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule I hereto and (b) in the
event and to the extent that the Underwriters shall exercise the election to
purchase Optional Shares as provided below, the Company agrees to issue and
sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company, at the purchase price
per share set forth in clause (a) of this Section 2, that portion of the number
of Optional Shares as to which such election shall have been exercised (to be
adjusted by you so as to eliminate fractional shares) determined by multiplying
such number of Optional Shares by a fraction, the numerator of which is the
maximum number of Optional Shares which such Underwriter is entitled to
purchase as
5
<PAGE> 6
set forth opposite the name of such Underwriter in Schedule I hereto and the
denominator of which is the maximum number of Optional Shares that all of the
Underwriters are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to _______________ Optional Shares, at the purchase price per
share set forth in the paragraph above, for the sole purpose of covering sales
of shares in excess of the number of Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the
Company, given within a period of 30 calendar days after the date of this
Agreement, setting forth the aggregate number of Optional Shares to be
purchased and the date on which such Optional Shares are to be delivered, as
determined by you but in no event earlier than the First Time of Delivery (as
defined in Section 4 hereof) or, unless you and the Company otherwise agree in
writing, earlier than two or later than ten business days after the date of
such notice.
3. Upon the authorization by you of the release of the Firm Shares,
the several Underwriters propose to offer the Firm Shares for sale upon the
terms and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours'
prior notice to the Company shall be delivered by or on behalf of the Company
to Goldman, Sachs & Co., for the account of such Underwriter, against payment
by or on behalf of such Underwriter of the purchase price therefor by wire
transfer of Federal (same-day) funds to the account specified by the Company to
Goldman, Sachs & Co. at least forty-eight hours in advance. The Company will
cause the certificates representing the Shares to be made available for
checking and packaging at least twenty-four hours prior to the Time of Delivery
(as defined below) with respect thereto at the office of Goldman, Sachs & Co.,
85 Broad Street, New York, New York 10004 (the "Designated Office"). The time
and date of such delivery and payment shall be, with respect to the Firm
Shares, 9:30 a.m., New York City time, on ____________, 1999 or such other time
and date as Goldman, Sachs & Co. and the Company may agree upon in writing,
and, with respect to the Optional Shares, 9:30 a.m., New York time, on the date
specified by Goldman, Sachs & Co. in the written notice given by Goldman, Sachs
& Co. of the Underwriters' election to purchase such Optional Shares, or such
other time and date as Goldman, Sachs & Co. and the Company may agree upon in
writing. Such time and date for delivery of the Firm Shares is herein called
the "First Time of Delivery", such time and date for delivery of the Optional
Shares, if not the First Time of Delivery, is herein called the "Second Time of
Delivery", and each such time and date for delivery is herein called a "Time of
Delivery".
(b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 7 hereof, including the cross
receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(k) hereof, will be delivered at the offices
of Fulbright & Jaworski L.L.P., 1301 McKinney, Suite 5100, Houston, Texas 77010
(the "Closing Location"), and the Shares will be delivered at the Designated
Office, all at such Time of Delivery. A meeting will be held at the Closing
Location at ____ p.m., New York City time, on the New York Business Day next
preceding such Time of Delivery, at which meeting the final drafts of the
documents to be delivered pursuant to the preceding sentence will be available
for review by the parties hereto. For the purposes of this Section 4, "New York
Business Day" shall mean each
6
<PAGE> 7
Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which
banking institutions in New York are generally authorized or obligated by law
or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus which
shall be disapproved by you promptly after reasonable notice thereof; to advise
you, promptly after it receives notice thereof, of the time when any amendment
to the Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed and to
furnish you with copies thereof; to advise you, promptly after it receives
notice thereof, of the issuance by the Commission of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or
prospectus, of the suspension of the qualification of the Shares for offering
or sale in any jurisdiction, of the initiation or threatening of any proceeding
for any such purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for additional
information; and, in the event of the issuance of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or
prospectus or suspending any such qualification, promptly to use its best
efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with
such laws so as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution of
the Shares, provided that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction;
(c) Prior to 10:00 A.M., New York City time, on the New York Business
Day next succeeding the date of this Agreement and from time to time, to
furnish the Underwriters with copies of the Prospectus in New York City in such
quantities as you may reasonably request, and, if the delivery of a prospectus
is required at any time prior to the expiration of nine months after the time
of issue of the Prospectus in connection with the offering or sale of the
Shares and if at such time any event shall have occurred as a result of which
the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not misleading, or, if
for any other reason it shall be necessary during such period to amend or
supplement the Prospectus in order to comply with the Act, to notify you and
upon your request to prepare and furnish without charge to each Underwriter and
to any dealer in securities as many copies as you may from time to time
reasonably request of an amended Prospectus or a supplement to the Prospectus
which will correct such statement or omission or effect such compliance, and in
case any Underwriter is required to deliver a prospectus in connection with
sales of any of the Shares at any time nine months or more after the time of
issue of the Prospectus, upon your request but at the expense of such
Underwriter, to prepare and deliver to such Underwriter as many copies as you
may request of an amended or supplemented Prospectus complying with Section
10(a)(3) of the Act;
7
<PAGE> 8
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c) under
the Act), an earnings statement of the Company (which need not be audited)
complying with Section 11(a) of the Act and the rules and regulations
thereunder (including, at the option of the Company, Rule 158);
(e) During the period beginning from the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, not to offer,
sell, contract to sell or otherwise dispose of, except as provided hereunder
any securities of the Company that are substantially similar to the Shares,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or any such
substantially similar securities (other than pursuant to employee stock option
plans existing on, or upon the conversion or exchange of convertible or
exchangeable securities outstanding as of, the date of this Agreement), without
your prior written consent;
(f) To furnish to its stockholders as soon as practicable after the
end of each fiscal year an annual report (including a balance sheet and
statements of income, stockholders' equity and cash flows of the Company and
its consolidated subsidiaries certified by independent public accountants) and,
as soon as practicable after the end of each of the first three quarters of
each fiscal year (beginning with the fiscal quarter ending after the effective
date of the Registration Statement), to make available to its stockholders
consolidated summary financial information of the Company and its subsidiaries
for such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to deliver
to you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the Company is listed; and (ii)
such additional information concerning the business and financial condition of
the Company as you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement in the manner specified in the Prospectus under the
caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the Shares on the
National Association of Securities Dealers Automated Quotations National Market
System ("NASDAQ");
(j) To file with the Commission such information on Form 10-Q or Form
10-K as may be required by Rule 463 under the Act; and
(k) If the Company elects to rely upon Rule 462(b), the Company shall
file a Rule 462(b) Registration Statement with the Commission in compliance
with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this
Agreement, and the Company shall at the time of filing either pay to the
Commission the filing fee for the Rule 462(b) Registration Statement or give
irrevocable instructions for the payment of such fee pursuant to Rule 111(b)
under the Act.
6. The Company covenants and agrees with the several Underwriters that
the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's
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<PAGE> 9
counsel and accountants in connection with the registration of the Shares under
the Act and all other expenses in connection with the preparation, printing and
filing of the Registration Statement, any Preliminary Prospectus and the
Prospectus and amendments and supplements thereto and the mailing and
delivering of copies thereof to the Underwriters and dealers; (ii) the cost of
printing or producing any Agreement among Underwriters, this Agreement, the
Blue Sky Memorandum, closing documents (including any compilations thereof) and
any other documents in connection with the offering, purchase, sale and
delivery of the Shares; (iii) all expenses in connection with the qualification
of the Shares for offering and sale under state securities laws as provided in
Section 5(b) hereof, including the fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with the
Blue Sky survey (iv) all fees and expenses in connection with listing the
Shares on the NASDAQ; (v) the filing fees incident to, and the fees and
disbursements of counsel for the Underwriters in connection with, securing any
required review by the National Association of Securities Dealers, Inc. of the
terms of the sale of the Shares; (vi) the cost of preparing stock certificates;
(vii) the cost and charges of any transfer agent or registrar; and (viii) all
other costs and expenses incident to the performance of its obligations
hereunder which are not otherwise specifically provided for in this Section. It
is understood, however, that, except as provided in this Section, and Sections
8 and 11 hereof, the Underwriters will pay all of their own costs and expenses,
including the fees of their counsel, stock transfer taxes on resale of any of
the Shares by them, and any advertising expenses connected with any offers they
may make.
7. The obligations of the Underwriters hereunder, as to the Shares to
be delivered at each Time of Delivery, shall be subject, in their discretion,
to the condition that all representations and warranties and other statements
of the Company herein are, at and as of such Time of Delivery, true and
correct, the condition that the Company shall have performed all of its
obligations hereunder theretofore to be performed, and the following additional
conditions:
(a) The Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) within the applicable time period prescribed for such filing by
the rules and regulations under the Act and in accordance with Section 5(a)
hereof; if the Company has elected to rely upon Rule 462(b), the Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., Washington,
D.C. time, on the date of this Agreement; no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on
the part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Fulbright & Jaworski L.L.P., counsel for the Underwriters, shall
have furnished to you such written opinion or opinions (a draft of each such
opinion is attached as Annex II(a) hereto), dated such Time of Delivery, with
respect to the matters covered in paragraphs (i), (ii), (vi), (x) and (xiv) of
subsection (c) below as well as such other related matters as you may
reasonably request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon such
matters;
(c) Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
counsel for the Company, shall have furnished to you their written opinion (a
draft of such opinion is attached as Annex II(b) hereto), dated such Time of
Delivery, in form and substance satisfactory to you, to the effect that:
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<PAGE> 10
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with power and authority (corporate and other) to own its properties
and conduct its business as described in the Prospectus;
(ii) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of the Company
(including the Shares being delivered at such Time of Delivery) have been duly
and validly authorized and issued and are fully paid and non-assessable; and
the Shares conform to the description of the Stock contained in the Prospectus;
(iii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing under the
laws of each other jurisdiction in which it owns or leases properties or
conducts any business so as to require such qualification or is subject to no
material liability or disability by reason of failure to be so qualified in any
such jurisdiction and the Company does not own, directly or indirectly, any
interest in any corporation, partnership, business trust or other entity, which
would be required to be set forth in Exhibit 21 to the Registration Statement
(such counsel being entitled to rely in respect of the opinion in this clause
upon opinions of local counsel and in respect of matters of fact upon
certificates of officers of the Company, provided that such counsel shall state
that they believe that both you and they are justified in relying upon such
opinions and certificates);
(iv) The Company has good and marketable title in fee simple to
all real property owned by it, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or such
as do not materially affect the value of such property and do not interfere
with the use made and proposed to be made of such property by the Company; and
any real property and buildings held under lease by the Company are held by
them under valid, subsisting and enforceable leases with such exceptions as are
not material and do not interfere with the use made and proposed to be made of
such property and buildings by the Company (in giving the opinion in this
clause, such counsel may state that no examination of record titles for the
purpose of such opinion has been made, and that they are relying upon a general
review of the titles of the Company, upon opinions of local counsel and
abstracts, reports and policies of title companies rendered or issued at or
subsequent to the time of acquisition of such property by the Company, upon
opinions of counsel to the lessors of such property and, in respect to matters
of fact, upon certificates of officers of the Company, provided that such
counsel shall state that they believe that both you and they are justified in
relying upon such opinions, abstracts, reports, policies and certificates);
(v) To such counsel's knowledge and other than as set forth in
the Prospectus, there are no legal or governmental proceedings pending to which
the Company is a party or of which any property of the Company is the subject
which, if determined adversely to the Company, would individually or in the
aggregate have a material adverse effect on the current or future consolidated
financial position, stockholders' equity or results of operations of the
Company; and, to such counsel's knowledge, no such proceedings are threatened
or contemplated by governmental authorities or threatened by others;
(vi) This Agreement has been duly authorized, executed and
delivered by the Company;
(vii) The issue and sale of the Shares being delivered at such
Time of Delivery by the Company and the compliance by the Company with all of
the provisions of this Agreement and the consummation of the transactions
herein contemplated will not conflict with or result in a breach
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<PAGE> 11
or violation of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument known to such counsel to which the Company is a party
or by which the Company is bound or to which any of the property or assets of
the Company is subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or Bylaws of the Company or any
statute or any order, rule or regulation known to such counsel of any court or
governmental agency or body having jurisdiction over the Company or any of its
properties;
(viii) No consent, approval, authorization, order, registration
or qualification of or with any such court or governmental agency or body is
required for the issue and sale of the Shares or the consummation by the
Company of the transactions contemplated by this Agreement, except the
registration under the Act of the Shares, and such consents, approvals,
authorizations, registrations or qualifications as may be required under state
securities or Blue Sky laws in connection with the purchase and distribution of
the Shares by the Underwriters;
(ix) The Company is not in violation of its Certificate of
Incorporation or Bylaws or in default in the performance or observance of any
material obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust, loan agreement, lease or other agreement or
instrument to which it is a party or by which it or any of its properties may
be bound;
(x) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock and under the caption "Underwriting", insofar
as they purport to describe the provisions of the laws and documents referred
to therein, are accurate, complete and fair;
(xi) The statements set forth in the Prospectus under the
captions "Risk Factors --Substantial Sales of Our Common Stock After the
Offering Could Cause Our Stock Price to Fall", "Business --Government
Regulation", "Management -- 1999 Omnibus Equity Incentive Plan", "Management --
1999 Employee Stock Purchase Plan", "Management -- 1999 Non-employee Directors
Option Plan", "Certain Transactions", "Description of Capital Stock" and
"Shares Eligible for Future Sale" to the extent that they constitute matters of
law or legal conclusions, are accurate and complete;
(xii) The description in the Registration Statement and
Prospectus of the Certificate of Incorporation and Bylaws of the Company are
accurate and fairly present the information required to be presented by the Act
and the applicable Rules and Regulations;
(xiii) The Company is not an "investment company", as such term
is defined in the Investment Company Act;
(xiv) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior to such
Time of Delivery (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion) comply as to form in
all material respects with the requirements of the Act and the rules and
regulations thereunder; although they do not assume any responsibility for, and
have not independently verified, the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus, except
for those referred to in the opinion in subsection (x) of this Section 7(c),
they have no reason to believe that, as of its effective date, the Registration
Statement or any further amendment thereto made by the Company prior to such
Time of Delivery (other than the financial statements and related schedules
therein, as to which such counsel need
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<PAGE> 12
express no opinion) contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading or that, as of its date, the Prospectus or
any further amendment or supplement thereto made by the Company prior to such
Time of Delivery (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion) contained an untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading or that, as of such Time of Delivery, either the
Registration Statement or the Prospectus or any further amendment or supplement
thereto made by the Company prior to such Time of Delivery (other than the
financial statements and related schedules therein, as to which such counsel
need express no opinion) contains an untrue statement of a material fact or
omits to state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading; and they
do not know of any amendment to the Registration Statement required to be filed
or of any contracts or other documents of a character required to be filed as
an exhibit to the Registration Statement or required to be described in the
Registration Statement or the Prospectus which are not filed or described as
required; and
(xv) Except as set forth in the Registration Statement and
Prospectus, no holders of Stock or other securities of the Company have
registration rights with respect to securities of the Company and, except as
set forth in the Registration Statement and Prospectus, all holders of
securities of the Company having rights known to such counsel to registration
of such shares of Stock or other securities because of the filing of the
Registration Statement by the Company have, with respect to the offering
contemplated hereby, waive such rights or such rights have expired by reason of
lapse of time following notification of the Company's intent to file the
Registration Statement.
(d) On the date of the Prospectus at a time prior to the execution of
this Agreement, at 9:30 a.m., New York City time, on the effective date of any
post-effective amendment to the Registration Statement filed subsequent to the
date of this Agreement and also at each Time of Delivery, Arthur Andersen LLP
shall have furnished to you a letter or letters, dated the respective dates of
delivery thereof, in form and substance satisfactory to you, to the effect set
forth in Annex I hereto (the executed copy of the letter delivered prior to the
execution of this Agreement is attached as Annex I(a) hereto and a draft of the
form of letter to be delivered on the effective date of any post-effective
amendment to the Registration Statement and as of each Time of Delivery is
attached as Annex I(b) hereto);
(e) (i) The Company shall not have sustained since the date of the
latest audited financial statements included in the Prospectus any loss or
interference with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus, and (ii) since the respective dates as of which
information is given in the Prospectus there shall not have been any change in
the capital stock or long-term debt of the Company or any change, or any
development involving a prospective change, in or affecting the general
affairs, management, financial position, stockholders' equity or results of
operations of the Company, otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in clause (i) or
(ii), is in the judgment of the Representatives so material and adverse as to
make it impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered at such Time of Delivery on the terms
and in the manner contemplated in the Prospectus;
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<PAGE> 13
(f) On or after the date hereof (i) no downgrading shall have occurred
in the rating accorded the Company's debt securities by any "nationally
recognized statistical rating organization", as that term is defined by the
Commission for purposes of Rule 436(g)(2) under the Act, and (ii) no such
organization shall have publicly announced that it has under surveillance or
review, with possible negative implications, its rating of any of the Company's
debt securities;
(g) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange or on NASDAQ; (ii) a suspension or
material limitation in trading in the Company's securities on NASDAQ; (iii) a
general moratorium on commercial banking activities declared by either Federal
or New York or Texas State authorities; or (iv) the outbreak or escalation of
hostilities involving the United States or the declaration by the United States
of a national emergency or war, if the effect of any such event specified in
this Clause (iv) in the judgment of the Representatives makes it impracticable
or inadvisable to proceed with the public offering or the delivery of the
Shares being delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(h) The Shares to be sold at such Time of Delivery shall have been
duly listed for quotation on NASDAQ;
(i) The Company shall have obtained and delivered to the Underwriters
executed copies of an agreement from all stockholders of the Company,
substantially to the effect set forth in Subsection 5(e) hereof in form and
substance satisfactory to you;
(j) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement;
(k) All the representations and warranties of the Company contained in
this Agreement shall be true and correct at such Time of Delivery with the same
force and effect as if made on and as of such Time of Delivery;
(l) The Company shall not have failed at or prior to such Time of
Delivery to perform or comply with any of the agreements herein contained and
required to be performed or complied with by the Company at or prior to such
Time of Delivery;
(m) The Company shall have furnished or caused to be furnished to you
at such Time of Delivery certificates of officers of the Company satisfactory
to you as to the accuracy of the representations and warranties of the Company
herein at and as of such Time of Delivery, as to the performance by the Company
of all of its obligations hereunder to be performed at or prior to such Time of
Delivery, as to the matters set forth in subsections (a) and (e) of this
Section and as to such other matters as you may reasonably request;
(n) The Company shall have been reincorporated under the General
Corporation Law of the State of Delaware; and
(o) The Company shall have effected a stock split in respect of the
Stock as described in the Registration Statement and the Prospectus.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect
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<PAGE> 14
thereof) arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse each Underwriter
for any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such action or claim as such
expenses are incurred; provided, however, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any such amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through Goldman, Sachs & Co. expressly for use
therein.
(b) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission
was made in any Preliminary Prospectus, the Registration Statement or the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through Goldman, Sachs & Co. expressly for use therein; and will
reimburse the Company for any legal or other expenses reasonably incurred by
the Company in connection with investigating or defending any such action or
claim as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the
indemnifying party), and, after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under such
subsection for any legal expenses of other counsel or any other expenses, in
each case subsequently incurred by such indemnified party, in connection with
the defense thereof other than reasonable costs of investigation. No
indemnifying party shall, without the written consent of the indemnified party,
effect the settlement or compromise of, or consent to the entry of any judgment
with respect to, any pending or threatened action or claim in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified party is an actual or potential party to such action or claim)
unless such settlement, compromise or judgment (i) includes an
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<PAGE> 15
unconditional release of the indemnified party from all liability arising out
of such action or claim and (ii) does not include a statement as to or an
admission of fault, culpability or a failure to act, by or on behalf of any
indemnified party.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (c) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company on the
one hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that it would not
be just and equitable if contributions pursuant to this subsection (d) were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this
subsection (d). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this subsection (d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who
controls any Underwriter within the meaning of the Act; and the obligations of
the Underwriters under this Section 8 shall be in addition to any liability
which the respective
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<PAGE> 16
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company (including any person
who, with his or her consent, is named in the Registration Statement as about
to become a director of the Company) and to each person, if any, who controls
the Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within thirty-six hours
after such default by any Underwriter you do not arrange for the purchase of
such Shares, then the Company shall be entitled to a further period of
thirty-six hours within which to procure another party or other parties
satisfactory to you to purchase such Shares on such terms. In the event that,
within the respective prescribed periods, you notify the Company that you have
so arranged for the purchase of such Shares, or the Company notifies you that
it has so arranged for the purchase of such Shares, you or the Company shall
have the right to postpone such Time of Delivery for a period of not more than
seven days, in order to effect whatever changes may thereby be made necessary
in the Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion may thereby be
made necessary. The term "Underwriter" as used in this Agreement shall include
any person substituted under this Section with like effect as if such person
had originally been a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the Company
as provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one-eleventh of the aggregate number of all
the Shares to be purchased at such Time of Delivery, then the Company shall
have the right to require each non-defaulting Underwriter to purchase the
number of shares which such Underwriter agreed to purchase hereunder at such
Time of Delivery and, in addition, to require each non-defaulting Underwriter
to purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the Company
as provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased exceeds one-eleventh of the aggregate number of all the
Shares to be purchased at such Time of Delivery, or if the Company shall not
exercise the right described in subsection (b) above to require non-defaulting
Underwriters to purchase Shares of a defaulting Underwriter or Underwriters,
then this Agreement (or, with respect to the Second Time of Delivery, the
obligations of the Underwriters to purchase and of the Company to sell the
Optional Shares) shall thereupon terminate, without liability on the part of
any non-defaulting Underwriter or the Company, except for the expenses to be
borne by the Company and the Underwriters as provided in Section 6 hereof and
the indemnity and contribution agreements in Section 8 hereof; but nothing
herein shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations,
warranties and other statements of the Company and the several Underwriters, as
set forth in this Agreement or made by or on behalf of them, respectively,
pursuant to this Agreement, shall remain in full force and effect,
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<PAGE> 17
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of any Underwriter or any controlling person of any
Underwriter, or the Company, or any officer or director or controlling person
of the Company, and shall survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9
hereof, the Company shall not then be under any liability to any Underwriter
except as provided in Sections 6 and 8 hereof; but, if for any other reason,
any Shares are not delivered by or on behalf of the Company as provided herein,
the Company will reimburse the Underwriters through you for all out-of-pocket
expenses approved in writing by you, including fees and disbursements of
counsel, reasonably incurred by the Underwriters in making preparations for the
purchase, sale and delivery of the Shares not so delivered, but the Company
shall then be under no further liability to any Underwriter except as provided
in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex
or facsimile transmission to you as the representatives in care of Goldman,
Sachs & Co., 32 Old Slip, 21st Floor, New York, New York 10005, Attention:
Registration Department; and if to the Company shall be delivered or sent by
mail to the address of the Company set forth in the Registration Statement,
Attention: Secretary; provided, however, that any notice to an Underwriter
pursuant to Section 8(c) hereof shall be delivered or sent by mail, telex or
facsimile transmission to such Underwriter at its address set forth in its
Underwriters' Questionnaire, or telex constituting such Questionnaire, which
address will be supplied to the Company by you upon request. Any such
statements, requests, notices or agreements shall take effect upon receipt
thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and, to the extent provided in
Sections 8 and 10 hereof, the officers and directors of the Company and each
person who controls the Company or any Underwriter, and their respective heirs,
executors, administrators, successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. No purchaser of
any of the Shares from any Underwriter shall be deemed a successor or assign by
reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein,
the term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign
and return to us seven (7) counterparts hereof, and upon the acceptance hereof
by you, on behalf of each of the Underwriters, this letter and such acceptance
hereof shall constitute a binding agreement between
17
<PAGE> 18
each of the Underwriters and the Company. It is understood that your acceptance
of this letter on behalf of each of the Underwriters is pursuant to the
authority set forth in a form of Agreement among Underwriters, the form of
which shall be submitted to the Company for examination upon request, but
without warranty on your part as to the authority of the signers thereof.
Very truly yours,
Ashford.com, Inc.
By:
------------------------------------
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
BancBoston Robertson Stephens Inc.
Deutsche Bank Securities Inc.
E*TRADE Securities, Inc.
By:
-------------------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
18
<PAGE> 19
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF PURCHASED IF
FIRM SHARES MAXIMUM OPTION
UNDERWRITER TO BE PURCHASED EXERCISED
----------- --------------- ------------------
<S> <C> <C>
Goldman, Sachs & Co.............................
BancBoston Robertson Stephens Inc...............
Deutsche Bank Securities Inc....................
E*TRADE Securities, Inc. .......................
[NAMES OF OTHER UNDERWRITERS]...................
Total........................ --------------- ------------------
=============== ==================
</TABLE>
19
<PAGE> 20
ANNEX I
Pursuant to Section 7(d) of the Underwriting Agreement, the
accountants shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with
respect to the Company within the meaning of the Act and the
applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
financial forecasts and/or pro forma financial information) examined
by them and included in the Prospectus or the Registration Statement
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations thereunder; and, if applicable, they have made a review in
accordance with standards established by the American Institute of
Certified Public Accountants of the unaudited interim financial
statements, selected financial data, pro forma financial information,
financial forecasts and/or condensed financial statements derived from
audited financial statements of the Company for the periods specified
in such letter, as indicated in their reports thereon, copies of which
have been separately furnished to the representatives of the
Underwriters (the "Representatives");
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants
of the unaudited condensed statements of income, balance sheets and
statements of cash flows included in the Prospectus as indicated in
their reports thereon copies of which have been separately furnished
to the Representatives and on the basis of specified procedures
including inquiries of officials of the Company who have
responsibility for financial and accounting matters regarding whether
the unaudited condensed financial statements referred to in paragraph
(vi)(A)(i) below comply as to form in all material respects with the
applicable accounting requirements of the Act and the related
published rules and regulations, nothing came to their attention that
cause them to believe that the unaudited condensed financial
statements do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the related
published rules and regulations;
(iv) The unaudited selected financial information with respect
to the results of operations and financial position of the Company for
the five most recent fiscal years included in the Prospectus agrees
with the corresponding amounts (after restatements where applicable)
in the audited financial statements for such five fiscal years which
were included or incorporated by reference in the Company's Annual
Reports on Form 10-K for such fiscal years;
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K
and on the basis of limited procedures specified in such letter
nothing came to their attention as a result of the foregoing
procedures that caused them to believe that this information does not
conform in all material respects with the disclosure requirements of
Items 301, 302, 402 and 503(d), respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and
other information referred to below, a reading of the latest available
interim financial statements of the Company, inspection of the minute
books of the since the date of
<PAGE> 21
the latest audited financial statements included in the Prospectus,
inquiries of officials of the Company responsible for financial and
accounting matters and such other inquiries and procedures as may be
specified in such letter, nothing came to their attention that caused
them to believe that:
(A) (i) the unaudited statements of income, balance
sheets and statements of cash flows included in the
Prospectus do not comply as to form in all material
respects with the applicable accounting requirements of the
Act and the related published rules and regulations, or
(ii) any material modifications should be made to the
unaudited condensed statements of income, balance sheets
and statements of cash flows included in the Prospectus for
them to be in conformity with generally accepted accounting
principles;
(B) any other unaudited income statement data and
balance sheet items included in the Prospectus do not agree
with the corresponding items in the unaudited financial
statements from which such data and items were derived, and
any such unaudited data and items were not determined on a
basis substantially consistent with the basis for the
corresponding amounts in the audited financial statements
included in the Prospectus;
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived any
unaudited condensed financial statements referred to in
Clause (A) and any unaudited income statement data and
balance sheet items included in the Prospectus and referred
to in Clause (B) were not determined on a basis
substantially consistent with the basis for the audited
financial statements included in the Prospectus;
(D) any unaudited pro forma condensed financial
statements included in the Prospectus do not comply as to
form in all material respects with the applicable
accounting requirements of the Act and the published rules
and regulations thereunder or the pro forma adjustments
have not been properly applied to the historical amounts in
the compilation of those statements;
(E) as of a specified date not more than five days
prior to the date of such letter, there have been any
changes in the capital stock (other than issuances of
capital stock upon exercise of options and stock
appreciation rights, upon earn-outs of performance shares
and upon conversions of convertible securities, in each
case which were outstanding on the date of the latest
financial statements included in the Prospectus) or any
increase in the long-term debt of the, or any decreases in
net current assets or stockholders' equity or other items
specified by the Representatives, or any increases in any
items specified by the Representatives, in each case as
compared with amounts shown in the latest balance sheet
included in the Prospectus, except in each case for
changes, increases or decreases which the Prospectus
discloses have occurred or may occur or which are described
in such letter; and
(F) for the period from the date of the latest
financial statements included in the Prospectus to the
specified date referred to in clause (E) there were any
decreases in net revenues or operating profit or the total
or per share amounts of net income or
2
<PAGE> 22
other items specified by the Representatives, or any
increases in any items specified by the Representatives, in
each case as compared with the comparable period of the
preceding year and with any other period of corresponding
length specified by the Representatives, except in each
case for decreases or increases which the Prospectus
discloses have occurred or may occur or which are described
in such letter; and
(vii) In addition to the examination referred to in their
report(s) included in the Prospectus and the limited procedures,
inspection of minute books, inquiries and other procedures referred to
in paragraphs (iii) and (vi) above, they have carried out certain
specified procedures, not constituting an examination in accordance
with generally accepted auditing standards, with respect to certain
amounts, percentages and financial information specified by the
Representatives, which are derived from the general accounting records
of the Company, which appear in the Prospectus, or in Part II of, or
in exhibits and schedules to, the Registration Statement specified by
the Representatives, and have compared certain of such amounts,
percentages and financial information with the accounting records of
the Company and have found them to be in agreement.
3
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Ashford Buying Company, a Delaware corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement.
Houston, Texas
July 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001089909
<NAME> ASHFORD.COM, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 893,447
<SECURITIES> 100,000
<RECEIVABLES> 135,619
<ALLOWANCES> 0
<INVENTORY> 3,273,112
<CURRENT-ASSETS> 4,854,938
<PP&E> 301,853
<DEPRECIATION> 48,595
<TOTAL-ASSETS> 5,108,196
<CURRENT-LIABILITIES> 2,298,816
<BONDS> 0
0
2,000
<COMMON> 2,250
<OTHER-SE> 2,805,130
<TOTAL-LIABILITY-AND-EQUITY> 5,108,196
<SALES> 5,937,555
<TOTAL-REVENUES> 5,937,555
<CGS> 5,109,610
<TOTAL-COSTS> 5,109,610
<OTHER-EXPENSES> 2,099,363
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,041
<INCOME-PRETAX> (1,264,270)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,264,270)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,264,270)
<EPS-BASIC> (.58)
<EPS-DILUTED> .00
</TABLE>
