<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 24, 1999.
REGISTRATION NO. 333-82759
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
ASHFORD.COM, INC.
(Exact Name of Registrant as Specified in Its Charter)
----------------------
<TABLE>
<S> <C> <C>
DELAWARE 5944 76-0565398
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
3800 BUFFALO SPEEDWAY, SUITE 400
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
3800 BUFFALO SPEEDWAY, SUITE 400
HOUSTON, TEXAS 77098
(713) 369-1300
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
----------------------
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. [ ]
----------------------
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 AUGUST 24, 1999.
6,250,000 Shares
ASHFORD.COM, INC.
Common Stock
----------------------
This is an initial public offering of shares of common stock of
Ashford.com, Inc. All of the 6,250,000 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 $11.00 and $13.00. Ashford.com intends to list the common
stock on the Nasdaq National Market under the symbol "ASFD".
See "Risk Factors" beginning on page 7 to read about 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
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<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Ashford.com................... $ $
</TABLE>
In connection with this offering, the underwriters have reserved up to
437,500 shares of common stock being sold by Ashford.com for sale at the initial
public offering price to directors, officers, employees and friends of
Ashford.com.
The underwriters may purchase up to an additional 937,500 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*OFFERING
---------------------
Prospectus dated , 1999.
<PAGE> 3
DESCRIPTION OF ARTWORK
Photograph of crowded shopping area: "Have you ever thought that there must be
a better way to shop for luxury and premium products than running from store to
store only to find large crowds, a limited selection and indifferent
salespeople?"
Triangle points to Ashford.com logo, text inside of triangle reads "We thought
so..."
Photograph of a leather belt beside the text "Ashford.com shoppers will find
an extensive selection of luxury and premium products, including new and
vintage watches, fine writing instruments, fragrances, sunglasses and other
personal accessories. We offer over 8,000 styles of products from over 150
leading brands. Our online store features detailed product information,
reviews and over 75,000 product photos. We also provide our customers with
personal shopping services such as birthday reminders and wish lists. Our
online store is available 24 hours a day, seven days a week. We are committed
to excellent customer service that includes on-staff product experts, and free
gift wrapping and shipping. All our products are competitively priced. Our
combination of selection, convenience, service and value provides customers
with a luxury shopping experience-only nicer." Photographs beside text are of
a leather purse and a necklace.
Photograph of Ashford.com home page with descriptions. Above photo of homepage
there are photographs of a cologne bottle, a ladies watch and a mens' watch.
To the left of the photograph, text "Our home page features holiday offerings,
highlights special promotions and introduces new additions to our collection.
The home page is updated bi-weekly so there is always something new to see."
and "Our Private Reserve enables customers to create their own Ashford.com
collection. Customers can save and return to their personal reserve on future
visits."
Above the photograph, text "The navigation bar leads you to our various
departments--Watches, Vintage Watches, Writing Instruments, Personal
Accessories, Fragrances, Sunglasses and Boutiques." and "Search: Each
department lets customers browse by brand, activity, price, gender or other
features."
To the right of the photograph, text "Exclusives: A bi-weekly collection of
special offers at Ashford.com. We feature great finds from across our
departments at extraordinary values." and "The A Plus Club: In our preferred
customer program, members receive advance notification of special buying
opportunities, previews of new items and membership reward updates." and
"What's Hot: Our featured fashion editor, Jill Newman, comments on the latest
styles, trends and up-and-coming designers for luxury and premium products."
Description of the homepage:
"Ashford.com/watches/vintage watches/writing instruments/personal
accessories/fragrances/sunglasses/boutiques" buttons along the top of the page.
Ashford.com logo above the following text: "Welcome to Ashford.com, a unique
shopping experience created to bring you the quality, sophistication and
selection in fine accessories you desire, as well as the online convenience,
service, security and guarantees you deserve. If you are a first-time visitor,
we invite you to register your shopping preferences with us. If you are one of
our regular customers, what can we do for you today?"
Display of five watches above "The understated style of white metal. Whether
sporty or sophisticated, watches featuring white metals not only present an
understated elegance, but also reflect the latest in fashion trends. Created
from stainless steel, white gold or platinum, these watches offer a subtle
beauty that complements everything from diamonds to denim. With a variety of
styles, in a range of prices, there has never been a better time to add one of
these distinctive timepieces to your collection."
Text "Gift Services: Our customers improve their gift-giving experience with an
array of gift services."
TEXT: "PRIVATE RESERVE
Select the items you'd like to think about and place them in your Private
Reserve where you can make your final choices before you buy.
Click to learn more."
Text: "GIFT SERVICES When you shop for yourself and others online at
Ashford.com we try to make your retail experience as personal and effortless as
possible. Our gift services and special conveniences include Private
Reminders, Wish Lists and Live Assistance--all features designed to help you
shop. We offer Gift Certificates for when you'd like to share the Ashford.com
experience. And of course, we offer Complementary Gift Wrapping and Shipping
with each purchase.
Click to learn more."
"ANNOUNCEMENTS
Ashford.com adds FENDI boutique Click to learn more.
Win a free jersey with every Festina purchase Click to learn more.
See our new Fall specials Click to learn more."
Photograph of Crescent leather belt
"EXCLUSIVES
BRAND: Crescent Belt
SERIES: Belt
MODEL: AS2 BK
DESCRIPTION: Alligator Belt
PRICE: $ 256.00
(TELL ME MORE)"
PHOTOGRAPH OF CARTIER WATCH
Cartier
MODEL: TF6
PRICE: 3,960.00
(TELL ME MORE)
"PREFERRED CUSTOMERS
(Ashford "A") PLUS
join our Preferred Customer Program"
"STYLE REVIEW
WHAT'S HOT
BY JILL NEWMAN
JULY 16, 1999
WHAT TO WATCH FOR
So many watches so little time! Looking for the right watch can be
overwhelming ...Continue Article"
"REVIEWS
Customer Reviews"
"CUSTOMER REVIEWS: Our customers participate in an open forum, sharing
experiences and opinion with each other and with us."
[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 and all information in this
prospectus relating to the number of shares of our common stock, preferred
stock, options and warrants is based upon information as of June 30, 1999 and
assumes a 4.75 to 1 forward split of our common stock to be effected before the
offering. This prospectus also assumes no exercise of the underwriters'
over-allotment option.
ASHFORD.COM, INC.
OUR BUSINESS
We are a Web-based retailer focused exclusively on luxury and premium
products, including new and vintage premium watches, fine writing instruments,
fragrances, sunglasses and other luxury goods. 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 we
currently carry over 7,000 new and vintage watch SKUs or styles. We have
recently expanded into additional product categories and currently offer a total
of more than 8,000 styles across all of our product categories. We believe that
our current luxury and premium product offerings, as well as other product
categories such as leather goods, ties, scarves and jewelry, 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 are able to 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 what we believe is one of the largest selections of
premium watches available on the Internet.
- - COMPELLING CONTENT AND DETAILED PRODUCT INFORMATION. Our goal is to help
customers make informed purchasing decisions by providing significant content
and detailed product information.
- - COMPETITIVE PRICES AND COMPELLING VALUE. We believe 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 and we aim to exceed
our customers' expectations by providing superior customer service, extended
warranties, complimentary shipping and gift-wrapping, and a generous return
policy.
- - PERSONALIZED SHOPPING EXPERIENCE. We provide convenient and useful shopping
services, such as an innovative online private reserve that allows customers
to choose and compare products side-by-side, gift suggestions and software
that allows real-time online customer interaction.
3
<PAGE> 5
- - 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
online market position in watches to become the primary destination for
consumers to purchase premium watches.
- - 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 are well
suited for online commerce.
- - 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 brand owners a powerful new distribution channel consistent
with their luxury identities.
- - EXPAND RELATIONSHIPS WITH LEADING LUXURY BRANDS. Our intent is to be the
Internet retailer of choice for leading luxury and premium brand owners.
- - 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.
- - 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.
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, including a net
loss of $3.2 million in the three months ended June 30, 1999, and as of June 30,
1999, we had an accumulated deficit of $4.4 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 7 of this prospectus.
CORPORATE INFORMATION
We were incorporated in Texas in March 1998 under the name NewWatch Company
and began conducting 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 3800 Buffalo Speedway, Suite 400, Houston,
Texas 77098. The telephone number is (713) 369-1300. Information contained on
our Web site does not constitute part of this prospectus.
4
<PAGE> 6
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 11,974,750 shares of common stock reserved for issuance under our
stock plans, of which 2,934,809 were subject to outstanding options as of June
30, 1999 with a weighted average exercise price of $0.27 per share and excludes
warrants to purchase 28,500 shares of common stock with a weighted average
exercise price of $0.43 per share. See "Underwriting", "Management -- Stock
Plans" and Notes 5 and 9 of the notes to our financial statements.
Shares offered by Ashford.com......... 6,250,000 shares
Shares to be outstanding after the
offering.............................. 36,864,429 shares
Shares owned by affiliates after the
offering.............................. 18,942,126 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"
5
<PAGE> 7
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 assumed conversion of outstanding Series A and Series B
preferred stock into common stock. The balance sheet data displayed in the "Pro
Forma" column reflect 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 6,250,000 shares of common
stock offered by us at an assumed initial public offering price of $12.00 per
share, after deducting the underwriting discount and estimated offering
expenses.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION THREE MONTHS ENDED
(MARCH 6, 1998) JUNE 30,
THROUGH -------------------------
MARCH 31, 1999 1998 1999
--------------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................ $ 5,938 $ 296 $ 3,623
Gross profit..................................... 828 16 626
Operating expenses:
Marketing and sales............................ 1,013 23 2,401
General and administrative..................... 1,086 91 1,705
----------- ----------- -----------
Loss from operations............................. (1,271) (98) (3,480)
Interest income (expense), net................... 7 -- 302
----------- ----------- -----------
Net loss......................................... $ (1,264) $ (98) $ (3,178)
=========== =========== ===========
Net loss per share -- basic and diluted.......... $ (0.12) $ (0.01) $ (0.27)
=========== =========== ===========
Pro forma net loss per share for the assumed
conversion of outstanding Series A and Series B
preferred stock -- basic and diluted........... $ (0.10) $ (0.01) $ (0.12)
=========== =========== ===========
Shares used to compute net loss per share --basic
and diluted.................................... 10,396,596 10,687,500 11,603,571
Shares used to compute pro forma net loss per
share for the assumed conversion of outstanding
Series A and Series B preferred stock -- basic
and diluted.................................... 13,263,606 10,687,500 26,995,400
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $24,502 $40,826 $109,376
Working capital...................................... 29,645 45,949 114,499
Total assets......................................... 32,108 48,432 116,982
Total stockholders' equity........................... 30,313 46,617 115,167
</TABLE>
6
<PAGE> 8
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. 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 and through June 30, 1999, we have expended
approximately $4.3 million 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 June 30, 1999, we had an accumulated deficit of $4.4 million. We
incurred net losses of $1.3 million for the fiscal year ended March 31, 1999 and
$3.2 million for the quarter ended June 30, 1999.
7
<PAGE> 9
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. The following are material factors that may harm our business or
cause our operating results to fluctuate:
- - our inability to obtain new customers at reasonable cost, retain existing
customers or encourage repeat purchases;
- - 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;
- - our inability to obtain product lines from our suppliers;
- - the availability and pricing of merchandise from vendors; and
- - increases in the cost of online or offline advertising.
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 approximately 40% 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.
8
<PAGE> 10
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".
IF WE ARE UNABLE TO PURCHASE OR CONTINUE TO PURCHASE CERTAIN PRODUCT LINES
DIRECTLY FROM THE BRAND OWNERS, OUR NET SALES COULD DECREASE.
We currently purchase watches directly from the brand owner on
approximately 55 of the 70 watch brands that we sell and 9 of the 12 writing
instrument brands that we sell. Watches purchased directly from brand owners
accounted for approximately 70% of all watches that we sold through June 30,
1999. In particular, 16% of all watches sold were purchased from Seiko and 10%
were purchased from Citizen. We are negotiating with some of the remaining brand
owners to purchase those brands directly, in watches and other product
categories. We believe that purchasing directly from the brand owners will
provide us with a more predictable supply of products, as well as a lower cost
of goods. As a result, we believe that part of our success is contingent on
attaining or maintaining our ability to buy directly from the brand owners. If
we lose our ability to buy directly from the brand owners, 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 BRAND OWNERS. IF WE
ARE UNABLE TO OBTAIN POPULAR PRODUCTS THROUGH INDIRECT SOURCES, OUR NET SALES
WILL DECLINE.
We purchase brands indirectly from distributors and other third parties
that we do not purchase directly from the brand owners. Currently, we purchase
indirectly approximately 15 of the 70 watch brands that we sell, 3 of the 12
writing instrument brands that we sell and all of the fragrances and sunglasses
that we sell. Although no indirect source accounted for more than 3% of all
watches that we sold through June 30, 1999, watches purchased indirectly from
wholesalers, distributors and retailers accounted for approximately 30% of all
watches that we sold. 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 brand owners could 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 cause customer dissatisfaction.
IF WE ARE UNABLE TO OBTAIN SUFFICIENT QUANTITIES OF POPULAR LUXURY AND PREMIUM
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 generally do not have
long-term or exclusive arrangements with brand owners, distributors or brokers
that guarantee the availability of products for resale.
In the luxury goods market, a product or fashion style periodically becomes
intensely popular. From time to time, we may have trouble obtaining sufficient
product allocations of particularly popular brands. In addition, we believe that
some of our suppliers may establish their own online retailing efforts, which
may impact our ability to get sufficient product allocations from suppliers. In
several cases, the brands that we wish to carry have delayed establishing a
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relationship with us until they have their own Web site up and running. In other
cases, the brand owners distribute 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 brands 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.
BECAUSE WE CARRY ALMOST ALL OF THE PRODUCTS WE SELL IN INVENTORY, IF WE ARE
UNABLE TO ACCURATELY PREDICT AND PLAN FOR CHANGES IN CONSUMER DEMAND OUR NET
SALES AND GROSS MARGINS MAY DECREASE.
We carry inventory on approximately 75% of the products we sell. At June
30, 1999, we held approximately $6.2 million of products in inventory and we
expect this number will increase in the future in order to support possible
higher sales levels. 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".
IF WE EXPERIENCE SIGNIFICANT INVENTORY THEFT, OUR GROSS PROFIT MARGIN WOULD
DECREASE.
Although immaterial to date, 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.
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.
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TO MANAGE OUR GROWTH AND EXPANSION, WE NEED TO 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. 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.
We expect competition in the online sale of luxury and premium products to
intensify in the future. 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 retail
watch industry is intensely competitive. We currently or potentially compete
with a variety of other companies, including:
- - traditional retailers of luxury and premium products;
- - brand owners of the products we sell;
- - other online retailers of luxury and premium products; and
- - catalog retailers.
Many of our competitors have advantages over us including longer operating
histories, greater brand recognition and significantly greater financial, sales
and marketing and other resources. In addition, traditional store-based
retailers offer customers benefits that are not obtainable over the Internet,
such as enabling customers to physically inspect a product before purchase and
not incurring costs associated with maintaining a Web site. See "Business --
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
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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 brand owners 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", "-- Marketing
and Promotion" and "-- 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 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.
IF OUR STRATEGY TO SELL PRODUCTS OUTSIDE OF THE UNITED STATES IS NOT SUCCESSFUL,
OUR INCREASES IN OPERATING EXPENSES MAY NOT BE OFFSET BY INCREASED SALES.
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
operating margins. 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.
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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. In the retail industry, fourth quarter sales
are often as much as 50% of total annual sales. Our success depends on our
ability to rapidly expand our fulfillment operations and information systems in
order to accommodate increases in customer orders, whether due to seasonal
factors or growth of our business. Our planned expansion may cause disruptions
in our business. Our current fulfillment operations may not be adequate to
accommodate increases in customer demand that may occur during the fourth
calendar quarter of 1999.
IF WE EXPERIENCE PROBLEMS WITH OUR THIRD-PARTY SHIPPING SERVICES, WE COULD LOSE
CUSTOMERS.
We rely upon third-party carriers, primarily Federal Express and UPS, 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
increases by more than 20 times our current sales levels, 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
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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 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
realized losses of approximately $36,000 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
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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 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 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. While the proceeds of these
policies might assist us in recruiting executive officers, the proceeds would
not address the potential disruption to our business of recruiting and
integrating new senior management.
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WE MAY NOT ACHIEVE EXPECTED BENEFITS OF ANY INVESTMENTS OR ACQUISITIONS THAT WE
COMPLETE.
As 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.
CONSUMER DEMAND FOR OUR PRODUCTS AND SERVICES WOULD DECREASE 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 materially impact our operating
expenses and sales. Other 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, our net sales and our gross profit. 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 51% 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. In particular, our certificate of
incorporation provides for a board of directors that is divided into three
classes which may issue preferred stock without any stockholder action. Our
certificate of incorporation also does not allow stockholders to act by written
consent or for cumulative voting in the election of directors. In addition,
Section 203 of the Delaware General
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Corporation Law places restrictions on business combinations with interested
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:
- pay a price per share that substantially exceeds the value of our assets
after subtracting liabilities; and
- contribute 62% of our capital but will only own 17% of the shares
outstanding. 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.
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
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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.
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
decrease our gross profit.
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
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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.
NO PUBLIC MARKET FOR OUR COMMON STOCK CURRENTLY EXISTS.
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 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.
19
<PAGE> 21
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, 30,614,429, OR 83%, 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 36,864,429 shares of common
stock. This includes the 6,250,000 we are selling in this offering, which may be
resold in the public market immediately. The remaining 83%, or 30,614,429
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".
20
<PAGE> 22
USE OF PROCEEDS
The net proceeds to Ashford.com from the sale of the 6,250,000 shares of
common stock offered hereby are estimated to be $68,550,000, assuming an initial
public offering price of $12.00 per share, and after deducting estimated
underwriting discounts and commissions and estimated offering expenses. The net
proceeds of this offering are estimated to be $79,012,500 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, to increase our visibility in the retail marketplace.
Our business plan currently provides that we will use over 50% of the net
proceeds for increases in marketing expenditures to generate sales, for working
capital investments in inventory and other increases in operating expenses
relating to personnel and for facilities to accommodate possible future growth
of our business. We plan to use a portion of the remaining net proceeds for the
acquisition of businesses, products and technologies that are complementary to
ours. 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.
21
<PAGE> 23
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999 on an
actual, pro forma, and pro forma as adjusted basis. The "Actual" column reflects
our capitalization as of June 30, 1999 on an historical basis, without any
adjustments to reflect subsequent events or anticipated events. The "Pro Forma"
column reflects our capitalization as of June 30, 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, and a 4.75 to 1 forward split of our common
stock and preferred stock;
- - the issuance of 1,425,679 shares of Series C preferred stock in July 1999; and
- - the automatic conversion of all shares of outstanding Series A, Series B and
Series C preferred stock into 18,074,429 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 June
30, 1999 with the preceding pro forma adjustments plus the receipt of the
estimated net proceeds from our sale of 6,250,000 shares of common stock at an
assumed initial public offering price of $12.00 per share.
None of the columns reflects the 11,974,750 shares of common stock reserved
for issuance under our stock plans, of which 2,934,809 shares were subject to
outstanding options as of June 30, 1999 or the 28,500 shares of common stock
reserved for issuance under outstanding warrants. The table below reflects that
we recorded amortization expense related to deferred compensation of $17,500 for
the fiscal year ended March 31, 1999 and $591,912 for the quarter ended June 30,
1999.
The table below should be read in conjunction with our balance sheet as of
June 30, 1999 and the related notes, which are included elsewhere in this
prospectus. You should review Notes 5 and 9 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>
JUNE 30, 1999
-----------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA ADJUSTED
--------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Stockholders' equity:
Convertible preferred stock, $.001 par value per share,
19,166,250 shares authorized, 16,648,750 shares issued
and outstanding actual; no shares authorized, issued
and outstanding pro forma and as adjusted............. 16 -- --
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, 54,150,000
shares authorized, 12,540,000 shares issued and
outstanding actual; 100,000,000 shares authorized,
30,614,429 shares issued and outstanding pro forma;
100,000,000 shares authorized, 36,864,429 issued and
outstanding as adjusted............................... 13 31 37
Additional paid-in capital............................... 51,428 67,730 136,274
Deferred compensation.................................... (15,922) (15,922) (15,922)
Subscription receivable.................................. (780) (780) (780)
Accumulated deficit...................................... (4,442) (4,442) (4,442)
-------- ------- --------
Total stockholders' equity....................... 30,313 46,617 115,167
-------- ------- --------
Total capitalization............................. $ 30,313 $46,617 $115,167
======== ======= ========
</TABLE>
22
<PAGE> 24
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was approximately
$46.6 million or $1.52 per share. Pro forma net tangible book value per share
represents the amount of our total tangible assets at June 30, 1999 increased by
the net proceeds of the Series C preferred stock issuance in 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 6,250,000 shares
of common stock offered by us at an assumed initial public offering price of
$12.00 per share, and after deducting the underwriting discount and estimated
offering expenses payable by us, our pro forma net tangible book value at June
30, 1999 would have been approximately $115.2 million or $3.12 per share of
common stock. This represents an immediate increase in pro forma net tangible
book value of $1.60 per share to existing stockholders and an immediate dilution
of $8.88 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............. $12.00
Pro forma net tangible book value per share before the
offering............................................... $ 1.52
Increase per share attributable to new investors.......... 1.60
------
Pro forma net tangible book value per share after the
offering (as adjusted).................................... 3.12
------
Dilution per share to new investors......................... $ 8.88
======
</TABLE>
The following table summarizes on an as adjusted basis after giving effect
to the offering, as of June 30, 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 by investors and the
average price per share paid:
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
---------------------- ----------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 30,614,429 83% $ 46,617,000 38% $ 1.52
New investors................... 6,250,000 17 75,000,000 62 12.00
----------- ----- ------------ -----
Totals................ 36,864,429 100.0% $121,617,000 100.0% 3.30
=========== ===== ============ =====
</TABLE>
The preceding tables exclude 11,974,750 shares of common stock reserved for
issuance under our option plans, of which 2,934,809 were subject to outstanding
options as of June 30, 1999 with a weighted average exercise price of $0.27 per
share and warrants to purchase 28,500 shares of common stock with a weighted
average exercise price of $0.43 per share.
23
<PAGE> 25
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 assumed conversion of outstanding 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. In the opinion of
management, the unaudited statements of operations data shown for the three
month periods ended June 30, 1998 and June 30, 1999 and the unaudited balance
sheet data as of June 30, 1999 have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations for such
periods. Results for the three months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the fiscal year ending March
31, 2000. 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 and $591,912 for the period April 1, 1999 through June 30, 1999.
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS
INCEPTION ENDED
(MARCH 6, 1998) JUNE 30,
THROUGH -------------------------
MARCH 31, 1999 1998 1999
--------------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.............................................. $ 5,938 $ 296 $ 3,623
Cost of sales.......................................... 5,110 280 2,997
----------- ----------- -----------
Gross profit........................................... 828 16 626
Operating expenses:
Marketing and sales.................................. 1,013 23 2,401
General and administrative........................... 1,086 91 1,705
----------- ----------- -----------
Total operating expenses...................... 2,099 114 4,106
----------- ----------- -----------
Loss from operations................................... (1,271) (98) (3,480)
Interest income (expense), net......................... 7 -- 302
----------- ----------- -----------
Net loss............................................... $ (1,264) $ (98) $ (3,178)
=========== =========== ===========
Net loss per share -- basic and diluted................ $ (0.12) $ (0.01) $ (0.27)
=========== =========== ===========
Pro forma net loss per share for the assumed conversion
of outstanding preferred stock -- basic and
diluted(1)........................................... $ (0.10) $ (0.01) $ (0.12)
=========== =========== ===========
Shares used to compute net loss per share -- basic and
diluted.............................................. 10,396,596 10,687,500 11,603,571
=========== =========== ===========
Shares used to compute pro forma net loss per share for
the assumed conversion of outstanding Series A and
Series B preferred stock -- basic and diluted(1)..... 13,263,606 10,687,500 26,995,400
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999 JUNE 30, 1999
-------------- ----------------------
ACTUAL ACTUAL PRO FORMA(2)
-------------- ------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 893 $24,502 $40,826
Working capital.......................................... 2,556 29,645 45,949
Total assets............................................. 5,108 32,108 48,432
Total stockholders' equity............................... 2,809 30,313 46,617
</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 1,425,679 shares of
Series C preferred stock for $16.3 million in cash in July 1999.
24
<PAGE> 26
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 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. We initially focused exclusively on the sale
of new and vintage watches, which accounted for approximately 96% of our net
sales for the quarter ended June 30, 1999. Since inception, we have focused on
broadening our product offerings, establishing relationships with luxury and
premium brand owners, generating sales momentum and expanding our operational
and customer service capabilities. We have grown rapidly since launching our
site in April 1998. Our net sales totaled $5.9 million for the fiscal year ended
March 31, 1999 and $3.6 million for the quarter ended June 30, 1999. Our cost of
sales and our operating expenses have increased significantly since inception
with cost of sales and total operating expenses in the quarter ended June 30,
1999 of $3.0 million and $4.1 million, respectively. 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.
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 and 17% for the quarter ended
June 30, 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.
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.
25
<PAGE> 27
Since inception, we have incurred significant net losses of $1.3 million
for the fiscal year ended March 31, 1999, and $3.2 million for the quarter ended
June 30, 1999. 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, options
granted have been considered to be granted at exercise prices below the deemed
fair value. Deferred compensation associated with options granted through June
30, 1999 amounted to $16.5 million. Of this amount, $17,500 was charged to
operations for the fiscal year ended March 31, 1999, and $591,912 was charged to
operations for the quarter ended June 30, 1999. The remaining balance of $15.9
million will be amortized over the vesting periods of the applicable options
through the fiscal year ended March 31, 2004. In addition, we granted 450,340
options from July 1, 1999 through August 22, 1999, for which additional deferred
compensation of approximately $2.5 million will be recorded and amortized over
the applicable vesting periods. In connection with a 12-month advertising and
promotion agreement, we are also obligated to issue warrants to purchase 28,500
shares of common stock for $0.43 per share which are exercisable through August
2004, and for which we will record approximately $500,000 in deferred marketing
expense.
26
<PAGE> 28
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 five quarters ended June 30, 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 five quarters. The unaudited quarterly information for each of the quarters
in the fiscal year ended March 31, 1999 has been derived from our audited
financial statements. In the opinion of management, the unaudited quarterly
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, JUNE 30,
1998 1998 1998 1999 1999
-------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................ $ 296 $ 798 $ 2,370 $ 2,474 $ 3,623
Cost of sales.................... 280 651 1,998 2,181 2,997
------- ------- ------- ------- -------
Gross profit..................... 16 147 372 293 626
Operating expenses:
Marketing and sales............ 23 81 260 649 2,401
General and administrative..... 91 52 261 682 1,705
------- ------- ------- ------- -------
Total operating
expenses............. 114 133 521 1,331 4,106
------- ------- ------- ------- -------
Income (loss) from operations.... (98) 14 (149) (1,038) (3,480)
Interest income (expense), net... -- -- (4) 11 302
------- ------- ------- ------- -------
Net income (loss)................ $ (98) $ 14 $ (153) $(1,027) $(3,178)
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1998 1998 1998 1999 1999
--------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF NET SALES:
Net sales........................ 100% 100% 100% 100% 100%
Cost of sales.................... 95 82 84 88 83
------- ------- ------- ------- -------
Gross margin..................... 5 18 16 12 17
Operating expenses:
Marketing and sales............ 8 10 11 26 66
General and administrative..... 31 7 11 28 47
------- ------- ------- ------- -------
Total operating
expenses............. 39 17 22 54 113
------- ------- ------- ------- -------
Income (loss) from operations.... (33) 2 (6) (42) (96)
Interest income (expense), net... -- -- (0) 0 8
------- ------- ------- ------- -------
Net income (loss)................ (33)% 2% (6)% (42)% (88)%
======= ======= ======= ======= =======
</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
27
<PAGE> 29
ended June 30, 1998 to approximately $3.6 million during the quarter ended June
30, 1999. The growth in net sales is principally due to increased site traffic
and awareness resulting from advertising expenditures and additional product
offerings. During the quarter ended June 30, 1999, watches comprised over 96% of
our sales as we did not add writing instruments to our Web site until June 1999.
Net sales increased $104,000 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.
Net sales increased $1.1 million during the quarter ended June 30, 1999 compared
to the quarter ended March 31, 1999 principally due to increased marketing
activities and seasonal gift giving associated with significant holidays and
events during the June quarter.
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 five quarters presented. The fluctuation in gross margin is
principally due to the impact of the mix of product sold, pricing strategy and
promotional activities. Gross profit decreased $79,000 during the quarter ended
March 31, 1999 compared to the quarter ended December 31, 1998 principally due
to promotional pricing during March 1999. Gross profit increased $333,000 during
the quarter ended June 30, 1999 compared to the quarter ended March 31, 1999
principally due to the absence of promotional pricing in the month of March 1999
that did not continue into the quarter ended June 30, 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 $389,000 during the quarter ended March
31, 1999 compared to the immediately preceding quarter principally due to
increased levels of online advertising activity including expenses related to a
promotion agreement with Yahoo! and other online banner advertising. Marketing
and sales expenses increased $1.8 million during the quarter ended June 30, 1999
compared to the quarter ended March 31, 1999 principally due to an increase of
$806,000 in online advertising, including expenses related to a promotion
agreement with Yahoo! and an increase of $548,000 in newspaper 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 $421,000 during the quarter ended March 31,
1999 compared to the quarter ended December 31, 1998 primarily due to $211,000
attributable to increased staffing levels in operations, finance and development
as
28
<PAGE> 30
well as incremental professional fees of $97,000 associated with attracting new
employees. General and administrative expenses increased $1.0 million during the
quarter ended June 30, 1999 compared to the quarter ended March 31, 1999
principally due to amortization of $574,000 of deferred compensation associated
with options granted at exercise prices below the deemed fair value through June
30, 1999 and expenses of $238,000 associated with increased staffing levels in
administration, marketing, finance and development.
In the fiscal year ended March 31, 1999, we recorded deferred stock
compensation of $431,500 in connection with stock options granted during the
period. Also, during the quarter ended June 30, 1999, we recorded additional
deferred stock compensation of approximately $16.1 million in connection with
stock options granted during the period. These amounts will be 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 and
$591,912 for the quarter ended June 30, 1999, which are included in general and
administrative expenses.
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.............................................. $3,692
March 31, 2001.............................................. 4,133
March 31, 2002.............................................. 4,133
March 31, 2003.............................................. 4,115
March 31, 2004.............................................. 441
</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. Interest
income (expense), net increased during the quarter ended June 30, 1999 compared
to the quarter ended March 31, 1999 principally due to interest earned on cash
balances resulting from our sale of 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.
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During the fiscal year ended March 31, 1999 and the quarter ended June 30,
1999, net cash used in operating activities was $3.7 million and $5.2 million,
respectively. Net cash used in operating activities during the fiscal year ended
March 31, 1999 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. Net
cash used in operating activities during the quarter ended June 30, 1999
primarily consisted of increases in inventories and net losses, excluding
non-cash compensation charges.
In February 1999, we entered into a 12-month advertising and promotion
agreement with Yahoo! that provides for the display of our banner advertisement
when one of several hundred watch-related search words is entered by a Yahoo!
user. In connection with this agreement, we are obligated to make payments of
$1.3 million during the term, $1.05 million of which has already been paid. The
balance is due by the end of 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.
In July 1999, we entered into a 22-month interactive marketing agreement
with America Online, Inc. pursuant to which we will be one of three anchors in
the jewelry and watches department and in the accessories department. In
addition, in connection with this agreement we are obligated to make payments of
$7.7 million during the term. As part of this agreement, we have committed to
share a percentage of our America Online-derived revenue with America Online
after the America Online-derived revenue exceeds a certain threshold value.
Through August 1999 we have paid $2.0 million to America Online under this
agreement.
In August 1999, we entered into a 12-month advertising and promotion
agreement with Yahoo! that provides for the display of our banner advertisement
when one of almost two hundred fashion accessory-related search words is entered
by a Yahoo! user. In connection with this agreement, we are obligated to make
payments of $2.0 million during the term, $725,000 of which has already been
paid. The balance is due in installments ending in May 2000.
In July 1999, we entered into an operating lease for our principal
administrative offices and warehouse facilities. The commitment provides for
aggregate annual payments of approximately $875,000 through the term of the
lease expiring in March 2003.
In August 1999, we entered into a revolving credit agreement with a
financial institution. The Revolving Credit Facility provides for borrowings of
up to $5.0 million for working capital needs under a revolving line of credit,
the availability of which equals 50% of available merchandise inventory, as
defined. The Revolving Credit Facility matures in August 2000 and bears interest
at the prime rate. Commitment fees equal to 0.33% per annum are payable on the
unused portion of the facility. The Revolving Credit Facility is secured by all
of our assets, does not permit the payment of cash dividends and requires
Ashford.com to comply with certain earnings, liquidity, tangible net worth and
capital expenditure covenants.
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, our Revolving Credit Facility and the net proceeds of this offering will
be sufficient to meet our anticipated needs for working capital and capital
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
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be certain that additional financing will be available to us on favorable terms
when required, or at all. See notes 5 and 9 of notes to our financial statements
for a description of our currently outstanding preferred stock and see "Related
Party Transactions" for a description of transactions with affiliates with
respect to our preferred stock.
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. In particular, we recently purchased a new phone system in
connection with the relocation of our Houston facilities, as well as new
servers, routers and other critical communications equipment, all of which we
believe are year 2000 compliant. Further, we have discussed year 2000 compliance
with our major third-party vendors, UPS, Federal Express and Chase Bank of
Texas, all of which assured us that their systems are year 2000 compliant. Based
upon the results of this assessment we have not needed and do not expect to need
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. Although we believe it to be unlikely,
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 and non-information
technology necessary to support our operations is difficult to assess. Other
than assessing our information systems, including our phone systems, servers,
switches, routers and other communications equipment, as well as our third-party
vendors, we have not assessed non-information technology systems. 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. We believe that our most likely worst-case year 2000
scenario would be a significant disruption in the ability of consumers to
reliably access the Internet or portions of it or to use their credit cards.
This scenario, if not quickly remedied, would have an adverse effect on demand
for our services and would have a material adverse effect on our sales and
operating results. As for other non-information technology systems that we have
not
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assessed, we do not believe that we are any more or less vulnerable to a failure
of non-information technology systems than other businesses of our size or in
our physical vicinity.
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.
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BUSINESS
ASHFORD.COM
We are a Web-based retailer focused exclusively on luxury and premium
products, including new and vintage premium watches, fine writing instruments,
fragrances, sunglasses and other luxury goods. 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 we
currently carry over 7,000 new and vintage watch styles from more than 70
premium brands. We have recently expanded into additional product categories and
currently offer a total of more than 8,000 styles across all of our product
categories. We believe that our current luxury and premium product offerings, as
well as other luxury and premium product categories such as leather goods, ties,
scarves and jewelry, 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 approximately 75% 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
luxury brand owners 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 142 million
Web users worldwide at the end of 1998. IDC anticipates that number will grow to
approximately 502 million users by the end of 2003. IDC also estimates that
revenue generated worldwide from online commerce will exceed $1.3 trillion by
2003, although growth rates for online commerce for luxury and premium products
may differ significantly from the growth of online commerce generally. These
projected growth rates 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. The benefits of online retailing should be viewed in the
context of the inherent challenges of online retailing, such as the expenses of
establishing and maintaining a Web site, reliance on newly developed Internet
technology, coordinating new distribution channels, and the difficulty of
converting a Web site visitor to a purchaser given limitations such as a
customer's inability to physically inspect, try on or use a product.
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 sunglasses, fragrances, leather goods, 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. 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.
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- - 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.
- - 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 these challenges facing traditional store-based retailers
limit their ability to 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 Web-based retailer focused exclusively on luxury and
premium products. Our initial product focus has been fine watches and we
currently offer thousands of styles of new and vintage premium watches. We also
offer an extensive selection of premium writing instruments, fragrances,
sunglasses and other luxury goods that we believe are well-suited for online
commerce. 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
700 styles of fine writing instruments from 12 brands, over 150 styles of
sunglasses from 10 brands, over 250 fragrances from over 60 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. 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
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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 inspect each product, and
in the case of watches, adjust the size and set the time for the customer. 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. We also offer our watch customers a certification of authenticity,
repair and battery replacement services and an extended, three-year warranty.
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.
- - Private Reserve. An innovative feature of our site enables customers to create
their own virtual collection of products. The private reserve 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 reserve on the site,
enabling the customer to return to their personal reserve 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 expertise in Internet-based retailing
of fine watches to other luxury and premium products, such as writing
instruments, sunglasses, fragrances, leather goods, ties and scarves, and
jewelry. Key elements of our strategy include:
FOCUS ON THE PREMIUM RETAIL WATCH MARKET. We have become what we believe to
be one of the leading sellers of watches on the Internet by providing thousands
of styles of new and vintage watches from premium brands at competitive prices.
We intend to capitalize on our 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 luxury and premium brand owners.
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
in June 1999 and an assortment of other luxury products such as fragrances,
sunglasses and leather goods in August 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 luxury brand owners 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 luxury and premium brands. We currently have
approximately 55 direct relationships with premium watch brand owners, and nine
direct relationships with brand owners of fine writing instruments. We plan to
expand the direct relationships with brand owners we have in watches and fine
writing instruments, and to develop strong relationships in these and other
product categories. Direct relationships enable us to purchase product more
efficiently. We believe that our merchandising history and well-established
relationships with brand owners enable us to provide our customers with
compelling product offerings, while giving us access to additional sources of
merchandise. As is customary in our industry, we purchase from our direct
suppliers through purchase orders rather than through long-term contracts.
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 advantageous relationships with distributors and brand owners;
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
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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 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, sunglasses, fragrances and
personal accessories. 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. Here we offer over 7,000 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 700 styles from 12 leading brands.
SUNGLASSES. This department offers our growing collection of sunglasses,
with prices generally ranging from $75 to over $175. The collection includes
over 150 styles from 10 brands.
FRAGRANCES. The fragrance department offers a broad selection of over 250
fragrances from over 60 brands. Our prices in this department generally range
from $30 to $60.
PERSONAL ACCESSORIES. This department offers over 75 styles of leather
goods products and will feature other product categories that do not clearly fit
in our other departments.
During our fiscal year ended March 31, 1999 and the interim period ended
June 30, 1999, watch sales comprised substantially all of our total revenues.
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
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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 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.
PRIVATE RESERVE. We offer customers the ability to create their own virtual
collection of products. The private reserve is a tool that allows customers to
set aside and view several products simultaneously on their own customized
pages. A customer can save the private reserve on the site, enabling the
customer to return to their personal reserve 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. In the last fiscal year, we spent
approximately $700,000 on advertising, of which over 90% was spent online.
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, in May
and June 1999 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 agreements with Yahoo! under which our
advertisement banner will appear on the screen each time one of over several
hundred watches or fashion accessory-related words is entered as a search term
by a user. Under our agreements with Yahoo! we have agreed to pay an aggregate
of $3.3 million over the terms of the agreements in
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return for minimum impressions. In addition we have also entered into an
agreement with America Online whereby we will be one of three anchor merchants
in the jewelry and watches department and in the accessories department. We also
plan to continue to enter into month-to-month banner advertising agreements with
a broad range of online sites, including major online portals such as
Excite@Home, Infoseek and Lycos, as well as other online commerce sites such as
E*Trade and USA Today. These agreements typically provide for minimum
impressions and we renew these agreements on a month-to-month basis depending on
results. We also intend to advertise our site in conjunction 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. Although immaterial to our sales
to date, 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 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 approximately
55 direct relationships with watch brand owners. Of these brands, we purchased
16% of the watches we sold from Seiko and 10% of the watches we sold from
Citizen during the quarter ended June 30, 1999. For our fine writing instruments
business, we have direct relationships with nine brand owners. We have ongoing
efforts to expand the number of direct relationships with brand owners 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 approximately 75% 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 of approximately 15 representatives
with a broad range of experience and knowledge enabling us to answer immediately
over 90% of phone calls and to respond within one day to over 70% of e-mails. 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
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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 from 7:00 a.m. to 9:00 p.m., Monday through Friday
and from 9:00 a.m. to 5:00 p.m. on Saturday, central time. Before shipment, we
inspect each product, and in the case of watches, adjust the size and set the
time for the customer. We ship over 80% of our products on the date of order
entry, approximately 10% with 5 days and the remainder typically requires
approximately 15 days. 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 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 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. We
engage Synergy Development Corp., an information technology firm, to provide
system integration assistance which we contract on an hourly basis. Fees for
these services have typically been less than $50,000 per month.
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.
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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 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. For
example, California, New York and Texas prohibit anyone from representing as
"new" any watch that has had its serial number removed. Pursuant to these laws,
a watch with a serial number removed must clearly be labeled as "secondhand"
even if it has never been worn. We have implemented procedures whereby all of
our buyers explicitly communicate to suppliers that we will only buy a watch if
its serial number has not been removed. In addition, we inspect each watch we
sell that is manufactured with a serial number to ensure it has a serial number
prior to shipment. If a court were to find, however, that we have violated these
statutes, we could be subject to civil or criminal penalties.
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 luxury and premium products, which may compete with
both an online and offline presence, including high-end department stores such
as Saks Fifth Avenue and Neiman Marcus, jewelers such as Zales and national
department stores such as Macy's;
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<PAGE> 44
- - 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 luxury and premium products, including online
service providers that feature shopping services; and
- - catalog retailers of luxury and premium 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, particularly the traditional store-based retailers and the brand
owners of products we sell, 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.
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 luxury and
premium products. For example, established catalog retailers may have greater
experience than we do in marketing and selling goods with in-person customer
interaction.
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 retailers, 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
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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 62,000 square feet under a lease that
provides for aggregate annual lease payments of $875,000 through the term of the
lease expiring in March 2003.
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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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following tables sets forth specific information regarding our
executive officers and directors as of July 31, 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,
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
Gary A. Paranzino..................... 38 Vice President, General Counsel and
Secretary
Kevin R. Harvey....................... 34 Director
Colombe M. Nicholas................... 54 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 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.
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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 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.
GARY A. PARANZINO has served as our Vice President, General Counsel and
Secretary since July 1999. From July 1996 to July 1999, Mr. Paranzino served as
Vice President, General Counsel and Secretary of PointCast Incorporated, an
internet news and information service. Prior to joining PointCast, Mr. Paranzino
was in private practice in the New York office of Morgan, Lewis and Bockius LLP.
Mr. Paranzino earned a Bachelor of Arts Degree from Cornell University and a
J.D. from Cornell Law School.
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.
COLOMBE M. NICHOLAS has served as a Director of Ashford.com since August
1999. Ms. Nicholas served as President and Chief Executive Officer for Anne
Klein Group, a women's fashion apparel company, from August 1996 to July 1999,
when the company was sold to Kasper, ASL. From December 1993 to July 1996, Ms.
Nicholas served as President and Chief Executive Officer of Orr Felt Company, a
family-owned business that provides felt for paper manufacturing. From April
1991 to November 1993, she was the President and Chief Operating Officer of
Giorgio Armani Fashion Corporation, the largest licensee of Armani Spa, Italy.
From May 1980 to January 1989, Ms. Nicholas served as President and Chief
Executive Officer of Christian Dior New York, a designer fashion company. Ms.
Nicholas received a Bachelor of Arts Degree in languages from the University of
Dayton and a J.D. from the University of Cincinnati College of Law.
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
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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 2,375 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 7,125 shares of our common stock. In no event will a non-employee
director receive an option for 7,125 shares in the same calendar year that he
receives the option for 2,375 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 1,852,500 shares of our common stock at an exercise price of $0.43
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
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Officer, Mr. Whitcomb, during the fiscal year ended March 31, 1999. 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.
We granted Mr. Kurtzman, our current Chief Executive Officer, an option
with the following features:
<TABLE>
<CAPTION>
NUMBER VESTING
GRANT OF OPTION EXERCISE EXPIRATION COMMENCEMENT VESTING
DATE SHARES PRICE DATE DATE SCHEDULE
----- --------- -------- ---------- ------------ --------
<C> <C> <C> <C> <C> <S>
May 15, 1999 1,852,500 $0.43/share May 14, 2009 April 1, 1999 1/48th of the shares
become vested upon his
completion of each
month of service from
April 1, 1999
</TABLE>
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 severance payments. Under this agreement, Mr. Kurtzman was
granted an option for 1,852,500 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.
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
2,375,000 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, 1,900,000 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.
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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 475,000 shares in the
same year, except that a newly hired employee may receive options or stock
appreciation rights covering up to 1,425,000 shares in the first year of
employment.
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.
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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 2,375 shares of our 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 7,125 shares
of our common stock. However, any non-employee director who receives an option
for 2,375 shares under this plan will first become eligible to receive the
annual option for 7,125 shares at the annual meeting that occurs during the
calendar year following the year in which he received the option for 2,375
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
950,000 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, 712,500 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
50
<PAGE> 52
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 950 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.
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> 53
RELATED PARTY TRANSACTIONS
Since March 6, 1998, we have issued and sold preferred stock to the
following persons who are our principal stockholders.
<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............ 9,500,000 1,187,500 174,677
Entities affiliated with Sequoia Capital...... -- 2,375,000 116,053
Markas Holdings, BV........................... -- 2,375,000 --
</TABLE>
We refer you to the more complete discussion of our preferred stock in Note
5 and Note 9 of the notes to our financial statements.
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 1,852,500 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 3,111,250 shares of common
stock to Mr. Shaw and 90,250 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 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.
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<PAGE> 54
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.
53
<PAGE> 55
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of July 31, 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>
Kevin Harvey.......................... 10,862,177 35.48% 10,862,177 29.47%
Benchmark Capital Partners II,
L.P.(4)
Michael Moritz........................ 2,491,053 8.14 2,491,053 6.76%
Entities affiliated with Sequoia
Capital(5)
Bernard Arnault....................... 2,375,000 7.76 2,375,000 6.44%
Markas Holding B.V(6)
John P. McNamara...................... 2,128,000 6.95 2,128,000 5.77%
c/o Ashford.com
Jeffrey R. Helms...................... 1,662,500 5.43 1,662,500 4.51%
c/o Ashford.com
J. Robert Shaw........................ 3,111,250 10.16 3,111,250 8.44%
Kenneth E. Kurtzman................... 1,852,500 6.05 1,852,500 5.03%
James H. Whitcomb, Jr. ............... 3,111,250 10.16 3,111,250 8.44%
All directors and executive officers
as a group (9 persons)(7)........... 18,942,126 61.87 18,942,126 51.38%
</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 6,250,000 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. The address for Mr. Harvey and the Benchmark entities is
2480 Sand Hill Road, Suite 200, Menlo Park, California 94025.
(5) Includes 903,056 shares held by Sequoia Capital VIII, 11,457 shares held by
Sequoia International Technology Partners VIII, 59,784 shares held by
Sequoia International Technology(q), 19,931 shares held by CMS Partners LLC,
2,195 shares held by Sequoia 1997, 1,484,185 shares held by Sequoia Capital
Franchise Fund and 10,445 shares held by Sequoia Capital Franchise Partners.
Mr. Moritz may be deemed to share the power to direct the voting and
disposition of all of the shares held by these entities, and he disclaims
beneficial interest of such shares. The address for each of these entities
and for Mr. Moritz is 3000 Sand Hill Road, Building 4, Suite 280, Menlo
Park, California 94025.
(6) Mr. Arnault may be deemed to share the power to direct the voting and
disposition of all of the shares held by Markas Holding B.V., and he
disclaims beneficial interest of such shares. The address for Markas Holding
B.V. and for Mr. Arnault is Locatellikade, 1, Parnassustoren 1076 AZ
Amsterdam, The Netherlands.
(7) Includes options to purchase 4,949 shares held by an executive officer not
named in this table which will be exercisable within 60 days of July 31,
1999.
54
<PAGE> 56
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.
COMMON STOCK
As of July 31, 1999, we had 30,614,429 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 2,934,809 shares of common stock subject to outstanding
options. When this offering is completed, there will be 36,864,429 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 31, 1999, the number of
outstanding shares for each series of our preferred stock was:
- - 9,500,000 shares of Series A preferred stock;
- - 7,148,750 shares of Series B preferred stock; and
- - 1,425,679 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 18,074,429 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.
REGISTRATION RIGHTS
The holders of the 18,074,429 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
55
<PAGE> 57
agreement between us and the holders of these registrable securities. 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.
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
56
<PAGE> 58
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 ChaseMellon
Shareholder Services, L.L.C. The transfer agent's address is 2323 Bryan Street,
Suite 2300, Dallas, Texas 75201 and telephone number is (214) 965-2232.
57
<PAGE> 59
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 36,864,429 outstanding shares
of common stock and options to purchase 2,934,811 shares of common stock,
assuming no additional option grants or exercises after June 30, 1999. Of these
shares, the 6,250,000 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 30,614,429 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 6,227,250 shares
will be eligible for sale pursuant to Rule 701, no shares will be eligible for
sale pursuant to Rule 144(k), and approximately 24,387,137 additional shares
will be eligible for sale from time to time 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 368,644 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
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<PAGE> 60
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.
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 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 2,934,811 shares of
common stock. See "Management -- Stock Plans" and "Description of Capital
Stock -- Registration Rights".
59
<PAGE> 61
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 45,149 shares of preferred
stock, convertible into our common stock on the closing of this offering. 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 reports with respect thereto and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
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. 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.
60
<PAGE> 62
INDEX TO FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
Report of Arthur Andersen LLP, Independent Public
Accountants............................................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity.......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 63
After the stock split discussed in Note 9 to Ashford.com's financial
statements is effected, we expect to be in a position to render the following
report.
/s/ Arthur Andersen LLP
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.
Houston, Texas
July 9, 1999
F-2
<PAGE> 64
ASHFORD.COM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY
MARCH 31, JUNE 30, JUNE 30,
1999 1999 1999
----------- ------------ -------------
(UNAUDITED)
(UNAUDITED) (NOTE 5)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 893,447 $ 24,501,720
Certificate of deposit........................ 100,000 100,000
Accounts receivable........................... 135,619 177,565
Merchandise inventory......................... 3,273,112 6,245,814
Prepaids and other............................ 452,760 414,470
----------- ------------
Total current assets.................. 4,854,938 31,439,569
Property and equipment, net of accumulated
depreciation of $48,595 and $109,222 at March
31, 1999 and June 30, 1999, respectively...... 253,258 529,517
Other assets.................................... -- 138,458
----------- ------------
Total assets.......................... $ 5,108,196 $ 32,107,544
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 976,513 $ 1,514,327
Accrued liabilities........................... 322,303 279,929
Note payable.................................. 1,000,000 --
----------- ------------
Total current liabilities............. 2,298,816 1,794,256
----------- ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 19,166,250
shares authorized, 9,500,000, 16,648,750
and No shares issued and outstanding at
March 31, 1999, June 30, 1999 and Pro Forma
June 30, 1999, respectively................ 9,500 16,649 $ --
Common stock, $.001 par value, 54,150,000
shares authorized, 10,687,500, 12,540,000
and 29,188,750 shares issued and
outstanding at March 31, 1999, June 30,
1999 and Pro Forma June 30, 1999,
respectively............................... 10,688 12,540 29,189
Additional paid-in capital.................... 4,467,462 51,427,996 51,427,996
Subscription receivable....................... -- (780,000) (780,000)
Deferred compensation......................... (414,000) (15,922,002) (15,922,002)
Accumulated deficit........................... (1,264,270) (4,441,895) (4,441,895)
----------- ------------ ------------
Total stockholders' equity............ 2,809,380 30,313,288 $ 30,313,288
----------- ------------ ------------
Total liabilities and stockholders'
equity.............................. $ 5,108,196 $ 32,107,544
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 65
ASHFORD.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 6, THREE MONTHS ENDED
1998) JUNE 30,
THROUGH ----------------------
MARCH 31, 1999 1998 1999
-------------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Net sales........................................... $ 5,937,555 $296,073 $ 3,623,414
Cost of sales....................................... 5,109,610 279,896 2,997,348
----------- -------- -----------
Gross profit........................................ 827,945 16,177 626,066
Operating expenses:
Marketing and sales............................... 1,013,007 23,141 2,400,616
General and administrative........................ 1,086,356 91,204 1,705,289
----------- -------- -----------
Total operating expenses.................. 2,099,363 114,345 4,105,905
----------- -------- -----------
Loss from operations................................ (1,271,418) (98,168) (3,479,839)
Interest income..................................... 13,189 -- 305,122
Interest expense.................................... (6,041) -- (2,908)
----------- -------- -----------
Net loss............................................ $(1,264,270) $(98,168) $(3,177,625)
=========== ======== ===========
Net loss per share, basic and diluted............... $ (0.12) $ (0.01) $ (0.27)
=========== ======== ===========
Pro forma net loss per share, basic and diluted..... $ (0.10) $ (0.01) $ (0.12)
=========== ======== ===========
Shares used to compute net loss per share:
Basic and diluted................................. 10,396,596 10,687,500 11,603,571
Pro forma basic and diluted....................... 13,263,606 10,687,500 26,995,400
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 66
ASHFORD.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------- -------------------- ADDITIONAL
PAR PAR PAID-IN SUBSCRIPTION DEFERRED
SHARES VALUE SHARES VALUE CAPITAL RECEIVABLE COMPENSATION
------ ----- ------ ----- ---------- ------------ ------------
<S> <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... -- -- 6,312,750 6,313 (4,722) -- --
Issuance of common stock for
services in April 1998............ -- -- 4,374,750 4,375 50,184 -- --
Issuance of Series A preferred stock
in exchange for cash and
conversion of note payable on
December 4, 1998.................. 9,500,000 9,500 -- -- 3,990,500 -- --
Deferred compensation related to
grants of options to purchase
common stock...................... -- -- -- -- 431,500 -- (431,500)
Amortization of deferred
compensation...................... -- -- -- -- -- -- 17,500
Net loss............................ -- -- -- -- -- -- --
---------- ------- ---------- ------- ----------- --------- ------------
Balance at March 31, 1999............ 9,500,000 9,500 10,687,500 10,688 4,467,462 -- (414,000)
Issuance of Series B preferred stock
in exchange for cash and
conversion of note payable on
April 17, 1999 (unaudited)........ 7,148,750 7,149 -- -- 30,082,472 -- --
Deferred compensation related to
grants of options to purchase
common stock (unaudited).......... -- -- -- -- 16,099,914 -- (16,099,914)
Amortization of deferred
compensation (unaudited).......... -- -- -- -- -- -- 591,912
Officer exercise of options to
purchase common stock pursuant to
note receivable (unaudited)....... -- -- 1,852,500 1,852 778,148 (780,000) --
Net loss (unaudited)................ -- -- -- -- -- -- --
---------- ------- ---------- ------- ----------- --------- ------------
Balance at June 30, 1999
(unaudited)......................... 16,648,750 $16,649 12,540,000 $12,540 $51,427,996 $(780,000) $(15,922,002)
========== ======= ========== ======= =========== ========= ============
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
----------- -------------
<S> <C> <C>
Balance at inception, March 6,
1998................................ $ -- $ --
Issuance of common stock for cash
upon formation on March 6, 1998... -- 1,591
Issuance of common stock for
services in April 1998............ -- 54,559
Issuance of Series A preferred stock
in exchange for cash and
conversion of note payable on
December 4, 1998.................. -- 4,000,000
Deferred compensation related to
grants of options to purchase
common stock...................... -- --
Amortization of deferred
compensation...................... -- 17,500
Net loss............................ (1,264,270) (1,264,270)
----------- -----------
Balance at March 31, 1999............ (1,264,270) 2,809,380
Issuance of Series B preferred stock
in exchange for cash and
conversion of note payable on
April 17, 1999 (unaudited)........ -- 30,089,621
Deferred compensation related to
grants of options to purchase
common stock (unaudited).......... -- --
Amortization of deferred
compensation (unaudited).......... -- 591,912
Officer exercise of options to
purchase common stock pursuant to
note receivable (unaudited)....... -- --
Net loss (unaudited)................ (3,177,625) (3,177,625)
----------- -----------
Balance at June 30, 1999
(unaudited)......................... $(4,441,895) $30,313,288
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 67
ASHFORD.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION THREE MONTHS ENDED
(MARCH 6, 1998) JUNE 30,
THROUGH ------------------------
MARCH 31, 1999 1998 1999
--------------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................... $(1,264,270) $ (98,168) $(3,177,625)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation............................ 48,595 -- 60,627
Amortization of deferred compensation
related to common stock options....... 17,500 -- 591,912
Compensation expense related to issuance
of common stock....................... 53,900 53,900 --
Changes in assets and liabilities:
Accounts receivable................... (135,619) -- (41,946)
Merchandise inventory................. (3,273,112) (134,913) (2,972,702)
Prepaids and other.................... (452,760) (3,235) 38,290
Other assets.......................... -- -- (38,458)
Accounts payable...................... 976,513 167,468 537,814
Accrued liabilities................... 322,303 45,644 (152,753)
----------- --------- -----------
Net cash provided by (used in)
operating activities............. (3,706,950) 30,696 (5,154,841)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........ (301,853) (6,806) (336,886)
Certificate of deposit..................... (100,000) -- --
----------- --------- -----------
Net cash used in investing
activities....................... (401,853) (6,806) (336,886)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock................... 2,250 2,250 --
Issuance of Series A preferred stock....... 3,245,000 -- --
Issuance of Series B preferred stock....... -- -- 29,100,000
Proceeds from notes payable................ 1,755,000 -- --
----------- --------- -----------
Net cash provided by financing
activities....................... 5,002,250 2,250 29,100,000
----------- --------- -----------
Net increase in cash and cash
equivalents............................. 893,447 26,140 23,608,273
CASH AND CASH EQUIVALENTS:
Beginning of period........................ -- -- 893,447
----------- --------- -----------
End of period.............................. $ 893,447 $ 26,140 $24,501,720
=========== ========= ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Issuance of preferred stock upon conversion
of note payable......................... $ 755,000 $ -- $ 1,000,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 68
ASHFORD.COM, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
INCLUDING AMOUNTS RELATED TO UNAUDITED INTERIM PERIODS
1. OPERATIONS AND ORGANIZATION OF BUSINESS
BACKGROUND
Ashford.com, Inc. formerly NewWatch Company, is a Delaware corporation
which was incorporated on March 6, 1998, but did not commence operations until
April 1998. Ashford.com is engaged in the distribution of premium new and
vintage watches and other luxury and premium products primarily through online
sales. Ashford.com 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 Ashford.com's sales are made through
third-party credit cards.
Ashford.com 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. Ashford.com has funded its activities to date primarily from equity
financings. Ashford.com may continue to incur losses, and there can be no
assurance that Ashford.com will attain successful operations. The business
activities in which Ashford.com 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
INTERIM FINANCIAL STATEMENTS
The accompanying consolidated balance sheet as of June 30, 1999, the
consolidated statements of operations and cash flows for the three months ended
June 30, 1998 and 1999 and the consolidated statement of stockholders' equity
for the three months ended June 30, 1999 are unaudited, but in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of results for the interim
periods. Results for the three months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the year ending March 31,
2000.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) requires Ashford.com'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.
F-7
<PAGE> 69
ASHFORD.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CERTIFICATE OF DEPOSIT
A certificate of deposit was issued to Ashford.com in January 1999 for the
purpose of securing Ashford.com'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. Ashford.com
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. Ashford.com evaluates
the market value of its inventory quarterly based on known market prices
available directly from manufacturers and key suppliers. Inventory balances are
reviewed monthly for slow moving or obsolete inventories.
ADVERTISING COSTS
The costs of advertising are expensed as incurred as no direct-response
advertising has been incurred. Through March 31, 1999, Ashford.com 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. Through March 31, 1999, 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, Ashford.com has expensed all start-up
costs, including organization costs, as incurred.
WARRANTY
Ashford.com guarantees its watches to be genuine, in new condition and free
from defects for a period of at least two years. If Ashford.com is an authorized
agent or service center for the manufacturer, it will extend the original
manufacturer's warranty for a period of two years. Ashford.com estimates future
warranty costs not covered by the original manufacturer's warranty. Warranty
expense is accrued at the date revenue is recognized on the sale of merchandise
held for sale. Through March 31, 1999, Ashford.com has recorded warranty expense
of approximately $40,000.
INCOME TAXES
Ashford.com 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
F-8
<PAGE> 70
ASHFORD.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
deferred tax assets to the amount more likely than not expected to be realized
in future tax returns.
COMPREHENSIVE INCOME
Ashford.com 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, Ashford.com
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 Ashford.com to adopt one of two methods for accounting for stock
options. Ashford.com has elected the method that requires disclosure only of
stock-based compensation. Because of this election, Ashford.com 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
Ashford.com'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 outstanding preferred stock into shares of Ashford.com's common
stock effective upon the closing of Ashford.com's initial public offering as if
such conversion occurred on the dates of original issuance.
F-9
<PAGE> 71
ASHFORD.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the computation of basic and dilutive, and
pro forma basic and dilutive, net loss per share for the respective periods:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION THREE MONTHS ENDED
(MARCH 6, 1998) JUNE 30,
THROUGH -------------------------
MARCH 31, 1999 1998 1999
---------------- ---------- -----------
<S> <C> <C> <C>
Numerator:
Net Loss....................................... $(1,264,270) $ (98,168) $(3,177,625)
=========== ========== ===========
Denominator:
Weighted average common shares................. 10,396,596 10,687,500 11,603,571
=========== ========== ===========
Denominator for basic and diluted
calculation................................. 10,396,596 10,687,500 11,603,571
Weighted average effect of pro forma
securities:
Series A preferred stock.................... 2,867,010 -- 9,500,000
Series B preferred stock.................... -- -- 5,891,829
----------- ---------- -----------
Denominator for pro forma basic and diluted
calculation................................. 13,263,606 10,687,500 26,995,400
=========== ========== ===========
Net loss per share:
Basic and diluted.............................. $ (0.12) $ (0.01) $ (0.27)
=========== ========== ===========
Pro forma basic and diluted.................... $ (0.10) $ (0.01) $ (0.12)
=========== ========== ===========
</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
charged to expense as incurred. Property and equipment consists of the
following:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1999
--------- -----------
(UNAUDITED)
<S> <C> <C>
Computer and office equipment............................... $255,599 $ 592,485
Leasehold improvements...................................... 46,254 46,254
-------- ---------
301,853 638,739
Less -- Accumulated depreciation............................ (48,595) (109,222)
-------- ---------
Property and equipment, net....................... $253,258 $ 529,517
======== =========
</TABLE>
4. NOTE PAYABLE
In March 1999, Ashford.com received $1.0 million cash from a stockholder,
in exchange for a note payable bearing interest at an annual rate of 6%. The
note payable had a maturity date of June 1999. The note payable was converted
into preferred stock in April 1999 (see Note 5). In management's opinion, the
terms of this note and its subsequent conversion were at arms length.
F-10
<PAGE> 72
ASHFORD.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCKHOLDERS' EQUITY
In April 1999, Ashford.com increased the number of authorized shares of its
common and preferred stock to 54,150,000 shares and 17,100,000 shares,
respectively, each with a par value of $.001 per share. In addition, 7,600,000
shares of Ashford.com's preferred stock was designated as Series B preferred
stock.
SERIES A AND SERIES B PREFERRED STOCK
In December 1998, Ashford.com entered into a stock purchase agreement with
an investor whereby Ashford.com issued 9,500,000 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 $0.03
per share per annum, or, if greater, an amount equal to that paid on any other
outstanding shares of Ashford.com. The dividends are not cumulative, and the
holder can waive any dividend preference.
In the event of any liquidation, dissolution or winding up of Ashford.com,
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 $0.42 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 Ashford.com'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 Ashford.com at each annual election of directors.
In April 1999, Ashford.com entered into a stock purchase agreement with
five investors whereby Ashford.com issued 7,148,750 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 $0.34 per share
per annum, a liquidation preference of $4.21 per share and are not entitled to
elect a specified number of directors of Ashford.com at each annual election of
directors.
PRO FORMA STOCKHOLDERS' EQUITY INFORMATION
As discussed in Note 9, Ashford.com filed a registration statement which
upon its effectiveness, the preferred stock would convert into common stock. The
accompanying balance sheet includes an unaudited pro forma stockholders' equity
as of June 30, 1999 which assumes the conversion of outstanding preferred stock
into common stock.
F-11
<PAGE> 73
ASHFORD.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 Ashford.com, all of the remaining assets of Ashford.com 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 Ashford.com
at each annual election of directors.
On December 4, 1998, Ashford.com entered into an agreement with certain
existing stockholding employees whereby the employees agreed to allow 5,957,099
shares of previously issued common stock to be subject to certain restrictions
(Restricted Stock). The restrictions provide Ashford.com 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 1,895,849 shares, vests ratably over a 39-month service period. Of
the other holders' Restricted Stock, 1,015,313 shares vested on March 6, 1999;
the remaining shares vest ratably over a 36-month service period. During fiscal
1999, restrictions on 1,268,929 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 4,688,169 shares subject to restrictions are included in
outstanding common stock in the accompanying balance sheet at March 31, 1999.
STOCK OPTIONS
In April 1998, Ashford.com 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 Ashford.com, 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. Ashford.com may grant a total of 8,649,750 shares of options
and Restricted Stock under the 1998 Stock Incentive Plan, as amended. Through
March 31, 1999, 4,374,750 shares of Restricted Stock have been issued under the
1998 Stock Incentive Plan.
Pursuant to the provisions of SFAS No. 123 applicable to nonpublic
entities, Ashford.com 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, Ashford.com'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 1,258,750 shares of common stock
at exercise prices of $0.05 per share issued to employees of Ashford.com. 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. Ashford.com
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
F-12
<PAGE> 74
ASHFORD.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
price. The fair value of the common stock on the date of grant was determined
based upon valuations in relation to recent preferred stock financings and an
independent appraisal. The deferred compensation is being amortized over the
vesting period of the options. Of those shares granted, 190 shares were canceled
during the period from inception, March 6, 1998, through March 31, 1999, and
51,956 shares were exercisable as of March 31, 1999.
As of March 31, 1999, 3,016,440 shares of common stock were available for
grant under the 1998 Stock Incentive Plan, as amended.
From April 1, 1999 through June 30, 1999, Ashford.com granted options to
purchase 3,532,264 shares of common stock at exercise prices of $0.43 per share
to employees and consultants, of which 1,679,764 were granted pursuant to the
1998 Stock Incentive Plan. 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. Ashford.com will record approximately $16.1 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 fair value of the common stock on the date of grant was determined
based upon valuations in relation to recent preferred stock financings and an
independent appraisal. The deferred compensation will be amortized over the
four-year vesting period of the options. During the quarter ended June 30, 1999,
Ashford.com recognized $591,912 in compensation expense related to these
options.
EMPLOYEE LOAN
In May 1999, Ashford.com entered into a $780,000 full-recourse promissory
note with its Chief Executive Officer, in connection with the exercise of
options to purchase 1,852,500 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.
6. 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 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, Ashford.com had a
F-13
<PAGE> 75
ASHFORD.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 Ashford.com's fiscal year 2014. A change in control, as
defined by federal income tax regulations, could significantly limit
Ashford.com's ability to utilize its carryforwards.
7. 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.
8. 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.
Ashford.com 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, Ashford.com 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 requirement is
waived for those employed on the effective date. Ashford.com does not contribute
to the plan.
EMPLOYMENT AGREEMENTS
Ashford.com 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
Ashford.com with protection for its trade secrets, intellectual property rights
and other confidential information.
ADVERTISING AGREEMENT
In February 1999, Ashford.com 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. Ashford.com 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.
F-14
<PAGE> 76
ASHFORD.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OTHER MATTERS
From time to time, Ashford.com 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
Ashford.com.
9. SUBSEQUENT EVENTS (UNAUDITED)
STOCK OPTION GRANTS
Ashford.com granted 450,340 options from July 1, 1999 through August 22,
1999, for which additional deferred compensation of approximately $2.5 million
will be recorded and amortized over the applicable vesting periods.
1999 EQUITY INCENTIVE PLAN
In July 1999, Ashford.com 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 Ashford.com , 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 2,375,000 shares of common
stock. 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
1,900,000 shares of common stock.
PREFERRED STOCK FINANCING
In July 1999, Ashford.com increased the number of authorized shares of its
preferred stock to 19,166,250 shares with a par value of $.001 per share. In
addition, 2,066,250 shares of Ashford.com's preferred stock was designated as
Series C preferred stock. Also in July 1999, Ashford.com entered into a stock
purchase agreement with six investors whereby Ashford.com issued 1,425,679
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 Ashford.com at each annual election
of directors.
Had the Series C stock issuances occurred on June 30, 1999, the pro forma
effect of the net proceeds would be as follows:
<TABLE>
<CAPTION>
JUNE 30, 1999
----------------------
HISTORICAL PRO FORMA
---------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Cash........................................................ $24,502 $40,826
Total assets................................................ 32,108 48,432
Accrued liabilities......................................... 280 300
Preferred stock............................................. 16 18
Common stock................................................ 13 13
Additional paid-in capital.................................. 51,428 67,730
Total stockholders' equity.................................. 30,313 46,617
</TABLE>
F-15
<PAGE> 77
ASHFORD.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
Ashford.com to sell shares of its common stock to the public. In addition, upon
the effectiveness of a registration statement, the Board of Directors authorized
950,000 shares of common stock be made available for an employee stock purchase
plan.
In August 1999, Ashford.com's Board of Directors declared a stock split of
4.75 shares for every 1 share of common stock or preferred stock then
outstanding. The stock split will become effective at the date Ashford.com's
public offering of common stock is closed. Accordingly, the accompanying
financial statements and footnotes have been restated to reflect the stock
split, including an assumed increase in authorized shares of common stock and
preferred stock. The par value of the shares of common stock to be issued in
connection with the stock split was credited to common stock and a like amount
charged to additional paid-in capital.
LEASE COMMITMENT
In July 1999, Ashford.com entered into an operating lease for Ashford.com's
principal administrative offices and warehouse facilities. The commitment
provides for aggregate annual payments of approximately $875,000 through the
term of the lease expiring in March 2003.
REVOLVING CREDIT FACILITY
In August 1999, Ashford.com entered into a revolving credit agreement with
a financial institution (the "Revolving Credit Facility"). The Revolving Credit
Facility provides for borrowings of up to $5.0 million for working capital needs
under a revolving line of credit, the availability of which equals 50% of
available merchandise inventory, as defined. The Revolving Credit Facility
matures in August 2000 and bears interest at the prime rate. Commitment fees
equal to 0.33% per annum are payable on the unused portion of the facility. The
Revolving Credit Facility is secured by all of Ashford.com's assets, does not
permit the payment of cash dividends and requires Ashford.com to comply with
certain earnings, liquidity, tangible net worth and capital expenditure
covenants.
ADVERTISING AND PROMOTION AGREEMENTS
In July 1999, Ashford.com entered into a 22-month advertising and promotion
agreement with an Internet service company and, in August 1999, a 12-month
advertising and promotion agreement with an Internet search engine company. In
connection with these agreements, Ashford.com is obligated to make aggregate
initial cash payments of $2.3 million upon execution and additional aggregate
cash payments of $3.2 million and $4.3 million during the fiscal years ending
March 31, 2000 and March 31, 2001, respectively.
In August 1999, Ashford.com entered into a 12-month advertising and
promotion agreement with a luxury goods brand owner. The agreement provides that
Ashford.com will be the exclusive online distributor of products for the brand
and will be authorized to use the related trademarks and images in connection
with Ashford.com's advertising and promotional activities. The agreement further
provides that Ashford.com is obligated to issue the brand owner warrants to
purchase 28,500 shares of common stock of Ashford.com for $0.43 per share which
are exercisable through August 2004. The warrants vest in equal monthly
installments for 12-months from the execution of the agreement. Ashford.com will
record approximately $500,000 in deferred marketing expense during fiscal 2000
relating to these warrants for the excess of the estimated
F-16
<PAGE> 78
ASHFORD.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
fair value of the warrants on the date of grant over the purchase price. The
fair value of the warrants on the date of grant was determined using the
Black-Scholes option pricing model with an estimated fair value utilizing the
contemplated initial public offering valuation. The deferred advertising cost
will be amortized over the 12-month term of the agreement and vesting period of
the warrants.
PURCHASE OPTION AGREEMENT
In August 1999, Ashford.com entered into an option agreement to purchase an
Internet domain name and related trademarks (the "Purchased Assets") from a
product information Internet site (the "Option Agreement"). In connection with
the Option Agreement, Ashford.com will pay $300,000 in cash upon execution of
the Option Agreement for the exclusive right to acquire the Purchased Assets.
The Option Agreement expires in November 1999, however, this option period can
be extended until January 2000 at the sole discretion of Ashford.com in exchange
for an additional payment of $100,000 in cash. Should Ashford.com elect not to
exercise its option by January 2000, Ashford.com is obligated to issue the
seller 71,250 shares of common stock of Ashford.com and will forfeit any
previously made cash payments. In the event that the option is exercised, all
previously made cash payments will be applied to the total cash price of the
Purchased Assets.
F-17
<PAGE> 79
UNDERWRITING
Ashford.com and the underwriters named below will enter into an
underwriting agreement with respect to the shares being offered. 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*OFFERING Corp. 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*OFFERING Corp. ...........................................
---------
Total............................................. 6,250,000
=========
</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 937,500
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.......................... $ 0.84 $ 0.84 $5,250,000 $6,037,500
------ ------ ---------- ----------
Other items............................ .016 .014 101,530 101,530
------ ------ ---------- ----------
Total............................. $ .856 $ .854 $5,351,530 $6,139,030
====== ====== ========== ==========
</TABLE>
The Goldman Sachs Group, Inc., the parent of Goldman, Sachs & Co., owns
65,503 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 $11.45, the price paid for the shares of Series C
preferred stock held by The Goldman Sachs Group, Inc.
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> 80
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 437,500 shares of the common stock offered hereby at the initial
offering price to directors, officers, employees and friends of Ashford.com. 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 $1,200,000.
Ashford.com has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
U-2
<PAGE> 81
Seven photographs, from left to right: a pearl necklace, a gold ladies' watch,
a cologne bottle, a leather belt, three writing instruments, a leather purse
and a mens' watch. The Ashford.com logo appears in the lower right hand corner
of the page.
<PAGE> 82
- ------------------------------------------------------
- ------------------------------------------------------
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........................ 7
Use of Proceeds..................... 21
Dividend Policy..................... 21
Capitalization...................... 22
Dilution............................ 23
Selected Financial Data............. 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 25
Business............................ 33
Management.......................... 45
Related Party Transactions.......... 52
Principal Stockholders.............. 54
Description of Capital Stock........ 55
Shares Eligible for Future Sale..... 58
Legal Matters....................... 60
Experts............................. 60
Additional Information.............. 60
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.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
6,250,000 Shares
ASHFORD.COM, INC.
Common Stock
----------------------
[LOGO]
----------------------
GOLDMAN, SACHS & CO.
BANCBOSTON ROBERTSON STEPHENS
DEUTSCHE BANC ALEX. BROWN
E*OFFERING
Representatives of the Underwriters
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 83
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...................................... 185,000
Legal fees and expenses..................................... 350,000
Accounting fees and expenses................................ 200,000
Directors and Officers Liability Insurance.................. 250,000
Blue sky fees and expenses.................................. 10,000
Transfer agent fees......................................... 10,000
Miscellaneous............................................... 139,200
----------
Total............................................. $1,200,000
==========
</TABLE>
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> 84
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 9,500,000 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 7,148,750 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 1,425,679 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 12,540,000
shares of common stock and 4,974,841 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> 85
<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, 1999 between the Registrant
and Yahoo!, Inc.
10.6** -- Office Lease dated July 23, 1999 between the Registrant
and Crescent Real Estate Funding III, L.P.
10.7** -- Employment Agreement dated May 10, 1999 between the
Registrant and Kenneth E. Kurtzman.
10.8** -- Employment Agreement dated November 28, 1998 between the
Registrant and James H. Whitcomb, Jr.
10.9+ -- Fashion Accessories Program Advertising and Promotion
Agreement dated August 11, 1999 between the Registrant
and Yahoo!, Inc.
10.10+ -- Advertising Agreement dated July 30, 1999 between
Registrant and America Online, Inc.
10.11 -- Credit Agreement dated August 9, 1999 between the
Registrant and Chase Bank of Texas, National Association.
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.
24.2 -- Power of Attorney signed by Ms. Nicholas.
27.1** -- Financial Data Schedule.
99.1* -- Consent of International Data Corporation.
99.2 -- Consent of Data Monitor.
99.3 -- Consent of Global Industry Analysts.
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
+ 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.
II-3
<PAGE> 86
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 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> 87
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 2 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Houston, State of Texas, on this 24th day of August, 1999.
ASHFORD.COM, INC.
By: /s/ KENNETH E. KURTZMAN
----------------------------------
Kenneth E. Kurtzman
Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to the 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 August 24, 1999
- -----------------------------------------------------
J. Robert Shaw
/s/ KENNETH E. KURTZMAN Chief Executive Officer, Director August 24, 1999
- ----------------------------------------------------- (Principal Executive Officer)
Kenneth E. Kurtzman
/s/ DAVID F. GOW* Vice President, Finance and Chief August 24, 1999
- ----------------------------------------------------- Financial Officer (Principal
David F. Gow Financial and Accounting
Officer)
/s/ JAMES H. WHITCOMB, JR.* President and Chief Operating August 24, 1999
- ----------------------------------------------------- Officer, Director
James H. Whitcomb, Jr.
/s/ KEVIN R. HARVEY* Director August 24, 1999
- -----------------------------------------------------
Kevin R. Harvey
/s/ COLOMBE M. NICHOLAS* Director August 24, 1999
- -----------------------------------------------------
Colombe M. Nicholas
*By: /s/ KENNETH E. KURTZMAN
------------------------------------------------
Kenneth E. Kurtzman
Attorney-in-Fact
Pursuant to Power of Attorney
</TABLE>
II-5
<PAGE> 88
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards,
the financial statements of Ashford.com, Inc. included in this Form S-1
Registration Statement and have issued our report thereon dated July 9, 1999.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. This Schedule is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This Schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects, the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Houston, Texas
July 9, 1999
II-6
<PAGE> 89
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
Obsolescence................... $-- $100 $-- $100
Allowance for Warranty Costs...... -- 40 (4) 36
</TABLE>
<PAGE> 90
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, 1999 between the Registrant
and Yahoo!, Inc.
10.6** -- Office Lease dated July 23, 1999 between the Registrant
and Crescent Real Estate Funding III, L.P.
10.7** -- Employment Agreement dated May 10, 1999 between the
Registrant and Kenneth E. Kurtzman.
10.8** -- Employment Agreement dated November 28, 1998 between the
Registrant and James H. Whitcomb, Jr.
10.9+ -- Fashion Accessories Program Advertising and Promotion
Agreement dated August 11, 1999 between the Registrant
and Yahoo!, Inc.
10.10+ -- Advertising Agreement dated July 30, 1999 between
Registrant and America Online, Inc.
10.11 -- Credit Agreement dated August 9, 1999 between the
Registrant and Chase Bank of Texas, National Association
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.
24.2 -- Power of Attorney signed by Ms. Nicholas.
27.1** -- Financial Data Schedule.
99.1* -- Consent of International Data Corporation.
99.2 -- Consent of Data Monitor.
99.3 -- Consent of Global Industry Analysts.
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested as to certain portions of this exhibit.
<PAGE> 1
EXHIBIT 5.1
GUNDERSON DETTMER STOUGH
VILLENEUVE FRANKLIN & HACHIGIAN, LLP
8911 CAPITAL OF TEXAS HIGHWAY, SUITE 4240
AUSTIN, TEXAS 78759
(512) 342-2300 - TELEPHONE
(512) 342-8181 - FACSIMILE
August 24, 1999
Ashford.com, Inc.
3355 West Alabama, Suite 175
Houston, Texas 77098
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No.
333-82759) originally filed by Ashford.com, Inc. (the "Company") with the
Securities and Exchange Commission (the "Commission") on July 13, 1999, as
thereafter amended or supplemented (the "Registration Statement"), in connection
with the registration under the Securities Act of 1933, as amended, of up to
6,250,000 shares of the Company's Common Stock (the "Shares"). The Shares,
which include an over-allotment option granted by the Company to the
Underwriters to purchase up to 937,500 additional shares of the Company's Common
Stock, are to be sold to the Underwriters by the Company as described in the
Registration Statement for resale to the public. As your counsel in connection
with this transaction, we have examined the proceedings taken and are familiar
with the proceedings proposed to be taken by you in connection with the sale and
issuance of the Shares.
It is our opinion that, upon completion of the proceedings being taken
or contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
the various states where required, the Shares, when issued and sold in the
manner described in the Registration Statement and in accordance with the
resolutions adopted by the Board of Directors of the Company, will be legally
and validly issued, fully paid and non-assessable.
We consent to the use of this opinion as an exhibit to said Registration
Statement, and further consent to the use of our name wherever appearing in said
Registration Statement, including the prospectus constituting a part thereof,
and in any amendment or supplement thereto.
Very truly yours,
/s/ Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP
<PAGE> 1
EXHIBIT 10.2
ASHFORD.COM, INC.
1998 STOCK INCENTIVE PLAN
<PAGE> 2
ASHFORD.COM, INC.
1998 STOCK INCENTIVE PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section
ARTICLE I - PLAN -------
<S> <C>
Purpose...............................................................................................1.1
Effective Date of Plan................................................................................1.2
ARTICLE II - DEFINITIONS
Affiliate.............................................................................................2.1
Board of Directors or Board...........................................................................2.2
Cause.................................................................................................2.3
Change of Control.....................................................................................2.4
Code..................................................................................................2.5
Company...............................................................................................2.6
Disinterested Person..................................................................................2.7
Employee..............................................................................................2.8
Fair Market Value.....................................................................................2.9
Incentive Option.....................................................................................2.10
Nonqualified Option..................................................................................2.11
Option...............................................................................................2.12
Option Agreement.....................................................................................2.13
Optionee.............................................................................................2.14
Plan.................................................................................................2.15
Plan Year............................................................................................2.16
Restricted Stock.....................................................................................2.17
Restricted Stock Agreement...........................................................................2.18
Restricted Stock Purchase Price......................................................................2.19
Restricted Stock Recipient...........................................................................2.20
Stock................................................................................................2.21
Stock Award..........................................................................................2.22
10% Stockholder......................................................................................2.23
ARTICLE III - ELIGIBILITY
ARTICLE IV - GENERAL PROVISIONS RELATING TO OPTIONS AND STOCK AWARDS
Authority to Grant Options and Stock Awards...........................................................4.1
Dedicated Shares......................................................................................4.2
Non-Transferability...................................................................................4.3
Requirements of Law...................................................................................4.4
Changes in the Company's Capital Structure............................................................4.5
Election Under Section 83(b) of the Code..............................................................4.6
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE V - OPTIONS
Type of Option........................................................................................5.1
Option Price..........................................................................................5.2
Duration of Options...................................................................................5.3
Amount Exercisable--Incentive Options.................................................................5.4
Exercise of Options...................................................................................5.5
Exercise on Termination of Employment.................................................................5.6
Substitution Options..................................................................................5.7
No Rights as Shareholder..............................................................................5.8
ARTICLE VI - STOCK AWARDS
Stock Awards..........................................................................................6.1
Restrictions..........................................................................................6.2
Stock Certificate.....................................................................................6.3
Rights as Shareholder.................................................................................6.4
Lapse of Restrictions.................................................................................6.5
Restriction Period....................................................................................6.6
ARTICLE VII - ADMINISTRATION
ARTICLE VIII - AMENDMENT OR TERMINATION OF PLAN
ARTICLE IX - MISCELLANEOUS
No Establishment of a Trust Fund......................................................................9.1
No Employment Obligation..............................................................................9.2
Forfeiture ...........................................................................................9.3
Tax Withholding.......................................................................................9.4
Written Agreement.....................................................................................9.5
Indemnification of the Board of Directors.............................................................9.6
Gender................................................................................................9.7
Headings..............................................................................................9.8
Other Compensation Plans..............................................................................9.9
Other Options or Awards..............................................................................9.10
Governing Law........................................................................................9.11
Forms................................................................................................9.12
</TABLE>
Exhibit A - Form of Incentive Stock Option Agreement
Exhibit B - Form of Nonqualified Stock Option Agreement
Exhibit C - Form of Restricted Stock Award
ii
<PAGE> 4
ARTICLE I
PLAN
1.1 PURPOSE. This Plan is intended to advance the best interests of the
Company, its Affiliates, and its shareholders by providing those persons who
have substantial responsibility for the management and growth of the Company and
its Affiliates with additional incentives and an opportunity to obtain or
increase their proprietary interest in the Company, thereby encouraging them to
continue to provide services to the Company or any of its Affiliates.
1.2 EFFECTIVE DATE OF PLAN. The Plan is effective April 1, 1998, if
within one year of that date it shall have been approved by at least a majority
vote of shareholders voting in person or by proxy at a duly held shareholders'
meeting, or if the provisions of the corporate charter, by-laws or applicable
state law prescribes a greater degree of shareholder approval for this action,
the approval by the holders of that percentage, at a duly held meeting of
shareholders. No Incentive Option, Nonqualified Option, or Stock Award shall be
granted pursuant to the Plan after April 1, 2008.
ARTICLE II
DEFINITIONS
The words and phrases defined in this Article shall have the meaning
set out in these definitions throughout this Plan.
2.1 "AFFILIATE" means any parent corporation and any subsidiary
corporation. The term "parent corporation" means any corporation (other than the
Company) in an unbroken chain of corporations ending with the Company if, at the
time of the action or transaction, each of the corporations other than the
Company owns stock possessing 50% or more of the total combined voting power of
all classes of stock in one of the other corporations in the chain. The term
"subsidiary corporation" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if, at the time of the
action or transaction, each of the corporations other than the last corporation
in the unbroken chain owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in the
chain.
2.2 "BOARD OF DIRECTORS" or "BOARD" means the board of directors of the
Company.
2.3 "CAUSE" means the termination of the employment of the Employee by
the Company for (i) dishonesty, including any act described in Article 9.3(a)
and (b) herein, (ii) conviction of a felony or (iii) the continued failure by
the Employee to perform the material duties assigned to the Employee that are
consistent with the Employee's position with the Company after notice of such
failure has been given by the Company and a reasonable opportunity to cure is
provided to the Employee.
<PAGE> 5
2.4 "CHANGE OF CONTROL" means (i) the acquisition by any entity or
group of beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Securities Exchange Act of 1934, as amended) of fifty percent (50%) or
more of the combined voting power of the then outstanding voting securities of
the Company entitled to vote generally in the election of directors, provided,
however, that any such acquisition by J. Robert Shaw or James H. Whitcomb, Jr.
shall not be deemed to be a Change of Control, (ii) the approval by the
shareholders of the Company of any merger, consolidation or other reorganization
pursuant to which the Company is not the surviving entity (or survives only as a
subsidiary of an entity other than a previously wholly-owned subsidiary of the
Company), (iii) the approval by the shareholders of the Company of the sale,
lease or exchange of all or substantially all of the assets of the Company to
any other person or entity (other than a wholly-owned subsidiary of the
Company), or (iv) the approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
2.5 "CODE" means the Internal Revenue Code of 1986, as amended.
2.6 "COMPANY" means Ashford.com, Inc.
2.7 "DISINTERESTED PERSON" means a "disinterested person" as that term
is defined in Rule 16b-3 under the Securities Exchange Act of 1934, as amended.
2.8 "EMPLOYEE" means a person employed by the Company or any Affiliate
to whom an Option or a Stock Award is granted.
2.9 "FAIR MARKET VALUE" of the Stock as of any date means (a) the
average of the high and low sale prices of the Stock on that date on the
principal securities exchange on which the Stock is listed; or (b) if the Stock
is not listed on a securities exchange, the average of the high and low sale
prices of the Stock on that date as reported on the NASDAQ National Market
System; or (c) if the Stock is not listed on the NASDAQ National Market System,
the average of the high and low bid quotations for the Stock on that date as
reported by the National Quotation Bureau Incorporated; or (d) if none of the
foregoing is applicable, an amount at the election of the Board equal to (x) the
average between the closing bid and ask prices per share of stock on the last
preceding date on which those prices were reported, or (y) that amount as
determined by the Board.
2.10 "INCENTIVE OPTION" means an option granted under this Plan which
is designated as an "Incentive Option" and satisfies the requirements of Section
422 of the Code.
2.11 "NONQUALIFIED OPTION" means an option granted under this Plan
other than an Incentive Option.
2.12 "OPTION" means both an Incentive Option and a Nonqualified Option
granted under this Plan to purchase shares of Stock.
2.13 "OPTION AGREEMENT" means the written agreement which sets out the
terms of an Option.
2.14 "OPTIONEE" means a person to whom an Option is granted.
2
<PAGE> 6
2.15 "PLAN" means the Ashford.com, Inc. 1998 Stock Incentive Plan, as
set out in this document and as it may be amended from time to time.
2.16 "PLAN YEAR" means the Company's fiscal year.
2.17 "RESTRICTED STOCK" means stock awarded or purchased under a
Restricted Stock Agreement entered into pursuant to this Plan, together with (i)
all rights, warranties or similar items attached or accruing thereto or
represented by the certificate representing the stock and (ii) any stock or
securities into which or for which the stock is thereafter converted or
exchanged. The terms and conditions of the Restricted Stock Agreement shall be
determined by the Board of Directors consistent with the terms of this Plan.
2.18 "RESTRICTED STOCK AGREEMENT" means an agreement between the
Company or any Affiliate and the Restricted Stock Recipient pursuant to which
the Restricted Stock Recipient receives a Stock Award subject to Article VI.
2.19 "RESTRICTED STOCK PURCHASE PRICE" means the purchase price, if
any, per share of Restricted Stock subject to a Stock Award. The Restricted
Stock Purchase Price shall be determined by the Board. It may be greater than or
less than the Fair Market Value of the Stock on the date of the Stock Award.
2.20 "RESTRICTED STOCK RECIPIENT" means a person to whom a Stock Award
is granted.
2.21 "STOCK" means the Common Stock of the Company, or, in the event
that the outstanding shares of Common Stock are later changed into or exchanged
for a different class of stock or securities of the Company or another
corporation, that other stock or security.
2.22 "STOCK AWARD" means an award of Restricted Stock.
2.23 "10% STOCKHOLDER" means an individual who, at the time the Option
is granted, owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or of any Affiliate. An individual
shall be considered as owning the stock owned, directly or indirectly, by or for
his brothers and sisters (whether by the whole or half blood), spouse,
ancestors, and lineal descendants; and stock owned, directly or indirectly, by
or for a corporation, partnership, estate, or trust, shall be considered as
being owned proportionately by or for its stockholders, partners, or
beneficiaries.
ARTICLE III
Eligibility
The individuals or entities who shall be eligible to receive Incentive
Options shall be those employees of the Company or any of its Affiliates as the
Board shall determine from time to time. The individuals or entities who shall
be eligible to receive Nonqualified Options and Stock Awards shall be such
individuals or entities as the Board shall determine from time to time.
3
<PAGE> 7
ARTICLE IV
GENERAL PROVISIONS RELATING TO OPTIONS AND STOCK AWARDS
4.1 AUTHORITY TO GRANT OPTIONS AND STOCK AWARDS. The Board may grant to
those persons selected by it in accordance with this Plan, as it shall from time
to time determine, Options or Stock Awards under the terms and conditions of
this Plan. Subject only to any applicable limitations set out in this Plan, the
number of shares of Stock to be covered by any Option or Stock Award to be
granted to an individual or entity shall be as determined by the Board.
4.2 DEDICATED SHARES. The total number of shares of Stock with respect
to which Options and Stock Awards may be granted under the Plan shall be
1,821,000 shares. The shares may be treasury shares or authorized but unissued
shares. The number of shares stated in this Section 4.2 shall be subject to
adjustment in accordance with the provisions of Section 4.5.
In the event that any outstanding Option or Stock Award shall expire or
terminate for any reason or any Option or Stock Award is surrendered, the shares
of Stock allocable to the unexercised portion of that Option or Stock Award may
again be subject to an Option or Stock Award under the Plan. If Stock is used by
the Optionee pursuant to Section 5.5 of this Plan to pay the exercise price of
an Option, only the net number of shares of Stock issued by the Company shall be
considered utilized under this Plan. If shares of Stock are withheld by the
Company to pay tax withholding due from the Optionee, the number of such shares
withheld shall not be considered utilized under this Plan.
4.3 NON-TRANSFERABILITY. Unless otherwise indicated in the applicable
Option Agreement, Options shall not be transferable by the Optionee otherwise
than by will or under the laws of descent and distribution, and shall be
exercisable, during the Optionee's lifetime, only by him. Restricted Stock shall
be purchased by and/or become vested under a Restricted Stock Agreement during
the Restricted Stock Recipient's lifetime, only by him. Any attempt to transfer
a Stock Award other than under the terms of the Plan and the Restricted Stock
Agreement shall terminate the Stock Award and all rights of the Restricted Stock
Recipient to that Restricted Stock.
4.4 REQUIREMENTS OF LAW. The Company shall not be required to sell or
issue any Stock under any Option or Stock Award if issuing that Stock would
constitute or result in a violation by the Optionee or the Restricted Stock
Recipient, as applicable, or the Company of any provision of any law, statute,
or regulation of any governmental authority. Specifically, in connection with
any applicable statute or regulation relating to the registration of securities,
upon exercise of any Option or pursuant to any Stock Award, the Company shall
not be required to issue any Stock unless the Board has received evidence
satisfactory to it to the effect that the holder of that Option or Stock Award
will not transfer the Stock except in accordance with applicable law, including
receipt of an opinion of counsel satisfactory to the Company to the effect that
any proposed transfer complies with applicable law. The determination by the
Board on this matter shall be final, binding and conclusive. The Company may,
but shall in no event be obligated to, register any Stock covered by this Plan
pursuant to applicable securities laws of any country or any political
subdivision. In the event the Stock issuable on exercise of an Option or
4
<PAGE> 8
pursuant to a Stock Award is not registered, the Company may imprint on the
certificate evidencing the Stock any legend that counsel for the Company
considers necessary or advisable to comply with applicable law. The Company
shall not be obligated to take any other affirmative action in order to cause
the exercise of an Option or vesting under a Stock Award, or the issuance of
shares under either of them, to comply with any law or regulation of any
governmental authority.
4.5 CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. (a) The existence of
this Plan and any outstanding Options or Stock Awards shall not affect in any
way the right or power of the Company or its shareholders to make or authorize
any or all adjustments, recapitalizations, reorganizations or other changes in
the Company 's capital structure or its business, or any merger or consolidation
of the Company, or any issue of bonds, debentures, preferred or prior preference
stock ahead of or affecting the Stock or its rights, or the dissolution or
liquidation of the Company, or any sale, lease, exchange, or other transfer or
disposition of all or any part of its assets or business, or any other corporate
act or proceeding, whether of a similar character or otherwise.
(b) If the Company shall effect a subdivision or consolidation of
shares or other capital adjustment of, or the payment of a dividend in
capital stock or other equity securities of the Company on, Stock, or
other increase or reduction of the number of shares of Stock
outstanding without receiving consideration therefor in cash, property,
labor or services, or the reclassification of Stock, in whole or in
part, into other equity securities of the Company, then (i) the number,
class and per share price of shares of Stock subject to outstanding
Options hereunder shall be appropriately adjusted (or in the case of
the issuance of other equity securities as a dividend on, or in a
reclassification of, Stock, the Options shall extend to such other
securities) in such a manner as to entitle an Optionee to receive, upon
exercise of an Option, for the same aggregate cash consideration, the
equivalent total number and class or classes of shares (or in the case
of a dividend of, or reclassification into, other equity securities,
such other securities) he would have held after such adjustment if he
had exercised his Option in full immediately prior to the event
requiring the adjustment, or, if applicable, the record date for
determining shareholders to be affected by such adjustment; and (ii)
the number and class of shares then reserved for issuance under this
Plan (or in the case of a dividend of, or reclassification into, other
equity securities, such other securities) shall be adjusted by
substituting for the total number and class of shares of Stock then
received, the number and class or classes of shares of Stock (or in the
case of a dividend of, or reclassification into, other equity
securities, such other securities) that would have been received by the
owner of an equal number of outstanding shares of Stock as a result of
the event requiring the adjustment. Comparable rights shall accrue to
each Optionee in the event of successive
5
<PAGE> 9
subdivisions, consolidations, capital adjustments, dividends or
reclassifications of the character described above.
(c) If (i) the Company shall not be the surviving entity in any
merger, consolidation or other reorganization (or survives only as a
subsidiary of an entity other than a previously wholly-owned subsidiary
of the Company), (ii) the Company sells, leases or exchanges or agrees
to sell, lease or exchange all or substantially all of its assets to
any other person or entity (other than a wholly-owned subsidiary of the
Company), (iii) the Company is to be dissolved and liquidated, or (iv)
a Change of Control not otherwise described in clauses (i), (ii), or
(iii) of this sentence shall have occurred (each such event described
in any of clauses (i), (ii), (iii), and (iv) of this sentence is
referred to herein as a "Corporate Change"), the Board, acting in its
sole discretion without the consent or approval of any Optionee, shall
act to effect one or more of the following alternatives, which may vary
among individual Optionees and which may vary among Options held by any
individual Optionee: (1) accelerate the time at which Options then
outstanding may be exercised so that such Options may be exercised in
full for a limited period of time on or before a specified date (before
or after such Corporate Change) fixed by the Board, after which
specified date all unexercised Options and all rights of Optionees
thereunder shall terminate, (2) require the mandatory surrender to the
Company by selected Optionees of some or all of the outstanding Options
held by such Optionees (irrespective of whether such Options are then
exercisable under the provisions of this Plan or the Option Agreements
evidencing such Options) as of a date, before or after such Corporate
Change, specified by the Board, in which event the Board shall
thereupon cancel such Options and the Company shall pay to each
Optionee an amount of cash per share equal to the excess, if any, of
the amount calculated in Section 4.5(d) (the "Change of Control Value")
of the shares subject to such Option over the exercise price(s) under
such Option for such shares, (3) make such adjustments to the number
and class of shares then reserved for issuance under this Plan and/or
to Options then outstanding as the Board deems appropriate to reflect
such Corporate Change (provided, however, that in effecting this
alternative the Board may determine in its sole discretion that no such
adjustment is necessary), or (4) provide that the number and class of
shares of Stock covered by an Option theretofore granted shall be
adjusted (which adjustment may include, but shall not be limited to,
having such Option assumed by the corporation that survives, or that
acquires voting securities of the Company or all or substantially all
of the assets of the Company, as a result of such Corporate Change
and/or having a new option substituted by such
6
<PAGE> 10
corporation for such Option) so that such Option shall thereafter cover
the number and class of shares of stock or other securities or property
(including, without limitation, cash) to which the Optionee would have
been entitled pursuant to the terms of the agreement of merger,
consolidation, reorganization, sale, lease or exchange of assets, or
dissolution if, immediately prior to such merger, consolidation,
reorganization, sale, lease or exchange of assets, or dissolution, the
Optionee had been the holder of record of the number of shares of Stock
then covered by such Option.
(d) Unless otherwise indicated in the applicable Option Agreement,
if an Option can be exercised before the Optionee is vested in such
Option, upon a Corporate Change, any right to repurchase an Optionee's
unvested Option shares at the original exercise price upon termination
of the Optionee's service shall lapse and all of such Option shares
shall become vested if (i) the Company is subject to a Corporate Change
before the Optionee's service terminates and (ii) the repurchase right
is not assigned to the entity that employs the Optionee immediately
after the Corporate Change or to its parent or subsidiary. Unless
otherwise indicated in the applicable Option Agreement, if an Option
can only be exercised as the Optionee becomes vested in such Option,
upon a Corporate Change, all of an Optionee's Options shall become
exercisable and vested in full if (i) the Company is subject to a
Corporate Change before the Optionee's service terminates, (ii) such
Options do not remain outstanding, (iii) such Options are not assumed
by the surviving corporation or its parent and (iv) the surviving
corporation or its parent does not substitute options with
substantially the same terms for such Options.
(e) For the purposes of clause (2) in Section 4.5(c), the "Change
of Control Value" shall equal the amount determined in clause (i), (ii)
or (iii) of this Section 4.5(d), whichever is applicable, as follows:
(i) the price per share offered to shareholders of the Company in any
such merger, consolidation, reorganization, sale, lease or exchange of
assets or dissolution transaction, (ii) the price per share offered to
all or a portion of the shareholders of the Company in any tender
offer, exchange offer or other purchase or exchange transaction whereby
a Corporate Change takes place, or (iii) if such Corporate Change
occurs other than as a result of a transaction described in clause (i)
or (ii) of this sentence, the fair market value per share of the shares
of Stock into which such Options being surrendered are exercisable, as
determined by the Board as of the date determined by the Board to be
the date of cancellation and surrender of such Options. In the event
that the consideration offered to shareholders of the Company in any
transaction described in this Section 4.5(e) or
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Section 4.5(c) consists of anything other than cash, the Board shall
determine the fair cash equivalent of the portion of the consideration
offered which is other than cash.
(f) The provisions of this Plan to the contrary notwithstanding,
with respect to any Stock Award outstanding at the time of the
occurrence of a Corporate Change, the Board may, in its sole discretion
and as of a date determined by the Board, fully vest any or all
Restricted Stock awarded to the holder pursuant to such Stock Award and
then outstanding and, upon such vesting, all restrictions applicable to
such Stock Award shall terminate as of such date. Any action by the
Board pursuant to this Section 4.5(f) may vary among holders and may
vary among the Stock Awards held by any holder.
(g) In the event of changes in the outstanding Stock by reason of
recapitalizations, reorganizations, mergers, consolidations,
combinations, exchanges or other relevant changes in capitalization, or
in the event of any separation of the Company or any Affiliate
(including, but not limited to, any such separation resulting from a
spin-off or other distribution of stock or property by the Company or
any Affiliate), occurring after the date of the grant of any Option or
Stock Award and not otherwise provided for by this Section 4.5, any
outstanding Options and Stock Awards and any agreements evidencing such
Options and Stock Awards shall be subject to adjustment by the Board at
its discretion as to the number, class and price of shares of stock or
other consideration subject to such Options and Stock Awards (provided,
however, that the Board may determine in its discretion that no such
adjustment is necessary with respect to some or all of such outstanding
Options and/or Stock Awards and/or any agreements evidencing such
Options and Stock Awards). In the event of any such change in the
outstanding Stock or any such separation, the aggregate number and
class of shares available under this Plan may be appropriately adjusted
by the Board, whose determination shall be conclusive.
(h) Any adjustment provided for in Section 4.5(a) through (g) above
shall be subject to any required shareholder action.
(i) Except as hereinbefore expressly provided, the issuance by the
Company of shares of stock of any class, or securities convertible into
shares of stock of any class, for cash, property, labor or services,
either upon direct sale, upon the exercise of rights or warrants to
subscribe for them, or upon conversion of shares or obligations of the
Company convertible
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into shares or other securities, and in any case whether or not for
fair market value, shall not affect, and no adjustment by reason of
such issuance shall be made with respect to, the number, class, or
price of shares of Stock then subject to outstanding Options and Stock
Awards.
4.6 ELECTION UNDER SECTION 83(b) OF THE CODE. Any Optionee or
Restricted Stock Recipient who receives an Option or Stock Award under the Plan
may exercise the Option or Stock Award prior to the date on which any portion of
the Option or Stock Award becomes vested. If the Optionee or Restricted Stock
Recipient exercises an Option or Stock Award prior to vesting in the Option or
Stock Award, then the Company shall have a right to repurchase the shares of
Stock subject to the Option or Stock Award that remain unvested upon the
termination of service of the Optionee or Restricted Stock Recipient at the
original price that the Optionee or Restricted Stock Recipient paid for such
shares of Stock. Any Optionee or Restricted Stock Recipient may file an election
under Section 83(b) of the Code when exercising an Option or Stock Award that is
subject to a substantial risk of forfeiture, such as the Company's right of
repurchase.
ARTICLE V
OPTIONS
5.1 TYPE OF OPTION. The Board shall specify whether a given option
shall constitute an Incentive Option or a Nonqualified Option.
5.2 OPTION PRICE. The price at which Stock may be purchased under an
Incentive Option shall not be less than the greater of: (a) 100% of the Fair
Market Value of the shares of Stock on the date the Option is granted, or (b)
the aggregate par value of the shares of Stock on the date the Option is
granted. The Board in its discretion may provide that the price at which shares
of Stock may be purchased under an Incentive Option shall be more than 100% of
Fair Market Value. In the case of any 10% Stockholder, the price at which shares
of Stock may be purchased under an Incentive Option shall not be less than the
greater of: (a) 110% of the Fair Market Value of the Stock on the date the
Incentive Option is granted, or (b) the aggregate par value of the shares of
Stock on the date the Option is granted.
The price at which shares of Stock may be purchased under a
Nonqualified Option shall not be less than the lesser of: (a) 100% of the Fair
Market Value of the shares of Stock on the date the Option is granted or (b) the
aggregate par value of the shares of Stock on the date the Option is granted.
The Board in its discretion may provide that the price at which shares of Stock
may be purchased under a Nonqualified Option shall be more than 100% of Fair
Market Value.
5.3 DURATION OF OPTIONS. No Option shall be exercisable after the
expiration of ten (10) years from the date the Option is granted. In the case of
a 10% Stockholder, no Incentive Option shall be exercisable after the expiration
of five (5) years from the date the Incentive Option is granted.
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5.4 AMOUNT EXERCISABLE. Each Option is exercisable, in whole or in
part, in the manner and subject to the conditions the Board of Directors, in its
sole discretion, may provide in the Option Agreement, as long as the Option is
valid and outstanding; provided, however, that notwithstanding anything in this
Plan or any Option Agreement to the contrary, during or with respect to any
period in which the Company is an S corporation (as defined section 1361(a)(1)
of the Code or any successor or superseding provision of the tax laws of the
United States of America), the Board, in its sole discretion, may determine that
an Option that is otherwise exercisable may not be exercised if such exercise
would cause the Company's S corporation status to terminate, in which case such
Option may not be exercised unless and until such time as the Board, in its sole
discretion, determines that such Option may be exercised without causing the
Company's S corporation status to terminate.
To the extent that the aggregate Fair Market Value (determined as of
the time an Incentive Option is granted) of the Stock with respect to which
Incentive Options first become exercisable by an Employee during any calendar
year (under this Plan and any other incentive stock option plan(s) of the
Company or any Affiliate) exceeds $100,000, the Incentive Options shall be
treated as Nonqualified Options. In making this determination, Incentive Options
shall be taken into account in the order in which they were granted. If an
Incentive Option is not exercised within specified time limits prescribed by the
Code, it shall become a Nonqualified Option by operation of law.
5.5 EXERCISE OF OPTIONS. Each option shall be exercised by the delivery
of written notice to the Board setting forth the number of shares of Stock with
respect to which the Option is to be exercised, together with: (a) cash,
certified check, bank draft, or postal or express money order payable to the
order of the Company for an amount equal to the exercise price of the shares,
(b) Stock at its Fair Market Value on the date of exercise, except that no such
Stock shall be used if the surrender of such Stock would cause the Company to
recognize compensation expense (or additional compensation expense) with respect
to the option for financial reporting purposes, (c) an election to have shares
of Stock, which otherwise would be issued on exercise, withheld in payment of
the exercise price and/or to satisfy the minimum income tax withholding
obligation, (d) services rendered to the Company, (e) promissory note, (f) if
Stock is publicly traded, payment may be made all or in part by the delivery (on
a form prescribed by the Company) of an irrevocable direction to a securities
broker approved by the Company to sell shares of Stock and to deliver all or
part of the sales proceeds to the Company in payment of all or part of the
exercise price and any withholding taxes, (g) if Stock is publicly traded,
payment may be made all or in part by the delivery (on a form prescribed by the
Company) of an irrevocable direction to pledge shares of Stock to a securities
broker or lender approved by the Company, as security for a loan, and to deliver
all or part of the loan proceeds to the Company in payment of all or part of the
exercise price and any withholding taxes, (h) any combination of the above or
any other form of payment which is acceptable to the Board, and specifying the
address to which the certificates for the shares are to be mailed.
As promptly as practicable after receipt of written notification and
payment, the Company shall deliver to the Optionee certificates for the number
of shares with respect to which the Option has been exercised, issued in the
Optionee's name; provided, however, that if the shares with respect to which the
Option has been exercised are unvested, such shares will be held in escrow, as
provided in the applicable Option Agreement. If shares of Stock are used in
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payment, the aggregate Fair Market Value of the shares of Stock tendered must be
equal to or less than the aggregate exercise price of the shares being purchased
upon exercise of the Option, and any difference must be paid by cash, certified
check, bank draft, or postal or express money order payable to the order of the
Company. Delivery of the shares shall be deemed effected for all purposes when a
stock transfer agent of the Company shall have deposited the certificates in the
United States mail, addressed to the Optionee, at the address specified by the
Optionee.
Whenever an Option is exercised by exchanging shares of Stock owned by
the Optionee, the Optionee shall deliver to the Company certificates registered
in the name of the Optionee representing a number of shares of Stock legally and
beneficially owned by the Optionee, free of all liens, claims, and encumbrances
of every kind, accompanied by stock powers duly endorsed in blank by the record
holder of the shares represented by the certificates (with signature guaranteed
by a commercial bank or trust company or by a brokerage firm having a membership
on a registered national stock exchange). The delivery of certificates upon the
exercise of Options is subject to the condition that the person exercising the
Option provide the Company with the information the Company might reasonably
request pertaining to exercise, sale or other disposition. The Board may provide
that a legend or restriction be printed on the certificate as the Board
determines is necessary, in its discretion, to comply with applicable laws.
5.6 EXERCISE ON TERMINATION OF EMPLOYMENT. Unless it is expressly
provided otherwise in the Option Agreement, Options shall expire one day less
than six months after severance of employment of an Employee from the Company
and all Affiliates for any reason other than death, retirement, severance for
disability, or termination for Cause; provided, if an Incentive Option is not
exercised within specified time limits prescribed by the Code, it shall become a
Nonqualified Option by operation of law. Whether authorized leave of absence or
absence on military or government service shall constitute severance of the
employment of an Employee shall be determined by the Board at that time.
Upon a termination of service for any reason, the Optionee may exercise
all or part of the Optionee's Options at any time before the expiration of such
Options, but only to the extent that such Options had become exercisable and
vested before the Optionee's service terminated (or became exercisable as a
result of the termination) and the underlying shares had vested before the
Optionee's Service terminated (or vested as a result of the termination). The
balance of such Options shall lapse when the Optionee's service terminates.
In determining the employment relationship between the Company and an
Employee, employment by any Affiliate shall be considered employment by the
Company, as shall employment by a corporation issuing or assuming a stock option
in a transaction to which Section 424(a) of the Code applies, or by a parent
corporation or subsidiary corporation of the corporation issuing or assuming a
stock option (and for this purpose, the phrase "corporation issuing or assuming
a stock option" shall be substituted for the word "Company" in the definitions
of parent corporation and subsidiary corporation in Section 2.1, and the
parent-subsidiary relationship shall be determined at the time of the corporate
action described in Section 424(a) of the Code).
DEATH. If, before the expiration of an Option, an Employee, whether in
the employ of the Company or after he has retired or was severed for disability,
dies, the Option
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shall become fully vested and shall continue until the earlier of the Option's
expiration date or one year following the date of his death, unless it is
expressly provided otherwise in the Option Agreement. After the death of an
Employee, his executors, administrators or any persons to whom his Option may be
transferred by will or by the laws of descent and distribution shall have the
right, at any time prior to the Option's expiration or termination, whichever is
earlier, to exercise the Option in full unless it is expressly provided
otherwise in the Option Agreement.
RETIREMENT. Unless it is expressly provided otherwise in the Option
Agreement, before the expiration of an Incentive Option, an Employee shall be
retired in good standing from the employ of the Company under the then
established rules of the Company, the Incentive Option shall terminate on the
earlier of the Option's expiration date or one year after his retirement;
provided, if an Incentive Option is not exercised within specified time limits
prescribed by the Code, it shall become a Nonqualified Option by operation of
law.
Unless it is expressly provided otherwise in the Option Agreement, if
before the expiration of a Nonqualified Option, an Employee shall be retired in
good standing from the employ of the Company under the then established rules of
the Company, the Nonqualified Option shall terminate on the earlier of the
Nonqualified Option's expiration date or one year after his retirement.
In the event of retirement, an Employee shall have the right prior to
the termination of the Option to exercise the Option, to the extent to which he
was entitled to exercise it as of his retirement date, and shall be vested in
the Option to the extent that he was vested as of his retirement date, unless it
is expressly provided otherwise in the Option Agreement.
DISABILITY. If, before the expiration of an Option, an Employee shall
be severed from the employ of the Company for disability, the Option shall
terminate on the earlier of the Option's expiration date or one year after the
date he was severed because of disability, unless it is expressly provided
otherwise in the Option Agreement. In the event that an Employee shall be
severed from the employ of the Company for disability, an Employee shall become
fully vested in his Option and have the right prior to the termination of the
Option to exercise the Option in full unless it is expressly provided otherwise
in the Option Agreement. If an Incentive Option is not exercised within
specified time limits prescribed by the Code, it shall become a Nonqualified
Option by operation of law.
Notwithstanding the above, an Option may be amended by the Board, with
the consent of an Employee, to extend the termination date of the Option,
provided such extension shall not exceed a period of 10 years from the date of
the initial grant of the Option.
TERMINATION FOR CAUSE. Unless it is expressly provided otherwise in the
Option Agreement, Options shall terminate immediately upon the termination for
Cause of employment of an Employee from the Company.
5.7 SUBSTITUTION OPTIONS. Options may be granted under this Plan from
time to time in substitution for stock options held by employees of other
corporations who are about to become employees of or affiliated with the Company
or any Affiliate as the result of a merger
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or consolidation of the employing corporation with the Company or any Affiliate,
or the acquisition by the Company or any Affiliate of the assets of the
employing corporation, or the acquisition by the Company or any Affiliate of
stock of the employing corporation as the result of which it becomes an
Affiliate of the Company. The terms and conditions of the substitute Options
granted may vary from the terms and conditions set out in this Plan to the
extent the Board, at the time of grant, may deem appropriate to conform, in
whole or in part, to the provisions of the stock options in substitution for
which they are granted.
5.8 NO RIGHTS AS SHAREHOLDER. No Employee shall have any rights as a
shareholder with respect to Stock covered by his Option until the date a stock
certificate is issued for the Stock.
ARTICLE VI
STOCK AWARDS
6.1 STOCK AWARDS. The Board may issue shares of Stock to an individual
or entity subject to the terms of a Restricted Stock Agreement. The Restricted
Stock may be issued for no payment by the Restricted Stock Recipient or for a
payment below the Fair Market Value on the date of grant. Restricted Stock shall
be subject to restrictions as to sale, transfer, alienation, pledge or other
encumbrance and generally will be subject to vesting over a period of time
specified in the Restricted Stock Agreement. The Board shall determine the
period of vesting, if any, the number of shares, the price, if any, of Stock
included in a Stock Award, and the other terms and provisions which are included
in a Restricted Stock Agreement. In the discretion of the Board, a Restricted
Stock Award may be made as a grant of Restricted Stock or as a right to receive
stock (or their cash equivalent or a combination of both) in the future.
6.2 RESTRICTIONS. Restricted Stock may be subject to the following
terms and conditions as determined by the Board and as set forth in the
Restricted Stock Award, including without limitation any or all of the
following:
(a) a prohibition against the sale, transfer, alienation, pledge or
other encumbrance of the shares of Restricted Stock, such prohibition
to lapse at such time or times as the Board shall determine (whether in
annual or more frequent installments, at the time of the death,
disability or retirement of the holder of such shares, or otherwise);
(b) a requirement that the holder of shares of Restricted Stock
forfeit, or in the case of shares sold to an Employee, resell back to
the Company at his cost, all or a part of such shares in the event of
termination of the holder's employment during any period in which the
shares remain subject to restrictions;
(c) a prohibition against employment of the holder of Restricted
Stock by any competitor of the Company or its Affiliates, or against
such holder's dissemination of any secret or confidential information
belonging to the Company or an Affiliate;
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(d) unless stated otherwise in the Restricted Stock Agreement, (i)
if restrictions remain at the time of severance of employment with the
Company and all Affiliates, other than for reason of disability or
death, the Restricted Stock shall be forfeited; and (ii) if severance
of employment is by reason of disability or death, the restrictions on
the shares shall lapse and the Employee or his heirs or estate shall be
100% vested in the shares subject to the Restricted Stock Agreement.
6.3 STOCK CERTIFICATE. Shares of Restricted Stock shall be registered
in the name of the Restricted Stock Recipient receiving the Stock Award and
deposited, together with a stock power endorsed in blank, with the Company. Each
such certificate shall bear a legend in substantially the following form:
THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES OF STOCK
REPRESENTED BY IT IS RESTRICTED BY AND SUBJECT TO THE TERMS AND
CONDITIONS (INCLUDING CONDITIONS OF FORFEITURE) CONTAINED IN THE
ASHFORD.COM, INC. 1998 STOCK INCENTIVE PLAN, AND AN AGREEMENT ENTERED
INTO BETWEEN THE REGISTERED OWNER AND THE COMPANY. A COPY OF THE PLAN
AND AGREEMENT IS ON FILE IN THE OFFICE OF THE SECRETARY OF THE COMPANY.
6.4 RIGHTS AS SHAREHOLDER. Subject to the terms and conditions of the
Plan, each Restricted Stock Recipient receiving a certificate for Restricted
Stock shall have all the rights of a shareholder with respect to the shares of
Stock included in the Stock Award during any period in which such shares are
subject to forfeiture and restrictions on transfer, including without
limitation, the right to vote such shares, if unrestricted shares of the same
class have the right to vote. Dividends paid with respect to shares of
Restricted Stock in cash or property other than stock in the Company or rights
to acquire stock in the Company shall be paid to the Restricted Stock Recipient
currently. Dividends paid in stock in the Company or rights to acquire stock in
the Company shall be added to and become a part of the Restricted Stock.
6.5 LAPSE OF RESTRICTIONS. At the end of the time period during which
any shares of Restricted Stock are subject to forfeiture and restrictions on
sale, transfer, alienation, pledge, or other encumbrance, such shares shall vest
and will be delivered in a certificate, free of all restrictions, to the
Restricted Stock Recipient or to the Restricted Stock Recipient's legal
representative, beneficiary or heir; provided the certificate shall bear such
legend, if any, as the Board determines is reasonably required by applicable
law. By accepting a Stock Award and executing a Restricted Stock Agreement, the
Restricted Stock Recipient agrees to remit when due any federal and state income
and employment taxes required to be withheld.
6.6 RESTRICTION PERIOD. No Stock Award may provide for restrictions
continuing beyond ten (10) years from the date of the Stock Award.
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ARTICLE VII
ADMINISTRATION
This Plan shall be administered by the Board. All questions of
interpretation and application of the Plan, Options or Stock Awards shall be
subject to the determination of the Board. A majority of the members of the
Board shall constitute a quorum. All determinations of the Board shall be made
by a majority of its members. Any decision or determination reduced to writing
and signed by a majority of the members shall be as effective as if it had been
made by a majority vote at a meeting properly called and held. This Plan shall
be administered in such a manner as to permit the Options granted under it which
are designated to be Incentive Options to qualify as Incentive Options. In
carrying out its authority under this Plan, the Board shall have full and final
authority and discretion, including but not limited to the following rights,
powers and authorities, to:
(a) determine the individuals or entities to whom and the time
or times at which Options or Stock Awards will be made,
(b) determine the number of shares and the purchase price of
Stock covered in each Option or Stock Award, subject to the terms of
the Plan,
(c) determine the terms, provisions and conditions of each
Option and Stock Award, which need not be identical,
(d) accelerate the time at which any outstanding Option may be
exercised,
(e) define the effect, if any, on an Option or Stock Award of
the death, disability, retirement, or termination of employment of an
Employee,
(f) prescribe, amend and rescind rules and regulations
relating to administration of the Plan, and
(g) make all other determinations and take all other actions
deemed necessary, appropriate, or advisable for the proper
administration of this Plan.
The actions of the Board in exercising all of the rights, powers, and
authorities set out in this Article and all other Articles of this Plan, when
performed in good faith and in its sole judgment, shall be final, conclusive and
binding on all parties.
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ARTICLE VIII
AMENDMENT OR TERMINATION OF PLAN
The Board of Directors of the Company may amend, terminate or suspend
this Plan at any time, in its sole and absolute discretion; provided, however,
that to the extent required to qualify this Plan under Rule 16b-3 promulgated
under Section 16 of the Securities Exchange Act of 1934, as amended, no
amendment that would (a) materially increase the number of shares of Stock that
may be issued under this Plan, (b) materially modify the requirements as to
eligibility for participation in this Plan, or (c) otherwise materially increase
the benefits accruing to participants under this Plan, shall be made without the
approval of the Company's shareholders; provided further, however, that to the
extent required to maintain the status of any Incentive Option under the Code,
no amendment that would (a) change the aggregate number of shares of Stock which
may be issued under Incentive Options, (b) change the class of employees
eligible to receive Incentive Options, or (c) decrease the Option price for
Incentive Options below the Fair Market Value of the Stock at the time it is
granted, shall be made without the approval of the Company's shareholders.
Subject to the preceding sentence, the Board shall have the power to make any
changes in the Plan and in the regulations and administrative provisions under
it or in any outstanding Incentive Option as in the opinion of counsel for the
Company may be necessary or appropriate from time to time to enable any
Incentive Option granted under this Plan to continue to qualify as an incentive
stock option or such other stock option as may be defined under the Code so as
to receive preferential federal income tax treatment.
ARTICLE IX
MISCELLANEOUS
9.1 NO ESTABLISHMENT OF A TRUST FUND. No property shall be set aside
nor shall a trust fund of any kind be established to secure the rights of any
individual or entity under this Plan. All individuals and entities shall at all
times rely solely upon the general credit of the Company for the payment of any
benefit which becomes payable under this Plan.
9.2 NO EMPLOYMENT OBLIGATION. The granting of any Option or Stock Award
shall not constitute an employment contract, express or implied, nor impose upon
the Company or any Affiliate any obligation to employ or continue to employ any
Employee. The right of the Company or any Affiliate to terminate the employment
of any person shall not be diminished or affected by reason of the fact that an
Option or Stock Award has been granted to him.
9.3 FORFEITURE. Notwithstanding any other provisions of this Plan, if
the Board finds by a majority vote after full consideration of the facts that an
Employee, before or after termination of his employment with the Company or an
Affiliate for any reason (a) committed or engaged in fraud, embezzlement, theft,
commission of a felony, or proven dishonesty in the course of his employment by
the Company or an Affiliate, which conduct damaged the Company or Affiliate, or
disclosed trade secrets of the Company or an Affiliate, or (b) participated,
engaged in or had a material, financial or other interest, whether as an
employee,
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officer, director, consultant, contractor, stockholder, owner, or otherwise, in
any commercial endeavor which is competitive with the business of the Company or
an Affiliate without the written consent of the Company or Affiliate, the
Employee shall forfeit all outstanding Options and all outstanding Restricted
Stock, and including all exercised Options and other situations pursuant to
which the Company has not yet delivered a stock certificate. Clause (b) shall
not be deemed to have been violated solely by reason of an Employee's ownership
of stock or securities of any publicly owned corporation, if that ownership does
not result in effective control of the corporation.
The decision of the Board as to the cause of an Employee's discharge,
the damage done to the Company or an Affiliate, and the extent of an Employee's
competitive activity shall be final. No decision of the Board, however, shall
affect the finality of the discharge of an Employee by the Company or an
Affiliate in any manner.
9.4 TAX WITHHOLDING. The Company or any Affiliate shall be entitled to
deduct from other compensation payable to an Employee any sums required by
federal, state, or local tax law to be withheld with respect to the grant or
exercise of an Option or lapse of restrictions on Restricted Stock. In the
alternative, the Company may require an Employee (or other person exercising the
Option or receiving the Restricted Stock) to pay the sum directly to the
employer corporation. If an Employee (or other person exercising the Option or
receiving the Restricted Stock) is required to pay the sum directly, payment in
cash or by check of such sums for taxes shall be delivered within ten (10) days
after the date of exercise or lapse of restrictions. The Company shall have no
obligation upon exercise of any Option or lapse of restrictions on Restricted
Stock until payment has been received, unless withholding (or offset against a
cash payment) as of or prior to the date of exercise or lapse of restrictions is
sufficient to cover all sums due with respect to that exercise. The Company and
its Affiliates shall not be obligated to advise an Employee of the existence of
the tax or the amount which the employer corporation will be required to
withhold.
9.5 WRITTEN AGREEMENT. Each Option and Stock Award shall be embodied in
a written Option Agreement or Restricted Stock Agreement which shall be subject
to the terms and conditions of this Plan and shall be signed by the Optionee or
Restricted Stock Recipient, as applicable, and by a member of the Board on
behalf of the Board and the Company or an executive officer of the Company other
than the Optionee or Restricted Stock Recipient, as applicable, on behalf of the
Company. The Option Agreement or Restricted Stock Agreement may contain any
other provisions that the Board in its discretion shall deem advisable which are
not inconsistent with the terms of this Plan. This Plan and all shares of Stock
or stock equivalents granted pursuant hereto shall be subject to the terms of
any shareholders agreement entered into by the Company concurrent, or prior to,
the grant of any Option hereunder.
9.6 INDEMNIFICATION OF THE BOARD OF DIRECTORS. With respect to
administration of this Plan, the Company shall indemnify each present and future
member of the Board of Directors against, and each member of the Board of
Directors shall be entitled without further act on his part to indemnity from
the Company for, all expenses (including attorney's fees, the amount of
judgments and the amount of approved settlements made with a view to the
curtailment of costs of litigation, other than amounts paid to the Company
itself) reasonably incurred by him in connection with or arising out of any
action, suit, or proceeding in which he
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may be involved by reason of his being or having been a member of the Board of
Directors, whether or not he continues to be a member of the Board of Directors
at the time of incurring the expenses -- including, without limitation, matters
as to which he shall be finally adjudged in any action, suit or proceeding to
have been found to have been negligent in the performance of his duty as a
member of the Board of Directors. However, this indemnity shall not include any
expenses incurred by any member of the Board of Directors in respect of matters
as to which he shall be finally adjudged in any action, suit or proceeding to
have been guilty of gross negligence or willful misconduct in the performance of
his duty as a member of the Board of Directors. In addition, no right of
indemnification under this Plan shall be available to or enforceable by any
member of the Board of Directors unless, within sixty (60) days after
institution of any action, suit or proceeding, he shall have offered the
Company, in writing, the opportunity to handle and defend same at its own
expense. This right of indemnification shall inure to the benefit of the heirs,
executors or administrators of each member of the Board of Directors and shall
be in addition to all other rights to which a member of the Board of Directors
may be entitled as a matter of law, contract, or otherwise.
9.7 GENDER. If the context requires, words of one gender when used in
this Plan shall include the others and words used in the singular or plural
shall include the other.
9.8 HEADINGS. Headings of Articles and Sections are included for
convenience of reference only and do not constitute part of the Plan and shall
not be used in construing the terms of the Plan.
9.9 OTHER COMPENSATION PLANS. The adoption of this Plan shall not
affect any other stock option, incentive or other compensation or benefit plans
in effect for the Company or any Affiliate, nor shall the Plan preclude the
Company from establishing any other forms of incentive or other compensation for
employees of the Company or any Affiliate.
9.10 OTHER OPTIONS OR AWARDS. The grant of an Option or Stock Award
shall not confer upon the Employee the right to receive any future or other
Options or Stock Awards under this Plan, whether or not Options or Stock Awards
may be granted to similarly situated Employees, or the right to receive future
Options or Stock Awards upon the same terms or conditions as previously granted.
9.11 GOVERNING LAW. The provisions of this Plan shall be construed,
administered, and governed under the laws of the State of Texas.
9.12 FORMS. The Company shall use a form similar to the form attached
hereto as Exhibit A (or such other form as the Board may approve) to grant
Incentive Options, a form similar to the form attached hereto as Exhibit B (or
such other form as the Board may approve) to grant Nonqualified Options and a
form similar to the form attached hereto as Exhibit C (or such other form as the
Board may approve) to grant Restricted Stock.
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FASHION ACCESSORIES PROGRAM
ADVERTISING AND PROMOTION AGREEMENT
This Advertising and Promotion Agreement (this "Agreement") is entered
into as of August 11, 1999 (the "Effective Date") between Yahoo! Inc., a
Delaware corporation with offices at 3420 Central Expressway, Santa Clara, CA
95051 ("Yahoo") and Ashford.com, Inc., a Delaware corporation with offices at
3800 Buffalo Speedway, Suite 400, Houston, Texas 77098 ("Ashford").
In consideration of the mutual promises contained in this Agreement,
Yahoo and Ashford hereby agree as follows:
1. DEFINITIONS.
The following terms are used in this Agreement with the respective
meanings set forth below:
"Ashford Banner" shall mean the advertising promotions Ashford provides
to Yahoo hereunder and reasonably approved by Yahoo that: (a) promotes the
on-line sale of Fashion Accessories Products, (b) has dimensions no larger than
468 pixels wide by 60 pixels high, (c) does not have "looped" animation, (d)
does not have any animation longer than six seconds, (e) has a file size of no
greater than 12K, and (f) will permit users to navigate directly to a Page on
the Ashford Site relating to the Ashford Banner content. Yahoo may modify these
specifications (except clause (f)) at its reasonable discretion, provided that
any such modification does not have a material adverse impact on the value of
the Ashford Banner, as would be reasonably determined by a similarly situated
independent third party merchant.
"Ashford Banner Category Pages" shall mean those Pages within the
Ashford Banner Categories identified on Exhibit A.
"Ashford Banner Keywords" shall mean those keywords identified as such
on Exhibit A; provided that, Yahoo may substitute any such keyword for a
comparable keyword in its reasonable discretion with consent from Ashford, which
shall not be unreasonably withheld or delayed.
"Ashford Banner Pages" shall mean the Ashford Banner Category Pages and
Ashford Banner Search Results Pages.
"Ashford Banner Search Results Pages" shall mean those Pages displayed
upon a user's searching the Yahoo Main Site for an Ashford Banner Keyword.
"Ashford Brand Features" shall mean all trademarks, service marks,
logos and other distinctive brand features of Ashford that are used in or relate
to its business.
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"Ashford Button" shall mean a link substantially similar in form as
that set forth on Exhibit B that: (a) contains an Ashford logo and has
dimensions no larger than 88 pixels wide by 31 pixels high, (b) does not contain
animation, (c) has a file size of no greater than 2K, (d) contains alt text of
no more than ten (10) characters (including spaces), (e) and will permit users
to navigate directly to a Page on the Ashford Site reasonably relating to the
Page on which such Ashford Button appears. Yahoo may modify these specifications
(except clause (e)) at its reasonable discretion, provided that any such
modification does not have a material adverse impact on the value of the Ashford
Button, as would be reasonably determined by a similarly situated independent
third party merchant.
"Ashford Button Category Pages" shall mean those Pages within the
Ashford Button Categories identified on Exhibit A.
"Ashford Button Keywords" shall mean those keywords identified as such
on Exhibit A; provided that, Yahoo may substitute any such keyword for a
comparable keyword in its reasonable discretion with consent from Ashford, which
shall not be unreasonably withheld or delayed.
"Ashford Button Pages" shall mean the Ashford Button Category Pages and
Ashford Button Search Results Pages.
"Ashford Button Pages Area" shall mean the area on the Ashford Button
Pages on which the Ashford Button appears (together with other merchant or Yahoo
buttons).
"Ashford Button Search Results Pages" shall mean those Pages displayed
upon a user's searching the Yahoo Main Site for an Ashford Button Keyword
"Ashford Competitors" shall mean those merchants listed on Exhibit G;
[ * ]
"Ashford E-Mail" shall mean an e-mail message promoting Fashion
Accessories Products that: (a) is a single HTML mail message; (b) contains an
image in JPEG or GIF format under 5K in file size; (c) has a total page weight
of no more than 30K, (d) contains no animation longer than 6 seconds (with no
"looping") (e) contains no Java, JavaScript, frames, ActiveX , dynamic HTML ,
background body image or background color, (f) contains up to four lines of text
as provided by Ashford and reasonably approved by Yahoo, with no more than 40
characters (including spaces) on each line. Yahoo may modify these
specifications at its reasonable discretion, provided that any such modification
does not have a material adverse impact on the value of the Ashford E-Mail, as
would be reasonably determined by a similarly situated independent third party
merchant.
"Ashford Front Page Promotion" shall mean a promotion substantially
similar in form as that set forth on Exhibit B which will appear on the home
page of the Yahoo Main Site, that will in all cases comply with Yahoo's current
front-page promotion guidelines attached as Exhibit D, which may be modified by
Yahoo at its sole discretion; provided that, in the event that any such
modification has a material adverse impact on the value of the Ashford Front
Page Promotion as would be reasonably determined by a similarly situated
independent third-party merchant, Ashford shall be permitted to substitute any
undelivered Ashford Front Page Promotion inventory for alternative promotions in
the Yahoo Main Site mutually agreed upon by the parties ("Substitue Front Page
Inventory"). Any substitutions shall be made based on the ratio of
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Yahoo's then-current ratecard prices for the Substitute Front Page Inventory and
the then current value of the Ashford Front Page Promotion inventory to be
substituted (i.e., if at the time of substitution, the Substitute Front Page
Inventory is valued at a [ * ] cpm on Yahoo's then current ratecard, and the
then current value of the Ashford Front Page Promotion in the then current rate
card is [ * ], then Ashford shall get [ * ] the number of remaining impressions
of the Ashford Front Page Promotions when converted to the new inventory).
"Ashford Link" shall mean any link placed by Yahoo under this
Agreement, including, without limitation, the Ashford Banner, Ashford Button,
and Ashford E-Mail.
"Ashford Site" shall mean the web site owned by Ashford currently
located at http://www.ashford.com.
"Fashion Accessories Merchant" shall mean any company or other entity
that derives fifty percent (50%) or more of its revenue through the on-line sale
of Fashion Accessories Products.
"Fashion Accessories Merchant Program" shall mean Yahoo's program
consisting of certain marketing, advertising and promotional activities with
Fashion Accessories Merchants.
"Fashion Accessories Products" shall mean jewelry, certain leather
goods (e.g., handbags and wallets), pens, eyewear and similar fashion
accessories (e.g., watches).
"February 1999 Agreement" shall mean that Advertising and Promotion
Agreement, between Ashford and Yahoo, dated February 26, 1999.
"Launch Date" shall mean the date of first public availability of the
Ashford Links on the Yahoo Properties.
"Merchant Button" shall mean a link to a third party merchant's World
Wide Web site that substantially conforms to the specifications of Yahoo's then
current merchant promotional buttons.
"Page" means any World Wide Web page (or, for online media other than
Web sites, the equivalent unit of the relevant protocol).
"Page View" shall mean a user's request for a Page as measured by
Yahoo's advertising reporting system.
"Term" shall mean the period beginning on the Effective Date and
continuing for a period of twelve (12) months following the Launch Date.
"Treasure Hunt Click-Throughs" shall mean a user's "pressing" or
"clicking" on a Treasure Hunt Promotion "Win It" icon, as measured by Yahoo's
advertiser reporting system.
"Treasure Hunt Promotion" shall mean a multi-sponsor promotion on the
Yahoo Properties, conforming to the specifications set forth in Exhibit E (which
may be modified at Yahoo's reasonable discretion, provided that any such
modification does not have a material adverse impact on the value of the
Treasure Hunt Promotion), in which users view sponsors' pages and answer
demographic questions in exchange for entries towards a drawing for prizes.
"Yahoo Brand Features" shall mean all trademarks, service marks, logos
and other distinctive brand features of Yahoo that are used in or relate to its
business.
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"Yahoo Main Site" shall mean Yahoo's principal U.S. based directory to
the World Wide Web currently located at http://www.yahoo.com.
"Yahoo Properties" shall mean any Yahoo branded or co-branded media
properties, including, without limitation, Internet guides, that are developed
in whole or in part by Yahoo or its affiliates.
"Yahoo Sports" shall mean Yahoo's sports related property currently
located at http://sports.yahoo.com.
2. ASHFORD BANNER, FRONT PAGE PROMOTION AND SPORTS PROMOTION.
2.1 During the Term, Yahoo shall provide the Ashford Banner, on a
rotating basis until its Page View obligations under Section 7
are met, on the Ashford Banner Pages. Yahoo agrees to use
commercially reasonable efforts to ensure that the Ashford
Banners are served on the Ashford Banner Pages during each
month of the Term, unless otherwise mutually agreed upon by
the parties.
2.2 During the Term, Yahoo shall provide the Ashford Front Page
Promotion, on a rotating basis until its Page View obligations
under Section 7 are met, on the home page of the Yahoo Main
Site. Yahoo agrees to use commercially reasonable efforts to
ensure that the Ashford Front Page Promotions are served on
the home page of the Yahoo Main Site on the dates specified on
Exhibit A or, subject to availability, other dates mutually
agreed upon by the parties.
2.3 During the Term, Yahoo shall provide Ashford with an
advertising promotion valued at [ * ], calculated at a [ * ]
discount off of Yahoo's then current standard rate card
prices, in Yahoo Sports. The form of such advertisement shall
be mutually agreed upon by the parties but consistent with
applicable standard forms of advertising appearing in Yahoo
Sports.
3. ASHFORD BUTTONS.
3.1 Yahoo shall provide the Ashford Button on the Ashford Button
Pages throughout the Term. The Ashford Button's placement on
the Ashford Button Pages shall rotate equally with any other
buttons appearing in the Ashford Button Pages Area (consistent
with the limited exclusivity provision of Section 6.1). Yahoo
shall provide up to three (3) text links to accompany the
Ashford Button on the Ashford Button Pages. In no case shall
any Ashford Button text link exceed sixteen (16) characters
(including spaces). Further, each Ashford Button text link
shall promote Fashion Accessories Products and permit users to
navigate via a link directly to a Page on the Ashford Site
relating to the Fashion Accessories Products relevant to the
Ashford Button Page on which such text link appears.
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4. ASHFORD E-MAILS AND TREASURE HUNT PROMOTION.
4.1 Yahoo shall deliver (i) [ * ] Ashford E-Mails to unique
registered users of its U.S. based email service through the
Yahoo! Delivers program (the "Yahoo Delivers Program"); and
(ii) [ * ] Ashford E-Mails to unique registered users of its
U.S. based email service through the Yahoo! Welcome and/or
Birthday Club program (the "Yahoo Welcome Program"). In
addition, Yahoo shall deliver [ * ] Treasure Hunt
Click-Throughs. In all cases, Ashford E-Mails shall be
delivered only (x) to those registered users of Yahoo's U.S.
based e-mail service that have indicated during the
registration process for such service a willingness to receive
promotional solicitations via Yahoo Mail; and (y) in
accordance with Yahoo's privacy policy. The text of the
Ashford E-Mail and materials necessary for Ashford's
participation in the aforementioned programs shall be provided
by Ashford and shall be subject to Yahoo's reasonable approval
and consistent with Yahoo's generally applicable policies and
guidelines for such messages and programs. Yahoo shall use
commercially reasonable efforts to target the Ashford E-Mails
delivery to its users based on gender and age characteristics
mutually agreed upon by the parties.
5. IMPLEMENTATION.
5.1 Yahoo will be solely responsible for the user
interface and placement of the Ashford Links and
Ashford shall be solely responsible for and shall
provide Yahoo with all artwork and design elements of
the Ashford Links.
5.2 Ashford shall promptly provide Yahoo all URLs, URL
formats (as applicable), content, and other materials
necessary for Yahoo to provide the Ashford Links. All
content and material contained in the Ashford Links
is subject to Yahoo's reasonable approval and must
comply with all applicable federal, state and local
laws, rules and regulations, including, without
limitation, consumer protection laws and rules and
regulations governing product claims, truth in
labeling, and false advertising.
5.3 During the Term, Ashford hereby grants to Yahoo a
non-exclusive, worldwide, fully paid license to use,
reproduce and display the Ashford Brand Features (i)
to indicate the location of the Ashford Links as set
forth herein and (ii) in connection with the
marketing and promotion of Ashford in the Yahoo
Properties. In association with the forgoing license,
Yahoo agrees to comply with the reasonable quality
control guidelines provided by Ashford to Yahoo from
time to time. Yahoo agrees that all uses of the
Ashford Brand Features shall be on behalf of Ashford
and the goodwill associated therewith shall inure to
the sole benefit of Ashford.
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5.4 In no event shall the first Page on the Ashford Site
to which users click-through directly from any
Ashford Link contain graphic or textual hyperlinks,
banner advertisements or promotions of the following
third parties: [ * ]
5.5 Ashford shall place a Yahoo graphic link on the first
Page of the Ashford Site to which users directly
click-through from any Ashford Link. Such Yahoo
graphic link shall be substantially similar in form
as that set forth on Exhibit B, unless the parties
mutually agree to an alternative placement; and (b)
directly link the user back to a Page on the Yahoo
Properties either to the page from which the user
click-through from or to the Yahoo Main Site home
page.
5.6 During the Term, Yahoo hereby grants to Ashford a
non-exclusive, worldwide, fully paid license to use,
reproduce and display the Yahoo name and logo to
indicate the location of the Yahoo graphic links as
set forth herein. In association with the forgoing
license, Ashford agrees to comply with the Trademark
Usage Guidelines attached as Exhibit H. Ashford
agrees that all uses of the Yahoos name and logo
shall be on behalf Yahoo and the goodwill associated
therewith shall inure to the sole benefit of Yahoo.
5.7 The Ashford Site shall comply with the scale, speed
and performance requirements mutually agreed upon by
the parties, but in no event shall the scale, speed
and performance of the Ashford Site be materially
less capable in such regard to comparable similarly
situated Yahoo merchants.
6. LIMITED EXCLUSIVITY; RIGHT OF FIRST PRESENTATION.
6.1 Yahoo shall display no more than one (1) Merchant
Button of any Ashford Competitor on the Ashford
Button Pages. Further, in the event that Yahoo elects
to display seven (7) or more Merchant Buttons on the
Ashford Button Pages, Yahoo shall: [ * ].
6.2 For clarity, Ashford acknowledges that the foregoing
limited exclusivity provision of Section 6.1 shall
not preclude Yahoo from, among other things: (i)
promoting or placing banners, Merchant Buttons or any
other advertising of any entity (including Ashford
Competitors) on any Yahoo Property other than the
Ashford Button Pages; (ii) subject to Section 6.1,
promoting or placing banners, Merchant Buttons or any
other advertising of any entity except Ashford
Competitors on the Ashford Button Pages; or (iii)
promoting or placing banners or any other advertising
except Merchant Buttons of any entity (including
Ashford Competitors) on the Ashford Button Pages,
provided that if Yahoo incorporates a non-banner
promotion which is larger than the Ashford Buttons on
the Ashford Button Pages, Ashford shall have the
right to and Yahoo will agree to [ * ].
6.3 Within thirty (30) days prior to the expiration of
the Term, Yahoo will provide written notice to
Ashford in the event that Yahoo, at its sole
discretion, elects
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to extend the availability of the Fashion Accessories
Merchant Program described in this Agreement. Yahoo
shall describe Yahoo's reasonable business
requirements for such Fashion Accessories Merchant
Program in its written notice to Ashford. The parties
will [ * ]. The parties acknowledge that the
promotional opportunities and terms offered in any
Fashion Accessories Merchant Program may differ
substantially from those contained in this Agreement.
Further, under no circumstances shall the foregoing
right of presentation be deemed to restrict Yahoo's
ability to extend merchant positions in any
subsequent Fashion Accessories Merchant Program to
any third parties, provided that Yahoo complies with
the terms of this Section 6.3.
6.4 Yahoo will provide written notice to Ashford in the
event that Yahoo, at its sole discretion, elects to
create, during the Term, a new promotional
opportunity substantially similar in scope and nature
to this Fashion Accessories Merchant Program on the
Yahoo Main Site. Yahoo shall describe Yahoo's
reasonable business requirements for the new
promotional opportunity in its written notice to
Ashford. [ * ] For clarity, the parties acknowledge
that advertising and promotional opportunities that
are in the normal course of Yahoo's business
including, but not limited to, banner ads on category
pages and keyword search results pages, shall not be
considered new promotional opportunities for the
purposes of this Section 6.4.
7. PAGE VIEWS.
7.1 With respect to the Ashford Button, Ashford Banner,
and Ashford Front Page Promotion, Yahoo shall deliver
a minimum of [ * ] Page Views.
7.2 Yahoo shall use reasonable commercial efforts to
deliver such Page Views as follows: [ * ] Page Views
of the Ashford Button; [ * ] Page Views of the
Ashford Banner; and [ * ] Page Views of the Ashford
Front Page Promotion. Notwithstanding the foregoing,
Yahoo's Page View obligations are with respect to the
program as a whole as set forth in Section 7.1 above
and Yahoo shall not be in breach of this Agreement
for failure to deliver the specific number of Page
Views in any of the areas set forth in this Section
7.2.
7.3 In the event that Yahoo fails to deliver [ * ] or
less of (i.e. delivers [ * ] or more of) the number
of Page Views referred to in Section 7.1 at the
expiration of the Term, Yahoo will "make good" the
shortfall [ * ] after the end of the Term by
extending its obligations under Sections 2, 3 and 6
in the areas of the Yahoo Main Site set forth therein
(or similar mutually agreed upon inventory) beyond
the end of the Term until such Page View obligation
is satisfied. The provisions set forth in this
Section 7.3 set forth the entire liability of Yahoo,
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and Ashford's sole remedy, for Yahoo's breach of its
Page View obligations set forth in this Section 7.
7.4 Throughout the Term, Yahoo shall provide Ashford
access to an electronic database that describes
Yahoo's calculation of the Page Views delivered
during the Term. The database will be updated
according to Yahoo's standard updating procedures.
8. COMPENSATION.
8.1 Slotting Fee. In consideration of Yahoo's performance
and obligations as set forth herein, Ashford will pay
Yahoo a non-refundable slotting fee equal to two
million dollars ($2,000,000). Such fee shall be paid
to Yahoo on the dates set forth below with the first
payment designated as a set up fee for the design,
consultation and development of the Ashford Links.
a) Payment Date
-----------------------------------------------------
b) [ * ] [ * ]
c) [ * ] [ * ]
d) [ * ] [ * ]
e) [ * ] [ * ]
f) [ * ] [ * ]
8.2 Payment Information. All payments herein are
non-refundable and non-creditable (except as provided
in Section 9.3(b)) and shall be made by Ashford via
wire transfer into Yahoo's main account pursuant to
the wire transfer instructions set forth on Exhibit
C.
8.3 Late Payments. Any portion of the above payments
which has not been paid to Yahoo within [ * ] days of
the dates set forth above shall bear interest at the
greater of (i) one percent (1%) per month or (ii) the
maximum amount allowed by law. Notwithstanding the
foregoing, any failure by Ashford to make the
payments specified in Sections 8.1 on the dates set
forth therein shall constitute a material breach of
this Agreement.
9. TERMINATION.
9.1 Term. This Agreement shall commence upon the
Effective Date and, unless terminated as provided
herein, shall remain in effect for the Term.
9.2 Termination by Either Party with Cause. This
Agreement may be terminated at any time by either
party: (i) immediately upon written notice if the
other
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party: (a) is declared insolvent; (b) files a
petition in bankruptcy; or (c) makes an assignment
for the benefit of its creditors; or (ii) thirty (30)
days after written notice to the other party of such
other party's breach of any of its obligations under
this Agreement in any material respect (ten (10) days
in the case of a failure to pay), which breach is not
remedied within such notice period. In the event that
Yahoo provides a notice of termination under clause
(ii) above, Yahoo shall have the right to suspend its
performance under this Agreement for the notice
period unless and until the breach is fully remedied
by Ashford prior to the expiration of the notice
period.
9.3 Termination by Yahoo.
a) Yahoo may terminate this Agreement upon
forty-five (45) days written notice to
Ashford if (i) at any time during the Term
Yahoo reasonably determines that Ashford
Site is not fully operational with support
for conducting on-line sales of Fashion
Accessories Products, or (ii) at any time
during the Term after October 1, 1999, Yahoo
reasonably determines that the Ashford Site
is no longer one of the top five (5) sites
for the on-line sale of Fashion Accessories
Products (as determined, to the extent
practical, over a reasonable period of time,
by an independent, qualified and
industry-recognized third party based on the
quantity and quality of customers and
product offerings).
b) In the event of a termination of this
Agreement by Yahoo pursuant to Section
9.3(a) or Section 14.5: (i) Ashford's
payment obligations after the effective date
of such termination (the "Section 9.3(a)
Termination Date") [ * ]; and (ii) Yahoo
shall [ * ]. For the purposes of this
Section 9.3(b), the value of [ * ]. Any [ *
] pursuant to this Section 9.3(b) shall be
substantially similar to the promotions
contemplated under this Agreement unless
otherwise mutually agreed upon by the
parties. Yahoo agrees that any [ * ] subject
to this Section 9.3(b) shall be [ * ].
9.4 Survival. The provisions of Sections 1, 7.3, 8,
9.3(b) and 10 through 14 and this 9.4 shall survive
expiration or termination of this Agreement; provided
that, [ * ].
10. CONFIDENTIAL INFORMATION AND PUBLICITY.
10.1 Terms and Conditions. The terms and conditions of
this Agreement shall be considered confidential and
shall not be disclosed to any third parties except to
such party's accountants, attorneys, or except as
otherwise required by law. Neither party shall make
any public announcement regarding the existence of
this Agreement without the other party's prior
written approval and consent. If this Agreement or
any of its terms must be disclosed under any law,
rule or regulation, the disclosing party shall (i)
give written notice of the intended disclosure to the
other party at least five (5) days in advance of the
date of disclosure, (ii) redact portions of this
Agreement to the fullest extent permitted
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under any applicable laws, rules and regulations, and
(iii) submit a request, to be agreed upon by Yahoo,
that such portions and other provisions of this
Agreement requested by Yahoo receive confidential
treatment under the laws, rules and regulations of
the body or tribunal to which disclosure is being
made or otherwise be held in the strictest confidence
to the fullest extent permitted under the laws, rules
or regulations of any other applicable governing
body.
10.2 Publicity. Any and all publicity relating to this
Agreement and subsequent transactions between Yahoo
and Ashford and the method of its release shall be
approved in advance of the release, in writing, by
both Yahoo and Ashford. Subject to the pre-approval
restrictions of this Section 10.2, the parties agree
that Ashford may issue a press release relating to
this Agreement.
10.3 Nondisclosure Agreement. Yahoo and Ashford
acknowledge and agree that the Mutual Nondisclosure
Agreement terms attached as Exhibit F, shall be
incorporated by reference and made a part of this
Agreement, and shall govern the use and disclosure of
information and all discussions pertaining to or
leading to this Agreement.
10.4 User Data. All information and data provided to Yahoo
by users of the Yahoo Properties or otherwise
collected by Yahoo relating to user activity on the
Yahoo Properties shall be retained by and owned
solely by Yahoo. All information and data provided to
Ashford on the Ashford Site or otherwise collected by
Ashford relating to user activity on the Ashford Site
shall be retained by and owned solely by Ashford.
Each party agrees to use any personally identifying
user information only as authorized by the user and
shall not disclose, sell, license or otherwise
transfer any such user information to any third party
without the consent of the user or use the user
information for the transmission of "junk mail,"
"spam," or any other unsolicited mass distribution of
information.
10.5 Privacy of User Information. Ashford shall ensure
that all information provided by users of the Ashford
Site is maintained, accessed and transmitted in a
secure environment and in compliance with industry
standard security specifications. Further, Ashford
shall provide a link to its privacy policy regarding
the protection of user data on those pages of the
Ashford Site where the user is requested to provide
personal or financial information.
11. INDEMNIFICATION.
11.1 Ashford, at its own expense, will indemnify, defend
and hold harmless Yahoo and its employees,
representatives, agents and affiliates, against any
third party claim, suit, action, or other proceeding
brought against Yahoo based on or arising from a
claim any Ashford Brand Feature, any material,
product or service produced, distributed, offered or
provided by Ashford, or any material presented on the
Ashford Site, infringes in any manner any copyright,
patent, trademark, trade secret or any other
intellectual property right of any third party, is or
contains any material or information that is obscene,
defamatory,
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libelous, slanderous, or that violates any law or
regulation, or that otherwise violates any rights of
any person or entity, including, without limitation,
rights of publicity, privacy or personality, or has
otherwise resulted in any consumer fraud, product
liability, tort, breach of contract, injury, damage
or harm of any kind to any third party; provided,
however, that in any such case: (x) Yahoo provides
Ashford with prompt notice of any such claim; (y)
Yahoo permits Ashford to assume sole control over the
defense or settlement of such action upon Ashford's
written notice to Yahoo of its intention to
indemnify; and (z) upon Ashford's written request,
and at no expense to Yahoo, Yahoo will provide to
Ashford all available information and assistance
necessary for Ashford to defend and settle such
claim. Ashford will not enter into any settlement or
compromise of any such claim, which settlement or
compromise would result in any liability to Yahoo,
without Yahoo's prior written consent, which shall
not unreasonably be withheld. Ashford will pay any
and all costs, damages, and expenses (including, but
not limited to, reasonable attorneys' fees and costs
awarded against Yahoo) incurred by Yahoo in
connection with or arising from any such claim, suit,
action or proceeding.
11.2 Yahoo, at its own expense, will indemnify, defend and
hold harmless Ashford and its employees,
representatives, agents and affiliates, against any
claim, suit, action, or other proceeding brought
against Ashford based on or arising from [ * ];
provided, however, that in any such case: (x) Ashford
provides Yahoo with prompt notice of any such claim;
(y) Ashford permits Yahoo to assume sole control over
the defense and settlement of such action upon
Yahoo's written notice to Ashford of its intention to
indemnify; and (z) upon Yahoo's written request, and
at no expense to Ashford, Ashford will provide to
Yahoo all available information and assistance
necessary for Yahoo to defend and settle such claim.
Yahoo will not enter into any settlement or
compromise of any such claim, which settlement or
compromise would result in any liability to Ashford,
without Ashford's prior written consent, which shall
not unreasonably be withheld. Yahoo will pay any and
all costs, damages, and expenses, (including, but not
limited to, reasonable attorneys' fees and costs
awarded against Ashford) incurred by Ashford in
connection with or arising from any such claim, suit,
action or proceeding.
12. LIMITATION OF LIABILITY.
12.1 EXCEPT AS PROVIDED IN SECTION 11, UNDER NO
CIRCUMSTANCES SHALL ASHFORD, YAHOO, OR ANY AFFILIATE
BE LIABLE TO THE OTHER PARTY FOR INDIRECT,
INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY
DAMAGES ARISING FROM THIS AGREEMENT, EVEN IF THAT
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES, SUCH AS, BUT NOT LIMITED TO, LOSS OF REVENUE
OR ANTICIPATED PROFITS OR LOST BUSINESS.
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13. INSURANCE.
13.1 Ashford agrees that it will maintain insurance with a
carrier that is reasonably acceptable to Yahoo and
with coverage for commercial general liability and
errors and omissions of at least [ * ] per
occurrence. Ashford will name Yahoo as an additional
insured on such insurance and will provide evidence
of such insurance to Yahoo within ten (10) days of
the Effective Date. Such insurance policy shall not
be cancelled or modified in a manner which makes such
policy non-compliant with this Section 13.1 without
Yahoo's prior written consent.
14. GENERAL PROVISIONS.
14.1 Independent Contractors. It is the intention of Yahoo
and Ashford that Yahoo and Ashford are, and shall be
deemed to be, independent contractors with respect to
the subject matter of this Agreement, and nothing
contained in this Agreement shall be deemed or
construed in any manner whatsoever as creating any
partnership, joint venture, employment, agency,
fiduciary or other similar relationship between Yahoo
and Ashford.
14.2 Entire Agreement. This Agreement, together with all
Exhibits hereto, represents the entire agreement
between Yahoo and Ashford with respect to the subject
matter hereof and thereof and shall supersede all
prior agreements and communications of the parties,
oral or written, including without limitation the
Letter of Agreement executed on or about June 1,
1999, between Yahoo and Ashford. The parties
acknowledge and agree that this Agreement shall have
no effect on the February 1999 Agreement and the
February 1999 Agreement shall remain in full force
and effect.
14.3 Amendment and Waiver. No amendment to, or waiver of,
any provision of this Agreement shall be effective
unless in writing and signed by both parties. The
waiver by any party of any breach or default shall
not constitute a waiver of any different or
subsequent breach or default.
14.4 Governing Law. This Agreement shall be governed by
and interpreted in accordance with the laws of the
State of California without regard to the conflicts
of laws principles thereof.
14.5 Successors and Assigns. Neither party shall assign
its rights or obligations under this Agreement
without the prior written consent of the other party,
which shall not unreasonably be withheld or delayed.
Notwithstanding the foregoing, either party may
assign this Agreement to an entity that acquires
substantially all of the stock or assets of a party
to this Agreement; provided that if the non-assigning
party determines that the assignee will not have
sufficient capital or assets to perform its
obligations hereunder, or that the assignee is a
competitor of the non-assigning party, the
non-assigning party can terminate this Agreement for
convenience at any time after such an assignment. All
terms and provisions of this Agreement shall be
binding upon and inure to the benefit of the parties
hereto and their respective permitted transferees,
successors and assigns.
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14.6 Force Majeure. Neither party shall be liable for
failure to perform or delay in performing any
obligation (other than the payment of money) under
this Agreement if such failure or delay is due to
fire, flood, earthquake, strike, war (declared or
undeclared), embargo, blockade, legal prohibition,
governmental action, riot, insurrection, damage,
destruction or any other similar cause beyond the
control of such party.
14.7 Notices. All notices, requests and other
communications called for by this agreement shall be
deemed to have been given immediately if made by
facsimile or Electronic mail (confirmed by concurrent
written notice sent via overnight courier for
delivery by the next business day), if to Yahoo at
3420 Central Expressway, Santa Clara, CA 95051, Fax:
(408) 731-3301 Attention: Vice President (e-mail:
[ * ]), with a copy to its General Counsel (e-mail:
[ * ]), and if to Ashford at the physical or
electronic mail addresses set forth on the signature
page of this Agreement, or to such other addresses as
either party shall specify to the other. Notice by
any other means shall be deemed made when actually
received by the party to which notice is provided.
14.8 Severability. If any provision of this Agreement is
held to be invalid, illegal or unenforceable for any
reason, such invalidity, illegality or
unenforceability shall not effect any other
provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or
unenforceable provision had never been contained
herein.
14.9 Sole Responsibility. Ashford will remain solely
responsible for the operation of the Ashford Site,
and Yahoo will remain solely responsible for the
operation of the Yahoo Main Site. Each party: (a)
acknowledges that the Ashford Site and the Yahoo Main
Site may be subject to temporary shutdowns due to
causes beyond the operating party's reasonable
control; and (b) subject to the terms of this
Agreement, retains sole right and control over the
programming, content and conduct of transactions over
its respective internet-based service.
14.10 Counterparts. This Agreement may be executed in two
counterparts, both of which taken together shall
constitute a single instrument. Execution and
delivery of this Agreement may be evidenced by
facsimile transmission.
14.11 Authority. Each of Yahoo and Ashford represents and
warrants that the negotiation and entry of this
Agreement will not violate, conflict with, interfere
with, result in a breach of, or constitute a default
under any other agreement to which they are a party.
14.12 Attorneys Fees. The prevailing party in any action to
enforce this Agreement shall be entitled to
reimbursement of its expenses, including reasonable
attorneys' fees.
[Signature page follows]
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This Advertising and Promotion Agreement has been executed by the duly
authorized representatives of the parties, effective as of the Effective Date.
YAHOO! INC. ASHFORD.COM
By: By:
------------------------- -------------------------
Name: Name:
----------------------- -----------------------
Title: Title:
----------------------- -----------------------
Attn: VP, Business Development Attn: VP, Business Development
3420 Central Expressway 3800 Buffalo Speedway, Suite 400
Santa Clara, CA 95051 Houston, TX 77098
Tel.: (408) 731-3300 Tel: 713-369-1300
Fax: [ * ] Fax: 713-629-5631
e-mail: [ * ] email: [email protected]
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EXHIBIT A
Ashford Banner Keywords:
[ * ]
Ashford Banner Categories:
[ * ]
Ashford Button Keywords:
[ * ]
Ashford Button Categories:
[ * ]
Dates for the Ashford Front Page Promotions: [ * ] through [ * ]; [ * ] through
[ * ]; and [ * ] through [ * ] or other dates as mutually agreed by the parties.
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EXHIBIT B
(ATTACH SCREEN SHOTS)
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EXHIBIT C
Wire Transfer Instructions
Yahoo's Bank Information:
Institution Name: [ * ]
Institution Address: [ * ]
ABA: [ * ]
Beneficiary Name: [ * ]
Beneficiary Account Number: [ * ]
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EXHIBIT D
Front Page Promotion Guidelines
The Front Page Promotion shall be in the form of a banner advertisement and
subsequent promotion pages, and shall have the following specifications and
characteristics (references to the "sponsor" apply to the advertiser on whose
behalf the front page promotion is run).
Banner Specifications:
Size: 230 pixels wide by 33 pixels high. File size must not exceed 3k.
The banner can animate for a period of not more than 6 seconds. No endless
looping is permitted. For a 14 day promotion campaign, the sponsor may run up to
6 different banners that will rotate equally.
Background Color: Backgrounds which are not transparent must have a color(s)
which are using a HSB color space, between 0% and 50% in saturation, and between
50% and 80% in brightness. The hue may be any value. Yahoo reserves the right to
define the portions of a submitted image that comprises the background.
Transparent backgrounds are permitted.
All banners are subject to aesthetic and content approval by Yahoo. All artwork
must be submitted to Yahoo at least five (5) business days prior to the
promotion's launch date. Yahoo reserves the right to review, reject or modify
any part of any creative at its sole discretion. The sponsor shall ensure that
their promotion complies in all respects with applicable laws and regulations.
The sponsor expressly understands and agrees that the approval of the official
rules for any promotion by Yahoo shall not constitute an opinion as to the legal
appropriateness or adequacy of such rules or their manner of use.
Sweepstakes Prizes: Yahoo requires that front page promotion sponsors provide a
prize package of a minimum retail value. Values for different types of front
page promotions are set forth below.
Type of Promotion:
Prize Package Minimum
Front Page Banner [ * ]
Front Page Text [ * ]
Prize values for multi-sponsored promotions vary.
Sponsor is responsible for all shipping/handling charges and any other expenses
associated with prize fulfillment.
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Sponsor is responsible for sending 1099 notifications to the promotion winners
and the IRS.
Sponsor shall deliver prizes to winning contestant within six (6) weeks of the
promotion's conclusion.
Sponsor hosted promotions.
A standard promotion hosted by the sponsor shall consist of the following:
Banner(s) or text links on a Yahoo hosted page that link to the sponsor hosted
promotion jump page.
A jump page consisting of promotion graphics, client graphics, copy/content and
contest description.
A rules page consisting of official rules that govern the promotion.
An entry form page consisting of promotion graphics and the entry form. The
entry form shall include the following disclaimer located directly next to the
"submit" button.
(Sponsor's Name) is solely responsible for the use of this information.
A thank you page consisting of graphics and text.
Total size of all graphics on each promotion page must be less than 35K. This is
to optimize loading times for contestants and to reduce the amount of people
that turn away from the promotion before the page loads.
If sponsor host's the promotion, sponsor further agrees to the following:
To allow Yahoo engineers to run a stress test program to test the sponsor's
server(s) capacity. A mutually agreed upon time will be arranged with sponsor to
run this test program, which simulates the traffic level that can be expected
from a front page promotion. Sponsor shall make necessary modifications to its
server capacity so that it will pass such test prior to the start date of the
promotion.
Submit promotion URLs at least five (5) business days prior to the starting date
of the promotion for Yahoo final approval (which may include Yahoo required
modifications to the promotion).
Sponsor may not post any contest page until it receives final approval of the
entire page from Yahoo.
Consistent with its privacy policy, Yahoo reserves the right to access all
aggregate information captured on entry form submissions through the promotion.
Sponsor agrees to provide such
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information to Yahoo immediately upon Yahoo's request. Yahoo's use of this
information will in all cases in accordance with its privacy policy.
Traffic sent to sponsor home page.
In order to send traffic from the promotional banner on Yahoo directly to a
sponsor's home page instead of a jump page, the following requirements must be
met, with no exceptions:
Sponsor agrees to create a customized prominent graphic dedicated to
prize/contest details to be displayed on sponsor's home page. Such graphic shall
always be above the fold of the sponsor's home page and link directly to the
sweepstakes page/entry form.
Total pixel area of the graphic must be at least 28,080 k or the equivalent of a
468x60 banner.
All artwork/creative must be submitted to Yahoo at least five (5) business days
prior to the promotion's start date.
Yahoo reserves the right to review, reject or modify any part of any creative at
its sole discretion.
Sponsor shall be responsible for the design, layout, posting and maintenance of
the promotion pages.
Sponsor shall operate the contest on computers and network hardware under its
ownership or control.
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EXHIBIT E
Treasure Hunt Promotion Specifications
YAHOO! TREASURE HUNT: MATERIALS SPECS AND DUE DATES
Note: This is a general overview of the promotion's ad specs. When your
insertion order is completed, you will receive a customized version with the
game icon (gif) attached.
Welcome to Yahoo!'s Treasure Hunt! Please take a few minutes to review this
information, which details all the program basics.
CLIENT DELIVERABLES
Note: All deliverables are DUE EVERY FRIDAY, 12:00 PM EST. New campaigns "go
live" every Wednesday.
OFFER PAGE URL
Yahoo! has final approval on all client creative submitted. If file size and
creative does not meet Yahoo! specifications, we reserve the right to reject
any/all deliverables.
Offer pages are client specific and client hosted (your opportunity put a
specific offer in front of your audience). These pages are linked with game
pages and will include a "Win It" sweepstakes button which users click on to
continue through Treasure Hunt. These pages may contain email address opt-in
forms, software download capabilities, or links to other sites. OFFER PAGES MUST
NOT EXCEED 30K TO OPTIMIZE YAHOO!'S FAST PAGE LOADING STANDARDS. Include target
= "top" in the href tag if you have a framed site.
[GRAPHIC OMITTED]
Note: every offer page must include this button. If the button does not appear
on the offer page, Yahoo! will remove the page until the button is included.
Your redirect URL for the button will be assigned to you when your completed
insertion order is received.
BANNER
468 x 60 -- 12k max., no looping and maximum 6 second animation. This will be
served after a player has seen your site and clicked on the entry button. HTML
banners are not allowed. The banner only re-directs back to your offer page (not
your Web site).
[Note: We do not report impressions or banner click-through rates from banners.
The emphasis of the banner is to provide supplemental branding and stimulate
opt-ins.]
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OPT-IN OFFER
Maximum 50 characters. This will appear under your banner and must clearly
indicate what the player is signing up for (i.e. "Yes, I want more information
on space age widgets!"). Every week, you will receive a list of the e-mail
addresses of players who checked the box next to your OPT-IN offer. If players
request to be removed from this list, you will be responsible for removing them
once the list is in your possession.
EMAIL INSERTS (RESTRICTED TO CERTAIN PACKAGES)
Promotion focused e-mail messaging is sent once per week on Wednesday and
includes scoring information and 1-3 sponsor messages. Multi-sponsor e-mail
messages are 30 words long and placed in the center of the message.
Click-throughs from email inserts will be included in the following week's
report to sponsors.
REPORTING:
Once per week, Yahoo! will send you a report that includes:
o # of clicks delivered per offer page (broken down by day)
o The number of email inserts sent and click-through statistics from the
email inserts (if applicable)
Twice per month, Yahoo! will send you a report that includes:
o The list of the opt-in email addresses. Opt-ins will be reported distinctly
by landing page.
TERMS AND CONDITIONS
BANNERS ON TREASURE HUNT
The banners on Treasure Hunt game pages provide supplemental branding and create
an opt-in email list for sponsors. Restrictions include:
o Banners must link back to the offer page within Treasure Hunt. These
banners cannot link to other pages within sponsors' sites.
o Impressions and click-throughs from banners are not reported
separately, nor can multiple banners be rotated. One banner follows each
sponsor offer page.
o Third party ad banner serving is not allowed
o Clients may submit new offer page/banner pairs each week with the same
deliverable timeline as stated above.
MULTIPLE OFFER PAGE RULES
The number of offer pages scheduled to run must be clearly outlined in the
Insertion Order. If sponsors want to run multiple pages simultaneously, they
must spend at least $5,000 per page (For example, to run three pages
simultaneously, they will need to spend $15,000).
The number of clicks that we will deliver per offer page will be roughly equal
to the total clicks on the Insertion Order divided by the number of offer pages.
However, these are estimates and some variation is likely to occur.
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BACK BUTTON
The back button on sponsors' offer pages must be enabled. However, there is no
back button requirement for any pages deeper in sponsors' sites.
BROWSER SPAWNING
The offer page is not permitted to spawn a new browser window when users click
back into the promotion.
INTERSTITIAL
Sponsor interstitial between offer pages and game pages are not permitted.
Competitive advertising
Offer pages may not feature banner ads from Yahoo's online portal competitors.
SPECIAL REQUIREMENTS FOR THE "WELCOME" PAGE ON TREASURE HUNT
Sponsors can purchase clicks to the first page of the Treasure Hunt promotion.
This high-profile page guarantees approximately 100% unique users. However, the
following restrictions apply:
o Unlike other offer pages in Treasure Hunt, all offers on the Welcome
page are hosted by Yahoo! (including graphics). The sponsor must
provide the basic HTML and graphics to Yahoo! and Yahoo! will
re-purpose the material to fit within the space and page size
requirements.
o Graphics and HTML are limited to 20K and 500 pixels in width.
o Banner ads do not follow the Welcome page.
o Sponsors cannot put an email opt-in field in the Welcome page (or any
other type of form). Users must link to an email opt-in form.
o The Welcome page only provides general traffic; sponsors cannot reach
targeted selects from this page.
o Creative materials must be received 2 weeks before the launch date.
o The Insertion Order must specifically mention that the creative will
run on the Welcome Page.
CONTACTS FOR QUESTIONS AND COMMENTS:
Questions about ad specifications go directly to:
Mike Campos, Promotions Coordinator
[email protected]
(408) 530-5417
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EXHIBIT F
MUTUAL NONDISCLOSURE AGREEMENT TERMS
1. "Confidential Information" is that confidential, proprietary, and
trade secret information being disclosed by the disclosing party pursuant to
this Agreement.
2. Except as set forth in this Section 2, all Confidential Information
shall be in tangible form and shall be marked as Confidential or proprietary
information of the disclosing party. If the Confidential Information is
disclosed orally or visually, it shall be identified as such at the time of
disclosure and confirmed in a writing to the recipient within thirty (30) days
of such disclosure.
3. Each of the parties agrees that it will not make use of,
disseminate, or in any way disclose any Confidential Information of the other
party to any person, firm or business, except to the extent necessary for
negotiations, discussions, and consultations with personnel or authorized
representatives of the other party and any purpose the other party may hereafter
authorize in writing. Each of the parties agrees that it shall disclose
Confidential Information of the other party only to those of its employees who
need to know such information and who have previously agreed, either as a
condition to employment or in order to obtain the Confidential Information, to
be bound by terms and conditions substantially similar to those set forth in
this Exhibit D.
4. There shall be no liability for disclosure or use of Confidential
Information which is (a) in the public domain through no fault of the receiving
party (b) rightfully received from a third party without any obligation of
confidentiality, (c) rightfully known to the receiving party without any
limitation on use or disclosure prior to its receipt from the disclosing party,
(d) independently developed by the receiving party (e) generally made available
to third parties without any restriction on disclosure, or (f) communicated in
response to a valid order by a court or other governmental body, as otherwise
required by law, or as necessary to establish the rights of either party under
this Agreement (provided that the party so disclosing has provided the other
party with a reasonable opportunity to seek protective legal treatment for such
Confidential Information).
5. Each of the parties agrees that it shall treat all Confidential
Information of the other party with the same degree of care as it accords to its
own Confidential Information, and each of the parties represents that it
exercises reasonable care to protect its own Confidential Information.
6. Each of the parties agrees that it will not modify, reverse
engineer, decompile, create other works from, or disassemble any software
programs contained in the Confidential Information of the other party unless
otherwise specified in writing by the disclosing party.
7. All materials (including, without limitation, documents, drawings,
models, apparatus, sketches, designs and lists) furnished to one party by the
other, and which are
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designated in writing to be the property of such party, shall remain the
property of such party and shall be returned to it promptly at its request,
together with any copies thereof.
8. This terms set forth in this Exhibit D shall govern all
communications between the parties that are made during the period from the
Effective Date to the date on which either party receives from the other written
notice that subsequent communications shall not be so governed, provided,
however, that each party's obligations under Sections 2 and 3 with respect to
Confidential Information of the other party which it has previously received
shall continue unless and until such Confidential Information falls within
Section 4. Neither party shall communicate any information to the other in
violation of the proprietary rights of any third party.
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EXHIBIT G
ASHFORD COMPETITORS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
COMPANY WEBSITE
- --------------------------------------------------------------------------------
<S> <C>
[ * ] [ * ]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
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EXHIBIT H
TRADEMARK USAGE GUIDELINES
1. General. All Yahoo Brand Features will be used only as explicitly
licensed by Yahoo, and only under the terms and conditions and for the purposes
described in such license. The other party to such license shall herein be
referred to as the "Licensee". All such uses shall be in a manner consistent
with the following guidelines.
2. Appearance of Logos. The Licensee shall ensure that the presentation
of the Yahoo Brand Features shall be consistent with Yahoo's own use of the
Yahoo Brand Features in comparable media.
3. Notices. All trademarks and service marks included in the Yahoo
Brand Features shall be designated with "SM", "TM" or "(R)", in the manner
directed by Yahoo.
4. Appearance. From time to time during the term of the license, Yahoo
may provide the Licensee with guidelines for the size, typeface, colors and
other graphic characteristics of the Yahoo Brand Features, which upon delivery
to the Licensee shall be deemed to be incorporated into these "Yahoo Trademark
Usage Guidelines".
5. Restrictions Upon Use. The Yahoo Brand Features shall not be
presented or used:
A. in a manner that could be reasonably interpreted to suggest
editorial content has been authored by, or represents the views or
opinions of, Yahoo or any Yahoo personnel;
B. in a manner that is misleading, defamatory, libelous,
obscene or otherwise objectionable, in Yahoo's reasonable opinion;
C. in a way that infringes, derogates, dilutes or impairs the
rights of Yahoo in the Yahoo Brand Features;
D. as part of a name of a product or service of a company
other than Yahoo, except as expressly provided in a written agreement
by Yahoo.
6. Nonexclusive Remedy. The Licensee will make any changes to its use
of the Yahoo Brand Features as requested by Yahoo. The foregoing remedy shall be
in addition to any other legal and equitable rights that Yahoo may possess
relating to Licensee's use of the Yahoo Brand Features.
7. Revisions. These Guidelines may be modified at any time by Yahoo
upon written notice to the Licensee.
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EXHIBIT 10.10
================================================================================
AOL ADVERTISING INSERTION ORDER
================================================================================
CONTRACT #:_______________
AOL SALESPERSON:__________ [ ] Credit approval received
SALES COORDINATOR:________
DATE:_____________________
<TABLE>
<CAPTION>
=================================================================================================================================
ADVERTISER ADVERTISING AGENCY
=================================================================================================================================
<S> <C> <C>
Contact Person Jim Gerber
Company Name Ashford.com
Address - Line 1
Address - Line 2
Phone # 713 369 1317
Fax #
Email [email protected]
SIC Code
Advertiser IAB Category
=================================================================================================================================
BILLING INFORMATION
=================================================================================================================================
Send Invoices to (choose one): [ ] ADVERTISER [ ] AGENCY
Advertiser or Agency Billing
Contact Person
Company Name
Billing Address - Line 1
Billing Address - Line 2
Billing Phone #
Billing Fax #
Billing Email Address
P.O. #, if applicable
</TABLE>
This Agreement, dated as of July __, 1999 (the "Effective Date"), is made and
entered into by and between America Online, Inc. ("AOL"), a Delaware
corporation, with its principal offices at 22000 AOL Way, Dulles, Virginia 20166
and Ashford.com ("Advertiser") a Delaware corporation, with its principal
offices at 3800 Buffalo Speedway, Suite 400, Houston, TX 77098 (each a "Party"
and collectively the "Parties").
<TABLE>
<S> <C> <C>
=================================================================================================================================
INVENTORY TYPE (CHOOSE ONE): [ ] AOL SERVICE ONLY [ ] AOL AFFILIATE ONLY (E.G., AOL.COM)
[ ] AOL SERVICE & AOL AFFILIATE
=================================================================================================================================
</TABLE>
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<TABLE>
<CAPTION>
=================================================================================================================================
AOL SERVICE
INVENTORY
=================================================================================================================================
[AOL INVENTORY/DEMOGRAPHIC* DISPLAY DISPLAY
PURCHASED START STOP TOTAL
DATE DATE IMPRESSIONS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
See Exhibit D
TOTAL
* Attach completed AOL Demographic TOTALS:
Profile Worksheet]
</TABLE>
===============================================================================
ART
===============================================================================
All necessary artwork and active URL's must be provided by advertiser 3 business
days prior to start date.
ARTWORK REQUIRED FROM ADVERTISER/AGENCY:
[ ] 234x60 IAB Standard/7k Max
[ ] 120x60 Shopping/5k Max
[ ] 175x45 Chat/Mail in-box/5k Max
[ ] Special_____
* ANIMATION IS ONLY AVAILABLE ON SELECTED SCREENS. PLEASE CONTACT YOUR AOL
SALESPERSON FOR ADDITIONAL INFORMATION. *
Linking URL: The HTTP/URL address to be connected to the Advertisement shall be:
HTTP:// www.Ashford.com (THE "AFFILIATED ADVERTISER SITE")
PLEASE SEND ARTWORK AND URL TO (CHOOSE ONE):
[ ] [email protected]
[ ] [email protected]
[ ] [email protected]
<TABLE>
<CAPTION>
=================================================================================================================================
AOL AFFILIATE (E.G., AOL.COM)
INVENTORY
=================================================================================================================================
DISPLAY DISPLAY
AOL AFFILIATE INVENTORY/DEMOGRAPHIC* START STOP TOTAL
PURCHASED DATE DATE IMPRESSIONS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
See Exhibit D
* See attached package description for TOTALS:
any AOL.com package purchases
</TABLE>
===============================================================================
ART
===============================================================================
All necessary artwork and active URL's must be provided by advertiser
3 business days prior to start date.
ARTWORK REQUIRED FROM ADVERTISER/AGENCY :
[ ] 468x60 NF Reviews, Search Terms, My News & Hometown/12k Max/animation OK
[ ] 100x70 AOL.com Home Page/3k Max/No animation
[ ] 234x60 NF Kids Only & Hometown/5k Max/animation OK
[ ] 120x60 NF Home Page/2k Max/No animation
[ ] 120x60 Instant Messenger/7.5k Max/animation OK
LINKING URL: THE HTTP/URL ADDRESS TO BE CONNECTED TO THE ADVERTISEMENT SHALL BE:
THE AFFILIATED ADVERTISER SITE
PLEASE SEND ARTWORK AND URL TO (CHOOSE ONE):
[ ] [email protected]
[ ] [email protected]
[ ] [email protected]
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<TABLE>
<CAPTION>
=================================================================================================================================
ADVERTISING PURCHASE SUMMARY
=================================================================================================================================
TOTAL PRICE TOTAL IMPRESSIONS CPM
<S> <C> <C> <C>
AOL Networks
AOL Affiliate
Total Purchase Price
<Less Agency Discount>
NET PURCHASE PRICE TOTAL IMPRESSIONS
</TABLE>
The products and/or services to be offered or promoted by Advertiser in the
Advertisements are as follows (the "Advertiser's Products"):
o watches -- new and vintage
o non-prescription sunglasses
o leather goods (e.g., belts, purses, wallets, etc.)
o pens
o silk ties and scarves
o fragrances (may not be included in the Advertiser Promotions, but may
be offered on the Affiliated Advertiser Site )
o jewelry
o diamonds, pearls and other gemstones
o clocks
o crystal
o the following services, so long as they relate solely to the Products:
appraisal, authentication, business-to-person auctions, repair and
cleaning services
IMPRESSIONS COMMITMENT. During the Term, and subject to the Terms of this
Agreement, AOL agrees to deliver [*] Impressions as described in Exhibit D
(collectively "Advertiser Promotions") in the areas of the AOL Network as
described in Exhibit D to achieve the Impression Commitments described in
Exhibit D during the display periods described in Exhibit D. In the event AOL
delivers the Impressions Commitment provided for hereunder prior to the Display
Stop Date (as described in Exhibit D) , AOL may, at its option, discontinue
display at such earlier time; provided however that AOL shall not discontinue
any of the Anchor Promotions or continuous AOL Shopping Channel promotions prior
to the Display Stop Date. Any guarantees are to impressions (as measured by AOL
in accordance with its reasonable standard methodologies and protocols), not
"click-throughs." In the event there is (or will be in AOL's reasonable
judgement) a shortfall of less than [*]% of the Impressions Commitment, in the
aggregate, as of the Display Stop Date (a "Minor Shortfall"), such Shortfall
shall not be considered a breach of the Agreement by AOL: provided that, AOL
will provide Advertiser, as its sole remedy, with comparable "makegood"
impressions, which are substantially equal in value. In the event there is (or
will be in AOL's reasonable judgement) a shortfall of greater than [*]% of the
Impressions Commitment as of the Display Stop Date (a "Significant Shortfall"),
such Significant Shortfall shall not be considered a breach of the Agreement by
AOL: provided that, AOL will provide Advertiser, as its sole remedy, with (i)
comparable "makegood" impressions equal in value to the amount of the
Significant Shortfall plus, (ii) comparable "makegood" impressions equal in
value to [*] ([*]) the amount by which the Significant Shortfall exceeds [*]% of
the Impressions Commitment (i.e. total shortfall minus fifteen percent of
Impressions Commitment). AOL shall use commercially reasonable efforts to
deliver all such shortfall "makegood" impressions within the [*]period
immediately following such shortfall. To the extent Impressions Commitments are
identified without regard to specific placements, Display Start and Stop Dates,
such placements will be as mutually agreed upon by AOL and Advertiser during the
course of the Term. AOL reserves the right to alter Advertiser flight dates to
accommodate trafficking needs or other operational needs; provided that in such
cases, AOL will make available to Advertiser reasonably equivalent flight(s), as
reasonably approved by Advertiser.
NAVIGATION. Advertiser shall provide continuous navigational ability for AOL
Users to return to an agreed-upon point on the AOL Network (for which AOL shall
supply the proper address) from the Affiliated Advertiser Site (e.g., the point
on the AOL Network from
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which the Affiliated Advertiser Site is linked), which, at AOL's option, may be
satisfied through the use of a hybrid browser format. Advertiser will ensure
that navigation back to the AOL Network, whether through a particular pointer or
link, the "back" button on an Internet browser, the closing of an active window,
or any other return mechanism, shall not be interrupted by Advertiser through
the use of any intermediate screen or other device not specifically requested by
the user, including without limitation through the use of any html popup window
or any other similar device. Additionally, in cases where an AOL User performs a
search for Advertiser or any Advertiser product through any search or
navigational tool or mechanism that is accessible or available through the AOL
Network (e.g., promotions, keyword search terms, or any other promotions or
navigational tools), AOL shall have the right to direct such AOL User to the
Affiliated Advertiser Site. The provisions of this paragraph shall not affect
the rights of Advertiser set forth in Section 4 of Exhibit E, including the
right of Advertiser to terminate any Advertiser Promotion in the event that AOL
redesigns or modifies the organization, structure, "look and feel" or other
elements of the AOL Network, and such redesign or modification materially and
adversely affects such Advertiser Promotion.
STANDARD TERMS AND CONDITIONS. This Insertion Order (this "Insertion Order" or
"Agreement") incorporates by reference AOL's standard advertising terms and
conditions (the "Standard Terms") attached hereto as Exhibit E.
AUTHORIZED SIGNATURES
In order to bind the parties to this Insertion Order, their duly authorized
representatives have signed their names below on the dates indicated. This
Agreement (including (i) the Standard Terms on Exhibit E, (ii) the additional
terms and conditions on Exhibit A attached hereto, (iii) the definitions on
Exhibit B attached hereto, the operational provisions on Exhibit C attached
hereto and the Carriage Plan on Exhibit D attached hereto, each incorporated
herein by reference and made a part hereof) shall be binding on both parties
when signed on behalf of each party and delivered to the other party (which
delivery may be accomplished by facsimile transmission of the signature pages
hereto)).
AMERICA ONLINE, INC. ASHFORD.COM
By: By:
------------------------------------ -----------------------------------
Print Name: Print Name:
---------------------------- ---------------------------
Title: Title:
--------------------------------- --------------------------------
Date: Date:
---------------------------------- ---------------------------------
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EXHIBIT A
ADDITIONAL TERMS
1. PAYMENTS; LATE PAYMENTS; WIRED PAYMENTS. Subject to the terms of this
Agreement, Advertiser shall pay AOL a payment of Seven Million Seven
Hundred Forty Eight Thousand Six Hundred Twenty One Dollars (US
$7,748,621), payable as follows:
(a) [*]
All payments shall be apportioned to Tiers 1, 2 and 3 in proportion to the
percentage that such Tier represents of the total amount due hereunder
(e.g. the amount of the initial payment apportioned to Tier 1 shall equal
(i) $[*] multiplied by (ii) the result of (x) $[*] (total Tier 1 cost)
divided by (y) $ 7,748,621 (total guaranteed payment), (i.e. $[*])). All
amounts owed under this Agreement not paid when due and payable will bear
interest from the date such amounts are due and payable at the prime rate
in effect at such time. All payments required hereunder will be paid in
immediately available, non-refundable (except as provided hereunder) U.S.
funds wired to the "America Online" account, Account Number 323070752 at
The Chase Manhattan Bank, 1 Chase Manhattan Plaza, New York, NY 10081 (ABA:
021000021).
2. CONTENT OF AFFILIATED SITE. The Advertisements will only promote the
Advertiser Products. Additionally, the Affiliated Advertiser Site will only
offer the Advertiser Product and content related thereto (except to the
extent otherwise mutually agreed upon by the parties). Advertiser will
ensure that the prices, terms and conditions for the Advertiser Products in
the Affiliated Advertiser Site are generally no less favorable in any
material respect than the prices, terms and conditions on which the
Advertiser Products or substantially similar products are offered by or on
behalf of Advertiser through any other Advertiser online distribution
channel directed primarily at the consumer retail market (not wholesales).
[*]
3. SPECIAL OFFERS/MEMBER BENEFITS. Advertiser will generally promote through
the Affiliated Advertiser Site special or promotional offers which are
generally no less favorable in any material respect to any special or
promotional offers made available by or on behalf of Advertiser through any
other distribution channels. In addition, Advertiser shall promote through
the Affiliated Advertiser Site on a regular and consistent basis, special
offers exclusively available to AOL users (the "AOL Special Offers"). AOL
Special Offers made available by Advertiser shall provide a substantial
benefit to AOL users, either by virtue of a meaningful price discount,
product enhancement, unique service benefit or other special feature.
Advertiser will provide AOL with reasonable prior notice of AOL Special
Offers so that AOL can market the availability of such AOL Special Offers
in the manner AOL deems appropriate in its editorial discretion.
4. REVENUE SHARE. If at any time during the term of this Insertion Order
Agreement aggregate Transaction Revenues generated hereunder exceeds [*]
($[*]) (the "Revenue Threshold"), then Advertiser shall pay AOL [*] percent
([*]%) of the Transaction Revenues generated in excess of the Revenue
Threshold. Advertiser shall pay all of the foregoing amounts on a quarterly
basis within thirty (30) days following the end of the quarter in which the
applicable Transaction Revenues were generated. "Transaction Revenues"
shall mean the aggregate amounts paid by AOL Purchasers in connection with
the sale, licensing, distribution or provision of any products in the
Affiliated Advertiser Site (including, without limitation, the Advertiser
Product), including, in each case, handling, shipping, service charges, and
excluding, in each case, (a) amounts collected for sales or use taxes or
duties and (b) credits and chargebacks for returned or canceled goods or
services, but not excluding cost of goods sold or any similar cost.
5. THIRD PARTY ADVERTISEMENTS. Advertiser represents that it does not
currently include any third party advertisement on the Affiliated
Advertiser Site. In the event that Advertiser intends to include third
party advertisements on the Affiliated Advertiser Site in the future,
Advertiser agrees to conduct good faith discussions with AOL to establish
an advertising program which may include a sharing of Advertising Revenues.
In any event, (i) all sales of Advertisements by Advertiser on the
Affiliated Advertiser Site will be subject to AOL's then-existing generally
applicable advertising policies, and (ii) no Interactive Service (other
than AOL or its affiliates) will be promoted in the Affiliated Advertiser
Site.
6. AUDITING RIGHTS. Advertiser will maintain complete, clear and accurate
records of all expenses, revenues and fees in connection with payments due
to AOL hereunder. For the sole purpose of ensuring compliance with this
Insertion Order Agreement, AOL will have the right to have a big five
accounting firm conduct a reasonable and necessary inspection of portions
of the books and records of Advertiser which are relevant to Advertiser's
payments due AOL hereunder. Any such audit may be conducted after twenty
(20) business days prior written notice to Advertiser. AOL shall bear the
expense of any audit conducted pursuant to this Section 7 unless such audit
shows an error in AOL's favor amounting to a deficiency to AOL in excess of
five percent (5%) of the actual amounts payable to AOL hereunder, in which
event Advertiser shall bear the reasonable expenses of the audit.
Advertiser shall pay AOL the amount of any deficiency discovered by AOL
within thirty (30) days after receipt of notice thereof from AOL. All
information provided under this Section 6 shall be treated as Confidential
Information by the Parties.
7. TAXES. Advertiser will collect and pay and indemnify and hold AOL harmless
from, any sales, use, excise, import or export value added or similar tax
or duty not based on AOL's net income, including any penalties and
interest, as well as any costs associated with the collection or
withholding thereof, including attorneys' fees.
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8. SALES REPORTS. Advertiser will provide AOL in an automated manner with a
quarterly report, detailing the following activity in such period (and any
other information mutually agreed upon by the parties or reasonably
required for measuring revenue activity by Advertiser through the
Affiliated Advertiser Site): gross Transaction Revenues and all items
deducted or excluded from gross Transaction Revenues broken out on a
monthly basis.
9. AOL QUICK CHECKOUT AND AOL PRODUCT SEARCH. Advertiser will take all
reasonable steps necessary to conform its promotion and sale of products
through the Affiliated Advertiser Site to the then-existing commerce
technologies made available to Advertiser by AOL, provided however,
Advertiser will not be required to conform its promotion and sale of
Products to the then existing commerce technologies made available by AOL
if such activity, in Advertiser's reasonable opinion: (i) has a adverse
impact on the user experience or (ii) requires Advertiser to incur
unreasonable additional costs or expenses or engineering resources or (iii)
violates Advertiser's privacy policy. In addition, Advertiser will have no
obligation to comply with this section if it learns of any security
breaches or other technical problems relating its adherence to this
section. Advertiser will be given an opportunity, at Advertiser's sole
discretion and option, to offer AOL's "quick checkout" tool which allows
AOL users to enter payment and shipping information which is then passed
from AOL's centralized server unit to Advertiser for order fulfillment
("AOL Quick Checkout") and AOL's "product search" tool technology which
allows AOL Users to run a customized search among Advertiser's detailed
inventory data ("AOL Product Search"); provided however that in the event
that Advertiser declines participation in these programs then AOL reserves
the right to reduce or prohibit Advertiser's participation in any other
incremental merchandising programs offered through the Shopping Channel. At
Advertiser's request, AOL will make all reasonable efforts to provide the
tools for the Advertiser (i) to enable the Affiliated Advertiser Site with
the AOL Quick Checkout technology and functionality and (ii) to allow
integration of Advertiser's detailed inventory data into AOL's Search
Product database. Collection, storage and disclosure of AOL Quick Checkout
information which Advertiser provides to AOL, will be subject to AOL's
privacy policy and all confidentiality requirements hereunder. To the
extent that the Affiliated Advertiser Site includes AOL's Quick Checkout,
and unless not practical from a creative or user experience standpoint,
Advertiser will ensure that the AOL Quick Checkout is of equal placement
and promotion prominence to other available payment options.
10. MERCHANT CERTIFICATION PROGRAM. Advertiser will participate in any
generally applicable "Certified Merchant" program operated by AOL or its
authorized agents or contractors. Such program may require Advertiser
participants on an ongoing basis to meet certain reasonable standards
relating to provision of electronic commerce through the AOL Service,
AOL.com, the CompuServe Service and the Netscape Netcenter and may also
require the payment of certain reasonable certification fees to AOL or its
authorized agents or contractors operating the program. Notwithstanding the
foregoing, in the event that AOL makes a material change to the program and
such change has a materially adverse effect on Advertiser, Advertiser may,
upon written notice to AOL, discontinue its participation in the program.
11. BIZRATE SURVEY. Advertiser agrees to (i) participate in the
BizRate(R)Program, a service offered by Binary Compass Enterprises, Inc.
(BCE), which provides opt-in satisfaction surveys to Users who purchase
Products through Affiliated Advertiser Site, or such other provider of such
services reasonably agreeable to the Parties, and (ii) provide a link to
BizRate's then-current standard survey forms, or such other survey forms
offered by any other party that AOL may reasonably designate or approve
from time to time. Advertiser's participation shall be based upon a
separate written agreement which Advertiser will enter into with BCE, or
other such party reasonably agreeable to the Parties. Advertiser hereby
authorizes BCE to provide to AOL such reports as the Parties may reasonably
agree.
12. SPECIFIC CUSTOMER SERVICE REQUIREMENTS. It is the sole responsibility of
Advertiser to provide customer service to persons or entities purchasing
Products through the Affiliated Advertiser Site ("Customers"). Advertiser
will bear full responsibility for all customer service, including without
limitation, order processing, billing, fulfillment, shipment, collection
and other customer service associated with any Products offered, sold or
licensed through the Affiliated Advertiser Site, and AOL will have no
obligations whatsoever with respect thereto. Affiliated Advertiser Site
shall include clear and conspicuous disclosure of its customer service
policies and a phone number and an email or street address at which
customers may contact Advertiser. Advertiser shall provide a name of a
customer service contact for use by AOL and a telephone number and email or
street address to which AOL may forward or refer customer inquiries or
complaints relating to Advertiser. Advertiser will receive all emails from
Customers via a computer available to Advertiser's customer service staff
and generally respond to such emails within one business day of receipt.
Advertiser will receive all orders electronically and generally process all
orders within one business day of receipt, provided Products ordered are
not advance order items. Advertiser will ensure that all orders of Products
are received, processed, fulfilled and delivered on a timely and
professional basis. Advertiser will offer AOL Users who purchase Products
through the Affiliated Advertiser Site a money-back satisfaction guarantee.
Advertiser will bear all responsibility for compliance with federal, state
and local laws in the event that Products are out of stock or are no longer
available at the time an order is received. Advertiser will also comply
with the requirements of any federal, state or local consumer protection or
disclosure law. Payment for Products will be collected by Advertiser
directly from customers. Advertiser's order fulfillment operation will be
subject to AOL's reasonable review.
13. AOL LOOK AND FEEL. Advertiser acknowledges and agrees that AOL will own all
right, title and interest in and to the AOL Look and Feel (subject only to
Advertiser's ownership rights in any Advertiser trademarks or copyrighted
material within the Affiliated Advertiser Site).
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14. CROSS-PROMOTION
(a) [*]
(b) [*]
15. MANAGEMENT OF THE AFFILIATED ADVERTISER SITE. Advertiser will manage,
review, delete, edit, create, update and otherwise manage all Content
available on or through the Affiliated Advertiser Site, in a timely and
professional manner and in accordance with the terms of this Agreement.
Advertiser will ensure that the Affiliated Advertiser Site is current,
accurate and well-organized at all times. Advertiser warrants that the
Licensed Content: (i) will not infringe on or violate any copyright,
trademark, U.S. patent or any other third party right; (ii) will not
violate AOL's generally-applicable Terms of Service, as the same shall be
amended from time to time (AOL Keyword: TOS); and (iii) will not violate
any applicable law or regulation (federal, state, or otherwise), including
without limitation those relating to taxes, advertising, or contests,
sweepstakes or similar promotions. Additionally, Advertiser represents and
warrants that it owns or has a valid license to use any Licensed Content
used in AOL "slideshow" or other formats embodying elements such as
graphics, animation and sound, free and clear of all encumbrances and
without violating the rights of any other person or entity. Advertiser also
warrants that a reasonable basis exists for all Product performance or
comparison claims appearing through the Affiliated Advertiser Site.
Advertiser shall not in any manner, including, without limitation in any
Advertisement, the Licensed Content, or any Materials (defined below),
state or imply that AOL recommends or endorses Advertiser or Advertiser's
Services (e.g., no statements that Advertiser is an "official" or
"preferred" provider of products or services for AOL). AOL will have no
obligations with respect to the Products available on or through the
Affiliated Advertiser Site, including, but not limited to, any duty to
review or monitor any such Products.
16. DUTY TO INFORM. Advertiser will promptly inform AOL of any information
related to the Affiliated Advertiser Site which could reasonably lead to a
claim, demand, or liability of or against AOL and/or its affiliates by any
third party.
17. Continued Link. UPON CONCLUSION OF THE TERM OF THIS AGREEMENT, AOL MAY, AT
ITS DISCRETION, CONTINUE TO PROMOTE ONE OR MORE "POINTERS" OR LINKS FROM
THE AOL NETWORK TO THE AFFILIATED ADVERTISER SITE (OR, IF THE AFFILIATED
ADVERTISER SITE NO LONGER EXISTS, TO ANY ADVERTISER INTERACTIVE SITE) AND,
SUBJECT TO ADVERTISER'S REASONABLE GENERALLY APPLICABLE QUALITY CONTROL
GUIDELINES PROVIDED TO AOL FROM TIME TO TIME, CONTINUE TO USE ADVERTISER'S
TRADE NAMES, TRADE MARKS AND SERVICE MARKS IN CONNECTION THEREWITH
(COLLECTIVELY, A "CONTINUED LINK"). AFTER THE TERM, REGARDLESS OF ANY
CONTINUED LINK (EXCEPT AND PROVIDED BELOW). FOR THE AVOIDANCE OF DOUBT, THE
FOLLOWING OBLIGATIONS OF THE PARTIES WILL CEASE: (i) ADVERTISER WILL NOT BE
REQUIRED TO PAY ANY GUARANTEED, FIXED PAYMENT, MAINTAIN THE AFFILIATED
ADVERTISER SITE NOR PERFORM ANY OF THE CROSS-PROMOTIONAL OBLIGATIONS
CONTAINED HEREIN (EXCEPT AS SET FORTH BELOW); AND (ii) AOL WILL NOT BE
REQUIRED TO UNDERTAKE ANY MINIMUM PROMOTIONAL/PLACEMENT OBLIGATIONS
HOWEVER, SO LONG AS AOL MAINTAINS A CONTINUED LINK (THE "CONTINUED LINK
PERIOD"), THE FOLLOWING OBLIGATIONS SHALL SURVIVE THE TERM OF THIS
AGREEMENT: (i) ADVERTISER SHALL PAY TO AOL A PERCENTAGE OF ALL TRANSACTION
REVENUES (WITHOUT RESPECT TO ANY REVENUE THRESHOLDS OR HURDLES, PAYABLE ON
A QUARTERLY BASIS WITHIN THIRTY (30) DAYS FOLLOWING THE END OF THE QUARTER
IN WHICH THE APPLICABLE TRANSACTION REVENUES WERE GENERATED) EQUAL TO [*]
AND (ii) SECTIONS 6,7,8 AND 17 OF THIS EXHIBIT A AND SECTIONS 5,6,7(a),
7(b), 9, 10,11(a) AND 12 OF THE STANDARD TERMS SET FORTH ON EXHIBIT E SHALL
SURVIVE, TOGETHER WITH ANY PROVISIONS NECESSARY IF AND TO THE EXTENT
REQUIRED FOR THE EXPRESS PURPOSES OF THIS PARAGRAPH.
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EXHIBIT B
DEFINITIONS
ADVERTISING REVENUES. Aggregate amounts collected plus the fair market value of
any other compensation received (such as barter advertising) by Advertiser, AOL
or either Party's agents, as the case may be, arising from the license or sale
of Advertisements, promotions, links or sponsorships that appear within any
pages of the Affiliated Advertiser Site, less applicable advertising sales
commissions. Advertising Revenues does not include amounts arising from
Advertisements on any screens or forms preceding, framing or otherwise directly
associated with the Affiliated Advertiser Site, which will be sold exclusively
by AOL.
AFFILIATED ADVERTISER SITE. http:\\Ashford.com and any successor site.
AOL MEMBER. Any authorized user of the AOL Service, including any sub-accounts
using the AOL Service under an authorized master account.
AOL NETWORK. (i) The AOL Service, (ii) AOL.com, (iii) CompuServe, (iv) Digital
City, (v) Netcenter, and (vi) any other product or service owned, operated,
distributed or authorized to be distributed by or through AOL or its affiliates
worldwide (and including those properties excluded from the definitions of the
AOL Service or AOL.com). It is understood and agreed that the rights of MP
relate only to the AOL Service and AOL.com and not generally to the AOL Network.
AOL PURCHASER. (i) Any person or entity who enters the Affiliated Advertiser
Site from the AOL Network through an Advertiser Promotion or Keyword including,
without limitation, from any third party area therein (to the extent entry from
such third party area is traceable through both Parties' commercially reasonable
efforts, and generates Transaction Revenues during such visit (regardless of
whether such person or entity provides an e-mail address during registration or
entrance to the Affiliated Advertiser Site which includes a domain other than an
"AOL.com" domain).
AOL SERVICE. The standard narrow-band U.S. version of the America Online(R)
brand service, specifically excluding (a) AOL.com, Netcenter or any other AOL
Interactive Site, (b) the international versions of an America Online service
(e.g., AOL Japan), (c) the CompuServe(R) brand service and any other CompuServe
products or services (d) "Driveway," "ICQ(TM)," "AOL NetFind(TM)," "AOL Instant
Messenger(TM)," "Digital City," "NetMail(TM)," "Electra", "Thrive", "Real Fans",
"Love@AOL", "Entertainment Asylum," "AOL Hometown," "My News" or any similar
independent product, service or property which may be offered by, through or
with the U.S. version of the America Online(R) brand service, (e) any
programming or Content area offered by or through the U.S. version of the
America Online(R) brand service over which AOL does not exercise complete
operational control (including, without limitation, Content areas controlled by
other parties and member-created Content areas), (f) any yellow pages, white
pages, classifieds or other search, directory or review services or Content
offered by or through the U.S. version of the America Online(R) brand service,
(g) any property, feature, product or service which AOL or its affiliates may
acquire subsequent to the Effective Date and (h) any other version of an America
Online service which is materially different from the standard narrow-band U.S.
version of the America Online brand service, by virtue of its branding,
distribution, functionality, Content or services, including, without limitation,
any co-branded version of the service or any version distributed through any
broadband distribution platform or through any platform or device other than a
desktop personal computer.
AOL LOOK AND FEEL. The elements of graphics, design, organization, presentation,
layout, user interface, navigation and stylistic convention (including the
digital implementations thereof) which are generally associated with interactive
sites within the AOL Network.
AOL USER. Any user of the AOL Service, AOL.com, CompuServe, Digital City,
Netcenter, or the AOL Network.
AOL.COM. AOL's primary Internet-based Interactive Site marketed under the
"AOL.COM(TM)" brand, specifically excluding (a) the AOL Service, (b) Netcenter,
(c) any international versions of such site, (d) "ICQ," "AOL NetFind(TM)," "AOL
Instant Messenger(TM)," "NetMail(TM)," "AOL Hometown," "My News" or any similar
independent product or service offered by or through such site or any other AOL
Interactive Site, (e) any programming or Content area offered by or through such
site over which AOL does not exercise complete operational control (including,
without limitation, Content areas controlled by other parties and member-created
Content areas), (f) any programming or Content area offered by or through such
site which was operated, maintained or controlled by the former AOL Studios
division (e.g., Electra), (g) any yellow pages, white pages, classifieds or
other search, directory or review services or Content offered by or through such
site or any other AOL Interactive Site, (h) any property, feature, product or
service which AOL or its affiliates may acquire subsequent to the Effective Date
and (i) any other version of an America Online Interactive Site which is
materially different from AOL's primary Internet-based Interactive Site marketed
under the "AOL.COM(TM)" brand, by virtue of its branding, distribution,
functionality, Content or services, including, without limitation, any
co-branded versions or any version distributed through any broadband
distribution platform or through any platform or device other than a desktop
personal computer.
ADVERTISER INTERACTIVE SITE. Any Interactive Site (other than the Affiliated
Advertiser Site) which is managed, maintained, owned or controlled by Advertiser
or its agents.
COMPUSERVE. The standard, narrow-band U.S. version of the CompuServe brand
service, specifically excluding (a) any international versions of such service,
(b) any web-based service including "compuserve.com", "cserve.com" and "cs.com",
or any similar product or
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service offered by or through the U.S. version of the CompuServe brand service,
(c) Content areas owned, maintained or controlled by CompuServe affiliates or
any similar "sub-service," (d) any programming or Content area offered by or
through the U.S. version of the CompuServe brand service over which CompuServe
does not exercise complete or substantially complete operational control (e.g.,
third-party Content areas), (e) any yellow pages, white pages, classifieds or
other search, directory or review services or Content and (f) any co-branded or
private label branded version of the U.S. version of the CompuServe brand
service, (g) any version of the U.S. version of the CompuServe brand service
which offers Content, distribution, services and/or functionality materially
different from the Content, distribution, services and/or functionality
associated with the standard, narrow-band U.S. version of the CompuServe brand
service, including, without limitation, any version of such service distributed
through any platform or device other than a desktop personal computer and (h)
any property, feature, product or service which CompuServe or its affiliates may
acquire subsequent to the Effective Date.
CONFIDENTIAL INFORMATION. Any information relating to or disclosed in the course
of the Agreement, which is or should be reasonably understood to be confidential
or proprietary to the disclosing Party, including, but not limited to, the
material terms of this Agreement, information about AOL Members, AOL Users, AOL
Purchasers and Advertiser customers, technical processes and formulas, source
codes, product designs, sales, cost and other unpublished financial information,
product and business plans, projections, and marketing data. "Confidential
Information" will not include information (a) already lawfully known to or
independently developed by the receiving Party, (b) disclosed in published
materials, (c) generally known to the public, or (d) lawfully obtained from any
third party without obligations of confidentiality.
CONTENT. Text, images, video, audio (including, without limitation, music used
in synchronism or timed relation with visual displays) and other data, Services,
advertisements, promotions, links, pointers and software, including any
modifications, upgrades, updates, enhancements and related documentation.
DIGITAL CITY. The standard, narrow-band U.S. version of Digital City's local
content offerings marketed under the Digital City(R) brand name, specifically
excluding (a) the AOL Service, AOL.com, Netcenter, or any other AOL Interactive
Site, (b) any international versions of such local content offerings, (c) the
CompuServe(R) brand service and any other CompuServe products or services (d)
"Driveway," "ICQ(TM)," "AOL NetFind(TM)," "AOL Instant Messenger(TM),
"NetMail(TM)," "Electra", "Thrive", "Real Fans", "Love@AOL", "Entertainment
Asylum," "AOL Hometown," "My News" or any similar independent product, service
or property which may be offered by, through or with the standard narrow band
version of Digital City's local content offerings, (e) any programming or
Content area offered by or through such local content offerings over which AOL
does not exercise complete operational control (including, without limitation,
Content areas controlled by other parties and member-created Content areas), (f)
any yellow pages, white pages, classifieds or other search, directory or review
services or Content offered by or through such local content offerings, (g) any
property, feature, product or service which AOL or its affiliates may acquire
subsequent to the Effective Date, (h) any other version of a Digital City local
content offering which is materially different from the narrow-band U.S. version
of Digital City's local content offerings marketed under the Digital City(R)
brand name, by virtue of its branding, distribution, functionality, Content or
services, including, without limitation, any co-branded version of the offerings
or any version distributed through any broadband distribution platform or
through any platform or device other than a desktop personal computer, and (i)
Digital City- branded offerings in any local area where such offerings are not
owned or operationally controlled by America Online, Inc. or DCI (e.g., Chicago,
Orlando, South Florida, and Hampton Roads).
IMPRESSION. User exposure to the applicable Promotion, as such exposure may be
reasonably determined and measured by AOL in accordance with its standard
methodologies and protocols.
INTERACTIVE SERVICE. An entity offering one or more of the following: (i) online
or Internet connectivity services (e.g., an Internet service provider); (ii) an
interactive site or service whose primary purpose is featuring a broad selection
of aggregated third party interactive content (or navigation thereto) (e.g., an
online service or search and directory service) and/or marketing a broad
selection of products and/or services across numerous interactive commerce
categories (e.g., an online mall or other leading online commerce site); and
(iii) communications software capable of serving as the principal means through
which a user creates, sends and receives electronic mail or real time online
messages.
INTERACTIVE SITE. Any interactive site or area, including, by way of example and
without limitation, (i) a Advertiser site on the World Wide Web portion of the
Internet or (ii) a channel or area delivered through a "push" product such as
the Pointcast Network, interactive environment such as Microsoft's Active
Desktop or interactive television service such as WebTV.
LICENSED CONTENT. All Content offered through the Affiliated Advertiser Site
pursuant to this Agreement or otherwise provided by Advertiser or its agents in
connection herewith (e.g., offline or online promotional Content, Promotions,
AOL "slideshows" , etc.), including in each case, any modifications, upgrades,
updates, enhancements, and related documentation created by Advertiser or its
agents.
NETCENTER. Netscape Communications Corporation's primary Internet-based
Interactive Site marketed under the "Netscape Netcenter(TM)" brand, specifically
excluding (a) the AOL Service, (b) AOL.com, (c) any international versions of
such site, (d) "ICQ," "AOL Netfind(TM)," "AOL Instant Messenger(TM),"
"NetMail(TM)," "AOL Hometown," "My News," "Digital City(TM)," or any similar
independent product or service offered by or through such site or any other AOL
Interactive Site, (e) any programming or Content area offered by or through such
site over which AOL does not exercise complete operational control (including,
without limitation, Content areas controlled by
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other parties and member-created Content areas), (f) any programming or Content
area offered by or through the U.S. version of the America Online(R) brand
service which was operated, maintained or controlled by the former AOL Studios
division (e.g., Electra), (g) any yellow pages, white pages, classifieds or
other search, directory or review services or Content offered by or through such
site or any other AOL Interactive Site, (h) any property, feature, product or
service which AOL or its affiliates may acquire subsequent to the Effective Date
and (i) any other version of an AOL or Netscape Communications Corporation
Interactive Site which is materially different from Netscape Communications
Corporation's primary Internet-based Interactive Site marketed under the
"Netscape Netcenter(TM)" brand, by virtue of its branding, distribution,
functionality, Content or services, including, without limitation, any
co-branded versions and any version distributed through any broadband
distribution platform or through any platform or device other than a desktop
personal computer (e.g. Custom NetCenters built specifically for third parties).
SEARCH TERM or SEARCHTERM. The online search term or terms made available on
AOL.com only for use by AOL.com users using the NetFind brand search engine
thereon (the results of which such search are non-exclusive, and result in
references to many entities), the particular Search Terms available to
Advertiser shall include ____________________________.
PRO-RATA REFUND AMOUNT. [*]
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EXHIBIT C
OPERATIONS
Affiliated Advertiser Site Infrastructure. Advertiser will be responsible for
all communications, hosting and connectivity costs and expenses associated with
the Affiliated Advertiser Site. Advertiser will provide all hardware, software,
telecommunications lines and other infrastructure necessary to meet traffic
demands on the Affiliated Advertiser Site from the AOL Network. Advertiser will
design and implement the network between the AOL Service and Affiliated
Advertiser Site such that (i) no single component failure will have a materially
adverse impact on AOL Members seeking to reach the Affiliated Advertiser Site
from the AOL Network and (ii) no single line will run at more than 70% average
utilization for a 5-minute peak in a daily period. In the event that Advertiser
elects to create a custom version of the Affiliated Advertiser Site in order to
comply with the terms of this Agreement, Advertiser will bear responsibility for
all aspects of the implementation, management and cost of such customized site.
1. Optimization; Speed. Advertiser will use commercially reasonable efforts to
ensure that: (a) the functionality and features within the Affiliated
Advertiser Site are optimized for the client software then in use by AOL
Members; and (b) the Affiliated Advertiser Site is designed and populated
in a manner that minimizes delays when AOL Members attempt to access such
site. At a minimum, Advertiser will ensure that the Affiliated Advertiser
Site's data transfers initiate within fewer than fifteen (15) seconds on
average. Prior to commercial launch of any material promotions described
herein, Advertiser will permit AOL to conduct performance and, upon thirty
(30) days prior written notice)load testing of the Affiliated Advertiser
Site (in person or through remote communications), with such commercial
launch not to commence until such time as AOL is reasonably satisfied with
the results of any such testing.
2. User Interface. Advertiser will maintain a graphical user interface within
the Affiliated Advertiser Site that is competitive in all material respects
with interfaces of other similar sites based on similar form technology.
AOL reserves the right to review and approve the user interface and site
design prior to launch of the Promotions and to conduct focus group testing
to assess compliance with respect to such consultation and with respect to
Advertiser's compliance with the preceding sentence.
3. Technical Problems. Advertiser agrees to use commercially reasonable
efforts to address material technical problems (over which Advertiser
exercises control) affecting use by AOL Members of the Affiliated
Advertiser Site (a "Advertiser Technical Problem") promptly following
notice thereof. In the event that Advertiser is unable to promptly resolve
a Advertiser Technical Problem following notice thereof from AOL
(including, without limitation, infrastructure deficiencies producing user
delays), AOL will have the right to regulate the promotions it provides to
Advertiser hereunder until such time as Advertiser corrects the Advertiser
Technical Problem at issue.
4. Monitoring. Advertiser will ensure that the performance and availability of
the Affiliated Advertiser Site is monitored on a continuous basis.
Advertiser will provide AOL with contact information (including e-mail,
phone, pager and fax information, as applicable, for both during and after
business hours) for Advertiser's principal business and technical
representatives, for use in cases when issues or problems arise with
respect to the Affiliated Advertiser Site.
5. Telecommunications. The Parties agree to explore encryption methodology to
secure data communications between the Parties' data centers. The network
between the Parties will be configured such that no single component
failure will significantly impact AOL Users. The network will be sized such
that no single line runs at more than 70% average utilization for a
5-minute peak in a daily period.
6. Security. Advertiser will utilize Internet standard encryption technologies
(e.g., Secure Socket Layer - SSL) to provide a secure environment for
conducting transactions and/or transferring private member information
(e.g. credit card numbers, banking/financial information, and member
address information) to and from the Affiliated Advertiser Site. Advertiser
will facilitate periodic reviews of the Affiliated Advertiser Site by AOL
in order to evaluate the security risks of such site. Provided that nothing
herein shall require Advertiser to grant AOL access behind Advertiser's
firewall. Advertiser will promptly remedy any security risks or breaches of
security as may be identified by AOL's Operations Security team.
7. Technical Performance.
i. Advertiser will design the Affiliated Advertiser Site to support the
AOL-client embedded versions of the Microsoft Internet Explorer 3.0
and 4.0 browsers
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(Windows and Macintosh), the Macintosh version of the Microsoft
Internet Explorer 3.0, and make commercially reasonable efforts to
support all other AOL browsers listed at:
"http://webmaster.info.aol.com/BrowTable.html."
ii. To the extent Advertiser creates customized pages on the Affiliated
Advertiser Site for AOL Members, Advertiser will configure the server
from which it serves the site to examine the HTTP User-Agent field in
order to identify the "AOL Member-Agents" listed at:
"http://webmaster.info.aol.com/Brow2Text.html."
iii. Advertiser will periodically review the technical information made
available by AOL at http://webmaster.info.aol.com.
iv. Advertiser will design its site to support HTTP 1.0 or later protocol
as defined in RFC 1945 and to adhere to AOL's parameters for
refreshing cached information listed at
v. Prior to releasing material, new functionality or features through the
Affiliated Advertiser Site ("New Functionality"), Advertiser will use
commercially reasonable efforts to either(i) test the New
Functionality to confirm its compatibility with AOL Service client
software or (ii) provide AOL with written notice of the New
Functionality so that AOL can perform tests of the New Functionality
to confirm its compatibility with the AOL Service client software.
8. AOL Internet Services Advertiser Support. AOL will provide Advertiser
with access to the standard online resources, standards and guidelines
documentation, technical phone support, monitoring and after-hours
assistance that AOL makes generally available to similarly situated
web-based partners. AOL support will not, in any case, be involved
with content creation on behalf of Advertiser or support for any
technologies, databases, software or other applications which are not
supported by AOL or are related to any Advertiser area other than the
Affiliated Advertiser Site. Support to be provided by AOL is
contingent on Advertiser providing to AOL demo account information
(where necessary for the provision of support), a detailed description
of the Affiliated Advertiser Site's software, hardware and network
architecture and access to the Affiliated Advertiser Site for purposes
of such performance and load test, but only to the extent necessary
for the provision of support requested by Advertiser.
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EXHIBIT D
CARRIAGE PLAN
ASHFORD.COM
DISPLAY START DATE 8/6/99*
DISPLAY STOP DATE 8/31/01
<TABLE>
<CAPTION>
Target Impressions Target Impressions Cost Target
Impressions
<S> <C> <C> <C> <C>
SHOP@AOL* (TIER 1) [*] [*] $ [*] [*]
Accessories-Anchor
Jewelry and Watches-Anchor
TARGETED INVENTORY (TIER 2) [*] [*] $ [*] [*]
Search Terms
Run of News Channel
Run of Personal Finance Channel
Run of Sports Channel
Planet Out
Personal Finance MindSet Package
Business and Professional MindSet Package
BRANDING AND BROAD REACH INVENTORY (TIER 3) [*] [*] $ [*] [*]
Run of Email
People Connection- Chat
Run of Netscape
Run of AOL.COM
AOL Instant Messenger
$ 7,748,621 [*]
*Shop@AOL Year 1=10 months from Aug 31, 1999
*Shop@AOL Year 2=12 months from end of first period
</TABLE>
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DESCRIPTION OF SPECIFIC PROMOTIONS
ANCHOR PROMOTION
PRINCIPAL EXPOSURE ON THE AOL SERVICE, AOL.COM, THE COMPUSERVE SERVICE AND THE
NETSCAPE NETCENTER:
o One continuous (24/7) 143 x 245 pixels promotional space with corporate
brand or logo, product offering graphic and product offering two-line text
field on the department front screen.
ADDITIONAL PROMOTION ON THE AOL SERVICE SHOPPING CHANNEL:
o Rotation with other Anchor Tenants of the Commerce Center on the Commerce
Center front screen of the AOL Service on two promotional spaces with
corporate brand or logo, product offering graphic. These promotional space
rotations are reserved for the Anchor Tenant's of each Commerce Center and
will be divided proportionately among them.
o Product listing availability through the AOL Product Search, subject to
Advertiser's participation and AOL's standard policies, terms and
conditions.
o Banner rotation on the AOL Product Search screen of the AOL Service. These
banner rotations will be divided proportionately among all shopping channel
merchants.
o Up to three (3) AOL Keywords(TM) for use from the AOL Service, for
registered Advertiser trade name or trademark (subject to the AOL standard
policies, terms and conditions).
o Fifteen percent (15%) discount from the then-current rate card on purchases
of additional advertising banners or buttons on the AOL Service, AOL.com,
the CompuServe Service and the Netscape Netcenter, subject to availability
for the period requested (with such purchases to be made in accordance with
the then-applicable Standard Advertising Insertion Order for the property
in question). Sponsorships are not entitled to the aforementioned discount.
o Eligibility to participate in the following AOL Shopping promotional
programs (the "Program Areas") subject to AOL standard policies, terms and
conditions:
o Quick Gifts
o Standard Seasonal Catalogs or Special Event Merchandising areas (e.g.,
Christmas Shop), subject to Advertiser's participation in AOL's Quick
Checkout and AOL's Search Product.
o Premier-level Seasonal Catalogs or Special Event Merchandising areas
(e.g., Golf Outings), subject to Advertiser's participation in AOL's
Quick Checkout and AOL's Search Product.
o Gift Reminder
o Newsletters
All additional Promotions on the AOL Service, AOL.com, the CompuServe Service,
the Netscape Netcenter or the AOL Network not specified herein will be
determined at AOL's reasonable discretion; provided that the additional,
standard Promotions to be provided to the Advertiser within the Shopping areas
on the AOL Service, AOL.com, the CompuServe Service and the Netscape Netcenter
will be comparable in nature to the additional, standard Promotions provided to
other similarly situated Advertisers in the same category (i.e. Anchor Tenant,
Gold Tenant or Silver Tenant).
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Exhibit E
Standard Terms and Conditions (v.4)
1. Advertising Material/Display. Except as expressly provided in this Agreement,
the specific nature and positioning of the Advertiser Promotions will be as
determined by AOL in its editorial discretion. Advertiser agrees that (i) AOL
has the right to market, display, perform, transmit and promote the Advertiser
Promotions and the Advertiser content incorporated therein ("Advertiser
Content") through the AOL Network in connection with its obligations described
in this Agreement and (ii) users of the AOL Network have the right to access and
use the Advertiser Content. The Advertiser Content (i) shall not offer or
promote any other products and/or services other than the Products , (ii) will
link only to Affiliated Advertiser Site and (iii) shall not (a) disparage AOL;
(b) promote any product or service which is reasonably competitive with one or
more of the principal products or services offered by AOL on the AOL Network
("Competitive Products"); (c) be in contravention of AOL's generally applicable
advertising standards and practices for the relevant area of the AOL Network, as
such may be modified by AOL from time to time; or (d) violate any applicable
law, regulation or third party right (including, without limitation, any
copyright, trademark, patent or other proprietary right). Additionally,
Advertiser shall consistently update the Advertiser Content and will review,
delete, edit, create, update and otherwise manage such content in accordance
with the terms of this Agreement. In no event shall the Advertisement or the
linked area state or imply that (i) the Advertisement was placed by AOL or (ii)
that AOL endorses Advertiser's products or services. To the extent AOL notifies
Advertiser of reasonable complaints or concerns from a AOL User regarding the
Advertiser Content or any other content or materials linked thereto or
associated therewith ("Objectionable Content"), Advertiser will, to the extent
such Objectionable Content is within Advertiser's control, use commercially
reasonable efforts to respond in good faith to such complaints or concerns. If
advertising materials required per the Insertion Order are not provided in a
timely manner, except to the extent that AOL is the cause of such delay, AOL may
alter or shorten the flight dates set forth in the Insertion Order and
Advertiser shall not be entitled to any refund or proration for such delay.
2. Promotions. Advertiser will take all steps necessary to ensure that any
contest, sweepstakes or similar promotion conducted or promoted through the
Advertiser Content complies with all applicable federal, state and local laws
and regulations.
3. Search Terms/Keywords. To the extent Advertiser is purchasing an Advertiser
Promotion related to a "search" term, Advertiser represents and warrants that
Advertiser has the legal rights necessary to utilize such search term during the
Term in connection with the Advertiser Promotion. Any "keyword" terms for
navigation from within the proprietary America Online brand service or "go word"
terms for navigation from within the proprietary CompuServe brand service ("AOL
Keyword Terms") (as contrasted to search terms) which may be made available to
Advertiser shall be (i) subject to availability and (ii) limited to the
combination of the "keyword" or "go word" modifier combined with a registered
trademark of Advertiser. AOL reserves the right to revoke at any time
Advertiser's use of any AOL Keyword Terms which do not incorporate registered
trademarks of Advertiser. Advertiser acknowledges that its utilization of any
AOL Keyword Term will not create in it, nor will it represent it has, any right,
title or interest in or to such AOL Keyword Term, other than the right, title
and interest Advertiser holds in Advertiser's registered trademark independent
of the AOL Keyword Term. Advertiser will not: (i) attempt to register or
otherwise obtain trademark or copyright protection in the AOL Keyword Term; or
(ii) use the AOL Keyword Term, except for the purposes expressly required or
permitted under this Agreement. This section will survive the completion,
expiration, termination or cancellation of this Agreement.
4. Cancellation. AOL reserves the right to redesign or modify the organization,
structure, "look and feel" and other elements of the AOL Network at its sole
discretion at any time without prior notice. In the event such modifications
will materially and adversely affect the Advertiser Promotions, AOL will work
with Advertiser to display the Advertiser Promotions in a comparable location
and manner that is reasonably satisfactory to Advertiser. If AOL and Advertiser
cannot reach agreement on a substitute placement, Advertiser shall have the
right to cancel the Advertiser Promotion, upon thirty (30) days advance written
notice to AOL. In such case, Advertiser will only be responsible for the
pro-rata portion of payments attributable to the period from the commencement of
the Agreement through the effectiveness of such cancellation (the "Pro Rata
Payments") and shall be entitled to the Pro-Rata Refund Amount, if applicable.
AOL reserves the right to cancel and remove at any time any Advertiser Promotion
for any reason upon thirty (30) days advance
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written notice to Advertiser (or upon such shorter notice as may be designated
by AOL in the event that AOL believes in good faith that further display of the
Advertisement will expose AOL to liability or other adverse consequences). In
the event of such a cancellation, Advertiser will only be responsible for the
Pro-Rata Payments and shall be entitled to the Pro-Rata Refund Amount, if
applicable. Advertiser may not resell, trade, exchange, barter or broker to any
third-party any advertising space which is the subject of this Agreement.
5. Confidentiality. Each Party acknowledges that Confidential Information may be
disclosed to the other Party during the course of this Agreement. Each Party
agrees that it will take reasonable steps, at least substantially equivalent to
the steps it takes to protect its own proprietary information, during the term
of this Agreement, and for a period of seven years following expiration or
termination of this Agreement, to prevent the duplication or disclosure of
Confidential Information of the other Party, other than by or to its employees
or agents who must have access to such Confidential Information to perform such
Party's obligations hereunder, who will each agree to comply with this section.
Notwithstanding the foregoing, either Party may disclose information containing
Confidential Information without the consent of the other Party, to the extent
such disclosure is required by law, rule, regulation or government or court
order. In such event, the disclosing Party will provide at least five (5)
business days prior written notice of such proposed disclosure to the other
Party. Further, in the event such disclosure is required of either Party under
the laws, rules or regulations of the Securities and Exchange Commission or any
other applicable governing body, such Party will (i) redact payment provisions
(and such other provisions as the Parties may mutually agree) of this Agreement
to the fullest extent permitted under applicable laws, rules and regulations and
(ii) submit a request to such governing body that such portions and other
provisions of this Agreement receive confidential treatment under the laws,
rules and regulations of the Securities and Exchange Commission or otherwise be
held in the strictest confidence to the fullest extent permitted under the laws,
rules or regulations of any other applicable governing body.
6. Usage Data. AOL will provide Advertiser with usage information related to the
Advertiser Promotion in substance and form reasonably delivered by AOL,
consistent with its then-standard reporting practices. Advertiser may not
distribute or disclose usage information to any third party without AOL's prior
written consent, provided however that this limitation shall not apply to usage
information which Advertiser acquires through some other source.
7. Limitation of Liability; Disclaimer; Indemnification. (A) EXCEPT FOR A BREACH
OF THE CONFIDENTIALITY OBLIGATIONS DESCRIBED IN THE PRECEEDING PARAGRAPH AND
SUBJECT TO SECTION 7(C) BELOW, UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE
LIABLE TO THE OTHER PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR
EXEMPLARY DAMAGES (EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES), ARISING FROM ANY ASPECT OF THE RELATIONSHIP PROVIDED FOR HEREIN.
NEITHER PARTY SHALL IN ANY EVENT BE LIABLE TO THE OTHER UNDER THIS AGREEMENT
FOR MORE THAN THE AMOUNT TO BE PAID BY ADVERTISER DURING THE YEAR IN WHICH THE
LIABILITY ACCRUES.
(B) EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES ANY,
AND EACH PARTY HEREBY SPECIFICALLY DISCLAIMS ANY REPRESENTATIONS OR WARRANTIES,
EXPRESS OR IMPLIED, REGARDING THE PRODUCTS (EXCEPT TO THE EXTENT PROVIDED TO ANY
PURCHASER), THE AOL NETWORK, THE AOL SERVICE, AOL.COM, THE ADVERTISER PROMOTIONS
OR THE AFFILIATED ADVERTISER SITE, INCLUDING ANY IMPLIED WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND IMPLIED WARRANTIES
ARISING FROM COURSE OF DEALING OR COURSE OF PERFORMANCE. WITHOUT LIMITING THE
GENERALITY OF THE FOREGOING, AOL SPECIFICALLY DISCLAIMS ANY WARRANTY REGARDING
THE PROFITABILITY OF THE AFFILIATED ADVERTISER SITE.
(C) Indemnity. (i)Liabilities. Subject to each Party's material compliance with
the section_(c)(ii)below ("Claims"), either Party will defend, indemnify, save
and hold harmless the other Party and the officers, directors, agents,
affiliates, distributors, francisees and employees of the other Party from any
and all third party claims, demands, liabilities, costs or expenses, including
reasonable attorneys' fees ("Liabilities"), resulting from the indemnifying
Party's material breach of any duty, representation, or warranty of this
Agreement. (ii) Claims. If a Party entitled to indemnification hereunder (the
"Indemnified Party") becomes aware of any matter it believes is indemnifiable
hereunder involving any claim, action, suit, investigation, arbitration or other
proceeding against the Indemnified Party by any third party (each an "Action"),
the Indemnified Party will give the other Party (the "Indemnifying Party")
prompt written notice of such Action. Such notice will (i)
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provide the basis on which indemnification is being asserted and (ii) be
accompanied by copies of all relevant pleadings, demands, and other papers
related to the Action and in the possession of the Indemnified Party. The
Indemnifying Party will have a period of ten (10) days after delivery of such
notice to respond. If the Indemnifying Party elects to defend the Action or does
not respond within the requisite ten (10) day period, the Indemnifying Party
will be obligated to defend the Action, at its own expense (and under its sole
control), and by counsel reasonably satisfactory to the Indemnified Party. The
Indemnified Party will cooperate, at the expense of the Indemnifying Party, with
the Indemnifying Party and its counsel in the defense and the Indemnified Party
will have the right to participate fully, at its own expense, in the defense of
such Action. If the Indemnifying Party responds within the required ten (10) day
period and elects not to defend such Action, the Indemnified Party will be free,
without prejudice to any of the Indemnified Party's rights hereunder, to
compromise or defend (and control the defense of) such Action. In such case, the
Indemnifying Party will cooperate, at its own expense, with the Indemnified
Party and its counsel in the defense against such Action and the Indemnifying
Party will have the right to participate fully, at its own expense, in the
defense of such Action.
8. Solicitation. (a) Advertiser will not send unsolicited, commercial e-mail
(i.e., "spam") through or into AOL's products or services, absent a prior
business relationship, and will comply with any other standard AOL policies and
limitations relating to distribution of bulk e-mail solicitations or
communications through or into AOL's products or services (including, without
limitation, the requirement that Advertiser provide a prominent and easy means
for the recipient to "opt-out" of receiving any future commercial e-mail
communications from Advertiser. (b) Advertiser shall ensure that its collection,
use and disclosure of information obtained from AOL Users of the AOL Network
under this Agreement ("User Information") complies with (i) all applicable laws
and regulations and (ii) Advertiser's standard privacy policies so long as such
policies are prominently published on the site and provide adequate notice,
disclosure and choice to users regarding Advertiser's collection, use and
disclosure of user information). (c) Each request for information from an AOL
User ("Information Request") shall clearly and conspicuously specify to the AOL
Users at issue the purpose for which specific information related to User
Information collected by Advertiser shall be used (the "Specified Purpose").
Advertiser shall limit use of the User Information collected through an
Information Request to the Specified Purpose. In the case of AOL Users who
purchase products or services from Advertiser, Advertiser will be entitled to
incorporate such members into Advertiser's aggregate lists of customers;
provided that Advertiser shall in no way: (i) disclose User Information in a
manner that identifies AOL Users as end-users of an AOL product or service (or
in any other manner that could reasonably be expected to facilitate use of such
information by or on behalf of a Competitive Product); or (ii) otherwise use
such User Information in connection with marketing of a Competitive Product.
This section shall survive for two years after the expiration, termination or
cancellation of this Agreement. The restrictions of this Section 7 shall not
apply to (i) User Information obtained other than from AOL Users who enter the
Affiliated Advertiser Site during the Term or pursuant to a Continued Link, (ii)
AOL Users who were customers of Advertiser prior to the date hereof, or (iii)
AOL Users who first access (and provide User Information on) the Affiliated
Advertiser Site other than through an Advertiser Promotion on the AOL Network.
9. Press Releases. NEITHER PARTY SHALL ISSUE ANY PRESS RELEASES OR PUBLIC
STATEMENTS CONCERNING THE EXISTENCE OR TERMS OF THIS AGREEMENT AND THE FAILURE
OF EITHER PARTY TO OBTAIN THE PRIOR WRITTEN APPROVAL OF THE OTHER (SUCH APPROVAL
NOT TO BE UNREASONABLY WITHHELD) WILL BE DEEMED A MATERIAL BREACH OF THIS
AGREEMENT; PROVIDED THAT, EITHER PARTY MAY DISCLOSE SUCH INFORMATION WITHOUT THE
CONSENT OF THE OTHER PARTY, TO THE EXTENT SUCH DISCLOSURE IS REQUIRED BY LAW,
RULE REGULATION OR GOVERNMENT OR COURT ORDER. BECAUSE IT WOULD BE DIFFICULT TO
PRECISELY ASCERTAIN THE EXTENT OF THE INJURY CAUSED TO A PARTY, IN THE EVENT OF
SUCH A MATERIAL BREACH FO THIS PROVISION BY THE OTHER PARTY, (I) THE
NON-BREACHING PARTY MAY TERMINATE THIS AGREEMENT IMMEDIATELY FOLLOWING WRITTEN
NOTICE TO THE OTHER PARTY.
10. Trademarks. Except as required for the performance of its duties hereunder
or as otherwise provided for herein, neither party shall use, display or modify
the other Party's trademarks, service marks, or trade name ("Marks") in any
manner absent such party's express prior written approval. Each Party agrees
that any use of the other Party's Marks will inure to the benefit, and be on
behalf, of the other Party. Each Party acknowledges that its utilization of the
other Party's Marks will not create in it, nor will it represent it has,
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any right, title, or interest in or to such Marks other than the licenses
expressly granted herein. Each Party agrees not to do anything contesting or
impairing the trademark rights of the other Party. Each Party agrees that the
nature and quality of its products and services supplied in connection with the
other Party's Marks will conform to quality standards set by the other Party.
Each Party agrees to supply the other Party, upon request, with a reasonable
number of samples of any Materials publicly disseminated by such Party which
utilize the other Party's Marks. Each Party will comply with all applicable
laws, regulations, and customs and obtain any required government approvals
pertaining to use of the other Party's marks.
11. Termination.
(A)Either party may terminate this Agreement at any time with written notice to
the other party in the event of a material breach of this Agreement by the other
party, which remains uncured after thirty days written notice thereof; provided
that AOL shall not be required to provide notice to Advertiser or cure period in
connection with Advertiser's failure to make payment within five (5) days of the
scheduled due date of such payment to AOL required under this Agreement.
(B) Either party may terminate this agreement immediately following thirty (30)
days written notice to the other party if the other party (1) ceases to do
business in the normal course without a successor, (2) is declared insolvent or
bankrupt, (3) is the subject of any proceeding related to its liquidation or
insolvency (whether voluntary or involuntary) which is not dismissed within
one-hundred and twenty days (120) calendar days or (4) makes an assignment or
the benefit of creditors. Additionally, in the event of a change of control of
Advertiser resulting in the equity ownership or managerial control of Advertiser
by an Interactive Service, AOL may terminate this Agreement by providing thirty
(30) days prior written notice of such intent to terminate.
(C) Except for termination of this Agreement by AOL (i) for material breach of
the Agreement by Advertiser, including without limitation termination for
nonpayment, or (ii) pursuant to Section 10(B) of this Exhibit E, upon any early
termination of this Agreement, in addition to any other remedies available to
the Parties as a result of such termination (if any) and except as otherwise
provided in this Agreement, AOL agrees to refund to Advertiser the Pro-rata
Refund Amount.
(D) In the event of a material adverse change in the nature or content of the
Affiliated Advertiser Site (a "Material Adverse Change") (e.g. material decrease
in quality of user experience), AOL may immediately cancel the related
advertising flights for forty five (45) days or until such Material Adverse
Change has been reversed to AOL's reasonable satisfaction whichever is sooner.
If such Material Adverse Change has not been reversed within five (5) days, AOL
shall be entitled to immediately cancel this Agreement, provided, that
Advertiser shall be entitled to a Pro-Rata Refund and, if AOL does not elect to
cancel this Agreement pursuant to the foregoing and such Material Adverse Change
has not been reversed within thirty (30) days, AOL shall be entitled to
immediately cancel this Agreement and no refund shall be payable.
12. Miscellaneous. The parties to this Agreement are independent contractors.
Neither party is an agent, representative or partner of the other party. Neither
party shall have any right, power or authority to enter into any agreement for
or on behalf of, or incur any obligation or liability of, or to otherwise bind,
the other party. The failure of either party to insist upon or enforce strict
performance by the other party of any provision of this Agreement or to exercise
any right under this Agreement shall not be construed as a waiver or
relinquishment to any extent of such party's right to assert or rely upon any
such provision or right in that or any other instance. Except where otherwise
specified herein or in the Insertion Order, the rights and remedies granted to a
party under this Agreement are cumulative and in addition to, and not in lieu
of, any other rights or remedies which the party may possess at law or in
equity. This Agreement sets forth the entire agreement between Advertiser and
AOL, and supersedes any and all prior agreements of AOL or Advertiser with
respect to the transactions set forth herein. No change, amendment or
modification of any provision of this Agreement shall be valid unless set forth
in a written instrument signed by the party subject to enforcement of such
amendment. Advertiser shall not assign this Agreement or any right, interest or
benefit under this Agreement without the prior written consent of AOL.
Assumption of the Agreement by any successor to Advertiser (including, without
limitation, by way of merger or consolidation) shall be subject to AOL's prior
written approval. Subject to the foregoing, this Agreement shall be fully
binding upon, inure to the benefit of and be enforceable by the parties hereto
and their respective successors and assigns. In the event that any provision of
this Agreement is held invalid by a court with jurisdiction over the Parties to
this
18
Execution Copy
<PAGE> 19
Agreement, (i) such provision shall be deemed to be restated to reflect as
nearly as possible the original intentions of the Parties in accordance with
applicable law and (ii) the remaining terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect. This
Agreement may be executed in counterparts, each of which shall be deemed an
original and all of which together shall constitute one and the same document.
This Agreement shall be interpreted, construed and enforced in all respects in
accordance with the laws of the Commonwealth of Virginia, except for its
conflicts of laws principles. Advertiser hereby irrevocably consents to the
non-exclusive jurisdiction of the courts of the State of California and the
federal courts situated in the State of California in connection with any action
arising under this Agreement.
19
Execution Copy
<PAGE> 1
EXHIBIT 10.11
CREDIT AGREEMENT
(BORROWING BASE)
THIS CREDIT AGREEMENT (as amended, restated and supplemented from time to time,
this "AGREEMENT") by and between ASHFORD.COM, formerly known as Newwatch
Company, Inc., a Delaware corporation ("BORROWER") and CHASE BANK OF TEXAS,
NATIONAL ASSOCIATION ("BANK") is dated as of August 9, 1999 (the "EFFECTIVE
DATE").
1. THE LOANS.
REVOLVING CREDIT NOTE 1.1 Subject to the terms and conditions hereof, Bank
agrees to make loans ("LOAN" or "LOANS") to Borrower from time to time before
the Termination Date, not to exceed at any one time outstanding the lesser of
the Borrowing Base or $5,000,000.00 (the "COMMITMENT"). Borrower has the right
to borrow, repay and reborrow. The Loans may only be used to finance Borrower's
working capital needs. Chapter 346 of the Texas Finance Code (which governs
certain revolving loan accounts) will not apply to this Agreement, the Note or
any Loan. The Loans will be evidenced by, and will bear interest and be
payable as provided in, the promissory note of Borrower dated the Effective
Date (together with any and all renewals, extensions, modifications and
replacements thereof and substitutions therefor, the "NOTE"). "TERMINATION
DATE" means the earlier of: (a) August 8, 2000; or (b) the date specified by
Bank pursuant to Section 6.1 hereof.
BORROWING BASE 1.2 The "BORROWING BASE" will be the amount shown as the
BORROWING BASE on the most recent Borrowing Base Report, subject to
verification by Bank and determination by Bank at any time and calculated using
the eligibility criteria, borrowing base factors, dollar ceilings for various
components and any deductions specified in the attached EXHIBIT A, incorporated
herein by reference.
REQUIRED PAYMENT 1.3 If the unpaid amount of the Loans at any time exceeds
the Borrowing Base then in effect, Borrower must make a payment on the Note in
an amount sufficient to reduce the unpaid principal balance of the Note to an
amount no greater than the Borrowing Base. Such payment shall be accompanied
by any prepayment charge required by the Note and shall be due concurrently
with the Borrowing Base Report.
COMMITMENT FEE 1.4 Borrower will pay a commitment fee (computed on the basis
of the actual number of days elapsed in a year comprised of 360 days) of 1/3 of
1% per annum on the daily average difference between the Commitment and the
principal balance of the Note, during each calendar quarter from the date
hereof to the Termination Date. The Commitment fee is due and payable in
arrears for the preceding calendar quarter on the first day of the subsequent
calendar quarter, commencing on January 9, 2000.
PAST DUE AMOUNTS 1.5 Each amount due to Bank in connection with the Loan
Documents will bear interest from its due date until paid at the Highest Lawful
Rate unless the applicable Loan Document provides otherwise.
2. CONDITIONS PRECEDENT.
ALL LOANS 2.1 Bank is not obligated to make any Loan unless: (a) Bank has
received the following, duly executed and in Proper Form: (1) a Request for
Loan, substantially in the form of EXHIBIT B, not later than one (1) Business
Day before the date (which shall also be a Business Day) of the proposed Loan;
provided however, Bank may accept and act upon verbal advance requests received
from Borrower's representative reasonably believed by Bank to be authorized to
make such requests; (2) a Borrowing Base Report within the time required by
this Agreement; (3) a Guaranty of the Obligations in Proper Form duly executed
by each Subsidiary of Borrower in existence at the time of such Loan (each a
"Guarantor" and collectively, "Guarantors"); and (4) such other documents as
Bank reasonably may require; (b) no Event of Default exists; (c) the making of
the Loan is not prohibited by, or subjects Bank to any penalty or onerous
condition under any Legal Requirement; and (d) after making the Loan requested,
the ratio of Indebtedness outstanding under the Note to Liquid Assets shall not
exceed the limitations set forth in Section 4.9 hereof
FIRST LOAN 2.2 In addition to the matters described in the preceding section,
Bank will not be obligated to make the first Loan unless: (a) Bank has received
all of the Loan Documents specified on Annex I in Proper Form; (b) Borrower
shall have received proceeds in an amount of at least $30,000,000.00 from an
equity offering, resulting in an equity structure in Proper Form; (c) certified
public accountants satisfactory to Bank shall have performed a financial audit
of Borrower and shall have issued an unqualified opinion in Proper Form; and (d)
Borrower shall have an adjusted Tangible Net Worth as calculated in accordance
with Paragraph C.1 on EXHIBIT C hereto in an amount of not less than
$30,000,000.00.
3. REPRESENTATIONS AND WARRANTIES. To induce Bank to enter into this
Agreement and to make the Loans, Borrower represents and warrants as of the
Effective Date and the date of each request for a Loan that each of the
following statements is and shall remain true and correct throughout the term
of this Agreement:
ORGANIZATION AND STATUS 3.1 Borrower and each Subsidiary of Borrower is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization; has all power and authority to conduct its
business as presently conducted, and is duly qualified to do business and in
good standing in each jurisdiction in which the nature of the business
conducted by it makes such qualification desirable. Borrower has no Subsidiary
other than those listed on Annex II and each Subsidiary is owned by Borrower in
the percentage set forth on Annex II. If Borrower is subject to the Texas
Revised Partnership Act ("TRPA"), Borrower agrees that Bank is not required to
comply with Section 3.05(d) of TRPA and agrees that Bank may proceed directly
against one or more partners or their property without first seeking
satisfaction from partnership property.
FINANCIAL STATEMENTS 3.2 All financial statements delivered to Bank are
complete and correct and fairly present, in accordance with generally accepted
accounting principles, consistently applied ("GAAP"), the financial condition
and the results of operations of Borrower and each Subsidiary of Borrower as at
the dates and for the periods indicated. No material adverse change has
occurred in the assets, liabilities, financial condition, business or affairs
of Borrower or any Subsidiary of Borrower since the dates of such financial
statements. Neither Borrower nor any Subsidiary of Borrower is subject to any
instrument or agreement materially and adversely affecting its financial
condition, business or affairs.
ENFORCEABILITY 3.3 The Loan Documents are legal, valid and binding
obligations of the Parties enforceable in accordance with their respective
terms, except as may be limited by bankruptcy, insolvency and other similar
laws affecting creditors' rights generally. The execution, delivery and
performance of the Loan Documents have all been duly authorized by all
necessary action; are within the power and authority of the Parties; do not and
will not violate any Legal Requirement, the Organizational Documents of the
Parties or any agreement or instrument binding or affecting the Parties or any
of their respective Property.
COMPLIANCE 3.4 Borrower and each Subsidiary of Borrower has filed all
applicable tax returns and paid all taxes shown thereon to be due, except those
for which extensions have been obtained and those which are being contested in
good faith and for which adequate reserves have been established. Borrower and
each Subsidiary of Borrower is in compliance with all applicable Legal
Requirements and manages and operates (and will continue to manage and operate)
its business in accordance with good industry practices. Neither Borrower nor
any Subsidiary of Borrower is in default in the payment of any other
indebtedness or under any agreement to which it is a party. The Parties have
obtained all consents of and registered with all Governmental Authorities or
other Persons required to execute, deliver and perform the Loan Documents.
LITIGATION 3.5 Except as previously disclosed to Bank in writing, there is no
litigation or administrative proceeding pending or, to the knowledge of
Borrower, threatened against, nor any outstanding judgment, order or decree
affecting Borrower or any Subsidiary of Borrower before or by any Governmental
Authority.
TITLE AND RIGHTS 3.6 Borrower and each Subsidiary of Borrower has good and
marketable title to its Property, free and clear of any Lien except for Liens
permitted by this Agreement and the other Loan Documents. Except as otherwise
expressly stated in the Loan Documents or permitted by this Agreement, the
Liens of the Loan Documents will constitute valid and perfected first and prior
Liens on the Property described therein, subject to no other Liens whatsoever.
Borrower and each Subsidiary of Borrower possesses all permits, licenses,
patents, trademarks and copyrights required to conduct its business. All
easements, rights-of-way and other rights necessary to maintain and operate
Borrower's Property have been obtained and are in full force and effect.
REGULATION U; BUSINESS PURPOSE 3.7 None of the proceeds of any Loan will be
used to purchase or carry, directly or indirectly, any margin stock or for any
other purpose which would make this credit a "purpose credit" within the
meaning of Regulation U of the Board of Governors of the
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Federal Reserve System. All Loans will be used for business, commercial,
investment or other similar purpose and not primarily for personal, family, or
household use or primarily for agricultural purposes as such terms are used in
Chapter 303 of the Texas Finance Code or any successor statute.
ENVIRONMENT 3.8 Borrower and each Subsidiary of Borrower have complied with
applicable Legal Requirements in each instance in which any of them have
generated, handled, used, stored or disposed of any hazardous or toxic waste or
substance, on or off its premises (whether or not owned by any of them).
Neither Borrower nor any Subsidiary of Borrower has any material contingent
liability for non-compliance with environmental or hazardous waste laws.
Neither Borrower nor any Subsidiary of Borrower has received any notice that it
or any of its Property or operations does not comply with, or that any
Governmental Authority is investigating its compliance with, any environmental
or hazardous waste laws.
INVESTMENT COMPANY ACT/PUBLIC UTILITY HOLDING COMPANY ACT 3.9 Neither
Borrower nor any Subsidiary of Borrower is an "investment company" within the
meaning of the Investment Company Act of 1940 or a "holding company" or an
"affiliate" of a "holding company" or a "public utility" within the meaning of
the Public Utility Holding Company Act of 1935, as amended.
STATEMENTS BY OTHERS 3.10 All statements made by or on behalf of Borrower,
any Subsidiary of Borrower or any other of the Parties in connection with any
Loan Document constitute the joint and several representations and warranties
of Borrower hereunder.
YEAR 2000 3.11 Any reprogramming required to permit the proper functioning,
in and following the year 2000, of (i) Borrower's and Guarantors' computer
systems and (ii) equipment containing embedded microchips (including systems
and equipment supplied by others or with which Borrower's or Guarantors'
systems interface) and the testing of all such systems and equipment, as so
reprogrammed, have been completed. The cost to Borrower and Guarantors of such
reprogramming and testing and of the reasonably foreseeable consequences of
year 2000 to Borrower and Guarantors (including, without limitation,
reprogramming errors and the failure of others' systems or equipment) will not
result in any Event of Default or have a material adverse effect on Borrower or
Guarantors.
4. AFFIRMATIVE COVENANTS. Borrower agrees to do, and if necessary cause to be
done, and cause its Subsidiaries to do, each of the following:
CORPORATE FUNDAMENTALS 4.1 (a) Pay when due all taxes and governmental
charges of every kind upon it or against its income, profits or Property,
unless and only to the extent that the same shall be contested in good faith
and adequate reserves have been established therefor; (b) Renew and keep in
full force and effect all of its licenses, permits and franchises; (c) Do all
things necessary to preserve its corporate existence and its qualifications and
rights in all jurisdictions where such qualification is necessary or desirable;
(d) Comply with all applicable Legal Requirements; and (e) Protect, maintain
and keep in good repair its Property and make all replacements and additions to
its Property as may be reasonably necessary to conduct its business properly
and efficiently.
INSURANCE 4.2 Maintain insurance with such reputable financially sound
insurers, on such of its Property and personnel, in such amounts and against
such risks as is customary with similar Persons or as may be reasonably
required by Bank, and furnish Bank satisfactory evidence thereof promptly upon
request. Without limiting the generality of the preceding sentence, Borrower
shall at all times maintain business interruption insurance with such insurers,
in such amounts and subject to such terms as are satisfactory to Bank and
deliver to Bank satisfactory evidence thereof. These insurance provisions are
cumulative of the insurance provisions of the other Loan Documents. Bank must
be named as a beneficiary, loss payee or additional insured of such insurance
as its interest may appear and Borrower must provide Bank with copies of the
policies of insurance and a certificate of the insurer that the insurance
required by this section may not be canceled, reduced or affected in any manner
without 30 days' prior written notice to Bank.
FINANCIAL INFORMATION/BORROWING BASE REPORT 4.3 Furnish to Bank in Proper
Form (i) the financial statements prepared in conformity with GAAP on
consolidated and consolidating bases and the other information described in,
and within the times required by, Exhibit C, Reporting Requirements, Financial
Covenants and Compliance Certificate attached hereto and incorporated herein by
reference; (ii) the Borrowing Base Report substantially in the form of, and
within the time required by, Exhibit A along with the other information
required by Exhibit A to be submitted; (iii) within the time required by
Exhibit C, Exhibit C signed and certified by the chief financial officer or
president of Borrower; (iv) promptly after such request is submitted to the
appropriate Governmental Authority, any request for waiver of funding standards
or extension of amortization periods with respect to any employee benefit plan;
(v) copies of special audits, studies, reports and analyses prepared for the
management of Borrower by outside parties and (vi) such other information
relating to the financial condition and affairs of the Borrower and Guarantors
and their Subsidiaries as Bank may request from time to time in its discretion.
MATTERS REQUIRING NOTICE 4.4 Notify Bank immediately, upon acquiring
knowledge of (a) the institution or threatened institution of any lawsuit or
administrative proceeding which, if adversely determined, might adversely
affect Borrower; (b) any material adverse change in the assets, liabilities,
financial condition, business or affairs of Borrower; (c) any Event of Default;
or (d) any reportable event or any prohibited transaction in connection with
any employee benefit plan.
INSPECTION/AUDIT 4.5 Permit Bank and its affiliates to inspect and photograph
its Property, to examine and copy its files, books and records, and to discuss
its affairs with its officers and accountants, at such times and intervals and
to such extent as Bank reasonably desires. Without limiting the generality of
the foregoing, if at any time the Indebtedness outstanding under the Note
equals or exceeds $2,500,000.00, Borrower shall permit Bank or any of its
Subsidiaries or Affiliates to review the inventory, accounting procedures, and
inventory management and information systems, of Borrower and its Subsidiaries
at Borrower's expense.
ASSURANCES 4.6 Promptly execute and deliver any and all further agreements,
documents, instruments, and other writings that Bank may request to cure any
defect in the execution and delivery of any Loan Document or more fully to
describe particular aspects of the agreements set forth or intended to be set
forth in the Loan Documents.
CERTAIN CHANGES 4.7 Notify Bank at least 30 days prior to the date that any
of the Parties changes its name or the location of its chief executive office
or principal place of business or the place where it keeps its books and
records or the location of any of the Collateral.
EXHIBIT C 4.8 Comply with each of the other affirmative covenants set forth
in EXHIBIT C.
LIQUIDITY MAINTENANCE 4.9 Maintain a ratio of Indebtedness outstanding under
the Note to Liquid Assets at all times no greater than 1.00 to 1.00, except for
the month of November, 1999 when such ratio shall not exceed 2.25 to 1.00 and
the month of December, 1999 when such ratio shall not exceed 1.50 to 1.00. As
used in this Section 4.9, the term "LIQUID ASSETS" shall mean unencumbered
liquid assets in the form of cash, certificates of deposit, time and savings
accounts (and if any of the foregoing are maintained with a financial
institution other than Bank, then fully insured by the FDIC and not subject to
any offset by the financial institution), treasury bills or other readily
marketable securities held in Borrower's sole name and acceptable to Bank,
available to Borrower at all times. The value of the Liquid Assets shall be
the market value of such assets, as such value is determined by Bank ("MARKET
VALUE"). Bank may determine the Market Value of the Liquid Assets by any
reasonable method, which determination shall be conclusive absent manifest
error. Using published figures in The Wall Street Journal is agreed to be
reasonable. In the event the Market Value of the Liquid Assets ever causes the
above-described ratio to exceed the limitations of this Section 4.9, then
Borrower shall immediately notify Bank and within ten (10) days, Borrower shall
cause additional Liquid Assets to be maintained pursuant to the terms of this
Agreement. Bank shall have no obligation to make any Loans if the ratio of
Indebtedness outstanding under the Note exceeds the limitations of this Section
4.9.
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GUARANTEES 4.10 Furnish Bank with a Guaranty of the Obligations in Proper
Form duly executed by each Subsidiary of Borrower now or hereafter existing.
5. NEGATIVE COVENANTS. The Borrower will not, and no Subsidiary of Borrower
will:
INDEBTEDNESS 5.1 Create, incur, or permit to exist, or assume or guarantee,
directly or indirectly, or become or remain liable with respect to, any
Indebtedness, contingent or otherwise unless there is a permitted amount set
forth in Exhibit C, except: (a) Indebtedness to Bank, or secured by Liens
permitted by this Agreement, or otherwise approved in writing by Bank, and
renewals and extensions (but not increases) thereof; (b) current accounts
payable and unsecured current liabilities, not the result of borrowing, to
vendors, suppliers and Persons providing services, for expenditures for goods
and services normally required by it in the ordinary course of business and on
ordinary trade terms; and (c) Indebtedness of Borrower and all its
Subsidiaries, incurred entirely to finance or refinance the purchase price of
Property of Borrower or such Subsidiary which is secured by a Lien on such
Property in a cumulative amount not to exceed $100,000.00 during the period
from the Effective Date to and including the Termination Date.
LIENS 5.2 Create or permit to exist any Lien upon any of its Property now
owned or hereafter acquired, or acquire any Property upon any conditional sale
or other title retention device or arrangement or any purchase money security
agreement; or in any manner directly or indirectly sell, assign, pledge or
otherwise transfer any of its accounts or other Property, except: (a) Liens,
not for borrowed money, arising in the ordinary course of business; (b) Liens
for taxes not delinquent or being contested in good faith by appropriate
proceedings; (c) Liens in effect on the date hereof and disclosed to Bank in
writing, so long as neither the indebtedness secured thereby nor the Property
covered thereby increases; (d) Liens in favor of Bank, or otherwise approved in
writing by Bank; and (e) Liens securing the Indebtedness permitted by Section
5.1(c) hereof and placed on Property, contemporaneously with the purchase
thereof, by Borrower or any Subsidiary to secure all or a portion of the
purchase price thereof; provided that such Lien shall not extend to any other
Property of the Borrower or any Subsidiary. Notwithstanding anything to the
contrary herein, Borrower will not, and no Subsidiary of Borrower will permit
any Lien on any inventory that secures the Loans unless Bank shall provide
Borrower with Bank's prior written consent.
FINANCIAL AND OTHER COVENANTS 5.3 Fail to comply with the required financial
covenants and other covenants described, and calculated as set forth, in
Exhibit C. Unless otherwise provided on Exhibit C, all such amounts and ratios
will be calculated: (a) on the basis of GAAP; and (b) on a consolidated basis.
Compliance with the requirements of Exhibit C will be determined as of the
dates of the financial statements to be provided to Bank.
CORPORATE CHANGES 5.4 In any single transaction or series of transactions,
directly or indirectly: (a) liquidate or dissolve; (b) be a party to any merger
or consolidation; (c) sell or dispose of any interest in any of its
Subsidiaries, or permit any of its Subsidiaries to issue any additional equity
other than to Borrower; (d) sell, convey or lease all or any substantial part
of its assets, except for sale of inventory in the ordinary course of business;
or (e) permit any change in ownership of Borrower except as permitted by
Section 5.9.
RESTRICTED PAYMENTS 5.5 Unless otherwise permitted on Exhibit C, at any time:
(a) redeem, retire or otherwise acquire, directly or indirectly, any shares of
its capital stock or other equity interest; (b) declare or pay any dividend
(except stock dividends and dividends paid to Borrower); or (c) make any other
distribution or contribution of any Property or cash or obligation to owners of
an equity interest or to a Subsidiary in their capacity as such.
NATURE OF BUSINESS; MANAGEMENT 5.6 Change the nature of its business or enter
into any business which is substantially different from the business in which
it is presently engaged, or cease to have Robert Shaw and James Whitcomb
actively involved in its management.
AFFILIATE TRANSACTIONS 5.7 Enter into any transaction or agreement with any
Affiliate except upon terms substantially similar to those obtainable from
wholly unrelated sources.
SUBSIDIARIES 5.8 Form, create or acquire any Subsidiary without the prior
written consent of Bank.
LOANS AND INVESTMENTS 5.9 Unless otherwise provided on Exhibit C, make any
advance, loan, extension of credit, or capital contribution to or investment
in, or purchase, any stock, bonds, notes, debentures, or other securities of,
any Person, except: (a) readily marketable direct obligations of the United
States of America or any agency thereof with maturities of one year or less
from the date of acquisition; (b) fully insured certificates of deposit with
maturities of one year or less from the date of acquisition issued by any
commercial bank operating in the United States of America having capital and
surplus in excess of $50,000,000.00; and (c) commercial paper of a domestic
issuer if at the time of purchase such paper is rated in one of the two highest
rating categories of Standard and Poor's Corporation or Moody's Investors
Service. Notwithstanding the foregoing, Borrower may acquire an equity
interest in any Person; provided that the consideration paid is either through
the issuance of additional capital stock of the Borrower or the payment of cash
not to exceed a cumulative amount of $500,000.00 during the period from the
Effective Date to and including the Termination Date; provided no Event of
Default or event which with the giving of notice, the passage of time or both
would constitute an Event of Default (a "DEFAULT") has occurred or is imminent.
CAPITAL EXPENDITURES 5.10 Make or incur non-financed capital expenditures in
a cumulative amount in excess of $900,000.00 during the period from the
Effective Date to and including the Termination Date.
6. EVENTS OF DEFAULT AND REMEDIES.
EVENTS OF DEFAULT 6.1 Each of the following is an "EVENT OF DEFAULT":
(a) Any Obligor fails to pay any principal of or interest on the Note or any
other obligation under any Loan Document as and when due; or
(b) Any Obligor or any Subsidiary of Borrower fails to pay at maturity, or
within any applicable period of grace, any principal of or interest on any
other borrowed money obligation or fails to observe or perform any term,
covenant or agreement contained in any agreement or obligation by which it is
bound; or
(c) Any representation or warranty made in connection with any Loan Document
was incorrect, false or misleading when made; or
(d) Any Obligor violates any covenant contained in any Loan Document; or
(e) An event of default occurs under any other Loan Document; or
(f) Final judgment for the payment of money is rendered against Obligor or any
Subsidiary of Borrower and remains undischarged for a period of 30 days during
which execution is not effectively stayed; or
(g) The sale, encumbrance or abandonment (except as otherwise expressly
permitted by this Agreement) of any of the Collateral or the making of any
levy, seizure, garnishment, sequestration or attachment thereof or thereon; or
the loss, theft, substantial damage, or destruction of any material portion of
such Property; or
(h) Any order is entered in any proceeding against Borrower or any Subsidiary
of Borrower decreeing the dissolution, liquidation or split-up thereof, and
such order shall remain in effect for 30 days; or
(i) Any Obligor or any subsidiary of Borrower makes a general assignment for
the benefit of creditors or shall petition or apply to any tribunal for the
appointment of a trustee, custodian, receiver or liquidator of all or any
substantial part of its business, estate or assets or shall commence any
proceeding under any bankruptcy, insolvency, dissolution or liquidation law of
any jurisdiction, whether now or hereafter in effect; or any such petition or
application shall be filed or any such proceeding shall be commenced against
any Obligor or any subsidiary of Borrower and the Obligor or such subsidiary by
any act or omission shall indicate approval thereof, consent thereto or
acquiescence therein, or an order shall be entered appointing a trustee,
custodian, receiver or liquidator of all or any substantial part of the assets
of any Obligor or any subsidiary of Borrower or granting relief to any Obligor
or any subsidiary of Borrower or approving the petition in any such proceeding,
and such order shall remain in effect for more than 30 days; or any Obligor or
any subsidiary of Borrower shall fail generally to pay its debts as they become
due or suffer any writ of attachment or execution or any similar process to be
issued or levied against it or any substantial part of its property which is
not released, stayed, bonded or vacated within 30 days after its issue or levy;
or
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(j) Any Obligor or any Subsidiary of Borrower conceals or removes any part of
its Property, with intent to hinder, delay or defraud any of its creditors,
makes or permits a transfer of any of its Property which may be fraudulent
under any bankruptcy, fraudulent conveyance or similar law; or makes any
transfer of its Property to or for the benefit of a creditor at a time when
other creditors similarly situated have not been paid; or
(k) A material adverse change occurs in the assets, liabilities, financial
condition, business or affairs of any Obligor or any Subsidiary of Borrower; or
(l) Any change occurs in the ownership of Borrower except as permitted by
Section 5.9; or
(m) Any individual Obligor dies or any Obligor that is not an individual
dissolves.
IF ANY EVENT OF DEFAULT OCCURS, then Bank may do any or all of the following:
(1) declare the Obligations to be immediately due and payable without notice of
acceleration or of intention to accelerate, presentment and demand or protest,
all of which are hereby expressly waived; (2) without notice to any Obligor,
terminate the Commitment and accelerate the Termination Date; (3) set off, in
any order, against the indebtedness of Borrower under the Loan Documents any
debt owing by Bank to Borrower (whether such debt is owed individually or
jointly), including, but not limited to, any deposit account, which right is
hereby granted by Borrower to Bank; and (4) exercise any and all other rights
pursuant to the Loan Documents, at law, in equity or otherwise.
REMEDIES CUMULATIVE 6.2 No remedy, right or power of Bank is exclusive of any
other remedy, right or power now or hereafter existing by contract, at law, in
equity, or otherwise, and all remedies, rights and powers are cumulative.
7. MISCELLANEOUS.
NO WAIVER 7.1 No waiver of any default or Event of Default will be a waiver
of any other default or Event of Default. No failure to exercise or delay in
exercising any right or power under any Loan Document will be a waiver thereof,
nor shall any single or partial exercise of any such right or power preclude
any further or other exercise thereof or the exercise of any other right or
power. The making of any Loan during either the existence of any default or
Event of Default, or subsequent to the occurrence of an Event of Default will
not be a waiver of any such default or Event of Default. No amendment,
modification or waiver of any Loan Document will be effective unless the same
is in writing and signed by the Person against whom such amendment,
modification or waiver is sought to be enforced. No notice to or demand on any
Person shall entitle any Person to any other or further notice or demand in
similar or other circumstances.
NOTICES 7.2 All notices required under the Loan Documents shall be in writing
and either delivered against receipt therefor, or mailed by registered or
certified mail, return receipt requested, in each case addressed to the address
shown on the signature page hereof or to such other address as a party may
designate. Except for the notices required by Section 2.1, which shall be
given only upon actual receipt by Bank, notices shall be deemed to have been
given (whether actually received or not) when delivered (or, if mailed, on the
next Business Day).
GOVERNING LAW/ARBITRATION 7.3 (a) UNLESS OTHERWISE SPECIFIED THEREIN, EACH
LOAN DOCUMENT IS GOVERNED BY TEXAS LAWS AND THE APPLICABLE LAWS OF THE UNITED
STATES OF AMERICA. To the maximum extent permitted by law, any controversy or
claim arising out of or relating to the Loans or any Loan Document, including
but not limited to any claim based on or arising from an alleged tort or an
alleged breach of any agreement contained in any of the Loan Documents, shall,
at the request of any party to the Loan or Loan Documents (either before or
after the commencement of judicial proceedings), be settled by mandatory and
binding arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association (the "AAA Rules") and pursuant to Title 9 of
the United States Code, or if Title 9 does not apply, the Texas General
Arbitration Act. In any arbitration proceeding: (i) all statutes of
limitations which would otherwise be applicable shall apply; and (ii) the
proceeding shall be conducted in the city in which the office of Bank
originating the Loans is located, by a single arbitrator if the amount in
controversy is $1 million or less, or by a panel of three arbitrators if the
amount in controversy (including but not limited to all charges, principal,
interest fees and expenses) is over $1 million. Arbitrators are empowered to
resolve any controversy by summary rulings substantially similar to summary
judgments and motions to dismiss. Arbitrators may order discovery conducted in
accordance with the Federal Rules of Civil Procedures. All arbitrators will be
selected by the process of appointment from a panel, pursuant to the AAA Rules.
Any award rendered in the arbitration proceeding will be final and binding, and
judgment upon any such award may be entered in any court having jurisdiction.
(b) If any party to the Loan or Loan Documents files a proceeding in any court
to resolve any controversy or claim, such action will not constitute a waiver
of the right of such party or a bar to the right of any other party to seek
arbitration under the provisions of this Section or that of any other claim or
controversy, and the court shall, upon motion of any party to the proceeding,
direct that the controversy or claim be arbitrated in accordance with this
Section.
(c) No provision of, or the exercise of any rights under, this Section shall
limit or impair the right of any party to the Loan Documents before, during or
after any arbitration proceeding to: (i) exercise self-help remedies including
but not limited to setoff or repossession; (ii) foreclose any Lien on or
security interest in any Collateral; or (iii) obtain relief from a court of
competent jurisdiction to prevent the dissipation, damage, destruction,
transfer, hypothecation, pledging or concealment of assets or Collateral
including, but not limited to attachments, garnishments, sequestrations,
appointments of receivers, injunctions or other relief to preserve the status
quo.
(d) To the maximum extent permitted by applicable law and the AAA Rules,
neither Bank nor any Obligor or any Affiliate, officer, director, employee,
attorney, or agent of either shall have any liability with respect to, and Bank
and each Obligor waives, releases, and agrees not to sue any of them upon, any
claim for any special, indirect, incidental and consequential damages suffered
or incurred by such Person in connection with, arising out of, or in any way
related to, this Agreement or any of the other Loan Documents. Each of Bank
and each Obligor waives, releases, and agrees not to sue each other or any of
their Affiliates, officers, directors, employees, attorneys, or agents for
punitive damages in respect of any claim in connection with, arising out of, or
in any way related to, this Agreement or any of the other Loan Documents, or
any of the transactions contemplated by this Agreement or any of the other Loan
Documents. Nothing contained herein, however, shall be construed as a waiver
of any Obligor's or the Bank's right to compel arbitration of disputes pursuant
to subparagraphs (a) and (b), above.
(e) Nothing herein shall be considered a waiver of the right or protections
afforded Bank by 12 U.S.C. 91, Texas Banking Code Art. 342-609 or any similar
statute.
(f) Each party agrees that any other party may proceed against any other liable
Person, jointly or severally, or against one or more of them, less than all,
without impairing rights against any other liable Persons. A party shall not
be required to join the principal Obligor or any other liable Persons (e.g.,
sureties or guarantors) in any proceeding against any Person. A party may
release or settle with one or more liable Persons as the party deems fit
without releasing or impairing right to proceed against any Persons not so
released.
SURVIVAL; PARTIES BOUND; TERM OF AGREEMENT 7.4 All representations,
warranties, covenants and agreements made by or on behalf of Borrower in
connection with the Loan Documents will survive the execution and delivery of
the Loan Documents; will not be affected by any investigation made by any
Person, and will bind Borrower and the successors, trustees, receivers and
assigns of Borrower and will benefit the successors and assigns of the Bank;
provided that Bank's agreement to make Loans to Borrower will not inure to the
benefit of any successor or assign of Borrower. Except as otherwise provided
herein, the term of this Agreement will be until the later of the final
maturity of the Note and the full and final payment of all Obligations and all
amounts due under the Loan Documents.
DOCUMENTARY MATTERS 7.5 This Agreement may be executed in several identical
counterparts, on separate counterparts; each counterpart will constitute an
original instrument, and all separate counterparts will constitute but one and
the same instrument. The headings and captions in the Loan Documents have been
included solely for convenience and should not be considered in construing the
Loan Documents. If any provision of any Loan Document is invalid, illegal or
unenforceable in any respect under any applicable law, the remaining provisions
will remain effective. The Loans and all other obligations and indebtedness of
Borrower to Bank are entitled to the benefit of the Loan Documents.
EXPENSES 7.6 Any provision to the contrary notwithstanding, and whether or
not the transactions contemplated by this Agreement are consummated, Borrower
agrees to pay on demand all out-of-pocket expenses (including, without
limitation, the fees and expenses of counsel for Bank) in connection with the
negotiation, preparation, execution, filing, recording, modification,
supplementing and waiver of the Loan Documents and the making, servicing and
collection of the Loans. Borrower agrees to pay Bank's standard Documentation
Preparation and Processing Fee for preparation, negotiation and handling of
this Agreement. The obligations of the Borrower under this and the following
section will survive the termination of this Agreement.
Page 4 of 6 Pages
<PAGE> 5
Credit Agreement (With Borrowing Base) August 9, 1999
Ashford.com
INDEMNIFICATION 7.7 BORROWER AGREES TO INDEMNIFY, DEFEND AND HOLD BANK
HARMLESS FROM AND AGAINST ANY AND ALL LOSS, LIABILITY, OBLIGATION, DAMAGE,
PENALTY, JUDGMENT, CLAIM, DEFICIENCY AND EXPENSE (INCLUDING INTEREST,
PENALTIES, ATTORNEYS' FEES AND AMOUNTS PAID IN SETTLEMENT) TO WHICH BANK MAY
BECOME SUBJECT ARISING OUT OF OR BASED UPON THE LOAN DOCUMENTS, OR ANY LOAN,
INCLUDING THAT RESULTING FROM BANK'S OWN NEGLIGENCE, EXCEPT AND TO THE EXTENT
CAUSED BY BANK'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
NATURE OF OBLIGATIONS 7.8 If more than one Borrower executes this Agreement,
all of the representations, warranties, covenants and agreements of Borrower
shall be joint and several obligations of all Borrowers.
USURY NOT INTENDED 7.9 Borrower and Bank intend to conform strictly to
applicable usury laws. Therefore, the total amount of interest (as defined
under applicable law) contracted for, charged or collected under this Agreement
or any other Loan Document will never exceed the Highest Lawful Rate. If Bank
contracts for, charges or receives any excess interest, it will be deemed a
mistake. Bank will automatically reform the Loan Document or charge to conform
to applicable law, and if excess interest has been received, Bank will either
refund the excess to Borrower or credit the excess on any unpaid principal
amount of the Note or any other Loan Document. All amounts constituting
interest will be spread throughout the full term of the Loan Document or
applicable Note in determining whether interest exceeds lawful amounts.
NO COURSE OF DEALING 7.10 NO COURSE OF DEALING BY BORROWER WITH BANK, NO
COURSE OF PERFORMANCE AND NO TRADE PRACTICES OR OTHER EXTRINSIC EVIDENCE OF ANY
NATURE MAY BE USED TO CONTRADICT, VARY, SUPPLEMENT OR MODIFY ANY TERM OF THIS
AGREEMENT.
8. DEFINITIONS.
Unless the context otherwise requires, capitalized terms used in Loan Documents
and not defined elsewhere shall have the meanings provided by GAAP, except as
follows:
AFFILIATE means, as to any Person, any other Person (a) that directly or
indirectly, through one or more intermediaries, controls or is controlled by,
or is under common control with, such Person; (b) that directly or indirectly
beneficially owns or holds five percent (5%) or more of any class of voting
stock of such Person; or (c) five percent (5%) or more of the voting stock of
which is directly or indirectly beneficially owned or held by the Person in
question. The term "control" means to possess, directly or indirectly, the
power to direct the management and policies of a Person, whether through the
ownership of voting securities, by contract, or otherwise. Bank is not under
any circumstances to be deemed an Affiliate of Borrower or any of its
Subsidiaries.
AUTHORITY DOCUMENTS means certificates of authority to transact business,
certificates of good standing, borrowing resolutions (with secretary's
certificate), secretary's certificates of incumbency, and other documents which
empower and enable Borrower or its representatives to enter into agreements
evidenced by Loan Documents or evidence such authority.
BUSINESS DAY means a day when the main office of Bank is open for the conduct
of commercial lending business.
COLLATERAL means all Property, tangible or intangible, real, personal or mixed,
now or hereafter subject to Security Documents, or intended so to be.
CORPORATION means corporations, partnerships, limited liability companies,
joint ventures, joint stock associations, associations, banks, business trusts
and other business entities.
GOVERNMENT ACCOUNTS means receivables owed by the U.S. government or by the
government of any state, county, municipality, or other political subdivision
as to which Bank's security interest or ability to obtain direct payment of the
proceeds is governed by any federal or state statutory requirements other than
those of the Uniform Commercial Code, including, without limitation, the
Federal Assignment of Claims Act of 1940, as amended.
GOVERNMENTAL AUTHORITY means any foreign governmental authority, the United
States of America, any state of the United States and any political subdivision
of any of the foregoing, and any agency, department, commission, board, bureau,
court or other tribunal having jurisdiction over Bank or any Obligor, or any
Subsidiary of Borrower or their respective Property.
HIGHEST LAWFUL RATE means the maximum nonusurious rate of interest permitted to
be charged by applicable Federal or Texas law (whichever permits the higher
lawful rate) from time to time in effect. To the extent that Texas law
determines the Highest Lawful Rate, the Highest Lawful Rate is the weekly rate
ceiling as defined in Chapter 1D of the Texas Credit Title, Article 5069-1D.001
et seq., Title 79 of the Texas Revised Civil Statutes, as amended.
INDEBTEDNESS means and includes (a) all items which in accordance with GAAP
would be included on the liability side of a balance sheet on the date as of
which Indebtedness is to be determined (excluding capital stock, surplus,
surplus reserves and deferred credits); (b) all guaranties, endorsements and
other contingent obligations in respect of, or any obligations to purchase or
otherwise acquire, Indebtedness of others, and (c) all Indebtedness secured by
any Lien existing on any interest of the Person with respect to which
indebtedness is being determined, in Property owned subject to such Lien,
whether or not the Indebtedness secured thereby has been assumed.
LEGAL REQUIREMENT means any law, ordinance, decree, requirement, order,
judgment, rule, regulation (or interpretation of any of the foregoing) of, and
the terms of any license or permit issued by, any Governmental Authority.
LIEN shall mean any mortgage, pledge, charge, encumbrance, security interest,
collateral assignment or other lien or restriction of any kind, whether based
on common law, constitutional provision, statute or contract.
LOAN DOCUMENTS means this Agreement, the agreements, documents, instruments and
other writings contemplated by this Agreement or listed on Annex I, all other
assignments, deeds, guaranties, pledges, instruments, certificates and
agreements now or hereafter executed or delivered to the Bank pursuant to any
of the foregoing, and all amendments, modifications, renewals, extensions,
increases and rearrangements of, and substitutions for, any of the foregoing.
OBLIGATIONS means all principal, interest and other amounts which are or become
owing under this Agreement, the Note or any other Loan Document.
OBLIGOR means each Borrower and any guarantor, surety, co-signer, general
partner or other person who may now or hereafter be obligated to pay all or any
part of the Obligations.
ORGANIZATIONAL DOCUMENTS means, with respect to a corporation, the certificate
of incorporation, articles of incorporation and bylaws of such corporation;
with respect to a limited liability company, the articles of organization,
regulations and other documents establishing such entity, with respect to a
partnership, joint venture, or trust, the agreement, certificate or instrument
establishing such entity; in each case including all modifications and
supplements thereof as of the date of the Loan Document referring to such
Organizational Document and any and all future modifications thereof which are
consented to by Bank.
PARTIES means all Persons other than Bank executing any Loan Document.
PERSON means any individual, Corporation, trust, unincorporated organization,
Governmental Authority or any other form of entity.
PROPER FORM means in form and substance satisfactory to the Bank.
PROPERTY means any interest in any kind of property or asset, whether real,
personal or mixed, tangible or intangible.
SECURITY DOCUMENTS means those Security Agreements listed on Annex I and all
supplements, modifications, amendment, extensions thereof and all other
agreements hereafter executed and delivered to Bank to secure the Loans.
SUBORDINATED DEBT means any Indebtedness subordinated to Indebtedness due Bank
pursuant to a written subordination agreement in Proper Form by and among Bank,
subordinated creditor and Borrower which at a minimum must prohibit: (a) any
action by subordinated creditor which will result in an occurrence of an Event
of Default or default under this Agreement, the subordination agreement or the
subordinated Indebtedness; and (b) upon the happening of any Event of Default
or default under any Loan Document, the subordination agreement, or any
instrument evidencing the subordinated Indebtedness (i) any payment of
principal and interest on the subordinated Indebtedness; (ii) any act to compel
payment of principal or interest on subordinated Indebtedness; and (iii) any
action to realize upon any Property securing the subordinated Indebtedness.
SUBSIDIARY means, as to a particular parent Corporation, any Corporation of
which 50% or more of the indicia of equity rights is at the time directly or
indirectly owned by such parent Corporation or by one or more Persons
controlled by, controlling or under common control with such parent
Corporation.
Page 5 of 6 Pages
<PAGE> 6
Credit Agreement (With Borrowing Base) August 9, 1999
Ashford.com
THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN BANK AND THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF BANK AND THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN BANK AND THE PARTIES.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
BORROWER: ASHFORD.COM
By: /s/ David F. Gow
--------------------------------------------------------------
Name: David F. Gow
------------------------------------------------------------
Title: CFO
-----------------------------------------------------------
Address: 3800 Buffalo Speedway, Suite 400, Houston, Texas 77098
---------------------------------------------------------
BANK: CHASE BANK OF TEXAS, NATIONAL ASSOCIATION
By: /s/ Michael A. Cerda
--------------------------------------------------------------
Name: Michael A. Cerda
------------------------------------------------------------
Title: Vice President
-----------------------------------------------------------
Address: 717 Travis Street, 7th Floor South, Houston, Texas 77002
---------------------------------------------------------
EXHIBITS: ANNEXES:
A Borrowing Base Report I Loan Documents
B Request for Loan II Subsidiaries
C Reporting Requirements, Financial Covenants,
and Compliance Certificate
Page 6 of 6 Pages
<PAGE> 7
EXHIBIT A
BORROWING BASE REPORT
INVENTORY
<TABLE>
<S> <C> <C> <C> <C>
BORROWING BASE REPORT FOR PERIOD BEGINNING:___________________ AND ENDING ______________________ ("CURRENT PERIOD")
REQUIRED BY THE CREDIT AGREEMENT DATED THE EFFECTIVE DATE (AS AMENDED, RESTATED, AND SUPPLEMENTED FROM TIME TO TIME, THE
"AGREEMENT") BY AND BETWEEN ASHFORD.COM AND CHASE BANK OF TEXAS, NATIONAL ASSOCIATION
- -----------------------------------------------------------------------------------------------------------------------
THE BORROWING BASE REPORT MUST BE SUBMITTED TO BANK WITHIN 15 DAYS OF THE LAST DAY OF EACH CALENDAR MONTH AND WITH EACH
REQUEST FOR A LOAN. BORROWER MUST PROVIDE THE FOLLOWING ALONG WITH THE BORROWING BASE REPORT: MONTHLY INVENTORY LISTING
AND SUMMARY.
- -----------------------------------------------------------------------------------------------------------------------
Line 1. Total Inventory as of the end of the Current Period $
INELIGIBLE INVENTORY AS OF THE END OF THE CURRENT PERIOD: -------------
2. Offsite (without landlord's waiver) or out of territory locations $
--------------
3. Private label $
--------------
4. Obsolete $
--------------
5. Returned/damaged $
--------------
6. Consigned/unowned $
--------------
7. Subject to Purchase Money Security Interest $
--------------
8. Slow moving (older than 120 days) $
--------------
9. Inventory classified as long term assets $
--------------
10. Used $
--------------
11. Remanufactured $
--------------
12. In transit $
--------------
13. Material and supplies $
--------------
14. Other Ineligible Inventory $
--------------
15. Total Ineligible Inventory as of the end of the
Current Period (Lines 2+3+4+5+6+7+8+9+10+11+
12+13+14) $
--------------
16. Total Eligible Inventory as of the end of the
Current Period (Line 1 - Line 15) $
-------------
17. Multiplied by: Inventory Advance Factor 50%
18. Equals: Total BORROWING BASE (not to exceed $5,000,000.00) as of
the end of the Current Period $
-------------
19. Less: Aggregate principal amount outstanding under
the Note as of the end of the Current Period $
-------------
20. Equals: Amount available for borrowing subject to the terms of
the Agreement, if positive; or amount due, if negative $
-------------
The term "INVENTORY" has the meaning as set forth in the Texas Business and Commerce Code in effect as of the date of
the Agreement. Inventory shall be valued at the lesser of: (a) market value; and (b) cost. "OTHER INELIGIBLE INVENTORY"
means that Inventory of Borrower that is not subject to a first and prior Lien in favor of Bank, that Inventory that is
subject to any Lien not in favor of Bank and that Inventory of Borrower as shall be deemed from time to time to be in
the sole judgment of Bank, ineligible for purposes of determining the Borrowing Base. All other terms not defined
herein shall have the respective meanings as in the Agreement.
Borrower certifies that the above information and computations are true, correct, complete and not misleading as of the
date hereof.
Borrower: ASHFORD.COM
By:____________________________________________________________________________________________________________________
Name:__________________________________________________________________________________________________________________
Title:__________________________________________________ Date:______________________________________________________
Address:_______________________________________________________________________________________________________________
</TABLE>
EXHIBIT A Page 1 of 1
<PAGE> 8
EXHIBIT B
REQUEST FOR LOAN
LETTERHEAD OF BORROWER
Chase Bank of Texas, National Association
717 Travis, 7th Floor
Houston, Texas 77002
Attention: Michael A. Cerda, Vice President
Re: Request for Loan under Agreement
Ladies and Gentlemen:
This letter confirms our oral or telephonic request of _______________
__________, 19____, for a Loan in accordance with that certain Credit Agreement
(as amended, restated and supplemented from time to time, the "AGREEMENT")
dated as of the Effective Date between you and us. Any term defined in the
Agreement and used in this letter has the same meaning as in the Agreement.
The proposed Loan is to be in the amount of $_______________ and is to
be made on ____________________, 19____ , which is a Business Day at least
_______ Business Days after the date of this letter. The proceeds of the
proposed Loan should be (check one:) [ ] deposited into account number_________
with the Bank [ ] ___________________________________________________________.
The undersigned hereby certifies that:
(1) The representations and warranties made by the Borrower or by
any other Person in the Agreement and the other Loan Documents
are true and correct on and as of this date as though made on
this date.
(2) The proposed Loan complies with all applicable provisions of
the Agreement.
(3) No Event of Default has occurred and is continuing.
(4) A Borrowing Base Report is attached.
Sincerely,
ASHFORD.COM
By:____________________________________
Name:__________________________________
Title:_________________________________
EXHIBIT B Page 1 of 1
<PAGE> 9
ANNEX I
LOAN DOCUMENTS
"Loan Documents" includes, but is not limited to, the following:
1. Agreement
2. Note
3. Guaranty of Ashford Buying Company and all other Subsidiaries of
Borrower, now or hereafter existing
4. Borrowing Base Report
5. Compliance Certificate
6. Security Agreements, in Proper Form, covering:
Accounts and general intangibles
Inventory
7. Financing Statements
8. Other (specify): Landlord Waivers
9. Certified Copies of Organizational and Authority Documents of Borrower
and Guarantors
10. Insurance policies and certificates (including, business interruption
insurance)
11. Financial Statements of: Borrower and Guarantors
12. UCC search
Loan Documents - ANNES I Page 1 of 1
<PAGE> 10
ANNEX II
SUBSIDIARIES
IF NONE AS OF THE EFFECTIVE DATE, CHECK [ ] NONE
Subsidiary Name State Where
and Address Incorporated % Owned
- --------------- ------------ ---------
Ashford Buying Company
Delaware
- --------------------- ---------
- ---------------------
- ---------------------
ANNEX II Page 1 of 1
<PAGE> 11
EXHIBIT C to Agreement between
Ashford.com ("Borrower") and Chase Bank of Texas, National Association ("Bank")
dated the Effective Date as same may be amended, restated and supplemented in
writing.
REPORTING REQUIREMENTS, FINANCIAL COVENANTS AND
COMPLIANCE CERTIFICATE FOR CURRENT REPORTING PERIOD ENDING ________________,
199__ ("END DATE")
<TABLE>
<S> <C>
A. REPORTING PERIOD. THIS EXHIBIT WILL BE IN PROPER FORM AND SUBMITTED WITHIN 15 DAYS OF THE END OF EACH CALENDAR
MONTH INCLUDING THE LAST REPORTING PERIOD OF THE FISCAL YEAR AND WITH THE FISCAL YEAR END FINANCIAL STATEMENT.
BORROWER'S FISCAL YEAR ENDS ON March 31, 2000.
====================================================================================================================================
B. Financial Reporting. Borrower will provide the following financial information within the times indicated: Compliance
Certificate
====================================================================================================================================
WHO WHEN DUE WHAT (Circle)
- ------------------------------------------------------------------------------------------------------------------------------------
BORROWER (i) Within 90 days of fiscal year Annual financial statements Yes No
end prepared on a consolidating and
consolidated basis (balance
sheet, income statement, cash
flow statement) and audited
(with unqualified opinion) by
independent certified public
accountants satisfactory to
Bank, accompanied by Compliance
Certificate
--------------------------------------------------------------------------------------------
(ii) Within 15 days of each Unaudited interim financial Yes No
Reporting Period End Date, statements accompanied by
including final period of fiscal Compliance Certificate
year
--------------------------------------------------------------------------------------------
(iii) Within 15 days of each month Borrowing Base Report (Exhibit Yes No
end A), along with inventory listing
and inventory summary.
====================================================================================================================================
====================================================================================================================================
C. FINANCIAL COVENANTS. Borrower will comply with the COMPLIANCE CERTIFICATE
following financial covenants, defined in accordance
with GAAP and the definitions in Section 8, and
incorporating the calculation adjustments indicated on
the Compliance Certificate:
- ------------------------------------------------------------------------------------------------------------------------------------
REQUIRED ACTUAL REPORTED
-------- --------------- Compliance
Except as specified otherwise, each covenant will be For Current Reporting Period/as of the End Date (Circle)
maintained at all times and reported for each
Reporting Period or as of each Reporting Period End Yes No
Date, as appropriate:
- ------------------------------------------------------------------------------------------------------------------------------------
1. Maintain a Tangible Net Worth as adjusted, for the Stockholders' Equity $_______
fiscal quarter indicated below equalto or greater Minus: Goodwill $_______
than the sum of (a) an amount at least equal to 25% of Other Intangible Assets $_______
Borrower's Budgeted Tangible Net Worth indicated Loans to Affiliates $_______
below, (b) 50% of net income for such fiscal quarter Plus: Subordinated Debt
and (c) the proceeds of any equity offering received to Shareholders $_______
in such fiscal quarter:
= Actual Tangible Net Worth as adjusted $_______
Fiscal Quarter Ending Date Budgeted TNW
-------------------------- ------------ 25% of Budgeted Tangible Net Worth $_______
6/30/99 $29,336,045.00 + 50% of net income for fiscal quarter $_______
9/30/99 $22,278,945.00 + Proceeds of equity offering $_______
= Required Tangible Net Worth $_______
12/31/99 $15,417,321.00
Actual Tangible Net Worth greater than
3/31/00 $9,770,084.00 Required Tangible Net Worth Yes No
- ------------------------------------------------------------------------------------------------------------------------------------
2. Maintain a ratio of Indebtedness under the Note to Indebtedness under Note $_______ Yes No
Liquid Assets of no greater than 1.00 to 1:00, with Liquid Assets $_______
the exception of the month of November 1999 when the
ratio shall be no greater than 2.25 to 1:00 and the Ratio ________
month of December 1999 when the ratio shall be no
greater than 1.50 to 1:00 (Section 4.9)
====================================================================================================================================
</TABLE>
EXHIBIT C Page 1 of 2 Pages
<PAGE> 12
<TABLE>
<S> <C>
====================================================================================================================================
D. Other Required Covenants to be maintained and to be certified. COMPLIANCE CERTIFICATE
====================================================================================================================================
REQUIRED ACTUAL REPORTED COMPLIANCE
-------- --------------- (CIRCLE)
- ------------------------------------------------------------------------------------------------------------------------------------
(i) Capital expenditures not to exceed a cumulative $_______________________ Yes No
amount of $900,000.00 during the period from the
Effective Date to and including the Termination Date
(Section 5.10).
- ------------------------------------------------------------------------------------------------------------------------------------
(ii) Maintain business interruption insurance with Yes No
such insurers, in such amounts and subject to such
terms satisfactory to Bank (Section 4.2).
- ------------------------------------------------------------------------------------------------------------------------------------
(iii) No Liens or other Indebtedness except as $________________________ Yes No
permitted by Sections 5.1 and 5.2 respectively.
- ------------------------------------------------------------------------------------------------------------------------------------
(iv) No change in ownership, except as permitted under Yes No
Section 5.9. (Section 5.4).
- ------------------------------------------------------------------------------------------------------------------------------------
(v) Robert Shaw and James Whitcomb to remain actively Yes No
involved in Borrower's management. (Section 5.6).
- ------------------------------------------------------------------------------------------------------------------------------------
(vi) No change in nature of business (Section 5.6). Yes No
- ------------------------------------------------------------------------------------------------------------------------------------
(vii) No equity acquisitions except where Yes No
consideration is paid through issuance of Borrower's $_________________________
capital stock or the payment of cash in a cumulative
amount not to exceed $500,000.00 during the period
from the Effective Date to and including the
Termination Date; provided no Default or Event of
Default has occurred or is imminent. (Section 5.9).
====================================================================================================================================
THE ABOVE SUMMARY REPRESENTS SOME OF THE COVENANTS AND AGREEMENTS CONTAINED IN THE AGREEMENT AND DOES NOT IN ANY WAY
RESTRICT OR MODIFY THE TERMS AND CONDITIONS OF THE AGREEMENT. IN CASE OF CONFLICT BETWEEN THIS EXHIBIT C AND THE
AGREEMENT, THE AGREEMENT SHALL CONTROL.
The undersigned hereby certifies that the above information and computations are true and correct and not misleading as
of the date hereof, and that since the date of the Borrower's most recent Compliance Certificate (if any):
[ ] No default or Event of Default has occurred under the Agreement during the current Reporting Period, or
been discovered from a prior period, and not reported.
[ ] A default or Event of Default (as described below) has occurred during the current Reporting Period or
has been discovered from a prior period and is being reported for the first time and:
[ ] was cured on ___________________________________ .
[ ] was waived by Bank in writing on ________________________________.
[ ] is continuing.
Description of Event of Default: ___________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
Executed this ________ day of ______, 19__ .
BORROWER: ASHFORD.COM
SIGNATURE:__________________________________________________________________________________________________________________________
NAME:_______________________________________________________________________________________________________________________________
TITLE: (Chief Financial Officer or President)
-------------------------------------------------------------------------------------------------------------------
ADDRESS:____________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________
</TABLE>
EXHIBIT C Page 2 of 2 Pages
<PAGE> 13
REVOLVING CREDIT NOTE
(this "Note")
<TABLE>
<S> <C>
FOR VALUE RECEIVED, ON OR BEFORE the Termination Date, ASHFORD.COM ("Borrower," jointly and severally if more than
one), promises to pay to the order of Chase Bank of Texas, National Association ("Bank") at its office at 712 Main
Street, Houston, Harris County, Texas 77252-2558, or at such other location as Bank may designate, in immediately
available funds and lawful money of the United States of America, the sum of FIVE MILLION AND NO/100THS UNITED STATES
DOLLARS (U.S. $5,000,000.00) or the aggregate unpaid amount of all advances hereunder, whichever is lesser, plus
interest on the unpaid principal balance outstanding from time to time at a rate per annum equal to the lesser of (i)
the Prime Rate (as hereinafter defined) from time to time in effect (the "Stated Rate") or (ii) the Highest Lawful Rate.
If the Stated Rate at any time exceeds the Highest Lawful Rate, the actual rate of interest to accrue on the unpaid
principal amount of this Note will be limited to the Highest Lawful Rate, but any subsequent reductions in the Stated
Rate due to reductions in the Prime Rate will not reduce the interest rate payable upon the unpaid principal amount of
this Note below the Highest Lawful Rate until the total amount of interest accrued on this Note equals the amount of
interest which would have accrued if the Stated Rate had at all times been in effect. "Prime Rate" means the rate
determined from time to time by Bank as its prime rate. The Prime Rate shall change automatically from time to time
without notice to Borrower or any other person. THE PRIME RATE IS A REFERENCE RATE AND MAY NOT BE BANK'S LOWEST RATE.
This Note is the Revolving Credit Note described in Section 1.1 of the Credit Agreement (Borrowing Base) between
Borrower and Bank dated as of July 14, 1999 (as amended, restated and supplemented from time to time, the "Agreement")
and sometimes referred to therein as the Note. Capitalized terms used in this Note have the meanings used in the
Agreement.
Accrued and unpaid interest shall be due and payable quarterly, beginning on October 14, 1999, and continuing on the
fourteenth day of the first month of each three month period thereafter and at Termination Date when all unpaid
principal and accrued and unpaid interest shall be finally due and payable. Borrower must make the payments required by
Sections 1.3 and 1.4 of the Agreement.
Interest shall be computed on the basis of the actual number of days elapsed and a year comprised of 360 days,
unless such calculation would result in a usurious interest rate, in which case interest will be calculated on the basis
of a 365 or 366 day year, as applicable.
All past-due principal and, to the extent permitted by applicable law, interest on this Note, shall, at Bank's
option, bear interest at the Highest Lawful Rate, or if applicable law shall not provide for a maximum nonusurious rate
of interest, at a rate per annum equal to eighteen percent (18%).
The unpaid principal balance of this Note at any time shall be the total amounts advanced by Bank, less the amount
of all payments of principal. Absent manifest error, the records of Bank shall be conclusive as to amounts owed.
Subject to the terms and conditions of the Agreement, Borrower may use all or any part of the credit provided for herein
at any time before the Termination Date.
Time is of the essence. Borrower may at any time pay the full amount or any part of this Note without the payment
of any premium or fee. At Bank's sole option, all payments may be applied to accrued interest, to principal, or to
both.
If any Event of Default occurs, then Bank may exercise any and all rights and remedies under the Loan Documents, at
law, in equity or otherwise.
Each and all Obligors severally waive notice, demand, presentment for payment, notice of nonpayment, notice of
intent to accelerate, notice of acceleration, protest, notice of protest, and the filing of suit and diligence in
collecting this Note and all other demands and notices, and consent and agree that their liabilities and obligations
shall not be released or discharged by any or all of the following, whether with or without notice to them or any of
them, and whether before or after the stated maturity hereof: (i) extensions of the time of payment; (ii) renewals;
(iii) acceptances of partial payments; (iv) releases or substitutions of any collateral or any Obligor; and (v) failure,
if any, to perfect or maintain perfection of any security interest in any collateral. Each Obligor agrees that
acceptance of any partial payment shall not constitute a waiver.
Bank and any subsequent owner or holder hereof reserves the right, in its sole discretion, without notice to
Borrower, to sell participations or assign its interest or both, in all or any part of this Note. For purposes of this
Note, any assignee or subsequent holder of this Note will be considered the "Bank," and each successor to Borrower will
be considered the "Borrower."
IN WITNESS WHEREOF, Borrower has executed this Note effective as July 14, 1999
BORROWER: ASHFORD. COM
By:_________________________________________________________________________________________________________________________________
Typed Name:_________________________________________________________________________________________________________________________
Title:______________________________________________________________________________________________________________________________
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FOR BANK USE ONLY: ACCOUNT #0040430348 NOTE #_______________________
At time of booking _________________________ Administrator: Lula M. Johnson Attorney: Midge Hirsch
Agreement Effective Date: July 14, 1999
Maximum Amount: $5,000,000.00
Stated Termination Date: July 13, 2000
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All subsequent Amendments, if any, should be attached to the original Note.
PAGE 1 OF 1
<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.
/s/ Arthur Andersen LLP
Houston, Texas
August 18, 1999
<PAGE> 1
EXHIBIT 24.2
ASHFORD.COM, INC.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, the each individual whose signature appears
below constitutes and appoints Kenneth E. Kurtzman and James H. Whitcomb, Jr.
and each of them, her true and lawful attorneys-in-fact and agents with full
power of substitution, for her and in her name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to the 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 she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or her substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
/s/ Colombe M. Nicholas
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Colombe M. Nicholas, Director August 23, 1999
<PAGE> 1
EXHIBIT 99.2
[DATAMONITOR LETTERHEAD]
August 19, 1999
To Whom It May Concern:
After reviewing the information provided by Ashford.com regarding luxury goods,
Datamonitor, Inc. gives it consent for Ashford.com to reference Datamonitor,
Inc. in its S-1 Filing. We found the information to be consistent with our
numbers and hereby authorize Ashford.com to present is findings in any
appropriate manner.
Sincerely,
JOSEPH A. DENUAREZZ
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Joseph A. Denuarezz
Human Resources Assistant
<PAGE> 1
EXHIBIT 99.3
[GLOBAL INDUSTRY ANALYSTS, INC. LETTERHEAD]
August 16, 1999
To Who It May Concern
The information and market estimates attributed to Global Industry Analysts,
Inc. (GIA) on page 33 of Form S-1 (Ashford.com, Inc.) are accurate and true.
These numbers are based on GIA's research. Ashford.com, Inc. has our consent to
use this information in Form S-1 and any other company materials.
Please direct further questions in this regard to the undersigned.
Sincerely,
/s/ STEVE YERABATI
Steve Yerabati
Director, Research Operations
