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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-27357
ASHFORD.COM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0617905
(State or other jurisdiction of (I.R.S. Employer
incorporation or Identification Number)
organization)
3800 BUFFALO SPEEDWAY, SUITE 400
HOUSTON, TEXAS 77098
(Address of principal executive offices)
-----------------------------------------
(713) 369-1300
(Registrant's telephone number, including area code)
-----------------------------------------
Indicate by check |X| whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days
(1) Yes |X| No
------- --------
(2) Yes No |X|
------- --------
As of September 30, 2000, there were 46,146,064 shares of the Company's
common stock outstanding.
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<PAGE>
ASHFORD.COM, INC.
FORM 10-Q
INDEX
PART I. CONSOLIDATED FINANCIAL INFORMATION PAGE
----
ITEM 1. Consolidated Financial Statements.................................. 3
Consolidated Balance Sheets at September 30, 2000 and March
31, 2000........................................................... 3
Consolidated Statements of Operations for the three and six
months ended September 30, 2000 and 1999 .......................... 4
Consolidated Statements of Cash Flows for the six months
ended September 30, 2000 and 1999 ................................. 5
Notes to Consolidated Financial Statements......................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 8
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.........12
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings..................................................22
ITEM 6. Exhibits and Reports on Form 8-K...................................22
SIGNATURES..................................................................24
2
<PAGE>
PART I. CONSOLIDATED FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ASHFORD.COM, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share amounts)
SEPTEMBER 30, MARCH 31,
2000 2000
------------ ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ...................... $ 25,880 $ 46,474
Certificates of deposit ........................ 120 120
Accounts receivable, net of allowance for
doubtful accounts of $146 and $25, respectively 2,854 4,527
Merchandise inventory .......................... 25,228 24,205
Prepaids and other ............................. 27,790 79,793
--------- ---------
Total current assets .......................... 81,872 155,119
Property and equipment, net of accumulated
depreciation of $3,402 and $1,159, respectively 9,956 7,837
Purchased intangibles, net of accumulated
amortization of $5,650 and $2,141, respectively 9,733 11,365
Other assets ..................................... 2,233 3,287
--------- ---------
Total assets ..................................... $ 103,794 $ 177,608
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ....... $ 6,643 $ 6,221
Other long-term liabilities ...................... 117 117
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value,
10,000,000 shares authorized, no shares issued
and outstanding at September 30, 2000 and
March 31, 2000, respectively ................... -- --
Common stock, $.001 par value, 100,000,000 shares
authorized, 46,146,064 and 44,956,224 shares
issued and outstanding at September 30, 2000
and March 31, 2000, respectively ............... 46 45
Additional paid-in capital ....................... 263,782 260,563
Subscriptions receivable ......................... (1,156) (780)
Deferred compensation ............................ (12,653) (15,232)
Accumulated deficit .............................. (152,985) (73,326)
--------- ---------
Total stockholders' equity ..................... 97,034 171,270
--------- ---------
Total liabilities and stockholders' equity ....... $ 103,794 $ 177,608
========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
3
<PAGE>
ASHFORD.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ................................ $ 12,013 $ 4,400 $ 25,118 $ 8,023
Cost of sales ............................ 9,720 4,175 20,386 7,179
-------- -------- -------- --------
Gross profit (1) ......................... 2,293 225 4,732 844
Operating expenses:
Marketing and sales .................... 5,821 5,080 12,610 7,474
General and administrative ............. 5,858 2,605 11,759 3,658
Depreciation and amortization .......... 31,734 1,556 61,270 2,209
-------- -------- -------- --------
Total operating expenses .............. 43,413 9,241 85,639 13,341
-------- -------- -------- --------
Loss from operations ..................... (41,120) (9,016) (80,907) (12,497)
Interest income, net ..................... 564 463 1,249 765
-------- -------- -------- --------
Net loss ................................. $(40,556) $ (8,553) $(79,658) $(11,732)
======== ======== ======== ========
Net loss per share, basic and
diluted ................................. $ (0.89) $ (0.57) $ (1.76) $ (0.88)
======== ======== ======== ========
Pro forma net loss per share,
basic and diluted (3) ................... $ (0.89) $ (0.27) $ (1.76) $ (0.40)
======== ======== ======== ========
Shares used to compute net loss per share:
Basic and diluted (2) .................. 45,598 14,920 45,350 13,271
Pro forma basic and diluted (3) ........ 45,598 31,117 45,350 29,068
</TABLE>
(1) Includes the reclassification of certain promotional costs from marketing
and sales to cost of sales related to the adoption of the Emerging Issues
Task Force Issue No. 00-14, "Accounting for Certain Sales Incentives." All
periods presented have been reclassified for consistent presentation.
(2) Includes shares associated with the conversion of preferred stock into
common stock as of the closing of the Company's initial public offering on
September 22, 1999.
(3) Includes shares associated with the conversion of preferred stock into
common stock as if the conversion occurred on April 1, 1998, or at the date
of original issuance, if later.
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE>
ASHFORD.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................... $ (79,658) $ (11,732)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .............. 61,270 2,209
Changes in assets and liabilities:
Accounts receivable ....................... 1,673 (638)
Merchandise inventory ..................... (1,023) (11,829)
Prepaids and other ........................ 696 (3,122)
Other assets .............................. (389) (737)
Accounts payable and accrued liabilities .. 923 2,608
--------- ---------
Net cash used in operating activities ... (16,508) (23,241)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........ (4,222) (1,967)
Internet domain and other intangible asset
purchases ................................ (120) (1,564)
--------- ---------
Net cash used in investing activities ... (4,342) (3,531)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from initial public offering .. -- 73,963
Issuance of Series B preferred stock ....... -- 29,100
Issuance of Series C preferred stock ....... -- 16,304
Proceeds from exercise of stock options .... 148 --
Net proceeds from the issuance of common
stock .................................... 108 --
--------- ---------
Net cash provided by financing activities 256 119,367
--------- ---------
Net (decrease) increase in cash and cash
equivalents .............................. (20,594) 92,595
CASH AND CASH EQUIVALENTS:
Beginning of period ........................ 46,474 893
--------- ---------
End of period .............................. $ 25,880 $ 93,488
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Issuance of common stock in connection with
Internet domain and other intangible
asset purchases .......................... $ 1,812 $ --
Issuance of warrants in connection with
purchases of fixed assets ................ 702 --
The accompanying notes are an integral part of
these consolidated financial statements.
5
<PAGE>
ASHFORD.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying unaudited consolidated financial statements have been
prepared by Ashford.com, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion
of management, all adjustments, consisting only of normal recurring
adjustments, and disclosures necessary for a fair presentation of these
financial statements have been included. These financial statements should be
read in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended March 31,
2000. Results for the three and six months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for any future
quarter or for the year ending March 31, 2001.
The Company has incurred significant operating losses since inception.
Management believes that current cash balances and available borrowing
capacity will be sufficient to meet anticipated cash needs for at least the
next 12 months.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of 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.
RECLASSIFICATION OF PRIOR PERIOD BALANCES
Certain prior period balances have been reclassified for consistent
presentation.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding. Shares associated with stock options and warrants are not
included because they are antidilutive. The Company's convertible preferred
stock automatically converted into common stock effective upon the closing of
the Company's initial public offering on September 22, 1999 and are included
in the calculation of weighted average number of shares as of that date.
PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the
automatic conversion of the Company's convertible preferred stock into shares
of the Company's common stock effective upon the closing of the Company's
initial public offering as if such conversion occurred on April 1, 1998, or
at the date of original issuance, if later.
6
<PAGE>
The following table sets forth the computation of basic and pro forma net
loss per share for the periods indicated (in thousands, except per share
amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
Numerator:
Net loss ..................... $(40,556) $ (8,553) $(79,658) $(11,732)
======== ======== ======== ========
Denominator:
Weighted average shares ...... 45,598 14,920 45,350 13,271
-------- -------- -------- --------
Denominator for basic and
diluted calculation ......... 45,598 14,920 45,350 13,271
Series A convertible preferred
stock ....................... -- 8,570 -- 9,033
Series B convertible preferred
stock ....................... -- 6,449 -- 6,172
Series C convertible preferred
stock ....................... -- 1,178 -- 592
-------- -------- -------- --------
Denominator for pro forma
calculation ................. 45,598 31,117 45,350 29,068
======== ======== ======== ========
Net loss per share, basic and
diluted ....................... $ (0.89) $ (0.57) $ (1.76) $ (0.88)
======== ======== ======== ========
Pro forma net loss per share,
basic and diluted ............. $ (0.89) $ (0.27) $ (1.76) $ (0.40)
======== ======== ======== ========
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2000, the Emerging Issues Task Force released Issue No. 00-14 (EITF
00-14) "Accounting for Certain Sales Incentives," which provides guidance on
the accounting for certain sales incentives offered by companies to their
customers such as discounts, coupons, rebates and free products or services.
EITF 00-14 addresses the recognition, measurement and income statement
classification for sales incentives offered voluntarily by a vendor without
charge to customers that can be used in, or that are exercisable by a
customer as a result of a single exchange transaction. The accompanying
financial statements include the reclassification of free product and service
incentives delivered to customers at the time of sale, from marketing and
sales to cost of sales, related to the adoption of EITF 00-14. All periods
presented have been reclassified for consistent presentation.
In July 2000, the EITF reached a consensus on EITF 00-10, "Accounting for
Shipping and Handling Fees and Costs." This consensus requires that all
amounts billed to a customer in a sale transaction related to shipping and
handling, if any, represent revenue and should be classified as revenue. The
Company already classifies shipping charges to customers as revenue. In
September 2000, the EITF concluded that the classification of shipping and
handling costs should be disclosed pursuant to Accounting Principles Board
(APB) Opinion No. 22, "Disclosure of Accounting Policies." If shipping and
handling costs are significant and are not included in cost of sales,
companies should disclose both the amount of such costs and which line item
on the income statement includes that amount. Shipping and handling costs
cannot be netted against sales. The Company classifies inbound and outbound
shipping costs as costs of sales. The Company generally does not impose
separate handling charges on customers. Costs attributable to receiving,
inspecting and warehousing inventories and picking, packaging and preparing
customers' orders for shipment are classified as marketing and sales expense
and totaled $1.4 million and $249,000 for the six months ended September 30,
2000 and 1999, respectively.
2. SIGNIFICANT ACQUISITIONS
In January 2000, the Company entered into a merger agreement with an
online fragrance retailer. In connection with the agreement, the Company paid
an aggregate purchase price of $7.5 million representing $3.7 million of
cash, including the assumption of certain liabilities, and 330,354 shares of
the Company's common stock. The agreement further provided that the Company
issue up to an additional 736,514 shares of its common stock to the online
retailer upon the resolution of certain authorized dealer relationship
contingencies as set forth in the agreement. In August 2000, the Company
issued 658,998 shares of its common stock in
7
<PAGE>
connection with the resolution of the authorized dealer relationship
contingencies. The fair market value of the shares issued totaled
approximately $1.8 million and is included in other assets in the
accompanying consolidated balance sheet.
3. REVOLVING CREDIT FACILITY
During September 2000, the Company executed a three-year, $25 million
revolving credit facility with Congress Financial Corporation, a unit of
First Union National Bank. The credit facility is to be used for working
capital needs and is secured by the Company's assets. Availability under the
credit facility is determined pursuant to a borrowing base as defined in the
agreement ($10.6 million at September 30, 2000). Amounts outstanding under
the credit facility bear interest at the prime rate or LIBOR plus 250 basis
points, as elected by the Company. There were no amounts outstanding under
the revolving credit facility as of September 30, 2000.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE DISCUSSION IN THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS
THAT MAY AFFECT FUTURE RESULTS" AS WELL AS THOSE DISCUSSED IN THIS SECTION AND
ELSEWHERE IN THIS REPORT, AND THE RISKS DISCUSSED IN THE "RISK FACTORS THAT MAY
AFFECT FUTURE RESULTS" SECTION INCLUDED IN OUR ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED MARCH 31, 2000.
OVERVIEW
We were incorporated on March 6, 1998 and commenced operations and began
offering products for sale on our Web site in April 1998. We initially focused
exclusively on the sale of new and vintage watches. 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.
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 February,
May and June due to Valentine's Day, graduation gift giving, Mother's Day and
Father's Day. We expect that these trends will continue in future periods.
Our gross margin will fluctuate in future periods based on factors such
as:
o product sales mix;
o the mix of direct and indirect sources of inventory;
o pricing strategy;
o promotional activities;
o inventory management; and
o inbound and outbound shipping costs.
8
<PAGE>
We have incurred net losses since inception. We expect to generate
negative cash flows during future periods as we pursue marketing and advertising
campaigns to attract new customers and build our brand identity, develop new
strategic partnerships and invest in new operational and customer service
infrastructure. Our ability to become profitable depends on our ability to
generate and sustain substantially higher net sales while maintaining reasonable
expense levels, both of which are uncertain. 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.
We have a limited operating history upon which to base an evaluation of
our business and prospects. 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 and could limit or delay our ability to generate net
profits in any future period.
RESULTS OF OPERATIONS
NET SALES
Net sales consist primarily of product sales and are net of product
returns and promotional discounts. Net sales increased from $4.4 million during
the quarter ended September 30, 1999 to $12.0 million during the quarter ended
September 30, 2000 and from $8.0 million for the six months ended September 30,
1999 to $25.1 million for the six months ended September 30, 2000. The growth in
net sales is primarily related to an increase in units sold due to the growth of
the our customer base, growth in the rate of repeat purchases from existing
customers, the introduction of new product lines during the latter part of
fiscal 2000 and the growth of our coporate sales business.
COST OF SALES
Cost of sales consists primarily of the cost of products sold, free
product and service incentives delivered to customers at the time of sale,
inbound and outbound shipping costs and warranty and inventory obsolescence
costs. Cost of sales increased as net sales increased. Gross profit increased
from $225,000 to $2.3 million during the quarter ended September 30, 1999
compared to the quarter ended September 30, 2000. Gross profit increased from
$844,000 to $4.7 million during the six months ended September 30, 1999 compared
to the six months ended September 30, 2000. Gross margin increased from 5.1%
during the quarter ended September 30, 1999 to 19.1% during the quarter ended
September 30, 2000 and from 10.5% to 18.8% during the six months ended September
30, 1999 compared to the six months ended September 30, 2000. The increase in
gross margin is principally due to the reduction in the amount of free product
and service incentives offered, the growth of our corporate gift business, the
addition of new product categories during the latter part of fiscal 2000 and the
shift in the mix of products sold. See also "Recent Accounting Pronouncements."
OPERATING EXPENSES
MARKETING AND SALES. Marketing and sales expenses consist primarily of
advertising costs, credit card fees, fulfillment activities and related employee
salary and benefit expenses. Fulfillment activities include receiving of goods,
picking and packaging of goods for shipment. Marketing and sales expenses
increased from approximately $5.1 million during the quarter ended September 30,
1999 to $5.8 million for the quarter ended September 30, 2000. Marketing and
sales increased from approximately $7.5 million during the six months ended
September 30, 1999 to $12.6 million during the six months ended September 30,
2000. The increase in marketing and sales is primarily attributable to increased
advertising and promotional activity and incremental payroll and related costs
associated with fulfilling customer demand. During the current quarter, we
shifted our primary marketing focus from traditional print and broadcast media
to Internet and online media. We believe Internet and online media provides a
more efficient means of attracting new customers. Our advertising and
promotional expenditures are generally intended to build brand awareness,
generate site traffic and increase overall sales. See also "Recent Accounting
Pronouncements."
9
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
executive, finance and administrative employee salaries and benefits,
professional fees, Web site maintenance, office lease expenses and other general
corporate expenses. General and administrative expenses increased to $5.9
million during the quarter ended September 30, 2000 compared to $2.6 million
during the quarter ended September 30, 1999. General and administrative expenses
increased to $11.8 million during the six months ended September 30, 2000 from
$3.7 million during the six months ended September 30, 1999. The increase in
general and administrative expenses is primarily a result of expenses associated
with increased headcount, new office space and professional fees related to our
overall growth and expanded activities.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
includes depreciation related to property and equipment and amortization related
to advertising and marketing agreements designed to acquire new customers,
deferred compensation, distribution agreements, and certain other purchased
intangible assets. Depreciation and amortization expense was $31.7 million
during the quarter ended September 30, 2000 compared to $1.6 million during the
quarter ended September 30, 1999. Depreciation and amortization was $61.3
million during the six months ended September 30, 2000 compared to $2.2 million
during the six months ended September 30, 1999. The increase is primarily due to
the amortization of advertising and marketing agreements entered into during
December 1999, for which we issued 6,698,664 shares of our common stock with a
fair market value of $94.6 million, and paid $6.0 million in cash, which are
being amortized over the one year term of the agreements. Amortization expense
relating to such agreements totaled $26.6 and $51.3 million during the three and
six months ended September 30, 2000, respectively. The increase also includes
depreciation and amortization expense related to Internet domain and other
intangible asset purchases and distribution agreements entered into during the
latter part of fiscal 2000, as well as technology equipment purchases beginning
in the latter half of fiscal 1999 and continuing through the current quarter.
INTEREST INCOME, NET. Interest income, net consists of earnings on cash
and cash equivalents net of interest expense on borrowings. The increase during
the three and six months ended September 30, 2000 compared to the corresponding
periods in the prior year is due to interest earned on cash balances resulting
from our sales of preferred stock in April 1999 and July 1999, and interest
earned on cash balances resulting from our initial public offering in late
September 1999.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. We have financed our operations primarily through private sales
of convertible preferred stock, an initial public offering and the private sale
of our common stock. The proceeds from these offerings have generally been used
to fund our operations, including inventory purchases, marketing and advertising
campaigns, employee salaries and equipment purchases.
OPERATING ACTIVITIES. Net cash used in operating activities totaled $16.5
million during the six months ended September 30, 2000 compared to $23.2 million
during the six ended September 30, 1999. Our net operating cash outflow for both
periods was primarily a result of inventory purchases and operating losses,
exclusive of depreciation and amortization.
INVESTING ACTIVITIES. Net cash used in investing activities totaled $4.3
million during the six months ended September 30, 2000 compared to $3.5 million
during the six months ended September 30, 1999. Net cash used in investing
activities during the six months ended September 30, 2000 primarily consisted of
property and equipment purchases primarily associated with technology and Web
site enhancements. Net cash used in investing activities during the six months
ended September 30, 1999 consisted of approximately $2.0 million related to
property and equipment purchases related to the purchase of computer and office
equipment as well as leasehold improvements associated with new leased office
and warehouse facilities and $1.5 million of Internet domain and other
intangible asset purchases.
FINANCING ACTIVITIES. Net cash provided by financing activities totaled
$256,000 during the six months ended September 30, 2000 compared to $119.4
million during the six months ended September 30, 1999. Financing activities
during the six months ended September 30, 2000 related to cash received from the
exercise of employee stock options and from the sale of stock in connection with
our employee stock purchase plan.
10
<PAGE>
COMMITMENTS. As of September 30, 2000, our principal commitments consisted
of obligations outstanding under operating leases and certain marketing and
distribution agreements. Although we have no material commitments for capital
expenditures, we anticipate increases in capital expenditures consistent with
anticipated growth in our operations and infrastructure.
CREDIT FACILITY. During September 2000, we executed a three-year, $25
million revolving credit facility with Congress Financial Corporation, a unit of
First Union National Bank. The credit facility is to be used for working capital
needs and is secured by our assets. Availability under the credit facility is
determined pursuant to a borrowing base as defined in the agreement. Amounts
outstanding under the credit facility bear interest at the prime rate or LIBOR
plus 250 basis points.
We believe that current cash balances and borrowing capacity will be
sufficient to meet anticipated cash needs for at least the next 12 months.
However, any projections of future cash needs and cash flows are subject to
substantial uncertainty. If current cash and cash that may be generated from
future operations are insufficient to satisfy our liquidity requirements, we may
seek to sell additional equity or debt securities or to obtain additional credit
facilities from lenders. There can be no assurance that financing will be
available in amounts or on terms acceptable to us, if at all. Our ability to
raise cash through the sale of additional equity or convertible debt securities
may be difficult depending on market conditions and other factors, and if
available could result in additional dilution to our stockholders. In addition,
we will, from time to time, consider the acquisition of or investment in
complementary businesses, products, services and technologies which might impact
our liquidity requirements or cause us to issue additional equity or debt
securities.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2000, the Emerging Issues Task Force released Issue No. 00-14 (EITF
00-14) "Accounting for Certain Sales Incentives," which provides guidance on the
accounting for certain sales incentives offered by companies to their customers
such as discounts, coupons, rebates and free products or services. EITF 00-14
addresses the recognition, measurement and income statement classification for
sales incentives offered voluntarily by a vendor without charge to customers
that can be used in, or that are exercisable by a customer as a result of a
single exchange transaction. The accompanying financial statements include the
reclassification of free product and service incentives delivered to customers
at the time of sale, from marketing and sales to cost of sales, related to the
adoption of EITF 00-14. All periods presented have been reclassified for
consistent presentation.
In July 2000, the EITF reached a consensus on EITF 00-10, "Accounting for
Shipping and Handling Fees and Costs." This consensus requires that all amounts
billed to a customer in a sale transaction related to shipping and handling, if
any, represent revenue and should be classified as revenue. We already classify
shipping charges to customers as revenue. In September 2000, the EITF concluded
that the classification of shipping and handling costs should be disclosed
pursuant to Accounting Principles Board (APB) Opinion No. 22, "Disclosure of
Accounting Policies." If shipping and handling costs are significant and are not
included in cost of sales, companies should disclose both the amount of such
costs and which line item on the income statement includes that amount. Shipping
and handling costs cannot be netted against sales. We classifiy inbound and
outbound shipping costs as costs of sales. We do not impose separate handling
charges on customers. Costs attributable to receiving, inspecting and
warehousing inventories and picking, packaging and preparing customers' orders
for shipment are classified as marketing and sales expense and totaled $1.4
million and $249,000 for the six months ended September 30, 2000 and 1999,
respectively.
11
<PAGE>
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We operate in a rapidly changing environment that involves a number of
risks, some of which are beyond our control. The following discussion highlights
some of these risks. These risks should be read in conjunction with the "Risk
Factors That May Affect Future Results" section included in our Annual Report on
Form 10-K for the year ended March 31, 2000.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The following risk factors and other information included in this Report
should be carefully considered. The risks and uncertainties described below are
not the only ones we face. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may impair our business
operations. If any of the following risks actually occur, our business,
financial condition and operating results could be materially adversely
affected.
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 and began selling products on our Web
site in April 1998. Accordingly, we have an extremely limited operating history
upon which to base an evaluation of our business and prospects. Our business and
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets such as online
commerce. As a result of our limited operating history, it is difficult to
accurately forecast our net sales and we have limited meaningful historical
financial data upon which to base planned operating expenses. We base our
current and future expense levels on our operating plans and estimates of future
net sales, and our expenses are to a large extent fixed. Sales and operating
results are difficult to forecast because they generally depend on the volume
and timing of the orders we receive, which is uncertain. As a result, we may be
unable to adjust our spending in a timely manner to compensate for any
unexpected revenue shortfall. This inability could cause our net losses in a
given quarter to be greater than expected.
WE ANTICIPATE FUTURE LOSSES AND NEGATIVE CASH FLOW, WHICH MAY LIMIT OR DELAY OUR
ABILITY TO BECOME PROFITABLE.
Since our formation, we have made significant expenditures 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 negative cash flow during future periods. We expect to incur
additional costs and expenses related to:
o brand development, marketing and other promotional activities;
o the expansion of our fulfillment operations, which includes supply
procurement, warehousing, order receipt, packaging and shipment;
o the continued development of our Web site, the systems and staff that
process customer orders and payments, and our computer network;
o the expansion of our product offerings and Web site content; and
o development of relationships with strategic business partners.
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Our ability to become profitable depends on our ability to generate and
sustain substantially higher net sales while maintaining reasonable expense
levels, both of which are uncertain. 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 "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:
o our inability to obtain new customers at reasonable cost, retain existing
customers or encourage repeat purchases;
o seasonality;
o our inability to manage inventory levels or control inventory theft;
o our inability to manage our fulfillment operations;
o 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;
o the ability of our competitors to offer new or enhanced Web sites,
services or products;
o our inability to obtain product lines from our suppliers;
o the availability and pricing of merchandise from vendors; and
o 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 products we sell, 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."
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 50% and 40% of our net sales for fiscal year 2000 and
1999, respectively, during the fourth calendar quarter primarily due to gift
purchases made during the holiday season and this trend may continue in the
future.
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."
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IF WE ARE UNABLE TO PURCHASE OR CONTINUE TO PURCHASE PRODUCTS DIRECTLY FROM THE
BRAND OWNERS, OUR NET SALES COULD DECREASE.
A significant portion of our units sold are purchased directly from the
brand owners. We are negotiating with some of the remaining brand owners to
purchase those brands directly, in all 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. 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 and several brand owners in the U.S. have distinctive legal
rights rendering them the only legal importer of their respective brands into
the U.S. In the event we acquire such products indirectly from distributors and
other third parties who may not have complied with applicable customs laws and
regulations, such goods can be subject to seizure from our inventory by U.S.
Customs, and the importer may have a civil action for damages against us. As it
is often difficult to ascertain the original circumstances of importation of
certain goods offered to us by our distributors and other third parties, 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 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 products 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.
At September 30, 2000, we held approximately $25.2 million of products in
inventory. 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
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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.
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.
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. 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 EXPAND OUR ACCOUNTING AND FINANCIAL REPORTING
SYSTEMS, OUR STOCK PRICE COULD DECLINE.
We are currently 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 luxury
goods industry is intensely competitive. We currently or potentially compete
with a variety of other companies, including:
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o traditional retailers of luxury and premium products;
o brand owners of the products we sell;
o other online retailers of luxury and premium products; and
o 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.
IF WE ARE UNABLE TO BUILD AWARENESS OF THE ASHFORD.COM BRAND, WE MAY NOT BE ABLE
TO COMPETE EFFECTIVELY AGAINST COMPETITORS WITH GREATER NAME RECOGNITION AND OUR
SALES COULD BE ADVERSELY AFFECTED.
If we are unable to economically achieve or maintain a leading position in
online commerce or to promote and maintain our brand, our business, results of
operations and financial condition could suffer. We believe that the importance
of brand recognition will increase as more companies engage in commerce over the
Internet. Development and awareness of our brand will depend largely on our
success in increasing our customer base. If the leading 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 maintain our
marketing and advertising budgets and otherwise to increase substantially our
financial commitment to creating and maintaining brand loyalty among vendors and
consumers.
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. 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:
o regulatory requirements;
o export restrictions;
o tariffs and other trade barriers;
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o difficulties in staffing and managing foreign operations;
o difficulties in protecting intellectual property rights;
o longer payment cycles;
o problems in collecting accounts receivable;
o political instability;
o fluctuations in currency exchange rates; and
o potentially adverse tax consequences.
IF WE DO NOT SUCCESSFULLY EXPAND OUR FULFILLMENT OPERATIONS, OUR NET SALES MAY
FALL BELOW EXPECTATIONS.
We must be able to quickly and efficiently fill customer orders. If we do
not successfully expand our fulfillment operations to accommodate increases in
demand, particularly during the fourth calendar quarter of each year, we will
not be able to increase our net sales in accordance with the expectations of
securities analysts and investors. 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.
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 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 four 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 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 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 upgrade
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our Web site or expand these computer systems without system downtime 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. Under current credit card practices,
we are liable for fraudulent credit card transactions because we do not obtain a
cardholder's signature.
IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR SERVICES COULD BECOME
OBSOLETE AND WE COULD LOSE CUSTOMERS.
If we face material delays in introducing new services, products and
enhancements, our customers may forego the use of our services and use those of
our competitors. To remain competitive, we must continue to enhance and improve
the functionality and features of our online store. The Internet and the online
commerce industry are rapidly changing. If competitors introduce new products
and services, or if new industry standards and practices emerge, our existing
Web site and proprietary technology and systems may become obsolete. To develop
our Web site and technology entails significant technical and business risks. We
may use new technologies ineffectively or we may fail to adapt our technology to
meet customer requirements or emerging industry standards.
INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND COULD IMPAIR OUR
BUSINESS.
Other parties may assert infringement or unfair competition claims against
us. We cannot predict whether they will do so, or whether any 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
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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. We currently have applications for registration in the
United States Patent and Trademark Office, as well as various foreign trademark
offices, of several of the company's trademarks. In some instances, these
applications span a variety of goods and 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. Our relationships with 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.
WE MAY NOT ACHIEVE EXPECTED BENEFITS OF ANY INVESTMENTS OR ACQUISITIONS THAT WE
COMPLETE.
As we identify appropriate opportunities, we intend to continue 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.
EXECUTIVE OFFICERS, DIRECTORS AND ENTITIES AFFILIATED WITH THEM HAVE SUBSTANTIAL
CONTROL OVER ASHFORD.COM 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.
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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 Corporation Law places restrictions on
business combinations with interested stockholders.
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:
o use of the Internet, the Web and other online services does not continue
to increase or increases more slowly than expected;
o the infrastructure for the Internet, the Web and other online services
does not effectively support expansion that may occur;
o the Internet, the Web and other online services do not become a viable
commercial marketplace; or
o traffic to our Web site decreases or fails to increase as expected or if
we spend more than we expect to attract visitors to our Web site.
IF WE ARE UNABLE TO ACQUIRE THE NECESSARY WEB DOMAIN NAMES, OUR BRAND AND
REPUTATION COULD BE DAMAGED AND WE COULD LOSE CUSTOMERS.
We may be unable to acquire or maintain Web domain names relating to our
brand in the United States and other countries in which we may conduct business.
As a result, we may be unable to prevent third parties from acquiring and using
domain names relating to our brand, which could damage our brand and reputation
and take customers away from our Web site. We currently hold, among others, the
"Ashford.com," "newwatch.com," "sunglasses.com," "TimeZone.com,"
"Paris1925.com," "Jasmin.com" and "Ashfordcorporategifts.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
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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. One or more local, state or foreign
jurisdictions may seek to impose sales tax collection obligations on us. In
addition, any new operation could subject our shipments in other states to state
sales taxes under current or future laws. If we become obligated to collect
sales taxes, we will need to update our system that processes customer orders to
calculate the appropriate sales tax for each customer order and to remit the
collected sales taxes to the appropriate authorities. These upgrades will
increase our operating expenses. In addition, our customers may be discouraged
from purchasing products from us because they have to pay sales tax, causing our
net sales to decrease. As a result, we may need to lower prices to retain these
customers.
RISKS RELATED TO SECURITIES MARKETS
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS.
We cannot be certain that financing will be available to us on favorable
terms when required, or at all. If we raise 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 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 negative cash flow from operations
in the future. We have sufficient funds for 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.
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OUR COMMON STOCK PRICE IS VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR
INDIVIDUAL STOCKHOLDERS.
The trading price of our common stock fluctuates significantly. For
example, since our initial public offering through September 30, 2000, the
reported sale price of our common stock on the Nasdaq National Market was as
high as $24.88 and as low as $2.50. Trading prices of our common stock may
fluctuate in response to a number of events and factors, such as:
o actual or anticipated variations in our quarterly operating results;
o announcements of technological innovations or new products or services by
us or our competitors;
o changes in financial estimates by securities analysts;
o conditions or trends in the Internet and/or online commerce industries;
o changes in the economic performance and/or market valuations of other
Internet, online commerce or retail companies;
o announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
o additions or departures of key personnel;
o release of transfer restrictions on our outstanding shares of common stock
or sales of additional shares of common stock; and
o potential litigation.
In addition, the stock market has from time to time experienced extreme
price and volume fluctuations. These broad market fluctuations may adversely
affect the market price of our common stock.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are, and from time to time 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits under Item 601 of Regulation S-K
EXHIBIT
NUMBER DESCRIPTION
2.1** Option Agreement dated August 17, 1999 by and between the Company
and Power Reserve, Inc. and Richard E. Paige
2.2** Asset Acquisition Agreement dated October 26, 1999 by and between
the Company and Power Reserve, Inc.
2.3** Asset Acquisition Agreement dated October 26, 1999 by and between
the Company and Richard E. Paige
2.4*** Agreement and Plan of Reorganization dated as of January 14, 2000
by and among the Company, Ashford-Jasmin Fragrance Company and
Jasmin.com Corporation
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3.1* Amended and Restated Certificate of Incorporation of the Company
3.2* By-laws of the Company
4.1* Amended and Restated Investors' Rights Agreement, dated July 9,
1999, among the Company and the investors and founders named
therein
4.2* Specimen Certificate of the Company's common stock
4.3 Reference is made to Exhibits 3.1 and 3.2
10.1* Form of Indemnification Agreement entered into between the Company
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* Office Lease dated July, 1999 between the Company and Crescent
Real Estate Funding III, L.P.
10.6* Employment Agreement dated May 10, 1999 between the Company and
Kenneth E. Kurtzman
10.7* Employment Agreement dated November 28, 1998 between the Company
and James H. Whitcomb, Jr.
10.8* Advertising Agreement dated July 30, 1999 between the Company and
America Online, Inc.
10.9* Credit Agreement dated August 9, 1999 between the Company and
Chase Bank of Texas, National Association
10.10**** Stock Purchase Agreement dated as of November 29, 1999 by and
among the Company, Amazon.com, Inc. and Amazon.com Advertising
Services NV, Inc.
10.11***** Loan and Security Agreement by and among Congress Financial
Corporation (Southwest) as Lender and Ashford.com, Inc., Ashford
Buying Company, Ashford Corporate Gifts, Inc., and Ashford-Jasmin
Fragrance Company
27.1 Financial Data Schedule
* Incorporated by reference to the Company's Registration Statement
on Form S-1 (File No. 333-82759).
** Incorporated by reference to the Company's Current Report on Form
8-K/A filed on November 12, 1999.
*** Incorporated by reference to the Company's Current Report on Form
8-K/A filed on February 1, 1999.
**** Incorporated by reference to the Company's Current Report on Form
8-K filed on December 15, 1999.
***** Incorporated by reference to the Company's Current Report on Form
8-K filed on October 3, 2000.
(b) Reports on Form 8-K
Report on Form 8-K filed on October 3, 2000 containing (i) Loan and
Security Agreement by and among Congress Financial Corporation (Southwest) as
Lender and Ashford.com, Inc., Ashford Buying Company, Ashford Corporate Gifts,
Inc., and Ashford-Jasmin Fragrance Company; (ii) text of press release dated
July 27, 2000, announcing that Ashford.com secured a commitment for a
three-year, $25 million credit facility with Congress Financial Corporation and
(iii) text of press release dated September 25, 2000, announcing that
Ashford.com closed a three-year, $25 million credit facility with Congress
Financial Corporation.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 10, 2000 ASHFORD.COM, INC.
By: /s/ DAVID F. GOW
---------------------------------------
David F. Gow
Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
2.1** Option Agreement dated August 17, 1999 by and between the Company
and Power Reserve, Inc. and Richard E. Paige
2.2** Asset Acquisition Agreement dated October 26, 1999 by and between
the Company and Power Reserve, Inc.
2.3** Asset Acquisition Agreement dated October 26, 1999 by and between
the Company and Richard E. Paige
2.4*** Agreement and Plan of Reorganization dated as of January 14, 2000
by and among the Company, Ashford-Jasmin Fragrance Company and
Jasmin.com Corporation
3.1* Amended and Restated Certificate of Incorporation of the Company
3.2* By-laws of the Company
4.1* Amended and Restated Investors' Rights Agreement, dated July 9,
1999, among the Company and the investors and founders named
therein
4.2* Specimen Certificate of the Company's common stock
4.3 Reference is made to Exhibits 3.1 and 3.2
10.1* Form of Indemnification Agreement entered into between the Company
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* Office Lease dated July, 1999 between the Company and Crescent
Real Estate Funding III, L.P.
10.6* Employment Agreement dated May 10, 1999 between the Company and
Kenneth E. Kurtzman
10.7* Employment Agreement dated November 28, 1998 between the Company
and James H. Whitcomb, Jr.
10.8* Advertising Agreement dated July 30, 1999 between the Company and
America Online, Inc.
10.9* Credit Agreement dated August 9, 1999 between the Company and
Chase Bank of Texas, National Association
10.10**** Stock Purchase Agreement dated as of November 29, 1999 by and
among the Company, Amazon.com, Inc. and Amazon.com Advertising
Services NV, Inc.
10.11***** Loan and Security Agreement by and among Congress Financial
Corporation (Southwest) as Lender and Ashford.com, Inc., Ashford
Buying Company, Ashford Corporate Gifts, Inc., and Ashford-Jasmin
Fragrance Company
27.1 Financial Data Schedule
* Incorporated by reference to the Company's Registration Statement
on Form S-1 (File No. 333-82759).
** Incorporated by reference to the Company's Current Report on Form
8-K/A filed on November 12, 1999.
*** Incorporated by reference to the Company's Current Report on Form
8-K/A filed on February 1, 1999.
**** Incorporated by reference to the Company's Current Report on Form
8-K filed on December 15, 1999.
***** Incorporated by reference to the Company's Current Report on Form
8-K filed on October 3, 2000.
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